Trade-In Troubles : Car sales: Customers find they still owe on vehicles turned in to buy another auto. A DMV unit is looking into eight complaints against Jim Slemons dealerships.
It’s a car buyer’s worst nightmare and it has left Jerry McClellan and several other customers of a prominent Orange County car dealer in a state of angry bewilderment.
McClellan bought a new car from Jim Slemons Acura in early April and traded in a leased Acura as part of the deal.
In most cases, that would be the end of things: As part of the sale, a dealer typically pays off any balance owing on the trade-in, applies any extra cash to the customer’s down payment and the customer drives off in a new car. Everyone is happy.
But Slemons, who has since sold the Acura franchise, has not yet paid off McClellan’s trade-in, the Costa Mesa dentist said Tuesday.
Someone else is driving the car these days, and McClellan is still making monthly lease payments to keep his credit record clean while he tries to straighten things out.
Slemons owns several other dealerships, including Jim Slemons Imports in Newport Beach--one of the nation’s largest Mercedes-Benz franchises--but his businesses are in deep financial trouble. The state Department of Motor Vehicles special investigations unit in Irvine is looking into a total of eight complaints against various Slemons dealerships for delaying payoff of customers’ trade-ins.
The scenario is repeated with chilling regularity across the state, according to Al Bender, a senior deputy district attorney in Santa Clara County who has fought for a law to make slow payoffs a criminal offense.
As the auto industry enters its third year of slumping sales, more dealerships are running out of cash and some, to make ends meet, are holding back trade-in payoffs and using the funds for other purposes, according to Bender and other law enforcement officials.
There is no state law requiring a car dealer to pay off any loan balances owing on a customer’s trade-in.
But Bender has led a campaign that resulted in the California District Attorneys Assn. backing a state bill this year that would have made it illegal for a dealer to fail to pay off a trade within 20 days.
But the measure, AB-1644, was killed by the Senate Transportation Committee in mid-June, less than two weeks before Slemons’ financial difficulties surfaced and customers began complaining that trade-ins at several of his dealerships hadn’t been paid off.
One of the votes that killed the measure was cast by Sen. Marian Bergeson (R-Newport Beach), who counts Slemons and many of his customers--including McClellan--as constituents.
Bergeson said in a recent interview that the district attorneys group did not argue strongly enough for the bill’s passage.
Bender said deputy district attorneys around the state complain that there is a growing instance of auto dealers delaying trade-in payoffs.
He said his association pushed AB-1644 “because as a practical matter, car buyers’ options are very limited when trading in a car. Few dealers are going to buy the car from them and give them the cash up front. So you are putting yourself at risk when you have a trade-in and the dealer is in financial trouble.”
With an auto trade-in, a dealer only acts as the seller’s agent in agreeing to pay off any outstanding vehicle loan. The car owner remains responsible for ensuring that the debt is paid.
Slow payoffs sometimes result in cases like McClellan’s, in which the car is sold to a new retail buyer without an appropriate transfer of title. More often, Bender said, the delayed payments result in hefty late fees and interest charges that the original owner of the trade-in must pay.
Bergeson said she expects the measure to win a reprieve and said she will take a greater interest in the bill now because of the complaints against the Slemons dealerships in her district.
That is little comfort to McClellan, however.
Four months after he thought he had sold his Acura, the car is being driven around Orange County by a new “owner” who doesn’t know yet that McClellan’s bank retains the title and legal ownership and has the right to repossess the vehicle if McClellan stops making payments.
McClellan’s trade-in was wholesaled to another Orange County dealership and that dealer, according to state Department of Motor Vehicle records, sold it in apparent good faith to a retail buyer sometime last month, McClellan said.
“I don’t understand how they can sell a car they don’t have title to,” McClellan laments. “They still owe my bank about $12,500 to pay it off, so the bank still has the pink slip.”
Malcolm McCassy, Slemons’ general manager, acknowledges that the once formidable auto empire--which posted nearly $180 million in gross sales in 1989, is in deep financial trouble. “We are fighting for our life,” he said Tuesday.
But he maintains that most of the problems with delayed payoff on customers’ trade-ins have been resolved and that there was no intent to harm any of the dealerships’ customers.
With no law specifically prohibiting slow payoffs, the dealer’s intent is critical to any criminal case, law enforcement agents say, and intent is difficult to prove.
DRIVING A BAD BARGAIN 1. THE DEAL: Jim Consumer buys new car from Joe Dealer, trading in old car for $4,000. Consumer still owes $2,000 on old car, which Dealer agrees to pay off, deducting payment from trade-in value. That leaves $2,000 for down payment on Consumer’s $16,000 new car. Pink slip for the trade-in remains with Consumer’s old bank, which is legal owner until old car is paid off. 2. OLD CAR, PART I: Dealer sells old car to Acme Used Cars for $4,500 in a wholesale transaction. Acme issues Dealer a draft that can’t be converted to cash until Dealer delivers the pink slip, which Dealer can’t get until he pays Consumer’s old bank the $2,000 balance.
3. DEALER GETS MONEY: The company financing Consumer’s new car issues a payoff check to Dealer for $14,000. Dealer uses $11,000 to pay factory for the car. Of the remaining $3,000, Dealer is supposed to use $2,000 to pay off Consumer’s trade-in, with the remaining $1,000 as profit. Instead, Dealer uses the $3,000 to meet his weekly payroll, figuring he can pay the $2,000 owned on Consumer’s old car from future profits. 4. CONSUMER GETS STIFFED: Consumer doesn’t know it yet, but he is responsible for payments on both his old and new cars. As far as the old lender is concerned, Consumer borrowed the money and Consumer, not Dealer, is responsible for paying it back.
5. CONSUMER B: Jane Buyer sees Consumer’s old car at Acme and decides to buy it. She pays Acme $5,995 and drives off in what she thinks is her car. 6. PROMISES: Acme issues Buyer’s bank a written guarantee that Acme has title to the car and will supply the pink slip and other documents to the state Department of Motor Vehicles so the car can be re-registered in Buyer’s name and a new pink slip can be issued to Buyer’s bank. 7. PROMISES: Acme issues Buyer’s bank a written guarantee that Acme has title to the car and will supply the pink slip and other documents to the state Department of Motor Vehicles so the car can be re-registered in Buyer’s name and a new pink slip can be issued to Buyer’s bank. 7.OOPS!: Meanwhile, Consumer is shocked to get a delinquency notice from the bank that had financed his old car. He contacts the bank, which tells him that Dealer never paid it off. 8.REPO MAN: The lender for Consumer’s old car still has legal title to the vehicle, tracks it down and repossesses it from Buyer. She is left owing $5,995 for a car she no longer has. 9.MORE TROUBLE: Both consumers can file civil lawsuits against their respective dealers and can file complaints with the DMV. If it can make a case, the DMV has several options for penalties, ranging from small fines to revoking the dealers’ licenses to bringing criminal charges.
Source: Department of Motor Vehicles
