By Leland Faux
Nevada Revised Statute 482.345 requires a car dealer to post a $100,000 bond for the benefit of consumers. Recently, we’ve noticed an uptick in volume of lawsuits on these types of bonds. This article will provide a brief synopsis of some of the trends we are seeing and how a surety can protect its interests.
Plaintiff’s Side Overview
There are a few attorneys in Nevada who focus on consumer claims against auto dealers. These attorneys have honed their craft and are very good at turning small claims into large lawsuits. Additionally, they truly believe that they are doing a public service by “taking down” unscrupulous dealers (and it’s up to the dealer to prove they are not unscrupulous). And, based on Nevada feeshifting statutes, they happily charge you $450/hr for providing this service.
The goal of the Plaintiff’s attorney is, in my view, to attempt to maximize the claims to attorney’s fees-and many defendants play into this strategy. A side benefit is that they can get some relief for their clients as well.
1. 1. Decline in Case Quality. One of the more active attorneys in this area will state that he only brings slam dunk cases. Four years ago, I would say this was pretty much true. His cases typically had clear violations of Nevada law-often violations of disclosure requirements (federal and state), improper finance charges, title issues, or emissions. The cases had a clear legal duty and a clear violation of that duty. The only question was the amount of damages.
More recently, though, we’ve seen more and more claims that are in the grey areas of fact and law. The main grey areas relate to defects for which an inspection is not mandated by law-such as frame damage-and general allegations that the mandatory inspection was not properly performed. For example, a recent case claimed that a dealer did not disclose frame damage and did not actually perform the mandatory inspection. However, the dealer has a car fax report dated the date of the sale and he filled out the mandated inspection form. The plaintiff is just denying that he saw the car fax report and that inspection report is accurate. In other words, this is a he-saidshe- said case. The point is that this is not a slam dunk-there are issues of fact and law. This case is not against a clearly “unscrupulous” dealer, it is a case where either the dealer or the surety has to decide to fund a trial or settle. And more often than not, there is a settlement. The attorney gets paid even if the claim would have been defeated at trial.
1. 2. Forcing the Dealer to Shut Down. The Plaintiff’s attorney will aggressively litigate the cases. While you can’t really fault an attorney for doing that, these attorneys know that at some point a small dealer is going to run out of money and shut down. Then, once the dealer is out of the way the surety is left holding the bag. In the event the surety tendered defense of the bond, it could be facing years’ worth of attorney’s fees claims on a case it knows little about.
1. 3. Fishing for Class Action. In any of these types of cases, the plaintiff’s attorneys have the potential for a class action in mind. For instance, if they depose a dealer and have any hint of evidence that the dealer is merely checking off the boxes on the mandatory inspections, they will try to get all inspection reports from the dealer for class action purposes.
1. 4. Leveraging Business Court. Nevada has a specialty business court for handling business-related lawsuits. The filing fees for business court are around $1,300 compared to $270 for district court. A plaintiff recently applied and was granted a fee waiver and then filed the case in business court. I believe this was done only to make it more expensive for the dealer and surety to defend in order to leverage a settlement. Moreover, I believe the business court is an improper forum for a consumer claim. Nevertheless, the filing fee must be paid to make that argument.
1. 5. Evidence of Collusion. Interestingly, both of the more active attorneys in this area recently increased their claimed hourly rates from $350 to $450. I once used the argument that fees based on $450/hr were unreasonable because the other attorney (who had similar experience) only claimed $350/hr. The next thing I knew, I learned that this other attorney had increased his rate to $450/hr.
1. 6. Notice or No notice. The Plaintiffs’ attorneys do not necessarily agree on whether a surety should be provided notice of a claim. One view is that notice is advantageous because the surety will often issue a collateral demand to the dealer which could force the dealer to settle. In fact, Plaintiffs’ attorneys will actually warn the dealer that the dealer is going to have problems with the surety so it better settle. Oftentimes, this is exactly what happens. And it is, in my opinion, not necessarily a bad outcome for the dealer. It also does protect the surety from losses.
On the other hand, other attorneys will not notify the surety of a claim until they either obtain a judgment or place the dealer in default. The argument in favor of this approach is that the bond is liable for a judgment or default of the principal regardless of notice under the bond statute (NRS 482.345). As a result, we have had him claim fees for two years of litigation where the surety had no notice that a claim was even being litigated.
1. 7. More Cases. As noted, we are seeing a lot more activity-particularly from George West. If you are writing Nevada DMV license bonds, expect to see his name.
1. 1. Dealer’s Counsel. The dealers tend to find random attorneys to represent them. Many of the attorneys we see defending these claims have practiced primarily in criminal defense, bankruptcy/foreclosure, family law, etc. It’s basically a neighbor or an attorney who represented them previously. By and large, these attorneys do not understand the nature of these consumer claims or the litigation strategies of these Plaintiffs’ attorneys. This often leads to common problems:
1. a. Failure to Properly Frame the Decision. If the dealer is not willing to fund the case through trial, they absolutely need to settle and settle yesterday. If they are going to pay to litigate only to cop out later, all they will have done is increase the plaintiff’s demand for fees and, thus, increased the settlement figure. Also, if the dealer is going to fold halfway through the litigation, the surety will be left holding that bag with no principal and a huge claim for the Plaintiff’s attorney’s fees. It’s not a position of strength.
1. b. Attempting to Out Litigate. Remember when I mentioned that Plaintiffs’ attorney want to maximize their claim for fees? One way they do this is by goading the defendant to file motions they know they are likely to defeat. Some of these motions include moving for arbitration, venue issues, and pre-mature motions to dismiss. They also seemingly welcome discovery disputes. They want the defendant to put up a fight for document disclosures because as long as they have some reason for the request, the discovery commissioner will typically grant a motion to compel. These types of motions, in their view, only justify their claim for fees in any settlement discussions or, if they prevail, after a judgment.
Thus, the defense attorney in these types of cases needs to be very selective about the issues they take up. Are they framing an issue for appeal, or just trying to get to a decision on an issue of law or fact as quickly as possible? Moreover, many of the arguments we see tend to demonstrate a lack of understanding regarding the nature of the claims.
1. c. Exhausting the Retainer. Unfortunately, it is my view that defense counsel just wants to get a retainer from the dealer and use it up doing something-whether that something is in the best interest of their client or the surety, it doesn’t really matter. Once the retainer is gone, so is the attorney. This can put the surety in a difficult position.
1. d. Picking Fights with the Surety. Defense counsel who are unfamiliar with the nature of suretyship think the surety is being unfair and abusive to their clients. They don’t understand that the bond is more like a creditor relationship than that of an insurer. So they will refuse to cooperate or argue bad faith.
1. e. Tender. For these types of cases, my recommendation would be to make sure you are comfortable with the defense and motion strategy before you tender defense of the bond. This is particularly important in these cases because, if I were playing the odds, I would bet that the tendered counsel will at some point withdraw. So it is ideal to ensure you are comfortable with the defense. I would also suggest that the surety consider making the provision of collateral a requirement for tender if such right is included in the indemnity agreement. Not only does this protect the surety, but it can ultimately do the principal a favor. For example, if they can’t pay $12,000 in collateral. They can’t afford to fund litigation and should settle as a business decision.
1. 2. Issues of Bond Scope. The bond is limited to claims for breach of contract, fraud and fraudulent representation, deceptive trade practices, and violations of the dealer statutes (NRS 482). Plaintiffs have alleged that wrongful repossession, UCC violations, and other claims arising under state law are covered by the bond. This is not the case. Earlier this year, the district court ruled that the bond only covers the causes of action referenced in the bond statute.
1. 3. Surety Defense Preferences. Most claims reps we work with are familiar with these types of claims. In general, the surety faces the same question the dealer does (or should): Do we want to fund the defense to trial or settle? If you don’t want to fund to trial, the best time to settle is yesterday. More often than not, the surety will get these cases settled either by forcing the dealer’s hand through a collateral demand (which, again, I think does the principal a favor in many cases) or by a direct negotiated payment to the plaintiff. This obviously depends of the circumstances of each case.
That being said, if there are issues related to the scope of coverage of the bond, that issue of law can be determined by submitting a motion prior to the costs of discovery or trial. There are also other defense strategies that we can explore on a case-by-case basis. Just know that the plaintiff’s attorney will not concede any issues of fact or law. If you want an issue resolved, it will have to be by the judge or trier-of-fact. This means we tend to be very selective on the issues we pursue.
Overall, Nevada law related to DMV license bonds is very consumer friendly. By and large, dealers and their retained defense attorney do not understand the nature of these types of claims. Thus, before you tender defense of the bond, you should make sure you are comfortable with the defense strategy. Unless the law changes, we anticipate seeing these trends continue. Should you have further questions, please do not hesitate to contact a representative of the Faux Law Group.