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TN Court Rejects Idea That Dealer Reserves Are Fraudulent

Feb 18, 2005

The Tennessee Court of Appeals has dismissed a class action brought against a Tennessee GM retailer, which alleged that the mere failure to inform customers of the existence of a “dealer reserve” in finance transactions violated the Tennessee Consumer Protection Act.Plaintiffs in the case, Beaudreau v. Larry Hill Pontiac, alleged that dealership employees orally promised to obtain financing for his purchase at “the best rate they could give us.”Plaintiff alleged that financing was offered by GMAC at 11.25% and the dealership “secretly inflated” the finance rate to 13.5%, telling the plaintiff that this was “the best rate.” The Tennessee Court resoundingly rejected the argument that this conduct constituted consumer fraud.The Tennessee Court agreed with previous decisions from the federal 7th Circuit Court of Appeals, the Supreme Court of Alabama, and the California Court of Appeal, all of which have recognized that the practice of marking up a good or service is not fraud. It is to be hoped that this decision, though not binding in New Jersey, may nevertheless be an indicator that sanity is spreading through the legal system.The Court’s rationale for rejecting plaintiff’s claims represents a breath of fresh air and a confirmation that capitalism is indeed still lawful in America. A reasonable consumer should be aware that a for-profit retailer, in arranging for financing for a consumer, would expect to receive some sort of remuneration for its efforts.The consumer is free to seek financing elsewhere if he or she is unhappy with the terms quoted by the dealer, and that the practice of dealer reserve is in no way unlawful. The Tennessee Court also quoted approvingly from a decision of the California Court of Appeals, which held that the law, “was not intended to eliminate retailers’ profits by requiring them to sell at cost, whether the product is automobiles or automobile financing.” Although there are some signs of sanity in the courts, matters may be different in state legislatures.Governor Schwarzenegger of California recently vetoed the California Car Buyers Bill of Rights, one part of which would have installed a mandatory cap on dealer reserves.Consumer groups continue to push for capping, or even outlawing, dealer reserves.Dealership support for CAR-PACremains critical to ensure the retail automotive industry will have the resources to ensure that any action by New Jersey’s Legislature recognizes the right of retailers to earn a profit on the goods and services they sell.