Lemon Law Lawyer Blog

More and more consumers are facing the situation where they have a good claim under the California Lemon Law, which they cannot effectively pursue, because they have too much negative equity rolled into the financing.

Lenders are reporting a sharp increase in consumers trading in vehicles where they are “upside down” on the loan. In other words, they owe more than the car is worth. The difference is called “negative equity.” Undisclosed negative equity, i.e., negative equity from a trade-in vehicle that is rolled into the price of the new vehicle, violates state and federal truth in lending laws. Disclosed negative equity becomes a sticking point in lemon law cases. The dispute: manufacturers say “we’re willing to repurchase the vehicle, but we will deduct the negative equity from the final award.” The consumer’s attorney will respond: “the negative equity constitutes part of the price ‘paid or payable’ for the vehicle and should be reimbursed.” Indeed, the State of California Department of Consumer Affairs supports the lemon law lawyer’s view of the matter. The Department wrote an opinion letter to Ford Motor Company’s General Counsel in April 1997 stating specifically that “‘negative equity’ is part of the actual price payable by the buyer.”

The main problem with the negative equity question is that consumers could actually end up owing the manufacturer money at the end of a lemon law buy-back transaction. Here’s how. Let’s say you trade in a late-model vehicle where you have $10,000.00 in negative equity. That $10,000.00 is properly disclosed and re-financed in the purchase of the new vehicle. Let’s also say that you made a down-payment of $2,000.00 and that your monthly payments are $500.00 and that your loan balance is $30,000. Let’s also assume that within the first three months, you brought the vehicle into the shop four times for defects to the engine. The auto-maker agrees to buy your car back. Great you say! But wait. Here’s how the manufacturer does the math: you get back the $2,000.00 plus three monthly payments of $500.00 totaling $1,500.00. That comes to $3,500.00. The auto maker cuts a check to the bank for the $30,000.00 loan balance, but then subtracts $10,000.00 from $3,500.00, leaving a negative balance of $6,500.00. That’s the amount of the check you will be writing to the auto giant who made the lemon vehicle.

Is this fair? The auto makers say “Yes! While we might be responsible for making a lemon car; we’re not responsible for how consumers decide to handle their debt.” As a matter of public policy, however, this effectively lets the auto makers skate on their obligations under the lemon law, because very few consumers can come up with $6,500.00 cash at a moment’s notice. The law is unclear, so the moral of this story is: consider keeping that late-model vehicle a little longer if your only option in trading it in will be to re-finance the negative equity.

The California Lemon Law requires that consumers present their vehicle for repairs a “reasonable” number of times, before invoking the Lemon Law. The attorneys at our firm have talked to thousands of consumers throughout our years of practice. A recurring theme is the question: “what constitutes reasonable” or, in other words: “when is enough enough?”

The benchmark in the California Lemon Law is four times for the same defect under warranty or 30 cumulative days for any number of different or similar defects. If the defect constitutes a safety hazard that could cause bodily injury or death, then the benchmark is two times. But the benchmark is just that – a guideline. It is not a requirement. I have seen manufacturers repurchase vehicles after three repair attempts where the three repair attempts came in the first 5,000 miles. I have also seen manufacturers resist repurchasing vehicles where there have been nine or ten repair attempts, where the repair attempts stretched over 60,000 or 70,000 miles. (We eventually got our client a new replacement truck.)

One argument that we use at our firm is that the case of Krotin v. Porsche held that the California Lemon Law imposes an affirmative duty upon manufacturers to repurchase lemon vehicles after a reasonable number of repair attempts have yielded no fix. The rationale behind the Krotin case is that manufactuers have more knowledge, resources and power than any one individual consumer will every have. They are also charged with knowledge of the Lemon Law. Therefore, if your car starts to look like a lemon, the manufacturer should step up and offer to buy it back or replace it.

To summarize, it’s tempting to use that phrase that lawyers love to use “it depends,” but it really does depend – on the type of defect, on the mileage at the time you make the claim, and on whether the manufacturer knows your lawyer. If you think that you have given the manufacturer a reasonable amount of time to repair your vehicle, but the vehicle is still unrepaired, call an experienced lemon law attorney. Most will provide you with a free consultation, so there is no risk in getting that little bit of information that might help you ditch that lemon.

The California Lemon Law allows California consumers to return vehicles that the auto maker or its authorized repair facilities cannot repair after a reasonable number of repair attempts. Many consumers are unaware of the strength of the California Lemon Law, however, and miss out on opertunities to secure the rights it provides.

Manufacturers such as Chrysler, General Motors, Ford Motor Company, Toyota and Honda often find themselves on the receiving end of complaints from consumers about lemon vehicles. Not infrequently, these manufacturers tell consumers that the defect – also called a “non-conformity to warranty” – is somehow the fault of the consumer. A good example: a friend of mine who is an attorney had a pretty clear lemon law claim against Chrysler. Within the first 18,000 miles, his Town & Country had been to the dealership seven times for uneven and excessive brake wear. The first response from Chrysler was “you live on a hill; you are causing the brake wear.” My friend is a smart guy and of course had the perfect response: “are you saying that no one who lives on a hill can buy a Chrysler vehicle?” A little coaching from me and he was able to convince Chrysler to repurchase his MiniVan under California’s Lemon Law.

Now, my friend is an experienced and savvy attorney. Trained in argument and advocacy, he had a compelling answer to the “blame the victim” tactics of Chrysler. Many consumers, however, absorb the guilt that the manufacturers lay upon them. Our advice: resist the psychology of the blame game. If your vehicle is still under warranty and manifests a defect, take it to an authorized dealership and talk with the service advisor. Explain the defect in detail: what you experience, the conditions under which you experience it and the conditions under which you do not experience it. Confirm that the service advisor described the defect accurately on the repair order. When you pick up your vehicle, ask what was done to diagnose the problem. Then, ask what the technician did to repair it, if anything. If your service advisor blames your driving for the defect, seek clarification and specifics. Measure the advisor’s explanation against your own understanding of how you drive. You should not automatically assume that the advisor is right, just because he is wearing a shirt that says “Toyota” or “Honda.” After the repair attempt, take your vehicle for a test drive. If the defect remains unrepaired, take your car back to the dealership immediately. Do not delay, as that could a) be bad for your car and b) diminish your potential lemon law claim. The hope, of course, is that the dealership can fix your car. When the dealership cannot fix your car after a reasonable number of repair attempts (usually considered to be four times or a cumulative total of 30 days), then you may have a lemon on your hands and a claim under the lemon law to the manufacturer is in order.