NASHVILLE, N.C. — The federal and state rules, regulations and statutes for operating as an independent automobile dealer are constantly evolving. The risk of not adapting your business practices to those changes exposes you to ever-increasing liability.

Simply stated, there are several previously acceptable methods of doing business that are now considered "unfair and deceptive."

The unfortunate likelihood is that you have, and may still be, utilizing some of those methods in your business. With the current regulatory climate as it is, change is coming to many of the industries "tried and true" practices. 

In this column, I will discuss just one such change.

I want you to think about your last couple of years in the automobile business. Think about your trips to the auction. Saleable inventory is getting harder to find. Have you ever bought a seemingly perfect, late model, low mileage, off-lease sedan with announced frame damage? 

Did you look it over out on the yard and on the block, surmising the damage was minimal?  Was it sold "with a drive," and the announced damage under the 25-percent disclosure requirement?

When you sold that vehicle at retail did you sell it "as-is?" Did you disclose the damage, in detail and in writing, to the consumer?    

Some of you reading this are thinking, "the law" only requires a dealer to disclose damage in excess of 25 percent.  A few more of you are thinking, "I sold it ‘as-is;' it's the buyers responsibility to inspect before purchase."

I would venture a guess that more than a few reading this have sold that hypothetical vehicle without ever mentioning the frame damage.

Today, if you conduct a retail transaction that compares to the hypothetical, you will potentially be in violation of North Carolina law.  You could be subject to civil charges of misrepresentation, and/or unfair and deceptive trade practices, all variations of fraud.

The N.C. Department of Motor Vehicles could certainly levy a fine, as well as suspend or revoke your dealer license. Your liability for civil damages can be up to three times the price of the vehicle, plus the consumer's legal fees. Your legal fees alone may exceed $40,000 and worst yet, recently the North Carolina Court of Appeals upheld a punitive damage award of $250,000 in a case that involved a $2,000 retail sale.  

Do I have your attention yet?

For those that contend "the law" only requires disclosure of damage exceeding 25 percent:  you are only addressing one particular law applicable to the sale. However, multiple laws govern retail sales to a consumer.

The "25-percent rule" is a statute expressly governing the titling requirements of vehicles found in North Carolina General Statute Chapter 20 (NCGS §20). The statutes outlining unfair and deceptive trade practices are found in NCGS §75 for consumer protection  and the Uniform Commercial Code (UCC), adopted by the North Carolina General Assembly as NCGS § 25.  Where NCGS § 20 regulates NCDMV and automotive commerce, NCGS§ 25 regulates all commerce, including automobile dealers.  

A dealer is a merchant as defined by statute. A wholesale transaction, between two dealers, is a commercial transaction.  There is certainly a duty of "due diligence" in a commercial transaction.

The law considers merchants, in the same trade, to be on "equal footing." The same does not apply in a consumer transaction.

A retail purchaser is legally defined as a consumer. In consumer sales, you are legally accountable as an "expert" in your trade.

As an "expert," you are held to a duty of "knowing or should have known" as to the condition of your inventory offered for sale. You also have a duty to conduct business in the spirit of "good faith and fair dealing."

Frankly, the oft-times quoted Latin phrase, "Caveat Emptor, "or "Buyer Beware," no longer applies to consumer purchases of used vehicles.

There are many dealers who mistakenly believe they have an "umbrella" offered by "as-is" sales as a shield from liability. "As-is" is a term utilized to legally exclude an implied warranty of merchantability.

The term is further limited by the Federal Trade Commission in its application within the Used Car Rule. This rule, which created the "Used Car Buyers Guide Form" expressly limits the scope of "as-is" to mechanical issues.

Structural damage is not referenced and is therefore not waived or excluded.

Consequently, the "as-is" umbrella is limited protection, and it is shrinking as case law builds an increasing duty upon the dealer to inspect, investigate and disclose.

The legislature by statute, and the courts through case law have decided essentially: 

1. Merchants have expert knowledge in their trade.

2. That expert knowledge gives a merchant an unfair advantage over a consumer.

3. Failing to disclose information gained through expert knowledge is a deceptive trade practice.

4. Failing to exercise expert knowledge is not a defense, and could be considered negligent practice.

5. Consumers are not expected to have the same level of experience as a merchant. In fact, NCGS §20-285 expressly announces the State has a responsibility to regulate the auto industry to protect the consumer. 

What's that? You never received notice from the DMV or the attorney general's office describing the practices that are no longer allowed?  From what agency do you order the compliance manual?

Well, there is no manual, there is no notice requirement and there is no defense if a dealer fails to recognize that the "old ways" of doing business no longer apply.

You, as a merchant, are held to that previously mentioned duty of "Good Faith and Fair Dealing," which entails mandates for full and complete disclosure in consumer transactions. The legislature and various regulatory agencies, however, are only required to publish rules, statutes and subsequent amendments.

So when was the last time you read the Federal Register? 

To complicate this even more, judges interpret those published statutes, producing case law or precedent, which then becomes the method of application for the law in question. The developing case law and the actual statute do not merge ostensibly to maintain the constitutional separation of the judicial and legislative branches of government.

This disconnect definitely keeps the lobbyist and dealer education departments of industry trade groups busy, as well as providing job security for consumer protection attorneys.

Short of hiring a full-time compliance officer, there is realistically no way for an independent dealer to keep up. 

At this time, if you are the average dealer, you have probably concluded that my purpose here is to frighten you.  Here I am, practically shouting, "the sky is falling" until you buy every recommended form, the dealer management software package and pre-pay for the next dealer conference.

Well, every item offered by the trade groups is designed to limit your liability, but if you do not conduct business in a proper and legal manner, they are nothing but perfume on a hog.

Allow me to discuss some specific cases; In the appeal of GREENE v. ROYSTER 187 N.C.App. 71, 652 S.E.2d 277 it was revealed that:

—Evidence supported plaintiff vehicle buyer's award of punitive damages in the amount of $250,000 upon showing that defendant car dealer committed fraud, and thus, dealer was not entitled to new trial.

—Evidence showed that dealer sold buyer a car that was unfit for operation, in violation of state law, that considerable efforts were expended to conceal facts of similar conduct by dealer, that dealer was well aware that it was selling unfit vehicles.

Nobody reading this article would dare attempt what this dealer was found guilty of doing.  He pieced together one vehicle from several salvage unit and then affixed the VIN from the latest model salvage to the finished product.

He then sold the vehicle "as-is" in a $2,000 cash sale. The consumer contacted the local DMV Inspector after her complaints of mechanical problems were ignored by the dealer.

After investigating, DMV determined the vehicle was unsafe to operate and revoked the dealer's license.

Undaunted, the dealer reorganized and licensed under a relative's name.  It seems he even sold his defense attorney a vehicle in similar condition. 

That case is a clear-cut example of what the laws are designed for, protecting citizens and deterring corrupt individuals from transacting business in the state.

Fair enough, but in COMER v. PERSON AUTO SALES, INC.  368 F.Supp.2d 478 the dealer, in federal court, contended that he properly represented the vehicle. The consumer admitted the salesperson told him the vehicle had some minor prior damage; however, he alleged that he was misled, and discovered undisclosed damage.

The court then determined that the potential fraud of deception is a matter for a jury to decide.

Reading the case history reveals that the dealer failed to investigate the extent of frame damage declared at auction. The dealer settled before trial for more than $140,000. The vehicle involved sold for less than $20,000.

So far, the cases compare in a failure to disclose known damages. It is easily appreciable that both dealers had knowledge and notice of the vehicle's previous history.

In Comer, the Judge recognizes that there is no statutory duty to investigate the history of every vehicle purchased, but, when given notice of prior damage, there is a duty to inspect and assess the extent of those damages.

The results of that inspection and assessment are then required to be disclosed to the consumer.  That is precedent, and now governing law.

Recently, an area independent dealer was contacted by the attorney for a consumer who had purchased a vehicle and discovered undisclosed damage. Here are the facts of that situation:

1. The consumer purchase for $30,000 had occurred two years prior to the call.

2. The consumer had driven more than 40,000 miles since his purchase. 

3. The damage discovered was the result of a low-speed parking lot collision with a post. 

4. The damage happened while the vehicle was titled to the original owner shortly after the vehicle was purchased new, and the repairs at the time of the accident were under $2,300. 

5. The repaired damage did not adversely affect the operation of the vehicle in any way.

6. The only evidence of the damage was peeling paint from a replacement radiator support, visible only from the underside of the vehicle.

7.  The original owner traded the vehicle with the independent dealer and signed a damage disclosure form indicating no damage over 25 percent.  

8. The vehicle report on all computer registries revealed no adverse history, and the consumer only discovered the extent of damage by contacting the previous owner.

This dealer notified his insurance carrier where he had general liability and errors and omissions insurance. The insurance company settled for an undisclosed sum, estimated to be in excess of $100,000.

The company also determined it had no grounds for subrogation against the previous owner. As a consumer he had no duty to report any damage under 25 percent.

Hold on — you can check your insurance policy once you finish this article. Before you close up shop, before calling the hauler to carry your entire inventory to the auction, and before you begin to ponder the affordability of early retirement, realize the sky is not falling.

Obviously, laws are organic and flexible. For compliance you should be flexible as well, adjusting and adapting the way you do business.

There are no "catch-all" forms currently available or statutory procedures to assure compliance. However, by implementing the following practices you should reduce your potential liability:

1. Visually inspect every vehicle offered for sale, or have a body shop do it.

2. Limit wholesale and auction purchases to known and reputable sources.

3. Perform every available computer history search and keep in the vehicle file. 

4. Keep a list of any damage discovered upon inspection with an estimate of the repair cost in the vehicle file.

5. Teach, counsel, and/or force every salesperson to disclose every documented fault 

6. Print that information on the damage disclosure form.

7. Print that information on dealer letterhead disclosing the result of your inspection, the estimated cost of repairs. Sign it and have the consumer acknowledge it.

8. If the prior damage materially affects the average retail value of the vehicle, disclose on the letterhead that the selling price has been adjusted to compensate for that effect.

9. If the damage does not materially affect the retail value, state that on the letterhead disclosure. 

10. Do this for every retail sale, every time.

There is a silver lining to all this. The dealers who choose to ignore the increased attention to consumer protection will eventually be forced out of the market. Buyers will naturally do business with consumer-conscious competitors.

The law is designed to separate the "dealer wheat from the chafe," ultimately providing consumers with better-qualified independent dealers to service their transportation needs.  

Where your dealership falls is up to you. Until that time, good luck and happy motoring.  

Editor's Note: The column is intended to be a practical article for understanding why and how various commercial and consumer regulations apply to retail automotive sales in North Carolina. It is further intended for informational purposes only and is not represented as legal advice or as an exhaustive research on all applicable law. You should consult your legal counsel for any individual circumstances, regardless of how they may compare to cases cited or hypothetical representations.

R.E. "Steve" Stevenson III, Esq., has more than 20 years experience in North Carolina's retail auto industry and has held key management positions with several franchise and independent dealers. He is admitted to the N.C. State Bar, the U.S. Federal Court Eastern District of N.C. and is currently practicing law in Nashville, N.C., concentrating in dealer compliance, merchant defense and consumer protection. Stevenson can be reached at steve@businessconsumersolutions.com.