New York Lemon Law Blog

I have recently seen an increased amount of what I call the “Dealership Settlement Scam”.  Broadly, these are instances where a consumer purchases a vehicle that he is dissatisfied (whether or not it meets the requirements of the Lemon Law), and when he takes up this matter with his dealership, ends up getting scammed into buying another vehicle even though he is told he is getting a free replacement.

 The first thing that the owner of a defective vehicle must realize is that if it was purchased or leased new, the dealership is not responsible for providing a refund or replacement under the NYS Lemon Law.  The Lemon Law, ultimately, is a warranty enforcement statute.  The warranty comes from the manufacturer, and it is the manufacturer’s responsibility to repurchase or replace a vehicle if the requirements of the Lemon Law are not met.  If the manufacturer does not abide by its obligations under the Lemon Law, it’s the manufacturer that is going to be sued, not the dealership. 

Thus, the dealership has no reason at all, from a legal perspective, to do anything for you because there is no legal liability.  For this reason, I am immediately suspicious if a dealership, rather than the manufacturer, is offering to resolve a new car Lemon Law case.  You should be suspicious too.

The second thing to consider is that every dealership is in the business of buying and selling vehicles.  That is how they make the bulk of their profits.  The unhappy owner of a vehicle, in a weird sort of way, is exactly the type of person they are looking for - since it is somebody who will likely be looking to buy a new vehicle at some time in the near future.

So here is how the scam works. 

 The consumer (we’ll call him Joe), buys a brand new Nissan Maxima from his local Nissan dealership (it can be any manufacturer, but we will use Nissan in this example).  In order to pay for the vehicle, he finances it.  Over the course of the next few months he has a persistent water leak and has the vehicle repaired several times.  In fact, it has been repaired to the point that the requirements of the NYS Lemon Law are clearly met.

Last week it happened again, so Joe marched into his local dealership and demanded to speak with the General Manager.  A few minutes later Joe is sitting in the GM’s comfortable office.  The GM, seemingly concerned, asks Joe to recount what has happened.  Joe describes the issues he has had with the vehicle and the amount of repairs it has been subjected to.  He mentions that his boss has been upset due to missed days of work due to the problems he has been having with the vehicle.  He lets the General Manager know how upsetting it was to make payments on the vehicle when it seems like it is at the service department more often than his garage.

The General Manager listens to all this and when Joe is done, he apologizes profusely.  “Joe, I can’t tell you how sorry I am to hear that this has happened to you.  This really is completely unacceptable.  We take the relationships we have with our customers very seriously, and I won’t allow this continue.  Joe, we are going to get you into a brand new Maxima right away!”

Joe, of course, is very happy to hear this.  The General Manager tells Joe to sit down with Tommy who will handle the details of the replacement vehicle.  Joe does indeed sit down with Tommy, but this is where it gets a little bit tricky. 

Here is where the scam comes into play.  On a legitimate Lemon Law replacement transaction, there is no vehicle being purchased at all.  Rather the vehicle is given to you in exchange for the old vehicle (subject to a cash contribution from the consumer if the MSRP of the new vehicle exceeds that of the old one).  If there is financing on the old vehicle, one of two things happen.  Usually a “Substitution of Collateral” should be executed (so that the terms of the financing are not changed, but the bank accepts the new vehicle in place of the old one as collateral on the loan).  In some situations, new financing is executed on the new vehicle in an amount sufficient to payoff the loan on the old vehicle.  However, either way, there is no Purchase Contract being executed on a legitimate Lemon Law replacement transaction.

In our example, however, Joe is presented with a big stack of papers, one of which is a Purchase Contract.  Little does Joe know that he is not being given what he would understand to be a replacement.  The dealership is selling him a new car!  At this point the dealership can make money on the so-called ‘replacement’ transaction in all the ways it makes money on any new car sale.  First, they can try and sell the new vehicle for a high price.  Second, they can give a low price on the ‘trade in’.   Finally, they can make money by selling a new finance contract, perhaps at inflated interest rates.

 The essential problem is they are selling Joe a car instead of giving him a new one in exchange for the old one.  As I mentioned before, dealerships buy and sell vehicles in the regular course of their business every day.  There is nothing inherently wrong with this.  The problem here is when they tell their customer they are replacing the defective vehicle, when in fact they are selling them something else and making another profit. 

When Joe purchased his Nissan Maxima he sat down and negotiated a good price on it.  He traded in an older vehicle and got a good price on that as well.  He took advantage of an advertised 0% financing incentive.  In short, he was an informed consumer, and got a reasonable deal on his purchase.  The dealership made some money on the transaction, as it should, but not a windfall.

But now that Joe is sitting in a cubicle with Tommy, being told that his vehicle is being ‘replaced’, he doesn’t see the need to negotiate.  If he does notice in the big stack of papers he is given to sign that there are some numbers that perhaps don’t look right, Tommy tells him it is just for the bank and that he shouldn’t worry.  He is getting his old car ‘replaced’.   Every time Joe asks about something he is given a song and a dance about how it’s difficult to explain but he shouldn’t worry - that they are taking care of him and everything will work out in the end.  The problem is that in the end, the dealership is making a windfall on this new transaction, and the money is coming directly out of Joe’s pocket.

An important thing to realize here is that Joe isn’t stupid.  He is simply in over his head because he doesn’t understand the mechanics of a legitimate Lemon Law replacement transaction.  That, and he trusts the people who are looking into his eye and making promises.  As much as we like to say and think that we don’t trust strangers, most of us, as a matter of human nature, do not expect others to lie to our faces.  It often comes as a complete surprise to people who consider themselves pretty sharp when they find out they were scammed.

Unfortunately for Joe, when all is said and done his monthly payments are probably much higher than they used to be.  The new car works fine, but he was indeed scammed.  If he had asserted his Lemon Law rights against the correct party, Nissan North America, he would likely be in the same new car, and also would keep his old payment amounts and equity in the vehicle.  It also wouldn’t have even cost him a dime in attorney fees if he retained a legitimate Lemon Law attorney to represent him.

Unfortunately, I see this sort of thing happen several times a month.  Sometimes, like in our example, where there is a very strong lemon law case.  Often it is brought to my attention when it is already too late to do anything about it. 

If you are ever in a position where you think you may be getting scammed by a dealership, you should feel free to call me so that we can discuss the issue at no cost to you.

Under the NYS tax code, consumers are entitled to a refund of sales tax if their vehicle is repurchased pursuant to the Lemon Law.

 In the past, this was a fairly straightforward proposition.  The Application Form is available online. You would simply fill it out per the instructions, and mail it to the New York State Department of Taxation & Finance along with a copy of your Purchase Invoice or Lease Agreement (whichever is applicable) and a copy of either the court or arbitrator’s judgment, or settlement documents.

Unfortunately, the process has become a little bit more difficult.  I have recently been contacted by several of my former Lemon Law repurchase clients indicating that their application for a sales tax refund wasn’t approved - that NYS wanted to see more documentation. 

I was surprised to hear about this and contacted the auditor at NYS Department of Taxation & Finance who handles these applications.  The gentleman explained to me that in the case of a settlement, unless the documents specifically indicate that the vehicle is being repurchased pursuant to the Lemon Law, his office would have to interpret the transfer as simply an ordinary purchase of a vehicle, which would not entitle the consumer for a refund of his/her sales tax.

While I am not happy to hear that this process has been made more complicated, I certainly understand the auditor’s position.   Accordingly, I have updated my procedures to make sure that every repurchase settlement has this specific language contained in the settlement documents.  For my past clients, I am trying to work out a way for them to prove it was a lemon law repurchase, either through provision of a copy of my Demand Letter along with an attorney Affidavit, or a letter from the manufacturer or it’s representative.

While this is certainly not a very breathtaking topic, it literally means thousands of dollars in the pockets of my clients.  I take that very seriously.  It illustrates just one of the many pitfalls of Lemon Law practice in New York.  It is also shows why you, as a potential Lemon Law client, should be very dilligent about choosing an attorney to represent you on your New York case.  I am not so sure that a lawyer based out of Michigan or Pennsylvania, who happens to be licensed in New York, will be aware of the ins and outs of a New York specific practice. 

With General Motors and Chrysler on the verge of bankruptcy, the Obama Administration applied some tough love today and declined to bail them out - for the time being.

 GM was provided with 60 days of government financing for operating costs and Chrysler was offered up to $6 billion in financing if it comes to terms with Fiat, within 30 days, on a possible merger or sale.

Addressing the reasonable concern that these two companies might end up in bankruptcy court, which GM’s new CEO seems to acknowledge, the Administration announced that it would guarantee all warranties on new cars sold by GM and Chrysler during a “restructuring period”.  The length of the “restructing period” has not been clarified, so for all intents and purposes, it will last until the government says so.

Importantly, this guarantee of warranties does not apply to vehicles sold before March 30, 2009.  I previously discussed what might happen in the event of a large manufacturer bankruptcy.  Theoretically, if the manufacturer of your vehicle were to file for bankruptcy, your warranty could be voided.  Realistically, it would be politically lethal for the Obama Administration to let that happen - and it won’t.  My strong gut feeling is that even in a liquidation bankruptcy (restructuring is more likely), either a trust fund would be created by the bankruptcy court from remaining assets to cover warranty costs, or alternatively, Congress would draft legislation to cover consumer warranties of affected manufacturers.

 From a lemon law perspective, it is unclear at this time whether the government guarantee on new sales extends to legal claims against the manufacturers for breach of warranty pursuant to state lemon laws and the Magnusson Moss Warranty Act.  Its certainly possible that warranty repairs are ultimately covered, but breach of warranty claimants stand on line with the rest of the manufacturer’s unsecured creditors in bankruptcy court.  It’s even possible that warranty claims from before March 30, 2009 are stuck in bankruptcy court, and those after March 30, 2009 are covered, but if you have to litigate them you need to bring the case in the United States Court of Claims.

I have previously written blog articles about part shortages at GM and Chrysler, and have speculated about what would happen in the event of a GM bankruptcy. Now, a reputable industry blog, “The Truth About Cars”, is reporting a rumor that Chrysler is having short term cashflow problems. Suppliers are apparently being given an across the board 5% payment reduction, and payment has been delayed from 45 days after delivery of parts to 60 days.

 The blog article further speculates that Chrysler’s owner, private equity fund Cerebrus, is unlikely to infuse cash into the company.  This leads the author to conclude that Chrysler will file for bankruptcy by August, in addition to a false conveyance lawsuit against Daimler, which sold the troubled automaker to Cerebrus last year.

So far, I haven’t seen any differences with Chrysler.  In fact I was pleasantly surprised recently when checks for one of my Chrysler settlements came quicker than expected. 

 Nobody really knows how this will work out, but I will say that I would be shocked if none of the big three US automakers go bankrupt.  In fact, given the challenges they face, it would seem likely that all three will find their way to bankruptcy court at some point.

 We are living in interesting times.

A typical New York Lemon Law case involves a vehicle that has been serviced repeatedly for the same problem, or has been out of service for repair for an unreasonable amount of time.  These are “inability to repair cases”.  I previously wrote a blog that concentrates on these types of cases. 

 There is also another kind of New York Lemon Law case which perhaps doesn’t get as much attention, but is just as important.  Refusal to repair cases.  These are cases where the vehicle is brought to the dealership for warranty repairs and the dealership is either unable to verify the consumer’s complaint (”cannot duplicate customer’s concern”), or it verifies that something is wrong with the car, but determine that the problem is not covered by the vehicle’s warranty.

Refusal to repair cases are more difficult to pursue because there is a fundamental disagreement between the consumer and the manufacturer.  The manufacturer believes that there is either nothing wrong with the car, or alternatively, that whatever is wrong with the car is not its responsbility.  On the other hand, in an inability to repair case, the manufacturer has attempted a repair, which implies that it recognizes something was wrong with the vehicle and that it was its responsibility to fix it.  In those cases, where there are sufficient repairs, a manufacturer will usually concede that it must repurchase or replace the vehicle, and it does so voluntarily.  This absolutely never happens in a refusal to repair situation.

Thus, refusal to repair cases must always be litigated or arbitrated.  An expert must be retained to inspect the vehicle, verify a defective condition, and testify about it.  The manufacturer will, of course, produce its own technical specialists who will testify that there is nothing wrong with the vehicle.  Ultimately, it can often come down to credibility, or if its an arbitration, the arbitrator’s test drive.

In addition to the evidentiary hurdles that consumers must get through in order to win their refusal to repair case, there is also a procedural step that often proves difficult.  Pursuant to the New York Lemon Law statute, the following steps must occur before a consumer can bring a refusal to repair case:

• The consumer must bring the defect to the attention of the dealership
• After the dealership refuses to commence repairs within 7 days of being notified of the defective condition, the consumer must write a letter to the manufacturer of the vehicle, notifying it of its dealership’s refusal to commence repairs, and demanding that it commence repairs within 20 days of its receipt of the notice.  I have provided a sample letter here which you can use as a template when drafting your own.
• The letter must be mailed via Certified Mail, with Return Receipt Requested (the two green slips at the post office), to the manufacturer, NOT the dealership.

The statute is very specific about how these steps must be carried out.  Of course its also important to keep a photocopy of your letter, keep the certified mail slip when its given back to you at the post office, and the return receipt slip when it is mailed back to you after the manufacturer receives your letter. 

There is one side benefit to these procedural hurdles.  When a manufacturer receives this type of letter, it will often contact you to make arrangements for one of its own technical specialists (instead of a dealership employee) to inspect the vehicle and conduct repairs if the defective condition is verified.  I have had plenty of situations where this type of 20 day notice letter has resulted in the customer’s vehicle finally being fixed.  And of course, any such repair can potentially be used in an inability to repair case.

One thing to note is that the 2 year / 18,000 mile Lemon Law presumption period applies to refusal to repair cases.  If you purchased or leased your vehicle more than 2 years ago, or have put on more than 18,000 miles, the refusal to repair provision of the New York Lemon Law is not applicable to your case.

I often advise individuals to prepare their own 20 day notice letter using the sample letter I provided as a template.  If you follow all of the steps in this article, and 20 days after receipt of your letter the manufacturer has still not commenced any repairs, you may have a Lemon Law case.  At that point you should call me or another New York Lemon Law attorney, who can then assist you in pursuing your case further.

Good luck!