LEGAL FILE

Former dealership wins new trial in “straw buyer” case

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A former Chrysler-Jeep dealership has won a new trial in a South Carolina "straw buyer" case.

In a victory for Stivers Automotive of Lexington Inc., the South Carolina Supreme Court said the trial judge should have let a jury decide whether the store breached its dealer agreement with the South Carolina Federal Credit Union as alleged in the lender's lawsuit over a defaulted loan. Stivers gave up the franchises after the transaction involved in the case.

The credit union claims that a dealership salesman knew the creditworthy "owner" who signed the loan documents was the sister of the actual uncreditworthy buyer, who defaulted, thus violating the agreement under which Stivers assigned her contract.

The dealer agreement warranted that Stivers didn't "knowingly communicate" incorrect information to the lender and that the buyer "has legal capacity" to execute the contract.

According to the court, Hiram Riley wanted to buy a used 2006 Ford Taurus but didn't qualify for financing. The salesman recommended he get a co-signer, and Riley's sister agreed to do it. The salesman took the paperwork to her home for signature.

The salesman explained the documents, and the sister indicated she understood and signed them, but the court said that "the paperwork was drafted so she was the sole purchaser, not a co-signer."

Riley picked up the car with the understanding that he would make payments. He stopped making payments, however, after the lender learned the car was uninsured and obtained a "forced insurance policy," almost doubling Riley's monthly payments. Riley told the lender where to recover the car, and it was auctioned for less than half the sale price and below market value, the dealership alleged.

The lender's suit against the sister for the unpaid balance was dismissed on the ground that she had dementia and was incompetent to sign contracts, court papers said. The lender then sued Stivers for the deficiency.

Stivers disputed the claim, arguing that the sister was competent and that the dealer agreement did not prohibit assigning contracts where a borrower intends a relative to use the vehicle.

At trial, the judge entered a directed verdict in favor of the lender and awarded $17,612 plus attorney fees. He found that the sister lacked mental capacity to contract, and thus Stivers breached its dealer agreement.

But the state Supreme Court found enough evidence for a jury to decide whether the sister had the capacity to sign. For example, she was still driving and was current on her home equity and credit card payments.

At a new trial, the jury should also decide whether Stivers violated any other warranties and whether the credit union's disposition of the car was commercially reasonable, the court said.

Stivers' lawyer, Greg Studemeyer of Columbia, said: "Some lenders believe their broadly drafted dealer agreements guarantee a stream of income when dealers assign retail installment agreements to them, and that in the event of default, they are free to repossess and dispose of the collateral as they see fit and ultimately hold the dealer responsible for any loss. This case stands for the proposition that lenders have the same obligation to dealers as they have to consumers to dispose of collateral in a commercially reasonable manner to minimize losses."

Credit union attorney Cynthia Lowery of Charleston said she cannot comment because the case remains in litigation.

Editor's note: An earlier version of this story included an incorrect byline.

You can reach Eric Freedman at freedma5@msu.edu.

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