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

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

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

• 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.)
• Look at Your Loan Covenants - Your loans have contractual provisions that are probably tied to your store’s performance.  During good times, these covenants do not seem very important.  But you want to pay attention to them now.  I promise that your banker is looking at them.  You don’t want to be the last person to know if your bank is in a position to call the loan.  With the bad press about dealerships failing, there will probably be a lot of loans called in the near future.  You need to know what the rules are.
• Hoard Cash - Now is not the time to spend cash on capital improvements, renovating your home, buying a new boat, etc.  If you have a line of credit, you might want to borrow against it before your bank decides to freeze it.  If you have to put the money to use, pay off floorplan, since I would suspect that floorplan financing will be the last credit to be frozen.
• Reduce the Number of Non-revenue Producing Employees - This is the toughest suggestion because I know what it is like to lose a job.  But most dealers are probably staffed for about 25% to 30% more sales volume than they are experiencing.  Look at your non-revenue producing employees - managers, assistants, clerical workers, and lot technicians.  Variable pay plans take care of themselves.  You have to make the decision about hourly or salaried employees. 
• Bring Outsourced Work In-House - Review your payables and think about functions that can be brought in-house.  How much are you paying to clean your dealership?  Can your existing employees handle it?  (You will find out who wants to work when you ask employees to clean bathrooms.)  What about your used car details?  Is this something that can be done by your body shop or service department?  What about lawn care?  Do you think that someone in your dealership knows how to operate a lawnmower?  What about cleaning the cars on your lot?  All you really need are a few hoses, a bucket, and some effort.  When things are busy, many of these functions are better to outsource.  But when you are slow, you owe it to your employees not to send out work that they could do.
• Reduce Advertising - “Shoot when the ducks are flying.”  Enough said.
• Look at All Payables - One of my clients was spending about $1600 per month on gas bills last Summer.  When they looked closely at the bills, they realized that they were not using any gas, but they were still being charged for pipeline usage, etc.  For $80, they could have the gas disconnected in the Spring and reconnected in the Fall.  By paying attention to their payable, they will save $5000 to $6000.  Look at your payable closely.  I promise there is $10,000 to $20,000 per month that can be cut if you shop around, cut, and pay attention.
• Assume People Are Desperate - Desperation makes people do things that they would never do during normal times.  As my brother put it, “people are fighting for food now.”  Your customers, employees, and suppliers are all struggling to survive, so you need to watch closely.  Suppliers will “accidentally” double bill you.  Customers will suddenly complain and want something for free.  The government will show up and want to fine you for something. (The drop in tax revenues will be a huge issue in the coming year.)  You have to pay attention because everyone is being backed into a corner.
• Hunker Down and Work - When the President and the leaders of the country say that the economy is about to collapse, everyone is a little distracted.  Your customers and employees are probably paying more attention to what is happening in the market than they are to buying and selling cars.  It’s tough to do anything about your customers, but you have to convince your employees to put their heads down and go to work.  That’s where leadership and incentives come into play.  No matter how bad things get, they will be worse if your employees are thinking about something other than selling and servicing cars.
• Don’t hang on too long - If it does not look like you’re going to make it, be decisive and don’t go to jail over a financial problem.  When I review cases involving dealers who were accused of defrauding banks and customers, many were not bad people, but simply ran out of cash.  Not making payoffs and going out of trust with a bank are usually the final death throes of a dealer.  The poor dealer is just trying to hang on, but the law treats them as a criminal.  If you don’t think you’ll make it, give your lawyer a call and try to take care of yourself before it’s too late.  Life goes on.

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.

With dealers caught in the middle of the credit crunch, high gas prices, and declining overall sales, it is likely that many will have to face the difficult decisions with respect to reductions in force or outright closures.  These actions raise legal issues that most dealers have never seen, so if you are faced with these actions, you should definitely consult with a good labor lawyer.  

Source:  Automotive News [sub. required]

So what happened to Bill Heard?  I wonder if we will ever find out.  All I know is that the store near me seemed to “rock” and sold a lot of cars for a long time.  The market has been brutal for Chevy dealers, but you would think that Bill Heard would be able to hang on for awhile in a tough market.

If nothing else, this situation illustrates the downside of debt.  When stores are making money, everyone wants to give you money.  Buy other stores - lots of blue sky?   No problem!  Spend a few million to comply with your manufacturer’s architect de jour?  Here’s the money - no problem!  If the economy gets bad, guess who’s no longer your friend.  When you need the money to keep the doors open, they’ll yank it.  It seems like a lot of fundamentally sound businesses are closing because they relied on financing to operate.  Sometimes its absolutely necessary.  But if you paid off your floorplan instead of buying that 5th store, I bet you’re smiling now.

Stay tuned.  I’ll dig around and try to find more details about these suits.  

Automotive News (Subscrition Required)

The general manager of Carl Gregory Chrysler, Dodge, Jeep, Hyundai of Albany, Georgia was arrested on charges that he stole up to $9000 from customers.  The sheriff’s office claim that general manager, Joseph Martin, and “top salesman,” Mark “Bo” Kennedy, worked together to steal money from customers. Allegedly, the pair revised customers’ paperwork in order to scoop their down payments.  They were also accused of taking in trades, not paying them off and then pocketing the money.  They were caught when a customer complained to another Carl Gregory employee and produced a receipt that was not an official receipt from the store.

The sheriffs deputies caught former GM Martin when they spotted a Hyundai Sonata that he had reported stolen parked next to his car at his apartment.  Apparently Martin loaned out the car and then reported the car stolen when he could not explain the car’s whereabouts.  The “top salesman,” Bo Kennedy, is still at large.  According to reports, he has a long criminal background that includes deposit account fraud, aggravated assault, terroristic threats, criminal trespass and battery.

Carl Gregory immediately reimbursed the customers.  He also said that he is implementing procedures to do a more extensive background check on his employees. 

So what is the lesson from this situation?  Carl Gregory is a good dealer, and this case highlights one of the biggest problems of a good dealer – you have to trust your managers.  Carl Gregory can’t be in all of his stores all of the time.  He has to trust his GM’s to protect his interests.  When your GM is a thief, things can get out of control very quickly.  Obviously, a good background check would have caught the salesman because he had a long criminal history.  But what about the GM?  Carl Gregory has to ask himself why he trusted that man to run his business.  I’ve been in this business for a long time, and I have seen a lot of good, professional GM’s.  I’ve also seen a lot of GM’s who are blowhards and thieves.  The interesting thing is that the blowhards and thieves always find jobs.   

AlbanyHerald.com

WALB News

WFLX News

The United State Court of Appeals for the Ninth Circuit addressed a novel issue for the circuit courts in Boschetto v. Hansing, No. 06-16595 (9^th Cir. Aug. 20, 2008).  That is, “[d]oes the sale of an item via the eBay Internet auction site provide sufficient “minimum contacts” to support personal jurisdiction over a nonresident defendant in the buyer’s forum state”?  The court concluded that, under the facts of this case, a single sale of an item over eBay does not create jurisdiction in the buyer’s state.

San Francisco resident Paul Boschetto bought a 1964 Ford Galaxie on eBay from the Wisconsin-based Boucher Automotive Group.  Boschetto arranged to have the car picked up and delivered to him in San Francisco.  When it arrived, he was unhappy with the condition and tried to rescind the transaction (or to use the technical term, he tried to “p#ss backwards on the deal.”)  When he was unable to resolve the issue with Boucher or eBay, Boschetto sued in federal court and based his claims on California law.

While this might seem like something that would only interest a bar examiner, these cases are critically important for dealers.  State laws relating to car sales can vary dramatically from state to state.  The last thing that a dealer like Boucher would want is to defend its claim in a state like California.   So let’s spend a little time and dig into what this case means.

First, every state has a “long-arm statute” that allows it’s courts to have power over nonresidents.  In California, the “long-arm statute” has been interpreted to be co-extensive with the federal standard.  That means that California will exercise long-arm jurisdiction whenever it “comports with federal constitutional due process.”  It is also important to note that this case involved “specific” jurisdiction (as opposed to “general jurisdiction”) where the transaction in question is the subject matter of the lawsuit.

The Ninth Circuit concluded that Boschetto did not allege facts to show that Boucher “performed some type of affirmative conduct which allows or promotes the transaction of business within” California.  In other words, the mere fact that Boucher sold a vehicle to a California resident on eBay was not enough to meet the “purposeful availment” standard.  The court noted that this was a “one-shot affair.”  The court noted that there were no more contractual duties that had to be performed in California.  The court also noted that there were not other facts showing that Boucher did business in California.

The Boschetto court distinguished cases that analyzed whether the site was “interactive.”  In other words, some cases held that having a static website that can be read in a different state does not “purposefully avail” you of that court’s jurisdiction, but suggest that if the site is interactive, then jurisdiction might exist.  The Ninth Circuit noted that although eBay’s site is interactive, eBay is not the defendant.  Simply using eBay’s interactive site was not enough to invoke jurisdiction. 

Reading the court’s analysis suggests that there could be circumstances where the outcome would be different.  For example, the court noted that there were no on-going obligations in the contract.  So perhaps if the contract involved payments or warranty service, the outcome would have been different.  The court also noted that Boschetto did not allege that Boucher regularly did business on eBay.  It did not elaborate, but it might leave room to argue that if you use eBay routinely, then it would be fair to haul you into a foreign court.  Finally, if a customer bought a car from your own interactive website, then it might be different than simply using an auction site such as eBay.

All in all, if you get worked up about things like this (like I do), this is an important case.  Although it is not controlling outside of the Ninth Circuit, the case is well-written and the Ninth Circuit is an influential court.  By addressing the issue first, the Boschetto case could help set some limits to states’ long-arm jurisdiction.