2004 Developments in motor vehicle leasing
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Developments in motor vehicle leasing
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In 1965, approximately fourteen percent of the vehicles produced were leased with twenty percent of those being leased to individuals. (1) By 1995, however, leases accounted for nearly thirty-three percent of all vehicle deliveries to individual consumers. (2) The Association of Consumer Vehicle Lessors, whose members account for approximately eighty-five percent of all consumer vehicle leases in the United States, reported about 1.6 million new vehicle leases in 2003. (3)
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The relatively rapid growth of the motor vehicle leasing industry over the past forty years has lead to increased state and federal leasing regulation. At the federal level, Congress passed the Consumer Leasing Act (4) in 1976 as an amendment to the federal Truth in Lending Act. (5) The Consumer Leasing Act is implemented by the Federal Reserve Board’s Regulation M. (6) On a state level, Article 2A of the Uniform Commercial Code has been adopted, at least in some form, by most states. (7) In addition, many states have enacted statutes designed to provide increased protections for lessees by, for instance, requiring certain lease disclosures or imposing limitations on end-of-lease liability. (8)
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Federal and state regulation of consumer vehicle leasing continued to evolve in 2004, with important legislative and judicial developments that impact the industry. This Article discusses these most recent developments.
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2004 LEGISLATIVE DEVELOPMENTS VICARIOUS LIABILITY
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In some states, lessors, as record owners of leased vehicles, have been held vicariously liable for the negligent acts of lessees operating the leased vehicles. (9) Prior to 2003, Connecticut, New York, and Rhode Island did not limit the amount of damages that could be awarded against lessors for the negligent acts of lessees. (10)
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The leasing industry expended a great deal of effort in these states in seeking to amend the liability laws so that lessors would not be liable for the acts of lessees, or, at least, that lessors’ liability would be capped at certain amounts. (11) Connecticut and Rhode Island responded by passing bills which limited lessors’ liability, (12) though the Rhode Island bill included a sunset date of July 1, 2004, after which the liability limits were due to expire. (13) The New York legislature adjourned without amending its liability law. In 2004, Rhode Island passed new legislation extending the sunset date for lessors’ liability limits for another year to July 1, 2005. (14) As of the time of this writing, New York has not enacted legislation affecting lessors’ liability for the negligence of lessees. Several bills that would limit lessors’ liability have been introduced, however, and are currently pending in the New York legislature. (15)
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MISCELLANEOUS STATE LAW ENACTMENTS
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Alabama enacted a new version of Article 1 of the Uniform Commercial Code, which is patterned after the uniform text of revised Article 1 as approved by the National Conference of Commissioners on Uniform State Laws in 2001. (16) Among other changes, revised Article 1 provides guidance to distinguish between security interests and leases. (17)
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Colorado enacted a bill that clarifies that a person who leases motor vehicles needs to be licensed as a motor vehicle dealer, salesperson, or wholesaler. (18)
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Louisiana enacted the Additional Default Remedies Act, (19) which purportedly creates a new right of self-help repossession of vehicles in Louisiana. The new self-help law is effective January 1, 2005. There appear to be potential problems with implementation and interpretation of the Additional Default Remedies Act, however, and lessors should exercise caution in trying to implement self-help repossession until these issues are clarified.
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In Maine, for transactions subject to the Maine Consumer Credit Code, (20) creditors are limited in their ability to contract for and collect a balloon payment. (21) The Maine Consumer Credit Code provides that a balloon payment may be contracted for only if the transaction is made for a term of four or more years, and the consumer is given the contractual right, subject to certain restrictions, to refinance the amount of the final payment in order to fully amortize the obligation on terms then generally offered by the creditor. (22) Maine enacted legislation providing that a motor vehicle lease or loan is not subject to the Maine Consumer Credit Code’s minimum forty-eight month rule for balloon payments, if the contract permits the consumer to transfer the vehicle to the creditor without further liability in lieu of making the final payment. (23) Lessors are permitted, however, to contract for reasonable disposition fees, charges for excess mileage, charges for excess wear and tear, and charges for damage to the vehicle. (24)
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New Jersey enacted legislation allowing “[a]ny person who has entered military service for a period of more than 90 consecutive days,” and who “leased a noncommercial motor vehicle for personal use” prior to service, to cancel the lease “by giving written notice of cancellation to the lessor.” (25) The “[c]ancellation of a lease providing for monthly lease payments [is not] effective [until] (1) [] the last day of the month following the month in which notice of cancellation is made, or (2) when the leased vehicle is returned to the lessor or the lessor’s assignor, whichever is later.” (26)
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“Upon cancellation of the lease, the former lessee and any co-signer shall have no further liability to the lessor or the lessor’s assignor, except … for any damages to the vehicle and excess mileage over the pro rata amount permitted as of the date of cancellation of the lease.” (27) Furthermore, “[t]he lessor or lessor’s assignor shall not impose any penalty or charge upon the lessee or any co-signer on the lease for early cancellation of the lease.” (28) These rights and limitations apply whether or not the serviceperson is the sole signatory of the lease. (29)
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Tennessee enacted legislation creating “an exemption from [the] sales and use tax otherwise imposed on the gross proceeds of motor vehicle leases for insurance proceeds paid pursuant to a damage settlement by an insurance company to the owner of a leased passenger motor vehicle.” (30) In order to be exempt, the vehicle must sustain “damage that renders the vehicle a salvage vehicle, nonrepairable vehicle or flood vehicle, and the owner [must] transfer[] title to such damaged vehicle to the insurance company.” (31)
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UNIFORM CONSUMER LEASING ACT
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The National Conference of Commissioners on Uniform State Laws, which drafts and submits uniform laws for consideration and possible enactment by state legislatures, previously approved the Uniform Consumer Leases Act (UCLA) (32) and submitted it to the states for consideration.
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Connecticut adopted a nonuniform version of the UCLA (33) that became effective on July 1, 2003. Connecticut remains the only state to have enacted the UCLA. (34) At this writing, the UCLA has not been introduced in any other state legislature. As it appears increasingly less likely that other states will enact the UCLA, it may be appropriate to note that the UCLA does not seem to be achieving its purpose of creating a more uniform system of state laws to govern consumer leasing.
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LITIGATION ON VICARIOUS LIABILITY CLAIMS
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In Andreozzi v. Brownell, (35) Marilyn Brownell leased a vehicle from BMW Financial Services, N.A. (“BMW”). BMW was licensed to lease vehicles in Rhode Island. As a requirement for licensure, BMW filed proof of financial responsibility with the Rhode Island Division of Motor Vehicles. Brownell presented BMW with evidence of insurance when she entered into the lease. Two years after leasing the vehicle, Tori Andreozzi was struck by the leased BMW while it was being operated by Brownell. At the time of the accident, BMW was the owner of the vehicle and Brownell was an authorized driver. Andreozzi sued BMW, alleging that BMW was vicariously liable for Brownell’s negligence.
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The Superior Court of Rhode Island examined two provisions of Rhode Island law that determine whether an owner is vicariously liable for the negligence of another. (36) Rhode Island General Laws section 31-33-6, described by the court as a “general provision,” (37) requires that “any owner of a vehicle registered in Rhode Island … share liability for harm caused by the negligent acts of a driver who has the permission of the owner to operate the vehicle,” if the driver has not provided the owner with “proof of financial responsibility prior to an accident.” (38) On the other hand, Rhode Island General Laws section 31-34-4, which the court declared to be “more specific,” (39) deals with “for hire” vehicles. (40) This provision makes “[a]ny owner of a for hire motor vehicle or truck” subject to Rhode Island’s financial responsibility laws “jointly and severally liable … for any damages caused by the negligence of any person operating the vehicle by or with the permission of the owner.” (41)
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BMW argued that the more general provision applied, and that it was not, therefore, liable for Brownell’s negligence because she had provided BMW with proof of financial responsibility. The court disagreed and concluded that the more specific “for hire” provision applied. (42) The court explained that “[w]here there is no clear intention otherwise, a specific statute will not be controlled or nullified by a general one.” (43) Consequently, the court denied BMW’s motion for summary judgment, and held that the fact that Brownell filed proof of financial responsibility did not release BMW from potential liability. (44)
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Three cases from the state of New York were of interest in 2004. In Tikhonova v. Ford Motor Company, (45) Ford Motor Credit Corporation (FMCC) was the registered owner of a vehicle leased to Ford Motor Company. Ford Motor Company subleased the vehicle to the Russian diplomatic mission to the United States. While a Russian diplomat was driving the vehicle, it was involved in an accident and a passenger in the vehicle, Svetlana Tikhonova, was injured. Tikhonova sued FMCC as the car’s owner, claiming that FMCC was liable for the diplomat’s negligence under New York’s vicarious liability law.
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Citing case law developed in a workers’ compensation context, FMCC argued that it could not be held vicariously liable in cases where the driver is shielded from suit due to diplomatic immunity The trial court agreed with FMCC, and granted FMCC’s summary judgment motion. (46) Tikhonova appealed to the New York Supreme Court, Appellate Division.
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The appellate court framed the issue on appeal as “whether the Ford companies, who would normally be liable for the negligence of the car’s driver … are protected by the driver’s diplomatic immunity.” (47) The court declined to apply the statements of law from the workers’ compensation cases FMCC cited, explaining that the statements (i.e., that the immunity of the driver immunized the owner against liability) were “unnecessarily expansive.” (48) The court reasoned that it had the “responsibility to recognize when case law has evolved in an inappropriate direction or to a point where its statutory interpretation is contrary to the intent of the Legislature.” (49) The laws of New York, the court held, unequivocally provide that the owner of a motor vehicle is liable for the negligence of its driver, and that there was “no reason to apply a diplomat’s immunity to protect any other entities [that] would otherwise be liable.” (50) The court reversed the trial court’s decision. (51)
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The New York Supreme Court, Appellate Division had another occasion to interpret New York’s vicarious liability laws. In Ryan v. Sobolevsky, (52) Key Bank, the assignee of a lease, argued that, as a secured creditor, it was not an owner for purposes of New York’s vicarious liability law, and was not, therefore, liable for the negligence of the driver of the leased vehicle. The court disposed of Key Bank’s argument seemingly without difficulty, finding that the lease was not only assigned to the bank, but that the certificate of title was in Key Bank’s name. (53) The court explained that “[i]f the bank had retained no more than a security interest in the car, it would not be an ‘owner'” under New York law. (54) The bank, however, as assignee, “retained a significantly greater property interest in the vehicle,” and was the owner for purposes of the vicarious liability statute. (55)
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In yet another case interpreting New York law, Allianz Insurance Co. v. Lerner, (56) a lessor’s insurer sued the guarantor of the lessees’ obligations under a lease for the amount the insurer spent to settle a lawsuit arising out of an accident involving the leased vehicle. The lease agreement included an indemnity provision, whereby the lessees agreed that if Mercedes Benz Credit Corporation (“MBCC”), the lessor, were subject to claims related to use of the leased vehicle, the lessees would be responsible for paying “all resulting costs and expenses, including attorneys’ fees.” (57)
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Allianz Insurance Company argued that, as subrogee of MBCC’s rights, it was entitled to recover from the lessees the amount Allianz expended to settle the claims. Finding no ambiguity in the terms of the lease, and reasoning that the lessees could have obtained additional insurance to protect against liability above that covered by the required minimum insurance, the U.S. District Court for the Eastern District of New York held that no question of fact was raised by the guarantor as to the agreement’s enforceability. (58) The court granted Allianz’s motion for summary judgment. (59)
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In a Connecticut case, McCarthy v. Lamond, (60) Douglas Lamond was involved in a collision with a vehicle driven by John McCarthy, The accident killed McCarthy’s wife. McCarthy sued Lamond and Chase Manhattan Automotive Finance Corporation (“Chase”), which leased the vehicle involved in the accident to Lamond. Chase then impleaded James Lamond, the co-maker of the lease.
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Douglas and James Lamond moved to dismiss, citing several special defenses. Douglas Lamond claimed that Chase knew he was unaware of his responsibility to indemnify Chase under the lease terms, and that Chase should not be allowed to take advantage of his mistake. The Superior Court of Connecticut rejected this defense, finding that Douglas produced no evidence that he could not read the lease he signed “or was otherwise unaware of its terms.” (61) Douglas also claimed that the lease’s indemnity provision conflicted with other portions of the agreement, and that the court should strike the agreement as ambiguous. The court rejected Douglas’s claim because he did not point to specific ambiguous language in the lease. (62) The court also rebuffed Douglas’s claim that Chase misrepresented the contents of the lease agreement and fraudulently induced him to sign it, because Douglas simply claimed fraud without supplying any facts to support the claim. (63) Finally, Douglas argued that Chase’s lease was “procedurally unconscionable” as applied to him. (64) The court struck this claim because Douglas merely asserted a legal conclusion without supplying any facts to support it. (65)
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Douglas’s brother, James Lamond, claimed that the court should dismiss Chase’s motion bringing him into the lawsuit because Chase’s decision to assert liability against a lease co-maker violated public policy in support of good faith and fair dealing between contracting parties. Although the court noted that there is a common law duty of good faith and fair dealing in every contract, it found no facts supporting James’s defense, as the lease by its own terms provided that James could be separately liable. (66) The court struck all of the Lamonds’ special defenses and allowed McCarthy’s lawsuit to proceed with both Lamonds as defendants. (67)
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In Phillips v. Mirac, Inc., (68) Regeana Hervey was killed in a car accident when Da-Fel Reed, the driver of the car in which Hervey was a passenger, struck another vehicle. Reed had leased the car from Mirac, Inc., which does business as Enterprise Rent-A-Car. Margaret Phillips, Hervey’s mother and the personal representative of her estate, sued Reed and Mirac.
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The suit against Mirac was based on Michigan Compiled Laws section 257.401(3), which “establishes vicarious liability for automobile lessors when permissive users, such as Reed, are negligent and cause automobile accidents injuring others.” (69) The statute caps the lessor’s damages at $20,000 for each injured person and $40,000 for each accident. (70) A jury found Reed negligent and awarded Phillips $900,000 in damages. (71) The trial court awarded Phillips $250,000 in damages against Mirac under a theory of vicarious liability, despite the damages cap under section 257.401(3). (72) The trial court concluded that the damages caps were unconstitutional because they violated the right to a trial by jury in the Michigan Constitution. (73) The trial court essentially concluded that the right to a jury trial included the right, not only to have the jury determine damages, but the right to a jury determination unaltered by the legislature or the courts. (74) Mirac appealed.
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The Michigan Court of Appeals reversed the decision of the trial court. (75) First, the appellate court held that, “because the Legislature can abolish or modify common-law and statutory rights and remedies, it necessarily follows that it can limit the damages recoverable for a cause of action.” (76) Second, the appellate court held that Michigan’s interest in the continued operation of the automobile rental business, and protecting those businesses from large damages awards in jury trials satisfies the rational basis test. (77) Thus, the statute did not violate the equal protection clause. (78) Phillips appealed this decision.
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The Supreme Court of Michigan, in a plurality decision, affirmed the appellate court’s decision, holding that the damages cap was constitutional and did not violate Phillips’s right to a jury trial, due process, or equal protection under the Michigan Constitution. (79) First, the high court explained that the damages cap did not violate Phillips’s right to a jury trial. (80) The court noted that the jury had determined the facts of Phillips’s case, and that it was the court’s responsibility to determine the legal effect of the findings, including whether to cap, reduce, increase, treble, or otherwise modify the damages award. (81)
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Second, the court concluded that the damages cap was not an equal protection or due process violation. (82) The court theorized that the statutory caps on damages could have been designed to reduce insurance costs for automobile lessors, and to thereby increase the number of rental car providers for Michigan consumers, or to enhance auto sales for the domestic industry. (83) These purposes, the court held, established a rational basis for the law. (84)
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In a Florida case similar to the McCarthy decision discussed above, the Florida Court of Appeals in Sontay v. Avis Rent-A-Car Systems, Inc. (85) rejected Ubaldo Sontay’s challenge to the Florida vicarious liability limits for short-term lessors. (86) Sontay was injured when he was struck by a car allegedly driven by Jose Ceballo. Ceballo rented the car from Avis. Sontay and his girlfriend sued Avis, asserting vicarious liability, negligent entrustment, and a derivative claim on behalf of their children. Sontay moved for partial summary judgment, challenging the Florida limitation on liability for short-term lessors.
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Sontay argued that the limitation was unconstitutional, violated access to the courts, and violated his rights to a trial by jury, equal protection, and due process. The trial court held that the vicarious liability limit was constitutional, after which the parties entered into a settlement that did not waive the rights to appeal. (87)
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The Florida Court of Appeals rejected Sontay’s challenges and affirmed the trial court’s ruling. (88) The court noted that there is no deprivation of Sontay’s access to the courts. (89) Though Florida law limits damages payable by a short term lessor, the court noted that injured parties are not precluded from recovering for their injuries, whether such recovery is from the lessor, the lessee, or the operator. (90) Further, the court reasoned that “[c]apping the liability of the faultless owner, while leaving the unlimited liability of the wrongdoer intact,” does not violate Sontay’s right to a jury trial. (91) Finally, the Sontay court found no violation of due process or equal protection because, in the court’s estimation, the purpose of shifting liability from those without fault to those with fault is a legitimate legislative goal to which the statute is rationally related. (92)
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In Cenance v. Tassin, (93) Lynette Tassin leased a car from Dollar Rent A Car (“Dollar”). Her husband, Paul Tassin, accidentally backed the car into a car being driven by June Cenance. Cenance suffered extensive personal injuries and damage to her car. Cenance sued the Tassins, Dollar, and Ace Indemnity Insurance Company, who allegedly provided insurance for the car and Lynette Tassin. The trial court dismissed Dollar and Ace, finding that Dollar, as lessor, was under no legal obligation to provide liability coverage to Lynette Tassin, as lessee. (94) Cenance appealed as to the claim against Dollar.
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Cenance contended that Dollar had a duty to determine whether a lessee has the requisite liability insurance. The Court of Appeal of Louisiana rejected this argument. (95) The appellate court relied on the longstanding principle under Louisiana law that “the negligence of a lessee in the exclusive physical control of the object of [a] lease cannot be imputed to the lessor.” (96) The appellate court also said that no Louisiana law, including the Louisiana Motor Vehicle Safety Responsibility Law, imposed a duty on a lessor to verify whether the lessee had obtained liability insurance. (97) The court also rejected Cenance’s claim of negligent entrustment, finding that Cenance did not claim that the lessee was incompetent or under an apparent disability. (98) Rather, Cenance claimed only that Dollar negligently entrusted the vehicle to the lessee because Dollar failed to verify if the lessee maintained insurance. (99)
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MAGNUSON-MOSS WARRANTY ACT CLAIMS
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Though courts continue to wrestle with whether the Magnuson-Moss Warranty Act (the “MMW Act”) (100) applies to consumer lease transactions, there is a movement towards finding that consumer leases are subject to the MMW Act. In fact, it now appears to be the majority view that written warranties issued in connection with lease transactions are enforceable under the MMW Act. (101)
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In Peterson v. Volkswagen of America, Inc., (102) North Shore Bank had purchased a 1999 Volkswagen Beetle from a Volkswagen dealer in order to lease the Beetle to Jaime Peterson. Volkswagen issued and supplied a warranty to North Shore Bank, and the bank assigned its rights under the warranty to Peterson. After experiencing problems, and after Volkswagen was unable to fix the defects pursuant to the warranty, Peterson sued Volkswagen of America, asserting breach of warranty claims. Volkswagen moved to dismiss Peterson’s complaint on the ground that Peterson was a lessee and, therefore, was not protected by the MMW Act. The trial court agreed with Volkswagen and granted its motion to dismiss, concluding that because Peterson leased, rather than purchased, the vehicle under warranty, she failed to satisfy the MMW Act’s definition of a “consumer,” and was therefore not entitled to the Act’s protections. (103)
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On Peterson’s appeal, the Court of Appeals of Wisconsin reversed the trial court’s decision and remanded the matter. (104) The court held that “where the sale [from a dealer] is made in an effort to facilitate a lease, the issuance of the warranty accompanies [the] sale, and the lessor explicitly transfers its rights in the warranty to the lessee … the lessee is entitled to the protections [under the MMW] Act.” (105) The court explained that Volkswagen issued a “written warranty” for purposes of the MMW Act because the sale from the dealer to North Shore Bank was for purposes other than resale. (106) Accordingly, Peterson was a “consumer” under the MMW Act, because the vehicle was transferred to her during the duration of a written warranty. (107) Peterson was, therefore, entitled to enforce Volkswagen’s written warranty. (108)
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In Mangold v. Nissan North America, Inc., (109) Christopher and Erynn Mangold sued Nissan North America, asserting a MMW Act claim. The complaint alleged that Nissan failed to uphold the provisions of its warranties on a vehicle purchased by Debis Financial Services, Inc. (“Debis”) and leased to the Mangolds. The warranty was issued to Debis, and Debis assigned its rights under the written warranty to the Mangolds. Nissan moved to dismiss, contending that automobile leases did not fall under the protection of the MMW Act. The trial court denied Nissan’s motion, but granted its petition for interlocutory appeal to certify the question of whether automobile lessees may enforce warranties under the MMW Act. (110) The Illinois Appellate Court answered the certified question in the affirmative, finding that the Mangolds were “consumers,” and that the warranty was a “written warranty” for purposes of the MMW Act. (111)
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The court concluded that the Mangolds were “consumers” under the MMW Act, noting that “Debis transferred all of its warranty rights to [them] during the duration of the warranty.” (112) Thus, the Mangolds “were entitled to enforce the warranty.” (113) The court also explained that the warranty did not prohibit assignment of rights. (114) Accordingly, the Mangolds were entitled to enforce those rights to the fullest extent. (115)
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The court found the warranty issued to Debis to be a “written warranty” covered by the MMW Act. (116) The MMW Act, the court explained, simply requires that warranties under the Act be issued in connection with a sale. (117) The MMW Act does not require that a sale be made to the ultimate consumer in order for the warranties to be enforceable under the MMW Act. (118)
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In Pearson v. DaimlerChrysler Corp., (119) the Illinois Appellate Court consolidated two cases, both presenting similar issues of interpretation under the MMW Act.
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The plaintiffs in both cases brought individual claims for breach of express warranty under the MMW Act. Both plaintiffs appealed the adverse outcomes in their cases.
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In one appeal, Anthony Zenari argued that judgment in favor of DaimlerChrysler Corporation (“DaimlerChrysler”) was erroneously entered after a jury trial because the jury was improperly instructed on the elements of a breach of express limited warranty under the MMW Act. In the other case, the court granted summary judgment in favor of DaimlerChrysler because, by the time the parties went to arbitration, most of the vehicle’s defects had been remedied. (120) In her appeal, Shannon Pearson argued that there were issues of fact precluding summary judgment as to whether the manufacturer cured the defects within a reasonable amount of time, or after a reasonable number of repair attempts. The latter issue was common to both cases.
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The Illinois Appellate Court concluded that “[a] manufacturer does not have an unlimited time or an unlimited number of attempts to repair an automobile.” (121) The trial court in Zenari’s case provided a jury instruction that did not reflect this “reasonableness” requirement. (122) The appellate court found that the instruction failed to accurately state the law. (123) The court reversed the .judgment for DaimlerChrysler because the erroneous jury instruction misled the jury to the prejudice of Zenari. (124) Pearson argued on appeal that DaimlerChrysler took an inordinate amount of time to make the repairs to her vehicle and, consequently, that she presented issues of fact as to the reasonableness standard. The appellate court agreed and reversed summary judgment for DaimlerChrysler on the breach of express warranty claim. (125)
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DaimlerChrysler also argued that Pearson could not assert a claim under the MMW Act because she leased the vehicle. The appellate court found that DaimlerChrysler waived this argument by failing to raise it in the trial court. (126) Nevertheless, the court went on to address the merits of the argument, and concluded that Pearson was a “consumer” and had standing to bring her claim under the federal Act. (127) Pearson was a “consumer” because the warranty was issued in connection with the sale and was thereafter assigned to Pearson. (128) The court also explained that “public policy supported affording long-term automobile lessees the same rights afforded to purchasers,” and that the “legislative intent was best served by protecting lessees with a broad reading of the [MMW Act] definitions of ‘written warranty’ and ‘implied warranty.'” (129) The appellate court remanded both cases. (130)
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MISCELLANEOUS CAUSES OF ACTION
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Courtesy Auto Group, Inc. v. Garcia (131) was a class action alleging that Courtesy Auto Group (“Courtesy”) violated the Florida Motor Vehicle Lease Disclosure Act by failing to provide copies of all of the documents signed by the lessees. Courtesy appealed the trial court’s order allowing Wilma Garcia to act as class representative, arguing that the statute did not require Courtesy to provide her with copies of the credit application and consumer option plan. The District Court of Appeal of Florida disagreed and affirmed the trial court’s decision. (132) The appellate court concluded that the statute unambiguously requires dealers to give copies of “each document signed.” (133)
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In General Electric Capital Auto Lease v. Violante, (134) Alfonso Violante leased a Lexus from a dealer, who then assigned the vehicle and the lease to General Electric Capital Auto Lease (“General Electric”). The lease agreement required Violante to keep the car “in good working order and condition.” (135) When the car was vandalized, Violante, who was at that time in default on his lease payments, engaged David’s Towing Service to tow and repair the car. When General Electric learned that David’s Towing Service had possession of the car, it requested access to inspect and remove the vehicle. David’s Towing Service denied the request because General Electric would not pay the towing and storage charges. General Electric sued Violante and David’s Towing Service, and David’s Towing Service cross-claimed and counterclaimed against Violante and General Electric. The trial court entered an order granting summary judgment for General Electric, in the process concluding that the New Jersey Garage Keeper’s Lien Act (the “GKL Act”) did not apply to leased vehicles. (136) The court also relied on language in the lease to conclude that Violante as lessee could not encumber General Electric’s title. (137) David’s Towing Service appealed, and the intermediate appellate court affirmed, holding that Violante had no authority to incur repair and storage charges on General Electric’s behalf. (138)
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The Supreme Court of New Jersey reversed, holding that Violante had the authority to act as General Electric’s representative when he engaged David’s Towing Service. (139) The Supreme Court of New Jersey explained that the GKL Act gives a garage keeper the right to impose a lien on a vehicle when the garage keeper performs services “at the request or with the consent of the owner or [the owner’s] representative.” (140) The court relied primarily on language in the lease agreement to support its decision, noting that General Electric contractually obligated Violante to keep the vehicle in good repair. (141) Therefore, General Electric implicitly consented to services that were necessary to maintain the vehicle. (142) Violante, the lessee, acted as General Electric’s representative when he requested that David’s Towing Service repair the vehicle. (143)
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The Violante court also reasoned, however, that garage keepers should provide notice to the lessor when storing a leased vehicle owned by that lessor. (144) The GKL Act does not expressly require this notice, but the court concluded that, when storage of a vehicle is not necessary in order to make repairs under the lease, it would be unfair to hold the property of the lessor without notice. (145) The lessor would have no means to determine the vehicle’s location and would not be able to avoid unnecessary costs. (146) “Requiring the garage keeper to provide notice to the lessor avoids that potential injustice by ensuring that only storage expenses directly related to the performance of repairs may serve as a basis for a lien under the [GKL] Act.” (147)
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Absent legislative action to codify a notice requirement, the court suggested that garage keepers notify the lessor within seven days of the vehicle’s arrival in the repair shop. (148) “[A] garage keeper who provides notice within seven days will be entitled to a lien for both the cost of storage for those initial seven days and the cost of any storage that occurs after the lessor receives notice and an opportunity to reclaim the vehicle.” (149) Conversely, “a garage keeper who notifies the lessor after seven days have passed will not be permitted to hold the lessor responsible for the storage charges incurred from the end of the initial seven-day period until the time of notification.” (150)
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In the bankruptcy case In re Masek, (151) the Chapter 13 trustee in Scott and Kimberly Masek’s bankruptcy case filed a motion to cease payments to FMCC, the lessor of the Maseks’ 2001 Mercury Mountaineer, after FMCC obtained relief from the automatic stay to repossess and sell the vehicle. FMCC objected, arguing that, because the Maseks assumed the lease in their bankruptcy case, it was entitled to the full value of the lease payments ($3,439) as an administrative expense claim.
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The U.S. Bankruptcy Court for the District of Nebraska sided with FMCC, and allowed its remaining claim as an administrative expense. (152) The court noted that the assumption of a lease “changes the posture of the relationship between the parties to the contract,” so that when there is a breach of an assumed lease, it is considered a breach of a post-petition obligation, entitling the lessor to an administrative claim for the remaining lease payments. (153) The court cautioned debtors to take into account the possibility of a large administrative claim against their estate, if they breach an assumed lease, in deciding whether assumption of a lease is in their best interests. (154)
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The laws governing motor vehicle leasing transactions will continue to evolve, reflecting judicial interpretations of existing laws, as well as new legislative efforts to regulate the leasing industry. At a minimum, one can expect that industry lobbyists will continue to fight for reformation of the vicarious liability laws in New York. It will be interesting to see whether the industry’s efforts in New York will bring about a change in that state’s liability laws. It is also likely that consumer advocates will push for more consumer protections including, perhaps, more state regulation of leasing disclosures and limitations on the consumer’s liability upon lease termination. What effects, if any, these developments will have on leasing volumes remains to be seen, but it seems likely that vehicle leasing developments will continue to be an important part of the consumer financial services law arena.
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(1.) S. REP. No. 94-590, at 2 (1976), reprinted in 1976 U.S.C.C.A.N. 431, 432.
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(2.) Consumer Leasing, 61 Fed. Reg. 52,246 (Oct. 7, 1996) (to be codified at 12 C.F.R. pt. 213).
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(3.) Press Release, Association of Consumer Vehicle Lessors, Lease Volumes Down Another 20 Percent in 2003 (June 25, 2004), available at http://www.acvl.com/about/press_releases.htm. Though leasing continues to be a popular financing option for many consumers, leasing volumes have steadily declined since the late 1990s. For a brief discussion of this decline, see Thomas B. Hudson & Daniel J. Laudicina, Recent Developments in Motor Vehicle Leasing and Litigation, 59 BUS. LAW. 1145 (2004).
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(4.) Consumer Leasing Act of 1976, Pub. L. No. 94-240, [section] 3, 90 Stat. 257 (codified as amended 15 U.S.C. [subsection] 1667-1667e (2000)).
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(5.) 15 U.S.C. [subsection] 1601-1667f (2000).
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(6.) Consumer Leasing (Regulation M), 12 C.F.R. pt. 213 (2004).
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(7.) See 1 Secured Transactions Guide (CCH) [paragraph] 1501 (2001).
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(8.) See Thomas B. Hudson et al., Consumer Personal Property Leasing, in EQUIPMENT LEASING–LEVERAGED LEASING [section] 27.1 (Ian Shrank & Arnold G. Gough, Jr. eds., 4th ed. 2004).
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(9.) Hudson & Laudicina, supra note 3, at 1146-47.
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(10.) Id. at 1146. See also infra notes 35-99 and accompanying text (discussing litigation developments).
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(11.) Hudson & Laudicina, supra note 3, at 1147.
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(12.) See id. (discussing H.B. 6546, 2003 Gen. Assem., Jan. Sess. (Conn. 2003) and S.B. 668, 2003 Gen. Assem., Jan. Sess. (R.I. 2003)).
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(13.) S.B. 668, 2003 Gen Assem., Jan. Sess. (R.I. 2003).
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(14.) H.B. 7710, 2004 Gen. Assem., Jan. Sess. (R.I. 2004).
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(15.) See, e.g., A.B. 11793, 2004 Leg., 227th Sess. (N.Y. 2004)
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(16.) S.B. 68, 2004 Leg., Reg. Sess. (Ala. 2004).
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(17.) U.C.C. [section] 1-203 (2001).
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(18.) S.B. 128, 64th Gen. Assem., 2d Sess. (Colo. 2004).
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(19.) S.B. 768, 2004 Leg., Reg. Sess. (La. 2004).
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(20.) ME. REV. STAT. ANN. tit. 9-A, [subsection] 1-101 to 11-122 (West 1997 & Supp. 2004). The Maine Consumer Credit Code governs leases of goods:
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A. Which a lessor regularly engaged in the business of leasing makes to a person, other than an organization, who takes under the lease primarily for a personal, family or household purpose
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B. In which the amount payable under the lease does not exceed $25,000
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C. Which is for a term exceeding 4 months
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D. Which is not made pursuant to a lender credit card.
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A person is regularly engaged in the business of leasing if he enters into consumer leases more than 25 times in the preceding calendar year. If a person did not meet this numerical test in the preceding calendar year, the numerical standard [is] applied to the current calendar year.
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(21.) Id. [section] 3-308.
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(22.) Id. [section] 3-308(4).
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(23.) S.P. 602, 121st Leg., 2d Sess. (Me. 2004).
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(25.) A.B. 3568, 210th Leg., Reg. Sess. (N.J. 2004) (footnote omitted).
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(30.) H.B. 235 amend. 1, 103d Gen. Assem., Reg. Sess. (Tenn. 2004).
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(32.) The UCLA applies to consumer leases with a term exceeding four months and with total contractual obligations not exceeding $150,000. Uniform Consumer Leases Act [section] 102(a)(2)(A), 7A U.L.A. 5 (2002). Also, parties not covered by the UCLA may agree to be subject to its provisions. Id. [section] 105(b), 7A U.L.A. at 13. In addition to statutes governing leasing transactions in general, the UCLA includes provisions that apply only to motor vehicle leases. Id. [section] 102(a)(11) legis, note, 7A U.L.A. at 6.
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(33.) The version of the UCLA enacted in Connecticut is nonuniform in certain respects, including the procedures for calculating excess wear and use. Connecticut did not enact UCLA [section] 407(e), but rather enacted its own procedures regarding excess wear and use. See CONN. GEN. STAT. ANN. [subsection] 42-270 to -271 (West 2000 & Supp. 2004).
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(34.) Perhaps this is due to the leasing industry’s support for the adoption of the UCLA in Connecticut, whereas the industry has not supported adoption of the UCLA by other states. The leasing industry supported Connecticut’s enactment of the UCLA, at least in part, because the industry opposed other proposed Connecticut legislation that would have required disclosures of the “lease rate” in consumer leases. See Ralph J. Rohner, Leasing Consumer Goods: The Spotlight Shifts to the Uniform Consumer Leases Act, 35 CONN. L. REV. 647, 714 (2003).
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(35.) No. KC03-267, 2004 WL 1542228 (R.I. Super. Ct. July 8, 2004).
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(40.) See R.I. GEN. LAWS [section] 31-34-4 (2002).
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(41.) Id. [section] 31-34-4(a).
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(42.) Andreozzi, 2004 WL 1542228, at *4.
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(43.) Id. at *3 (quoting Morton v. Mancari, 417 U.S. 535, 550-51 (1974)).
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(45.) 779 N.Y.S.2d 47 (N.Y. App. Div. 2004).
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(52.) 772 N.Y.S.2d 310 (N.Y. App. Div. 2004).
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(56.) 296 F. Supp. 2d 417 (E.D.N.Y. 2003).
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(60.) No. CV010085215, 2004 WL 376993 (Conn. Super. Ct. Jan. 30, 2004).
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(68.) 685 N.W.2d 174 (Mich. 2004).
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(69.) MICH. COMP. LAWS ANN. [section] 257.401(3) (West 2001)
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(70.) MICH. COMP. LAWS ANN. [section] 257.401(3)
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(71.) Phillips, 685 N.W.2d at 178.
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(85.) 872 So. 2d 316 (Fla. Dist. Ct. App. 2004).
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(93.) 869 So. 2d 913 (La. Ct. App. 2004).
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(100.) 15 U.S.C [subsection] 2301-2312 (2000).
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(101.) See Mangold v. Nissan N. Am., Inc., 809 N.E.2d 251,255 (Ill. App. Ct. 2004).
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(102.) 679 N.W.2d 840 (Wis. Ct. App. 2004).
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(109.) 809 N.E.2d 251 (Ill. App. Ct. 2004).
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(119.) 813 N.E.2d 230 (Ill. App. Ct. 2004).
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(131.) 874 So. 2d 1220 (Fla. Dist. Ct. App. 2004).
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(134.) 848 A.2d 732 (N.J. 2004).
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(140.) Id. at 737 (alteration in original).
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(151.) 301 B.R. 336 (Bankr. D. Neb. 2003).
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Thomas B. Hudson and Daniel J. Laudicina *
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* Thomas B. Hudson is a partner in the California, Illinois, Connecticut, District of Columbia, New York, Virginia, and Maryland law firm of Hudson Cook, LLP, and chairs the firm. He is President of Counselor Library.com, LLC, and is the Editor-in-Chief of CARLAW[R] a monthly subscription service that reports legal developments in the auto finance and lease business. He is past Chair of the ABA Section of Business Law Consumer Financial Service Committee’s Personal Property Finance Subcommittee. Daniel J. Laudicina is an associate lawyer in the Maryland office of Hudson Cook, LLP.
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