There is a trend among used car dealers, and especially those used car dealers that tote the note, to install disabling devices in the automobiles they sell, which disables the vehicle from operating if a new code is not inputted at the time a payment is normally due.
The technology is generally called telematics, and where this term addresses many different solutions involving asset management such as maintaining the tracking of fleet vehicles and the use of anti-theft devices, one of the "solutions" is the ability to disable a mortgaged automobile if timely payments are not made. There is not a lot written on this aspect of telematics, but U. S. News & World Reports did report on it. There are a few companies that manufacture these devices. These are, for example, Aircept, PayTeck, and PassTime to name a few. Strangely enough, although devises to disable mortgage vehicles is a growing and vibrant area of the industry, it would seem that even the providers of the devices and system do not maintain websites that directly tout what they do in this regard. The disabling services deployed by these companies must seem insidious to these companies as well. Here is a video that explains the product from a positive standpoint that is not easy to find on the web -- CLICK HERE FOR THE VIDEO.
There are a lot of interesting issues concerning these auto disabling devices and who exactly they are intended to benefit. For example, the video talks about the system reducing interest rates charged by note lots. We seriously doubt that this is true and could find no direct evidence on this fact.
The truth of the matter is that used car dealers of this caliber might not be the most trustworthy people either. As a result, we have learned over the last few years that many of these auto disabling device systems are demanded by the floor planning company, who maintains a lien on most everything the used car dealer has, including its notes. The system is designed to issue a new code, but only after the used car dealer inputs the payment that was made. In this way the floor planning company knows that the used car dealer is not dealing under the table with its receivables, or failing to report money received.
Regardless of these issues, this disabling devices pose a big problem in a Chapter 13 bankruptcy context. Auto dealers are reluctant to remove the devices from the car, and they are not receiving new payment directly from the borrower. Our experience is that even dealers have a great deal of trouble figuring out how to manage the system in this context, especially given the fact they do not wish to disable the device just because of the bankruptcy filing. For example, do they violate some trust if they put in phantom payments so as to get a new code to provide to the borrower in bankruptcy? One dealer with which we dealt in the past swears that his PassTime system does not allow for bankruptcy to be noted in the system in order to receive a code to allow the auto to continue operating. What is the dealers liability for removing the devices required by its lender? Most of these issues come down to auto dealers not wishing to report the debt as included in bankruptcy, which might have financial consequences for the dealers as with their lenders.
These problems are not necessarily the concern of the bankruptcy attorney, but the issue is how do these devices interfere with the automatic stay now that payments are to be made through the Chapter 13 trustee?
The biggest problem with used car dealers not knowing themselves how to handle the issue, is that the dealers become indecisive and allow the car to become disabled, or aggravate the Chapter 13 debtor who must repeatedly try to obtain a new code so as to just operate their automobile every week, or two weeks or month. The dealers play with emergency codes, which also cause problems. The systems will usually only allow for a limited number of these to be issued. Many of the codes provided are wrong and the debtor becomes stranded when the automobile will not start. The automobile becomes unreliable.
The solution for the bankruptcy attorneys is to be proactive. When retaining a new client, if the debtor maintains a car note with a used car dealer, the attorney really needs to inquire if the car has one of these disabling devices. If so, the attorney need to treat the case much like he or she would a pending foreclosure. For example, we recommend the bankruptcy attorney or his or her office:
1. Specifically notify the auto dealer of the filing of the bankruptcy by fax, letter, overnight deliver, or a combination of these, which can trace or confirm receipt of the notice (also a properly noted phone note would not hurt);
2. Notify the auto dealer that your client will make the automobile immediately available to remove or disable the device;
3. Put the auto dealer on notice that if it does nothing, and requires the debtor to continually obtain numbers, or allows the auto to become disabled, that it will be exercising control over property of the bankruptcy estate and will have willfully violated the automatic stay; and,
4. Inform the auto dealer that should this happen that an adversary (or lawsuit) could be filed against it seeking damages, including attorneys' fees and costs.
Surprisingly, there are very few stay violation opinions written on this subject. Of the ones written, one of the better reasoned is In re Hampton, by Chief Bankruptcy Judge Audrey R. Evans of the United States Bankruptcy Court for the Eastern District of Arkansas (Little Rock).
This decision involved a PayTeck disabling device, as we described above, which was installed by Yam's Choice Plus Autos, Inc. before the filing of the Debtor's Chapter 13 bankruptcy filing. While the bankruptcy was pending, the Debtor had to call in repeatedly to obtain numbers, had to be provided emergency numbers to input to start the car, and accused Yam's Choice of providing incorrect numbers to input on occasion. Yam denied the wrong number allegation, and stated that the Debtor must have inputted the numbers provided incorrectly. Also, the dealer blamed the Debtor because she would not call for a new code number until after the auto shut off. The case goes into good detail on how the system works.
What is of the most importance are the legal findings of the Court. First, the Court finds that 11 U.S.C. § 362(k) (then § 362(h) of the old Bankruptcy Code provisions), prohibits anyone from exercising control over property of the bankruptcy estate.
Second, the Court agrees that a violation of the automatic stay is willful, for purposes of 11 U.S.C. § 362(k), if such a stay violation occurs when the creditor (in this case the used car dealer) acts deliberately with knowledge of the bankruptcy petition.
Third, the Court found that failure to disable the device was a deliberate act (or an "overt" act) because it is the "burden and responsibility" of the creditor (in this case the auto dealer) to take any action necessary and appropriate to ensure that the stay is not violated. In short, the auto dealer could not just sit on its hands and do nothing while the car in this case is disabled.
Fourth, regardless of the car in question becoming disabled, the auto dealer in this case violated the automatic stay by placing "the burden on Debtor to obtain a code in the first place". "Once Debtor filed bankruptcy, Debtor should have been free to use her vehicle without interference by Defendant (unless the creditor sought and obtained court approval to do so).
Fifth, the Court awarded actual damages and attorneys fees, and the device was deactivated.
We believe this case is well reasoned and follows the law most percisely.
Should you run into such a situation in a Chapter 13 bankruptcy context, notice is the first key. If that does not solve the problem, then feel free to contact my office.
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