United States :Firms halt N.Y. vehicle leases
Mounting lawsuits drive away automakers
By Ed Garsten / The Detroit News
DETROIT -- In 1999, Mark Chilberg accidentally ran over his teenage daughter with his leased Ford pickup as she sunbathed in the driveway of their Youngstown, N.Y., home.
Amber was dragged several feet but survived. Her mother, Cynthia, took advantage of the state's unique liability laws and, on her daughter's behalf, eventually sued Amber's dad and the leasing company, Ford Motor Credit Co., the finance arm of Ford Motor Co.
Last month, a jury awarded her $1 million.
It was the latest tremor to rock the automotive finance market and just one of more than 200 such lawsuits that have led several auto companies and banks to halt or plan to stop leasing vehicles in New York and Rhode Island.
The verdict was based on a legal concept -- vicarious liability -- where one person is liable for the negligent actions of another person, even though the first person was not directly responsible for the injury. A parent sometimes can be vicariously liable for the harmful acts of a child and an employer sometimes can be vicariously liable for the acts of a worker.
Every state, including Michigan, has a vicarious liability law on its books. However, only New York, Rhode Island and Connecticut allow drivers of leased vehicles who get into an accident to sue finance companies or banks for unlimited damages on the grounds that the companies are the legal owner and ultimately responsible.
"I pray a lot," he said.
Fearing more lawsuits, General Motors Corp.'s finance unit ended leasing in New York on May 1 and Honda Motor Co. will do so at the end of this month. Starting July 10, leasing will not be available to Ford customers in New York.
J.P. Morgan Chase & Co., the nation's second biggest bank, pulled its lease business out of Rhode Island in October after a court leveled a $28 million judgment against the institution.
Last Tuesday, the bank stopped leasing cars in New York but said it would rescind its plan to pull out of Connecticut when the state Legislature amended a law to limit liability if a driver has a proper amount of insurance. And late last week, the Rhode Island Legislature took similar action. The measures in both states are awaiting signatures from governors.
But in New York, a bill that would limit liability to $100,000 per injured person and $300,000 per incident if a lessee's insurance runs out is hung up with little hope of passage.
In addition to exiting the leasing market, some automakers are taking other steps to counter the suits and exposure.
On May 1, DaimlerChrysler Services, the finance unit of DaimlerChrysler AG, more than doubled its acquisition fees on leases to $1,000 in New York, Rhode Island, Connecticut and Kentucky.
"The law is totally outdated and out of context," said James Ryan, a spokesman for DaimlerChrysler Services.
He said the company raised its leasing fees in Kentucky because it's not clear whether the state's law includes a limit on liability damages.
The loss of lease business is considerable in the heavily populated New York City area, where leasing is more popular than in other parts of the country.
Nationally, leasing accounted for 14.7 percent of all new vehicle purchases in June. In the metro New York area, leasing accounts for 31.4 percent of all sales, according to J.D. Power and Associates.
In the New York area in June, 80.5 percent of all sales of Jaguar S-type and 80.4 percent of Infiniti M45's were leases.
Long Island dealer Paul Conte felt the pain immediately when GM pulled its lease business on May 1. At his Cadillac dealership, leasing accounts for 80 percent of all new model sales transactions. Until GM stopped leasing, his sales were up 18 percent this year. But by the end of May, Conte's Cadillac sales had plummeted 39 percent.
"Customers are very upset," Conte said.
Leasing a liability
Zero percent financing and other incentives have helped, Conte said, but they are not enough to offset the loss in lease business.
The head of the New York State Automobile Dealers Association predicts that unless the state Legislature moves at least to limit the amount of damages for which lessors are liable, leasing will cease to be an option in the Empire State.
"What's going to happen is pretty simple," said Robert Vancavage, head of New York's new car dealership trade group. "There is going to be an exodus of anyone who doesn't want to have this liability. It's just not worth it for them."
Ford Motor Credit lawyers say automakers are getting stuck paying for negligence in which they have no role.
"The law creates an inequity because we don't have any control over who's driving the vehicle," said John Godre, a lawyer with Ford Credit.
The companies pulling their lease business out of states with vicarious liability laws say the statutes should be amended to remove that liability, or limit it.
But some attorneys and consumer groups say the laws offer consumers maximum protection.
"The law's been on the books a long time," said Russ Haven, legislative counsel at the New York Public Interest Research Group, a consumer advocacy organization. "It's not clear to us it's not serving a beneficial purpose. The burden is on the industry to make a case why it should change."
The groups also contend automakers and banks are trying to play both sides of tax laws. On one hand, they claim not to own a leased vehicle to avoid exposure to liability, but they claim ownership for tax purposes because they can write off the depreciation of a leased vehicle.
"It's hypocritical to tell the IRS you own your property so you can deduct depreciation while telling everyone else that the consumers who lease cars are effectively the owners and are the responsible ones," Jeffrey Lichtman, president of the New York State Trial Lawyers Association, said in a statement.
But Ford Credit lawyer Muzette Hill counters the tax savings seen by automakers and banks translates into an advantage for consumers.
"We're passing it on to the consumer through lower monthly payments," Hill said.
In an effort to retain lease customers while avoiding liability, so-called "balloon payment" deals are being promoted. In a sale using a balloon payment, the ownership is transferred to the customer, and at the end of the lease, the customer can turn in the vehicle, buy it -- by paying a lump-sum "balloon payment" based on how much the vehicle is worth at the time -- or by refinancing the balance. However, balloon payments are not viewed as a long-term alternative, since monthly payments tend to be higher than traditional leases because customers are taxed on the full value of the vehicle.
Supporters of the vicarious liability laws argue the automakers are creating a false issue because, they believe consumers are choosing buying over leasing because of aggressive incentives such as no-interest financing.
"We've heard the banks and the auto industry say We have a crisis, the sky is going to fall,'" said NYPIRG's Haven. "Rarely has that been the case."
Vancavage argues it's shortsighted to write off leasing because of the current incentive levels.
"You can't count on money being this cheap forever," he said. "The cost of financing is going to be more expensive."
For his part, dealer Paul Conte is trying to move as much metal as he can through balloon payment leases and sales. But he's clinging to hopes the New York State Legislature will reconsider changing the law so the automakers will resume leasing in his state.
"I pray a lot," he said.
My first car was a 67 Mustang Coupe, 2nd one was a 67 Cougar XR-7, 3rd one was a 66 Mustang Coupe. Why did I get rid of these cars for ? I know why, because I'm stupid, stupid, stupid.
My next Ford.....