Motor Vehicle Dealer Bonds: A Scenic Overlook
When I started practicing law--eons ago--I became the firm’s designated baby surety attorney, often spending full days in the various trial courts all over the state, representing the firm’s surety clients on a variety of commercial surety bond cases. At that time, commercial bonds were called non-contract or miscellaneous bonds. I was constantly astounded at how many types of “non-contract bonds” there were. I also was also astounded at how few state court judges knew even the least about bonds, penal sum limitations, indemnification, or any other key concepts concerning our industry. I found that I functioned as an educator as much as an advocate, but maybe the one is subsumed by the other.
My most vivid memory of those early days was working on motor vehicle dealer bond (MVD) cases, of which there were many. The penal sum of the motor vehicle dealer bond at the time was $15,000 (and still is today), conditioned for the “faithful performance” of duties under the statute. A then recent state supreme court case held that the surety was liable to “any member of the public” for damages resulting from failure of the dealer to fulfill his or her MVD statutory obligations to furnish the buyer of a car with clear title to the vehicle. You might or might not be surprised at how many cars were sold by dealers who exercised a certain moral ambiguity on the concept of “good title.”
It was my experience that a dealer never had just a claim or two on its bond; much more likely, it had dozens of, sometimes over a hundred, claims on the same bond that exceeded the bond penalty. Then it became clear that it did not make any sense to try to investigate all the claims (including obtaining proofs of loss) but to interplead into the court the penal sum of the bond and be released from the case--letting the court distribute pro rata the funds. It was also clear that, in order to ensure the firmness of the surety’s penal sum liability, we had to “publish” in a number of newspapers around the state a notice of claims for other potential claimants. It was a time-consuming and annoyingly detailed process—and not inexpensive. And the process also included demanding exoneration from the principal/indemnitors.
Such commercial surety bond experiences were interesting, exciting, strategic, sometimes frustrating, and often challenging. In order to provide some protection to the public from fraud or misrepresentations in the sale and transfer of automobiles, states enacted statutory bond requirements for automobile dealers. Nearly every state requires a motor vehicle dealer to obtain a surety bond as a condition of licensure. What may be challenging for bond producers and surety company folks alike is that the statutory language often varies significantly from state to state concerning the bond amount, protected beneficiaries, transactions, and preconditions to coverage, among other things.
For instance, the statutory amount of the bond varies significantly, from $5,000 to $100,000 and everything in between. The penal sum of the bond in some states varies based on the type and number of motor vehicles sold during the preceding license year by the dealer. In other states the amount of the bond is statutorily set by the type of dealer seeking a license: motor vehicle dealer, used car dealer, all-terrain vehicle dealer, motorcycle dealer, automotive recycler, boat trailer (and/or snowmobile trailer, horse trailer) dealer, emergency vehicle dealer, among others.
The written indemnity agreement is generally a part of the application that the motor vehicle dealer signs in order to obtain the license bond. It will be less detailed than an indemnity agreement a principal signs in order to obtain construction bonds, but key indemnification provisions will be included. The application will also generally require the personal indemnity of the owner.
In some states the statutory language extends protection, as above, to “any person;” while other states limit the scope to smaller categories of potential claimants, such as a “seller or purchaser of a motor vehicle.” In varying language the statutes protect the designated claimants from either specified or vague fraudulent business practices by dealers. Some jurisdictions require a judgment against the principal before making a claim on the bond; other jurisdictions require that bond claims must be pursued through an administrative process.
As noted above, MVD bond claims can be challenging, because they often involve multiple claims on the same bond that exceed the bond penalty. The types of claims under the bond can encompass a wide variety of misdeeds: misrepresentation of the vehicle’s condition, tampering with the odometer, failure to honor a written warranty, failure to pay sales taxes, failure to pay off a trade-in vehicle, failure to provide title, among many others. Whether a specific type of claim is covered under a MVD bond is determined by each state’s statutory language and any case law interpreting that language.
Because the motor vehicle dealer statutes vary so much from jurisdiction to jurisdiction, it is important to familiarize yourself with the relevant statutes in those jurisdictions in which you do business and understand the specific MVD bond requirements. Understanding MVD bond requirements will help you steer the right path in your commercial surety business!
The author of this article is Martha Perkins, General Counsel at NASBP. Martha Perkins can be reached at firstname.lastname@example.org or 202.686-3700.
This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in this article without such advice.