Dealers who engage in "spot delivery" transactions typically ask buyers who are not immediately approved for credit to sign a document agreeing to rescind the automobile purchase transaction if the dealer is unable to assign the customer's retail installment sales contract. These agreements, sometimes called "unwind agreements," or in this case a "conditional delivery agreement," are usually separate documents from the retail installment sales contract.
This practice can pose problems in states that have so-called "single document rules." This is legalese for a statutory requirement usually found in a state's retail installment sales statute that all agreements between the dealer and the retail installment sale buyer must be contained in one document. A recent case illustrates the perils of using an unwind agreement in a state with such a statutory rule.
A consumer named Scott sued a Minnesota dealer for using a "conditional delivery agreement." On August 11, 1994, Scott signed a retail installment sales contract to purchase a 1991 Dodge Caravan. The contract provided for finance charges at a rate of 11.5% and monthly payments of $335 for 60 months. Scott also signed a "conditional delivery agreement" that provided the vehicle was being delivered "conditionally subject to approval of financing." This agreement also stated that if financing was not approved, the buyer agreed to return the vehicle and any retail installment sales contract executed for the vehicle purchase would be "null and void." The intended assignee did not approve financing, but Chrysler Credit agreed to extend Scott credit at a rate of 18.4% for a term of 60 months, with monthly payments of $384. Scott was asked to return to the dealership and sign a new retail installment sales contract, which he did. When Scott later sued the dealer, he complained that use of the conditional delivery agreement as a separate document violated the Minnesota Motor Vehicle Retail Installment Sales Act (MMVRISA).
The trial court granted summary judgment for the dealer and Scott appealed the decision. The Minnesota Court of Appeals reversed the trial court's decision, finding that use of the "conditional delivery agreement" violated the MMVRISA because the separate agreement was not referenced anywhere in the retail installment sales contract and Minn. Stat. § 168.71(a)(1) "requires that the retail installment contract 'shall contain all the agreements of the parties.'" Although the conditional delivery agreement did not contradict or alter any terms of the retail installment sales contract, failure to obtain financing approval ultimately invalidated the entire contract, leading to a second RISC with significantly higher interest, the court observed.
The court seemed to imply that the dealer would have complied with the MMVRISA if a "reference" to the conditional delivery agreement had been included in the retail installment sales contract. It appears that the court's use of the term "reference" meant that it would require formal language in the retail installment sales contract "incorporating by reference" the provisions of the unwind agreement. Conversely, it did not appear that the court would require the "unwind" language itself to appear in the retail installment sales contract. The court's decision isn't a model of clarity - you will want to discuss it with counsel.
It is unclear what courts in other states with single document rules will make of this decision. The Minnesota court's opinion is binding only on courts in Minnesota courts in other states may deal differently with the issue. Dealers and sales finance companies who buy contracts from dealers who use separate unwind agreements may need to review those dealers' practices and documents in light of the relevant state laws to determine whether they need to make changes in light of this case.