COLUMBIA, S.C. — On Nov. 4, the South Carolina Supreme Court upheld a jury court’s nearly $3.6 million ruling that a dealer’s document fee was in violation of a state consumer-protection law despite it being certified by the South Carolina Department of Consumer Affairs.

The main question before the state Supreme Court was whether the trial judge was correct in his pretrial interpretation of the closing fee dealers can charge. There was also the question of whether the plaintiff’s suit, which was filed as a group claim nine years ago, could be brought under a state consumer-protection law instead of a “Closing Fee Statute” the state legislature enacted in 2000 — neither of which provide specific guidance on the amount of the fee, what can be included, and how the fee could be set.

The statute, which is administered by the state’s Department of Consumer Affairs and falls under the South Carolina Consumer Protection Code (SCCPC), requires that dealers pay the department a $10 one-time registration fee each state fiscal year, include the closing fee in the advertised price of the motor vehicle, disclose the fee on the sale contract and display it in a conspicuous location in the dealership — requirements with which the dealership, Hendrick Honda of Easley (S.C.), complied.

But because the statute doesn’t offer guidance on what dealers can charge, the trial judge applied a ruling in another similar case and interpreted “closing fee” to mean a “predetermined set fee for the reimbursement of closing costs, but only those actually incurred by the dealer and necessary to the closing transaction.”

Under that interpretation, Hendricks had to provide evidence it calculated the cost comprising its closing fee, which it could not do. Because of that, the jury court — acting on the judge’s closing fee interpretation — ruled that the dealership violated the South Carolina Regulation of Manufacturers, Distributors and Dealers Act, which prohibits dealers from engaging in any action "which is arbitrary, in bad faith, or unconscionable …” It also provides consumer redress, whereas the Closing Fee Statute does not.

The ruling was upheld by a South Carolina circuit court judge early last year before the case went before the South Carolina Supreme Court, which supported those rulings by a 3-2 decision. In the court’s majority opinion, Justice Donald Beatty wrote that because Hendrick posted a notice that it charged a closing fee “as a means of reimbursing it for certain overhead costs, Hendrick clearly communicated that that the closing fee was intended to be repayment for that which was expended.”

“Notwithstanding this notice, Hendrick failed to offer any evidence that the calculated costs that comprised the closing fee,” Justice Beatty added. “When questions to how Hendrick arrived at the closing fee, Don Pendleton, the general manager, testified that he ‘didn’t sit there and do the math,’ and he was not sure about the actual costs of retrieving and preparing documents for closing, and he did not know ‘the exact charge.’

Pendleton also didn’t know how the dealership arrived at its original $199 document fee and how subsequent increases were determined

Dissenting in a separate opinion were Associate Justice John Kittredge and Acting Justice James Moore. “Not only were Hendrick Honda’s actions not prohibited by statute, they were specifically approved,” Justice Kittredge wrote. “Under the Court’s ruling today, Hendrick Honda is being punished for doing exactly what South Carolina permitted it to do.”

The trial court awarded the plaintiff, Julie Freeman, and more than 5,000 customers who paid the dealership’s closing fee — which, according to court documents, ranged between $249 and $399 — between August 2002 and August 2006 more than $1.4 million. That amount was doubled to $2.8 million by Circuit Court Judge Doyet Early last year, bringing the amount the dealership’s former customers will receive to around $526. The plaintiffs will also receive more than $750,000 in legal fees and costs.

The Supreme Court’s decision comes nine years after Freeman purchased a pre-owned vehicle from Hendrick Honda, one of 94 dealerships operated by Charlotte, N.C.-based Hendrick Automotive Group. After discussing the dealership’s $299 fee with an attorney friend, Freeman, who testified that she was “very happy at the time [she] bought the car,” filed her lawsuit on Aug. 29, 2006, seeking damages under the Dealers Act.

Hendrick Honda argued that Freeman could not pursue action under the Dealers Act because the exclusive remedy for her alleged closing-fee violation fell under the SCCPC. It also argued that Freeman waived her claim by voluntarily paying the closing fee.

The trial court disagreed, ruling that the Closing Fee Statute established procedural requirements a dealer must satisfy before charging a closing fee, “whereas the Dealers Act sets forth the remedy for an alleged closing fee violation.

“Although we agree with Hendrick that the Closing Fee Statute is a disclosure state and the department serves as a repository for the required filings, we find that the Closing Fee Statute does more than require disclosure of the 'Closing Fee,'” Justice Beatty wrote.

As for the dealership’s contention that Freeman freely paid the fee, Justice Beatty wrote that Freeman did not allege an unfair practice regarding the financing of her vehicle, which the SCCPC was designed to protect consumers against. “Rather, she claimed she was unfairly charged a closing fee that bore no relation to the actual expenses incurred by Hendrick,” he wrote.

Hendrick’s expert witness, Michael Thompson, testified that the dealership’s average closing costs, which were $506.96 in 2006, greatly exceeded the $299 fee Freeman paid. But he also admitted that he did not see anything to suggest Hendrick conducted any type of analysis before setting its fee.

“Moreover, in calculating the average closing cost, Thompson included expenses for the salaries of finance and sales managers, the building, utilities and outside services,” Justice Beatty wrote. “All of these are general operating expenses and not directly tied to the closing of motor vehicle sales. If a motor vehicle dealer wishes to be compensated for these expenses, it may include them as part of the overall purchase price of a vehicle.

“However, by specifically delineating a closing fee from the purchase price of the vehicle, the dealer must account for the costs that comprise the fee,” he added. “Without such an accounting, a dealer is charging a consumer an additional amount that is not directly related to the expense incurred in closing the sales of a motor vehicle … We find that such practice effectively circumvents the purpose of the ‘Closing Fee’ statute and the Dealers Act, which is, in part, to protect consumers from charges that are above the advertised price listed by the dealer.”

Justice Kittredge disagreed, noting that dealers are given little guidance in determining what costs may or may not be included in a closing fee. “The lack of guidance is at odds with the ideal legal frameworks, which are designed to provide reasonably discernable and objective criteria,” he wrote. “In my view, the absence of known objective criteria renders it difficult to characterize a dealer’s closing fee as arbitrary.”

Kittredge acknowledged that the lack of guidance doesn’t mean dealers can charge a “disguised profit,” but noted the legislature entrusted the state’s Department of Consumer Affairs with the role of protecting consumers by approving dealers’ closing-fee requests.

Danny Collins, general counsel and then-deputy of regulatory enforcement for the Department of Consumer Affairs, testified that the department generally accepts all registration forms submitted by dealers, but does not establish the closing fee charged by the dealer.

“Notably, Collins stated that ‘it’s pretty much just a registration,’” Justice Beatty pointed out.

Justice Kittredge noted in his opinion, however, that Collins did testify to the department’s rejection of an excessive closing fee and indicated that the department closely scrutinized others. “Contrary to the majority’s suggestion, the department does not merely rubber-stamp those requests,” he wrote.

“I reject as meritless the trial court’s determination that the legislature intended the predetermined closing fee to equal the dealer’s precise cost in unknown, future transactions,” Kittredge added. “Even assuming Freeman may pursue a claim under the Dealers Act, a new trial would nevertheless be warranted due to the trial court’s erroneous construction of the Closing Fee Statute.”

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