Car Dealer Lawyer

This is a special Halloween.  Once a year we are supposed to celebrate all that is dark, mysterious and frightening in our world.  This year, the economy has done that for us already.  For dealers, Halloween is usually the last day of a tough month where there is little or no possibility of a big sales push on the last day.  This month, it will be especially difficult.

Nevertheless, Halloween calls for horror stories (or “haar” stories as we say here), and today’s comes from Florida.  According to the St. Petersburg Times, Ernie Haire Ford in Tampa, Florida was ordered to pay $6.9 million to resolve a class-action suit.  What did Ernie Haire Ford do?  According to the lead plaintiff, it charged $199 for etch that she didn’t request.  She also claimed that there were other things in her contract that had been “concealed” in her sales contract, such as rust-proofing, paint sealant, and fabric protection.  Hmm – does this sound familiar to anyone?

The plaintiff’s lawyers are having a happy Halloween because they were awarded $3 million in attorneys’ fees and $431,700 for expenses.  (If I lived in Florida, I would have my kids trick or treating at their houses – but they probably have gates.)  

The frightening part of any class action case is the large numbers involved.  When a standard practice of a dealership is successfully challenged, the damages can be huge.  Etch, doc fees, and other disclosure issues create huge exposures.  

The other thing that this case shows is how important it is to have good insurance coverage.  According to the general manager’s comments in the article, it seems that Ernie Haire Ford’s insurance had assumed the defense of this case and was responsible for the settlement.  Dealers should all read their insurance policies carefully to make sure that they would be covered in cases like this.  Happy Halloween!

Source:  St. Petersburg Times

Do you remember when you were in school, and you worked really hard on a project to turn it in on time – then the teacher let everyone off the hook by moving back the deadline?  That’s how I felt today when I learned that the FTC delayed enforcement of the Red Flags rule for another six months.  Apparently the FTC discovered that a lot of businesses (who don’t read CarDealerLawyer.com) didn’t know that the Red Flags Rule applied to them.  Maybe the FTC thought that its enforcement people would lose their edge if they were hunting fish in a barrel.  As luck would have it, I just finished installing Red Flags programs in three dealerships – sorry about that guys!  I also ran into a guy today from Reynolds & Reynolds who was selling Red Flags compliance forms.  Tomorrow will probably be an interesting day for him.

All kidding aside, car dealers have enough on their plates now without implementing new programs.  A lot of good dealers are fighting for their lives.  Basically, our government has spent the last month telling us that our economic system is on the verge of collapse – not exactly the kind of talk that makes you want to go out and buy a new car.  Apparently, people don’t want to fix cars either.  In any event, this isn’t the right environment to impose a new regulatory burden, so I applaud the FTC for backing off for awhile.

FTC News Release

One of the most difficult parts of the car business is keeping your gross margin high.  When you buy your cars in an efficient market and sell them to an increasingly sophisticated customer base, it is difficult to maintain a return that justifies the investment, effort and risk.  There are only two ways to increase your gross margin: (1) charge more for the car; or, (2) buy it for less.

Stephen Lussier, a classic car dealer in New England, allegedly discovered two aggressive ways to increase his margin:  (1) don’t pay for the inventory (theft) and (2) assign contracts to banks without sales to back them up (bank fraud).  Mr. Lussier’s plan was pretty simple – take cars in consignment, sell them, and then don’t pay the owners.  This was good for about $150,000 to $200,000 in revenue.  The bank loans were good for about $430,000 in revenue.  But the great thing about Mr. Lussier’s business model is that he had absolutely no “cost of goods sold.”  If he kept his rent, advertising, payroll, and other expenses down, then his bottom line would look pretty good.

Theft and bank fraud on a large scale will lead to a government bailout, but on a small scale it usually leads to jail.  Mr. Lussier was indicted in both state and federal court and is facing a maximum of 7 1/2 to 15 years in prison for each theft charge.  But from a pure numbers standpoint, his gross margin was a thing of beauty.

Source:  Nashuatelegraph.com

Times are tough – really tough.  Most pundits predict that a significant number of dealerships will not be around much longer.  Most dealers have probably already thought of these ideas, but repeating them does not hurt.  These are my ideas on how to survive tough times:

• Assume Your Bank Will Fail – In the next year, hundreds of banks will probably fail.  If you are lucky enough to have a lot of cash in the bank, then you need to think about spreading that cash around in case your bank fails.  The new limit for FDIC is $250,000 per depositor.  If you keep more than $250,000 in a single bank, you are taking a risk.  The only thing I can think of is spreading it to multiple banks.  It will be a pain for your controller, but it is better than losing it.  (If someone has a better idea on how to protect your cash, please leave a comment.  I would love to know.) [Read more →]

I spent most of the week working on Red Flags policies.  Not being one to reinvent the wheel, I bought A Dealer’s Guide to the Red Flags Rule by Michael Benoit.  It worked like a charm.  If you haven’t implemented your Red Flags policy, remember the deadline is November 1.  You can order a copy of Mr. Benoit’s book at CounselorLibrary.com.  

In the process of implementing the Red Flags policy, I had the opportunity to examine past incidents of identity theft.  In doing so, I realized that many cases of identity theft are “inside jobs.”  This drives home the importance of doing good background screenings of all employees.  In fact, I would submit that careful hiring of employees is the most important thing that a dealership can do to prevent identity theft and theft of confidential customer information.  Employees are in the best position to steal – and a thorough background check is the best way to weed out the thieves.

Good employees are also important for another reason – they will follow your rules.  You can have the best information security and red flags policies in the world, but they are useless if no one pays attention to them.  A few simple rules consistently followed will do more than a complicated policy that is ignored.  Good employees are the key to protecting your customers.

So as you are designing and implementing your Red Flags policy, think about the employment angle.  How good is your background screening?  How good is your training?  A good policy might protect your from the FTC, but your employees will protect you from identity thieves.