Court of appeal’s favorable ruling on dealership’s informal hold check agreement will stand

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In August of this year, the California Court of Appeal in Nichols v. Century West, LLC. et al. held that a dealer’s informal agreement with a customer to delay depositing her down payment checks did not constitute an undisclosed deferred down payment on the sales contract, nor did it violate the single document rule. The challenges to this decision were resolved earlier this month and the remittitur issued last Monday. So, this is the law of the land. Nonetheless, Nichols leaves some unanswered questions and we strongly recommend consulting with an automotive attorney before changing your polices concerning deferred down payments.

In Nichols, the customer tendered three checks in the amount of $1000, two of which were post-dated one day, and one post-dated 14 days from the date of the sale. The dealership orally agreed to delay depositing each of the checks, and characterized the checks on the sales contract as a $3000 down payment, not a deferred down payment.

After owning the vehicle for eleven months, the plaintiff sued to rescind the contract, claiming that since deposit of the three checks was agreed to be delayed, they constituted deferred down payments which were improperly disclosed as a cash down payment, thus violating the Automobile Sales Finance Act. The Court of Appeal held that neither the Automobile Sales Finance Act nor applicable case law supported the customer’s claim that the dealer’s informal agreement to accommodate her by not immediately depositing checks tendered the day of the purchase—as opposed to scheduling a payment to be made at a later date—constituted a “deferred” down payment, or was a “term of payment” under the single document rule. The customer’s subsequent petition for rehearing was denied, as was her petition to the Supreme Court to review this case. As such, for now this decision remains valid precedent on this issue.

This case makes an important distinction regarding the definition of a “deferred down payment.” If the customer provides the down payment check at the time of the transaction and requests that the dealership delay deposit of the check, it is not a deferred down payment under the Nichols decision and therefore may be disclosed on the contract as a cash down payment. However, if the agreement is that the customer will provide the down payment check to the dealership at a scheduled date in the future, that would constitute a deferred down payment that must be disclosed as such in the contract. Dealers should still be careful in their handling of hold checks and should confer with legal counsel if they have any questions about the Nichols decision, or their handling of hold checks in any particular deal. Dealers should also review their retail dealer agreements with legal counsel in order to ensure that their handling and disclosure of hold checks will not violate these agreements.