In July of last year, a California appellate court handed down a very nasty, published decision that makes backdating retail installment sale contracts even riskier now than it was before.
So, the dealership ultimately faced a class of 1,500 similarly situated customers who had the ability to return their previously purchased vehicles to the dealership. In other words, those customers who chose to return their vehicle would not get a full credit for the original purchase price.
Rather, the trial court would have to determine a reasonable credit for use.
But even with this offset for use, the dealership was facing millions of dollars in refund costs.
The case settled before any repurchase determinations were made.
However, here are a few lessons we can learn from this case: Don’t Backdate Rewrites The first lesson is quite simple, don’t backdate contracts!
Backdating has occurred in the past largely due to two factors: (1) lenders requiring the contract date to match registration documentation (e.g., RS date) and (2) incentive cut-off dates.
Fortunately, these factors are no longer as much an issue as they have been historically.
The held that “the backdating of the second contract caused Nelson to pay interest on a contract that did not exist.” The court stated further that “We consider this pre-consummation interest to be an illegal finance charge.” The first major concern with this ruling is that the court definitively concluded that backdating a contract is a violation of California law, specifically, Civil Code section 2982(a).
This is one code section that you do not want to violate because such a violation may render the sale contract unenforceable.
(Civil Code § 2983) The second major concern with this ruling is that the court also concluded that the practice of backdating a second contract taken in conjunction with use of a standard Acknowledgement of Rewritten Contract resulted in a single document rule violation.
The court held “the second contract violated the single document rule because it did not contain ‘all of the agreements of the buyer and seller with respect to the total cost of and the terms of payment for the motor vehicle….’” (Civil Code § 2981.9) The single document rule is another code section, the violation of which may render the sale contract unenforceable. The only thing that appears to be positive about this ruling is that the court agreed to allow for an “offset” for use of the vehicles.