With the Consumer Financial Protection Bureau’s recent several hundred thousand dollar enforcement penalty against a buy-here, pay-here dealer for, in part, charging a hidden finance charge, we pay attention every time we see that term in a court opinion. It popped up in a recent case against a dealer by a car buyer, but, at least this time, the court determined that the dealer hadn’t hidden anything.

The case presented a couple of additional interesting issues, as well. Here’s what happened.

Metro Auto Sales, Inc., advertised a “Cash for Clunkers” program in 2014 that promised potential buyers “at least $4,500” for any car a buyer offered as a trade-in. Rodney Gregory traded in his  1995 Jeep Cherokee for a 2012 Ford Escape. The cash price for the Ford Escape was $29,214. Gregory  agreed to a retail installment sale for the cash price less the advertised trade-in amount and a $1,000 down payment.

Later, Gregory sued Metro Auto in federal court  in Pennsylvania. Gregory claimed that the arbitration agreement he allegedly signed in connection with  the purchase was not enforceable because it was only included in the buyers order.

Gregory also claimed that Metro Auto violated the Truth in Lending Act and Regulation Z because the price of the Ford Escape included a hidden finance charge. He argued that the $4,500 allowance he got for his Cherokee was more than its market value and that Metro Auto simply increased the sale price of the Ford Escape so it would not lose money on the deal. According to Gregory, the difference between the credit sale price and the market value was a hidden finance charge.

Gregory also claimed that Metro Auto violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law because it did not disclose that the Ford Escape had suffered frame damage. Metro Auto moved to dismiss.

The court explained that the arbitration agreement was not enforceable against Gregory. In Pennsylvania, the terms of a retail installment sale contract govern the transaction between a buyer and a retail seller. Because the contract did not include an arbitration clause, Metro Auto could not force Gregory to arbitrate his claims.

Next, the court dismissed the TILA hidden finance charge claim. Metro Auto’s “Cash for Clunkers” offer applied to both cash and credit sales. The court found that there was no hidden finance charge because Metro Auto would have asked Gregory to pay the same price in a cash purchase. The fact that Gregory might have been able to buy the Ford Escape for a lower price if the deal did not include the “clunker” trade-in was, according to the court, irrelevant.

Finally, the court refused to dismiss the UTPCPL claim. The court found that the UTPCPL requires a dealer to disclose frame damage to a buyer if the frame is “bent, cracked or twisted.” Metro Auto did not have to disclose this fact to Gregory because the damage to the frame on the Ford Escape had been repaired. However, the UTPCPL also includes a broad, catch- all provision that prohibits a dealer from engaging in any fraudulent or deceptive conduct that creates a likelihood of confusion or misunderstanding. The court decided that it was a question of fact whether Metro Auto’s failure to disclose that the Ford Escape had been in an accident that caused frame damage was likely to cause Gregory to be confused or misunderstand what  he was buying.

This dealer still must litigate that question but dodged the hidden finance charge bullet. That’s good news, but we have warned before that these guaranteed trade-in amount programs (“$XXXX dollars for your trade-in, push it or pull it, drive it or drag it”) pose the risk of a claim by a regulator or a consumer that the inflated trade-in value, coupled with an increase  in the price of cars sold, is illusory and is thus an unfair, deceptive, or (for dealers subject to the CFPB’s jurisdiction) abusive act or practice.

So, if your dealership is running a campaign like  this one, you might want to make sure you run it by the lawyers for a legal review.

Gregory v. Metro Auto Sales, Inc., 2016 U.S. Dist. LEXIS 9993 (E.D. Pa. January 27, 2016).