Over the last several years, Faux Law has litigated and evaluated multiple claims against Utah DMV dealer bonds, and this article will address common issues and problems which have arisen in those claims and cases. As is the case with regards to other types of bonds, evaluating these claims is hampered by some ambiguity in the statutes and rules dealing with these bonds and by the lack of cases interpreting the statutes and bonds. Thus far, most of our cases have dealt with two categories of claims, those where auction companies and financing companies accuse the bond principal of selling vehicles out of trust, and those where financing companies, credit unions, and individuals accuse the dealers of failing to provide titles for vehicles purchased or financed. While most of our Nevada DMV bond files deal with dissatisfied purchasers accusing the dealer of having sold to them defective vehicles, those types of claims have been quite rare among our Utah files.

THE APPLICABLE STATUTE:

Utah Code Annotated section 41-3-205 requires a $75,000 bond for all “dealer’s, special equipment dealer’s, crusher’s, or body shop’s”, and those bonds are conditioned upon the dealer’s conducting business without: “(A) fraud; (B) fraudulent representation; (C) violating Subsection 41-3-301(1) which requires a dealer to submit or deliver a certificate of title or manufacturer’s certificate of origin; or (D) violating Subsection 41-3-402(1) which requires payoff of liens on motor vehicles traded in; and (iii) may be continuous in form.”

In order to sue a surety on the bond, the claimant must first file a claim with the Utah Motor Vehicle Enforcement Division (“MVED”) within a year after the cause of action arises (41-3-205(2)(a)(i), and he must then sue the surety within two years after filing of the claim with MVED (UCA (2)(a)(ii). The surety in turn must wait for six months “from the date when the first claim on the bond was filed”  before paying a claim, and must then “assess the validity of all claims on the bond” and “submit a distribution assessment” to the claimants and pay the full amounts of the valid claims from the bond if they do not exceed the penal sum, or pay the claims on a pro rata basis if they are in excess of that penal sum. (41-3-205-3(a) through (c)) However, if the claimants cannot agree on a proposed pro rata, the surety must then file an interpleader action for the bond. (41-3-205(3)(d) The surety must also notify MVED of any payment (41-3-205(2)(b))

A successful bond claimant “shall be awarded attorney’s fees in cases successfully prosecuted or settled against the surety or principal if the bond has not been depleted.” (41-3-205(4))

RELEVANT UTAH CASES:

The surety must not issue a bond that enlarges statutory entitlements – even if it is a form provided by the State of Utah. In Dennis Dillon Oldsmobile v. Zdunich, 668 P.2d 557 (Utah 1983), the bond form failed to incorporate the exact statutory language limiting total liability to the penal sum of the bond, and the Utah Supreme Court held that where the language of the bond extends the sureties’ liability beyond that required by Utah Code Ann. § 41–3–16 (1982), the sureties are bound by the language of the bond.  The surety asserted it did not have absolute control over the exact language to be incorporated into the bond.  However, the court stated that a surety can provide its own bond form which the attorney general should approve if it contains language identical to the statute.  The Utah Appellate Court reached the same result in Shelter America Corp. v. Ohio Cs. And Ins. Co., 745 P.2d 843 (Utah Ct. App. 1987) and Western Surety Co. v. Murphy, 754 P.2d 1237 (Utah Ct. App. 1988). Thus, while a surety can exceed the bond coverage provided for by statute, it cannot limit such coverage. In any case, the statutory language always controls. In 1983, the legislature amended the statute to provide that “the total aggregate annual liability on the bond to all persons making claims may not exceed $20,000.” Utah Code Ann. § 41–3–16(1) (1983).

Furthermore, bonds are construed strictly against the surety. See, Dennis Oldsmobile, op. cit. However, the law has changed over the 37 years since this decision. Whether Utah will ultimately modify this strict analysis remains to be seen. PC Riverview, LLC v. Xiao-Yan Cao, 424 P.3d 162 (Utah 2017) (gratuitous sureties entitled to strict construction of the terms of that consent and any variation is fatal).

THE BOND:

In light of the above-cited case law, all sureties appear to use the bond form prepared by MVED and recommended by it, and the language of that bond reflects the statutory provisions limiting total payments from the bond, including attorney’s fees, to the penal sum of the bond.

CONSIDERATIONS IN EVALUATING FRAUD CLAIMS:

The claimants who assert that they were defrauded by the bond principal are typically auction houses or finance companies. The used car dealer will contact the auction houses and request that they sell vehicles to him at auctions on credit, and, if approved, the auctioneers will require the dealer to sign a so-called Flooring and Security Agreement, by which the dealer promises that, upon sale of the vehicle by the dealer, a certain percentage of the sales amount will be turned over to the auction house.  Similarly, financing companies may extend loans to the dealer to purchase vehicles, and the dealer once more promises to repay the loan upon sale of that vehicle. The vehicles are supposed to be kept “in trust” by the dealer, which must account for the whereabouts of the vehicles to the creditor, and the claims typically arise when the vehicles are sold “out of trust” by the dealer, meaning that none of the sales proceed is turned over to the creditor.

The surety’s main defense is the assertion that the claimant cannot prove all the elements of a fraud or fraudulent representation cause of action. In Utah, like in most other states, the elements of fraud are (1) that a representation was made (2) concerning a present existing material fact (3) which was false and (4) which the presentor either (a) knew to be false or (b) made recklessly, knowing that there was insufficient knowledge upon which to base such a representation, (5) for the purpose of inducing the other party to act upon it and (6) that the other party, acting reasonably and in ignorance of its falsity, (7) did in fact rely upon it (8) and was thereby induced to act (9) to that party’s injury and damages. Armed Forces Insur. Exchange v. Harrison, 70 P.3d 35, 40 (Utah, 2003) If the claimant cannot prove any of these elements, his bond claim must fail. For example, when the dealer signed the flooring or finance agreement and promised to repay the creditor from the sale of each vehicle, did he then already intend not to keep that promise, or did later financial developments, during the course of operating the dealership, induce him to sell vehicles “out of trust”? The best defense if often that there was no reasonable reliance by the creditor, that the creditor did not conduct a proper investigation before extending the loan, or that they often extended further credit to the dealer, although the dealer had not made the promised payments or had not properly accounted for the whereabouts of the vehicles. Were audits regularly conducted, and how thorough were those audits? Sales “out of trust” are often only possible when the dealer is given the title for the vehicle before making the proper loan payment or paying the original seller of the vehicle? Was it reasonable for the creditor to provide those titles?

CONSIDERATIONS IN EVALUATING “FAILURE TO PROVIDE TITLE” CLAIMS:

Faux Law Group is presently defending sureties in cases where typically banks, credit unions or finance companies send checks to the dealership on behalf of members or customers, who have purchased a vehicle from the dealership and have financed those purchases through the financial institution, and where the dealer then fails to provide the requested title documents to the financial institution. As was previously noted, the bond covers violations of “subsection 41-3-301(1), which requires a dealer to submit or deliver a certificate of title or manufacturers certificate of origin.” If the dealer fails to provide those documents, does that automatically entitle the claimant to recover from the bond, and if so, what are the dealer’s damages? A look at different scenarios may provide some answers.

Customer A goes to the dealership, buys a vehicle, pays cash for it and is promised the title document “shortly”, but then never gets the title document or even the certificate of origin. What should he do? He can obviously make a claim against the bond, but he can also do the following, as suggested by MVED:

If the previous title was a Utah title, the seller may complete Form TC-123, Application for Duplicate Utah Title in place of the original title, which not only requests a duplicate title, but also allows the seller to transfer that duplicate title to you. You may then take the Application for Duplicate Utah Title to the DMV along with a bill of sale.

If the previous title was from out-of-state, however, the seller is responsible for obtaining a duplicate title from that state. In cases like these, you may take a bill of sale to the DMV, pay your title and registration fees, and obtain a temporary permit so that you may use the vehicle while you wait for the title.

Of course, if the title is never delivered, and the customer considers the obtaining of substitute title too burdensome, a court may well compensate him for ultimate loss of use of the vehicle pursuant to the language of the statute and the bond. In the case of financial institutions asserting such claims, the first question to be asked should be what efforts they have made to obtain substitute titles, thus mitigating their damages? Another question would be how reasonable they were in sending those checks to the dealership in the first place, and how much they investigated the dealership and the purchaser. We presently have a case, where the owner of a dealership purchased a vehicle from his own company and then financed the purchase through accredit union, which in turn send a check for the financed amount to the dealership and then failed to get the title. In another case, a credit union financed half a dozen vehicle purchases through a dealership and kept sending checks to that dealership over a four-month period, without ever getting titles for the initially financed vehicles.

There may also be fraudulent elements involved, at least on the part of the dealership and of some purchasers, such as in the above-mentioned case of the owner of the dealership buying and financing a car, where the sales transaction may have never taken place, and the credit union may have been defrauded by the dealer, or where the dealer and a “purchaser” conspire, engage in a fake sales transaction, have the “sale” financed and then pocket the money without providing title. However, such fraudulent transaction would probably be covered by the “fraud and fraudulent representation” coverage of the statute and the bond, though the potential defenses delineated above would apply to them.

Other factual considerations are as follows: Is the vehicle purchaser still in possession of the vehicle, and is he making his car payments? If so, what are the damages of the financing company at this time? Of course, the purchaser will ultimately need to get the title once the loan is paid off. What if the purchaser fails to make loan payments? Without having the title, can the financing company repossess the vehicle?

SUMMARY:

While this article has delineated some potential claim defenses to Utah DMV dealer bond claims, the ultimate decision on whether to pay, deny or compromise a claim will depend on the specific facts of the claim, the amount of the claim, and also on economic considerations in potentially litigating a claim or multiple claims, with the potential of attorney’s fees being assessed against the surety as a consideration.