In Lobel Financial v. Baltazar, 2013 WL 821205 (2013), the Court of Appeal in an unpublished decision enforced a First Payment Default/Recourse provision in a Dealer Agreement that allowed an auto finance company to demand repurchase of a contract from the assigning car dealer. The facts were as follows.
Affordable Auto sells used cars, and in turn it sells its customers’ finance contracts to independent finance companies, such as Lobel. On May 28, 2003, Baltazar and Chavez, on behalf of Affordable Auto, signed a form “Dealer Agreement (with limited re-purchase obligation)” (hereafter the Dealer Agreement) setting forth terms on which Affordable Auto (designated as “Dealer” in the Dealer Agreement) would sell finance contracts to Lobel (designated as “Company” in the Dealer Agreement). Paragraph 1 of the Dealer Agreement provided in relevant part, “The contracts will be assigned with full recourse” and paragraph 10 provided, “The Dealer will repurchase all contracts that default in the first three (3) payments of the contract term….” ¶ The Dealer Agreement described a reserve ac-count (Reserve Account) that Lobel internally maintained for each dealer from which a dealer could additionally profit if the dealer’s customers, as a group, honored their payment obligations and paid off their loans. Paragraph 4 of the Dealer Agreement provided in full: “The Company will withhold a percentage on each contract purchased from the Dealer and credit that amount to the Reserve Account. It is the intent of the parties that the funds in the Reserve Account shall be accumulated to an amount equal to [30 percent] of the gross aggregate outstanding balance due on all contracts purchased by the Company hereinafter referred to as the Minimum Reserve Requirement. When determining whether the Minimum Reserve Requirement is satisfied the Company will deduct from the balance of the Reserve Account any amounts owing to the Company by the [vehicle purchasers] and the Dealer, including, without limitation, amounts owing for contracts which the Dealer is required to repurchase under the agreement.” ¶ Paragraph 5 of the Dealer Agreement provided “the Company may set off or charge against the Reserve Account any and all indebtedness owed for any reason by the Dealer to the Company…. Refunds from the Reserve Account will be paid to the Dealer only to the extent that the amount of said Reserve Account exceeds the Minimum Reserve Requirement….” ¶ Paragraph 7 of the Dealer Agreement provided: “The Dealer understands and agrees that the Dealer has no present proprietary or possessory interest in the Reserve Account. The Dealer must claim the reserve within five years from the date that the last contract was purchased by the Company…. Should the Dealer fail to repurchase any contracts [or otherwise breach the Dealer Agreement] the entire Reserve Account will become the property of the Company.” ¶ Paragraph 10 of the Dealer Agreement pro-vided: “The Dealer will repurchase all contracts that default in the first three (3) payments of the contract term, whether or not the … vehicle was repossessed. Any losses sustained after three (3) payments shall be charged against the Reserve Account only. The Dealer’s liability shall be limited to the funds in the Reserve Account…. If the Dealer fails to repurchase a contract due for repurchase the Company may take the proceeds from the Reserve Account…. The obligations of the Dealer to repurchase contracts from the Company shall not be in any manner dependent upon or related to the balance in the Reserve Account.”
The Court of Appeal enforced the Default/Recourse provision in the Dealer Agreement, holding:
At the same time they executed the Dealer Agreement, Affordable Auto and Lobel also executed a document titled “Bad Debt Election Form.” It pro-vided in relevant part, “California Sales and Use Tax Regulation 1642 allows the retailer [i.e., Affordable Auto] or the lender [i.e., Lobel] to claim a deduction or refund for bad debt losses from account(s) held by the lender without recourse. The retailer and the lender must file an election with the [Franchise Tax] Board designating which of them may claim the deduction or refund. This election will assign those rights to the lender as outlined below…. By signing this election, both parties agree to the following: [¶] 1. The retailer relinquishes all rights to the account to the lender. [¶] 2. The lender is entitled to claim any (and all) deduction or refunds as a result of any bad debt losses charged off by the lender for the accounts covered by this election as of 10–1–99 and forward. The retailer relinquishes all rights to claiming such deduction or refunds. [¶] 3. This election is a blanket election for all accounts assigned without recourse by the retailer to the lender or all accounts held by the lender without recourse pursuant to the lender’s contract directly with the retailer.” ¶ . . . .Affordable Auto argues the Dealer Agreement and the Bad Debt Election Form must be construed as one contract under Civil Code section 1642, which provides that “several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together[,]” because the two documents were executed at the same time and both pertain to Lobel’s purchase of finance contracts from Affordable Auto. (See, e.g., Vons Companies v. Lyle Parks, Jr., Inc. (2009) 177 Cal.App.4th 823, 834.) Lobel agrees the documents should be considered together. Although we do not quarrel with that proposition, it does not aid Affordable Auto because there is no conflict between the provisions of the two documents. ¶ . . . The gist of Affordable Auto’s argument is the Dealer Agreement provides for the assignment of contracts to Lobel with recourse but the Bad Debt Election Form states the assignments are without recourse, thus allowing Lobel to claim sales tax re-funds on bad debts. Affordable Auto argues the ex-istence of the Reserve Account against which Lobel can charge defaulting Affordable Auto loans after the three-month recourse period has expired in effect means all contract assignments are recourse assign-ments. Affordable Auto argues that because Lobel can debit bad loans against the Reserve Account, Affordable Auto alone bears the risk of defaults on its customers’ finance contracts. Accordingly, Affordable Auto reasons, to avoid an interpretation of the Bad Debt Election Form that renders it at best meaningless (i.e., if assignments are made with recourse, then Bad Debt Election Form serves no purpose), or at worst illegal (i.e., the Bad Debt Election Form allows Lobel to fraudulently claim sales tax refunds on bad debts to which it is not entitled because the account is held with recourse), we must interpret the two contracts together as providing that all assignments of contracts to Lobel are made without recourse. ¶ . . . Moreover, even if the Reserve Account is a form of recourse, there simply is no merit to Affordable Auto’s contention the Dealer Agreement and the Bad Debt Election Form conflict. The Bad Debt Election Form is a document required by California Code of Regulations, title 18, section 1642, which allows an income tax deduction for or refund of sales tax that was paid by a retailer in relation to what eventually has became a bad debt. If the account was assigned by the retailer to a lender, and the lender holds the debt without recourse, either the retailer or the lender (but not both) can claim the refund or deduction. “In order for the retailer or the lender to claim a deduction or refund for bad debt losses from an account held by the lender without recourse, the retailer and the lender must file an election with the [Franchise Tax] Board designating which of them may claim such deduction or refund.” (Cal.Code Regs., tit. 18, § 1642, subd. (i)(3)(A), italics added.) The written election must contain specified information and include “[a] list of accounts to which the election pertains. If the election is a blanket election for all accounts assigned without recourse by the retailer to the lender or all accounts held by the lender without recourse pursuant to the lender’s contract directly with the retailer, the election must so state.” (Cal.Code Regs., tit. 18, § 1642, subd. (i)(3)(A)(4).) ¶ Here, the Bad Debt Election Form states it is a blanket election that Lobel is entitled to claim the sales tax deduction or refund for “all accounts assigned without recourse by the retailer to the lender or all accounts held by the lender without recourse ….” (Italics added.) It does not state that all contracts assigned to Lobel by Affordable Auto are assigned or held without recourse. On its face, the Bad Debt Election Form provides only that if an account was assigned without recourse, or is held without recourse, then Lobel may claim the sales tax refund. The Bad Debt Election Form only has relevance when there no longer is recourse on a debt. It does not constitute an agreement or a representation to the Franchise Tax Board that all accounts bought by Lobel from Affordable Auto are without recourse, only that when there is no recourse on a bad debt, Lobel and not Affordable Auto gets to claim the sales tax deduction or refund. ¶ Moreover, there is no evidence suggesting the parties gave the Bad Debt Election Form any different interpretation than the one that is plain on its face. Hernandez testified that perhaps once or twice over the years Lobel bought a contract from Affordable Auto without recourse, but there was no evidence those contracts ever went into default. And there was no evidence Lobel construed the Bad Debt Election Form as permitting it to claim a sales tax refund on Affordable Auto contracts that were held with re-course. Indeed, the only evidence at trial was Her-nandez’s testimony that to his knowledge Lobel has never sought a sales tax refund on any bad debt from one of Affordable Auto’s contracts. Thus, Affordable Auto’s premise, that the Dealer Agreement and Bad Debt Election Form are in irreconcilable conflict, is a faulty one. ¶ Having concluded there is no conflict between the Dealer Agreement and the Bad Debt Election Form, the breach of contract judgment against Affordable Auto must be affirmed. The Dealer Agreement pro-vided for a three-month recourse period during which Affordable Auto was obligated to repurchase the Chaidez contract if it went into default, and it is un-disputed Chaidez defaulted within that recourse pe-riod. Baltazar and Chavez both testified they under-stood the repurchase requirement, and the evidence was uncontroverted that on 53 occasions Affordable Auto honored its repurchase obligation. Baltazar and Chavez both testified Affordable Auto refused to repurchase the Chaidez contract because of disputes over the amount owed. Lobel presented evidence the repurchase amount was $6,765.86, and Affordable Auto presented no evidence to the contrary.