Watch Your Fee

If your dealership operates in one of the 32.5 states that don’t impose a cap on doc fees (Mississippi doesn’t have a cap, but some districts within the state do), you better make sure your fee reflects, at a minimum, the “average costs actually incurred in all closing of the prior year.”

That was the opinion of the three South Carolina Supreme Court justices who upheld a jury court’s nine-year-old ruling that the “document preparation” fee Hendrick Honda of Easley (S.C.) charged between August 2002 and August 2006 violated the state’s Dealers Act. That law, by the way, doesn’t make any mention of doc fees, but it does prohibit dealers from engaging in any action “which is arbitrary, in bad faith or unconscionable.”

Whether you think charging customers between $249 and $399 — which is what Hendrick charged during that four-year period — is unconscionable, the dealership’s fee was in compliance with the Closing Fee Statute the state legislature enacted in 2000. The statute requires that dealers pay the state a $10 one-time registration fee each year, include the closing fee in the advertised price of the motor vehicle, disclose it on the sale contract and display it in a conspicuous location in the dealership.

But like the Dealers Act, the statute offers no guidance on how much dealers can charge. So the dealer had a good argument. Unfortunately, the case was lost before it began.

See, during pretrial proceedings, the trial judge applied rulings in another case and interpreted a closing fee to be a “predetermined set fee for the reimbursement of closing costs, but only those actually incurred by the dealer and necessary to the closing transaction.” By the way, that “predetermined” legal standard did not exist when the lawsuit was filed in August 2006. It came from a 2010 ruling by the same judge in a separate case.

So under that standard, the dealership had to produce evidence it calculated the costs comprising its closing fee. Unfortunately, none of the employees who testified, including the store’s general manager and F&I manager, could do so. That left the jury no choice but to award the named plaintiff, Julie Freeman, and 5,314 Hendrick customers a total of $1.4 million — an amount that was doubled to $2.8 million by a circuit court judge last year. The dealer was also ordered to pay more than $750,000 in legal fees and costs.

The state’s high court did consider the testimony of the dealership’s expert witness. While he admitted there was nothing to suggest Hendrick conducted any analysis before setting its fee, he testified that the average closing cost, including salaries and costs related to the building, utilities and outside services, was $506.96 in 2006. Unfortunately, the justices determined those other expenses were general operating costs and not directly tied to the closing of the transaction.

“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,” read the South Carolina Supreme Court’s majority opinion.

The justices, however, didn’t say dealers have to “hit the bullseye” when setting their fee. As previously noted, they said a dealer may comply with the Closing Fee Statute “by setting a closing fee in an amount that is an average of the costs actually incurred in all closings of the prior year.” Then why would the court exclude the salaries of F&I managers?

Keep in mind there were two dissenting justices. In their separate opinion, Associate Justice John Kittredge wrote that the plaintiff could not sue for a closing fee violation under the Dealers Act if there was no violation of the Closing Fee Statute. The two justices did agree with the trial judge’s determination that a closing fee must be predetermined. But under that interpretation, Kittredge wrote, it would be impossible for a dealer to set a fee equal to the actual closing costs in unknown, future transactions.

“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 is being punished for doing exactly what South Carolina permitted it to do.”

By the way, Freeman had testified that she was “very happy” when she bought a pre-owned vehicle in July 2006 from Hendrick. And she neither balked nor questioned the dealership’s $299 “procurement fee.” She even had her vehicle serviced by the dealership. But that all changed when she talked to an attorney. As the headline states, you may want to check your fee.