Judge’s Ruling Puts Crimp in Auto Subleasing Schemes

In a decision expected to have statewide impact, an Orange County judge ruled Thursday that it is illegal to sublease automobiles without first obtaining permission from the legal owners and notifying the Department of Motor Vehicles.

John C. Lamb, staff attorney for the state Department of Consumer Affairs, characterized the ruling as a “major breakthrough” that will have a “persuasive effect” in courts throughout the state as district attorneys attempt to curb auto subleasing schemes.

“This is the first time that auto subleasing has been declared illegal by a state court,” Lamb said.

Superior Court Judge Tully H. Seymour ruled that auto subleasing is an unfair business practice prohibited by state law when subleasing companies fail to obtain required owner consent, register the vehicles with the DMV, or notify the DMV of any vehicle transfers.

Seymour’s pretrial ruling, entered in connection with a case filed two years ago by the Legal Aid Society of Orange County, is a final order. Previously, another judge had issued a similar but temporary order.

Operators of subleasing firms claim that they provide a service by assuming car and insurance payments on behalf of those who no longer can afford them--thus protecting their credit ratings--and subleasing the cars to others who cannot otherwise lease or buy automobiles because they have never established credit or have bad ratings.

While it is a cash-rich and unregulated business, subleasing companies usually do not remain in business for more than six months or so, investigators for bank leasing companies, Legal Aid representatives and prosecutors have said.

What typically happens, they said, is that subleasing companies fail to make the payments that are owed to banks and other original lenders, who generally are not told that the cars are being subleased.

When the companies pull up stakes, they often leave two sets of victims behind. First are those who relinquished possession of their cars and later found that they owe thousands of dollars in past-due payments. Second are those who subleased the cars, usually with hefty down payments, only to have them repossessed.

An Anaheim company, National Security Financial Services, spawned at least two dozen imitators before it folded in April, 1985. The operations of National Security and its offspring have become the focus of civil investigations in Orange and San Diego counties and San Francisco, Contra Costa and other Bay Area counties.

Civil Suit Filed

The San Francisco County district attorney’s office, for instance, has filed a civil lawsuit accusing Best Auto Brokers and its owner-operator, Robert Sauer, of false advertising and unfair business practices, according to Laurel Pallock, a district attorney’s investigator.

Lamb said the state Legislature is close to passing a bill backed by the Consumer Affairs Department to make such auto subleasing practices a criminal offense.

Pallock hailed Judge Seymour’s ruling, saying it would benefit civil prosecutions in the Bay Area.

Jere Witter, a Legal Aid investigator, said the ruling should help to speed resolution of the civil suit filed by the agency two years ago after the Orange County’s district attorney’s office declined to investigate the matter. The Consumer Affairs Department joined in the suit in an effort to obtain the pretrial ruling issued Thursday.

Legal Aid is representing Farida Omari, a refugee from Afghanistan now living in San Juan Capistrano. Omari is suing National Security Financial Services; James Trawick II, its first president; Eustace T. Strickland, who succeeded Trawick, and others.

Car Repossessed

In November, 1984, Omari paid National Security $1,500 down and began making monthly payments of $139.15 to sublease a Honda Civic with an option to buy it at a later date. Instead, the car was repossessed by the original lender after six months.

National Security collected an estimated $400,000 in non-refundable service fees for arranging subleases for about 400 customers in its six-month existence, the Legal Aid suit claims. Witter and other investigators have been unable to find Trawick.

But Strickland remained in the subleasing business, starting a similar operation in Los Angeles before the court ordered him to halt.

Strickland was arrested last September and charged by the Los Angeles city attorney’s office with tax evasion for allegedly failing to file a state income tax return for 1985. City prosecutors also charged Strickland in February with grand theft, false advertising and violations of other state laws for allegedly promising to sell leased cars he had no authority to sell.

Strickland is scheduled to be tried on the misdemeanor charges in both cases on Oct. 7.