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January 26, 2016 in 75-1.1 Exemptions by

Reliance, and Why No One Likes Shopping for Used Cars

If you’ve ever shopped for a used car, you’ve probably been asked to sign a document that defines your warranty rights. Sometimes a used-car seller might make no warranty at all, asking you to agree that you’re buying the car as is.

If that happens, what recourse do you have if you later learn that the car had problems that the seller didn’t reveal? In particular:

  1. Can you sue the seller for violating N.C. Gen. Stat. § 75-1.1?
  1. Or does agreeing to the disclaimer negate any argument that you relied on the seller’s representations about the car?

A recent decision by the North Carolina Court of Appeals, perplexingly, answers yes to both questions. This post explains how the Court of Appeals reached these answers. It also tries to reconcile the two answers.

A Civic Lesson

Three years ago, Lisa and James Sain bought a used Honda Civic from Adams Auto Group. The car had previously been in a collision, but the Sains didn’t know that.

Following the collision, the car was repossessed by Capital One, which had financed the car’s purchase. Capital One then sold the car at auction to Adams. Adams learned at the auction that the car had sustained frame damage, but didn’t know the extent of the damage.

When the Sains showed up at Adams to look at the car, an Adams salesperson said that, to the best of his knowledge, the Civic had not been involved in a collision—at least not a collision that required repairs worth more than twenty-five percent of the car’s fair market value. To buttress this claim, Adams gave the Sains a CARFAX report. That report showed no accident or damage history.

Adams then gave the Sains a written disclosure. The written disclosure said that the Sains were buying the car “As Is—No Warranty.” The final sales contract included this same disclosure.

After the purchase, however, the car suffered from mechanical problems. The Sains explored a trade-in from a used-car store in Hickory and, in that process, learned about the earlier collision. That information came from an AutoCheck report.

The Sains investigated further and learned, through their insurance agent, that a claim had been made on the car’s insurance policy, in 2012, for over $7,500—nearly half of the car’s purchase price.

On these facts, the Sains sued Adams and Capital One for fraud, negligence, and violations of section 75-1.1. They also sued Adams for breach of contract.

Can Reliance Be Established for Some but Not All Claims?

Capital One and Adams moved to dismiss. The trial court granted these motions. It concluded that, as a matter of law, the Sains did not rely on any misrepresentation by Capital One or Adams.

On appeal, the Court of Appeals treated the Sains’ fraud and 75-1.1 claims against Capital One as indistinguishable. This treatment doomed the Sains, because a misrepresentation claim under section 75-1.1 requires actual and reasonable reliance, and the Sains did not rely on any statement by Capital One.

The Sains’ claims against Adams for fraud, breach of contract, and negligence fared no better than their claims against Capital One did. In particular, the Court of Appeals concluded that the terms of the “As Is—No Warranty” disclosure barred these three claims. These terms, the Court of Appeals explained, negated any allegation that the Sains relied on any misrepresentation that Adams made about the car. The Court of Appeals concluded that the Sains could not “avoid responsibility” for signing the disclosure.

This reasoning would also seem to be the death knell for the Sains’ section 75-1.1 claim. A “substantial aggravating circumstances” theory would seem hard to establish, because most courts require some form of deception for that type of claim to succeed (and because the Court of Appeals affirmed the dismissal of the breach-of-contract claim). Likewise, insofar as the Sains were alleging deception, the “as is” disclosure negated any reliance on any misrepresentation.

Despite these points, the Court of Appeals reversed the dismissal of the section 75-1.1 claim.

In doing so, the Court of Appeals cited two of its earlier decisions: Huff v. Autos Unlimited and Torrance v. AS & L Motors. The court concluded that, under Huff and Torrance, a 75-1.1 violation occurs when an employee of an auto dealership makes “a statement to a customer leading the customer to believe the vehicle has not been involved in a collision, when the employee knows this to be untrue.”

In Huff and Torrance, the Court of Appeals concluded that a 75-1.1 violation occurred even though a buyer signed an “as-is, no warranty” provision. In each case, the trial court found that the buyer relied on assurances from the seller that the car had not been in an accident.

In Sain, however, the Court of Appeals affirmed the dismissal of the Sains’ common-law claims on the ground that the Sains didn’t rely on any assurances from the seller, Adams.

Which tees up this question: How can the disclaimer negate the Sains’ reliance for some claims but not for their section 75-1.1 claim, when the claims are based on the same allegations?

One potential explanation is that the 75-1.1 claim in Sain should be construed as a direct unfairness claim. The Sain decision, however, expressly characterizes the 75-1.1 claim as being “based on Adams’ misrepresentation of the condition of the vehicle.” This characterization seems inconsistent with a direct unfairness theory.

Another potential explanation might be that Huff and Torrance establish a narrow rule under section 75-1.1 that certain misrepresentation-based claims do not require reliance. This explanation is not very satisfying, however, both because it lacks any source of law and because it conflicts with the North Carolina Supreme Court’s unambiguous holding in Bumpers v. Community Bank of Northern Virginia.

Living with Ambiguity

The question posed by Sain probably won’t be resolved by the appellate courts in the short term, because the Court of Appeals remanded the case to the trial court. Only if the trial court later renders judgment on the section 75-1.1 claim, and an appeal follows, will the Court of Appeals revisit the claim’s legal basis.

Even if Sain never reaches the Court of Appeals again, however, it reiterates a critical point in section 75-1.1 litigation: Any party who is pressing or defending a section 75-1.1 claim should nail down the basis for the claim and be ready to explain the factual predicates for establishing or defeating the claim.

Author: Stephen Feldman