AttorneyAuto DefenseJames S. SifersUsed-Car Dealerships

Dealer Bond vs. Cash Deposit

In order to operate as a dealer in California, the California Department of Motor Vehicles (“DMV”) requires dealers to provide a $50,000 dealer bond to protect purchasers, sellers, financing agencies, and governmental agencies against monetary loss resulting from the dealer committing fraud and/or making fraudulent misrepresentations. (Cal. Veh. Code § 11710.)  In response to this requirement, there are a number of third-party surety companies that will provide this bond in exchange for payment of an annual premium and the providing of a personal guaranty to cover any losses incurred by the surety as a result of any claims on the bond.  However, once a dealer posts the bond with the DMV via a third-party surety, that dealer losses nearly all control over payment of any claims made on that bond and subjects itself, and likely a personal guarantee, to additional liability over and above the $50,000 bond amount.  If a dealer has the means, it may make more sense to deposit $50,000 with the DMV in order to avoid purchasing a bond from a third-party surety company.

When “a purchaser, seller, financing agency, or governmental agency” makes a claim on a bond held by a surety; which is usually done in connection with a lawsuit against the dealer, surety, and if applicable, the financing company; that claim is directed to the surety who then makes a determination as to whether or not to pay the claim.  Sureties will generally seek input from the dealer as to the circumstances regarding the claim, but per most surety bonding agreements, the determination on whether to pay the claim or not rests with the surety.  This is where the surety has several options on how to proceed in response to its receipt of a claim.

If the claim is determined by the surety to be valid, less than $50,000, and there are no other pending claims that the surety is aware of, the claim may be paid by the surety.  Thereafter the surety would likely seek reimbursement from the dealer and/or personal guarantee for not only the amount paid under the claim, but any additional costs incurred by the surety, including attorneys’ fees paid by the surety to its counsel to resolve the claim.  This means that the total liability to the dealer and personal guarantee could exceed the $50,000 bond amount.  This approach can be employed by the surety even if the dealer is defending the claim in litigation with the claimant.

If the claim is determined to be valid, but there exist other claims that the surety is aware of which could potentially exceed the $50,000 bond, the surety can sue all of the claimants on the bond, the dealer, and the personal guarantor in a civil action separate and aside from the litigation that is likely pending by each of the claimants against the dealer and surety.  The claimants would be named in this separate action only as claimants on the bond with the entire bond being deposited with the court to allow the claimants, and/or the court should the claimants fail to come to an agreement, to determine how the funds should be divided.  The dealer and personal guarantor would be sued in order to allow the surety a means to recover the $50,000 bond deposited plus any additional costs incurred for having to so act.  The surety often recovers its fees and costs associated with depositing the funds directly from the deposited funds, but that will have no bearing on what it seeks to recover from the dealer and personal guarantor as the surety essentially pays itself from its own money.  The court action will then proceed with the surety seeking to recover all of its fees and costs from the dealer and personal guarantor.

The final option is where the surety elects to defend the claim, either through its own counsel or through the use of the dealer’s counsel.  While this may end in a favorable result for the surety if it is determined not to have to pay, the surety, per its agreement with the dealer and personal guarantor, will likely seek reimbursement from the dealer and personal guarantor for all fees and costs incurred in defending the claim.  This means that the dealer is out-of-pocket even on a win.  Should the surety not prevail in its defense of the claim, California case law has held that the surety’s liability for attorneys’ fees and costs is not limited to the bond amount of $50,000 or the damages cap related to the value of the vehicle. (Cal. Veh. Code § 11711; see Pierce v. Western Surety Co. (2012) 207 Cal.App.4th 83 [a case litigated on behalf of the surety by the Law Office of John L. Fallat, a firm who handles a substantial amount of surety representation in California].)  While the surety may be the one actually paying the award to the claimant, including the attorneys’ fees and costs award, the surety will likely seek to recover all of its expenses, including the amount paid to the claimant as well as the surety’s attorneys’ fees and costs, from the dealer and personal guarantor.

In every situation where a claim is made on the bond, there exists the potential that the dealer and personal guarantor could be liable to the surety for fees and costs associated with claims made on the bond.  A dealer can avoid this potential lack of control by depositing $50,000 with the DMV in lieu of providing a bond from a third-party surety company.  Cal. Code Civ. Proc. § 995.710 allows the deposit of money in lieu of providing the bond required by Cal. Veh. Code § 11710.  While a deposit in lieu of a bond requires the depositor to relinquish control over the deposited funds (Cal. Code Civ. Proc. § 995.710(c)), that deposit has a number of benefits to the dealer that are not present when the dealer purchases a surety bond.  There is no personal guarantee, there is no indemnification requirement for fees and costs incurred over and above the deposited amount, and there is no potential liability in excess of the $50,000 on the funds deposited. (See DMV Form OL 25E Deposit Agreement and Assignment.)  This is true even for the attorneys’ fees and costs incurred by the DMV in any claims related to the deposit, as those attorneys’ fees and costs are limited to the deposited funds. (Cal. Veh. Code § 11710.2(b).)  This is not to say that a claimant could not recover independently against the dealer for any violation of law, but that recovery would require the claimant to seek to enforce a court judgment against the dealer should the $50,000 cash deposited not be sufficient to satisfy the judgment.  It must be noted though that should there be an outstanding unsatisfied judgment, even after payment of the $50,000 on deposit with the DMV, the DMV will suspend the dealer’s license until such time as the dealer restores the deposit, provides the required bond, and/or satisfies the outstanding judgment. (Cal. Veh. Code § 11710(c).)

Should a dealer decide to deposit funds in lieu of providing a bond, those funds may be returned by the DMV at the expiration of either (1) three years from the date a dealer ceases doing business under a temporary permit; (2) three years from the date a dealer ceased being licensed, provided the DMV “is satisfied there are no outstanding claims against the deposit;” and (3) five years from the date the dealer “secured and maintained a dealer bond” provided the DMV “is satisfied there are no outstanding claims against the deposit.” (Cal. Veh. Code § 11710.2(a)(1).)  A dealer may seek the return of the bond via an order from a judgment of the Superior Court per the same time frames. (Cal. Veh. Code § 11710.2(a)(2).)

Should a dealer be interested in depositing funds in lieu of paying an annual premium, subjecting its principal(s) to personal liability, and losing all practical control over the payment of claims, please review DMV Form OL 25E Deposit Agreement and Assignment.

James S. Sifers

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