Although the “Cash for Clunkers” program has expired, its legacy may not be limited to its impact on retail sales. “Cash for Clunkers” may also trigger a spate of litigation concerning what consumers can recover if the replacements for their clunkers are lemons.

The “Cash for Clunkers” bill of 2009 provided consumers who owned poor gas mileage “clunkers” up to a $4,500 credit toward a new, more fuel efficient vehicle. This credit was paid by the federal government directly to the selling dealer.

In order to account for this credit, the sum paid by the government had to be documented as a line item on each individual purchase and/or loan contract. Dealers accounted for this credit in various ways. Some dealers accounted for it as a trade-in credit, some as rebates, and even some as cash down. Many of these contracts do not identify the source of the credit as “Cash for Clunkers.”

In addition to the credit toward the new vehicle purchase price, each consumer was also entitled to a refund of the “scrap value” for the vehicle traded in. This amount was often refunded directly to the consumer. The manner in which these transactions was recorded and the wording of many state lemon laws creates the potential to cost manufacturers significant sums in payments for lemon law buybacks and refunds.

Immediate issues are raised:

  • How are the funds that were paid by the government accounted for when calculating the refund per the applicable statutes?
  • How do you identify those contracts which include the “Cash for Clunkers” credit so that the manufacturer does not overpay for refunds?

These issues can be addressed by examining the trade-in descriptions on sales contracts from the relevant time period to find qualifying makes and model years. Another indicator may be the value of the trade-in. More reliable information may come from the sales folder from the selling dealership, if it contains Cash for Clunkers paperwork. Finally, contact can be made with the sales manager at the selling dealership to determine if any rebates listed on the sales contract were as a result of Cash for Clunkers.

Then, if the credit is identified, issues of the amount of recovery may come into play:

  • Does the consumer have a right to demand that the manufacturer refund to them the amount of the credit applied to their purchase?
  • Can the manufacturer offset the credit from the repurchase total because that amount was never paid by the consumer?
  • Could the federal government make a claim for reimbursement of the credit it paid toward the new vehicle?
  • Can the manufacturer also offset the scrap value reimbursement from the repurchase total it would be obligated to pay under a state’s Lemon Law?

Despite the fact that the equities appear to be on the side of the manufacturer, these issues will not be easily resolved. For example, an argument can be made that a consumer traded in something of value for “Cash for Clunkers” credit, so the monetary value of the credit should be refunded. Additional arguments will arise from the different recovery mechanisms set forth in individual state statutes.

Similar types of issues have been litigated over the manner of accounting for negative equity and manufacturer rebates. For example, consumers with Lemon Law claims have argued that rebates paid to the dealer by the manufacturer to reduce the purchase price at the time of sale should be refunded to the consumer in cash. The basis of the argument is that the consumer has lost the opportunity of using the rebate in the future, and/or that the state’s Lemon Law definition of the contract price subject to the refund captures that amount.

Nevertheless, successful counters to these argument have included the following:

  • The consumer did not pay that amount and should not be refunded an amount not paid.
  • The consumer received the full benefit of that rebate payment issued from the manufacturer to reduce the purchase price. The consumer would be unjustly enriched by a refund of an amount he or she did not pay.
  • The rebate was an amount already paid by the manufacturer to the dealer on behalf of the customer. Requiring the manufacturer to pay this sum as a refund to the consumer in a Lemon Law buyback would be forcing the manufacturer to make the same payment on the consumer’s behalf twice.

While the rebate analogy is imperfect in the sense that rebates are sums paid by manufacturers, not the government, the equitable principles still apply. Consideration of policies and legal defense strategies at this stage, in addition to identifying “Cash for Clunkers” vehicles, is an important step in being prepared to respond in a manner that will minimize financial losses with Lemon Law buybacks.