When Best Laid Floor Plans Go Awry: How to File Motor Vehicle Surety Bond Claims In Alabama

Bradley R. Hightower

A floor plan lender "advances money to automobile dealerships" who "use this money to purchase cars at auction or by trade-in." See Westlake Flooring Co., LLC v. Staggs, 2018 WL 3752383, *4 (N.D. Ala., August 8, 2018). Vehicles purchased by dealerships under this type of arrangement are referred to as "floor-planned" vehicles. Westlake at *4. When a dealership sells one of these vehicles "but fails to repay the floor-plan lender's advance," the vehicle is said to have been sold "out of trust," Westlake at *4, and a charge of fraud by the lender against the dealership is likely to follow. See John P. Maguire & Co. v. Herzog, 421 F.2d 419 (5^th Cir. 1970).[1] But any recovery by the lender against the dealership may be difficult because the dealership's fraud in selling the floor-planned vehicles out of trust will cut off its financing to purchase additional inventory and probably result in the closure of its business operations. It is for this reason lender may want to file a claim against the dealership's motor vehicle surety bond.

MOTOR VEHICLE SURETY BOND

Effective as of October 1, 2020, Alabama law requires automobile dealerships to post a $50,000 surety bond with the Alabama Department of Revenue as part of the dealership's licensing requirements. See Ala. Code §§ 40-12-398, 40-12-414, 40-12-448, and 32-8-34. See also Ala. Admin. Code r. 810-5-12-.01 through 810-5-12-.07. The surety bond is payable to "any person who shall recover any judgment for any loss as a result of any violation of the conditions … of any contract made by such dealer in connection with the sale or exchange of any motor vehicle" or any violation by the dealership of "any of the provisions of law relating to the conduct of the business for which [the dealership] is licensed." See Ala. Code § 40-12-398.

REQUIREMENTS TO FILE A BOND CLAIM

Floor plan lenders and other persons[2] entitled to file a claim with the Alabama Department of Revenue against a dealership's motor vehicle surety bond must meet the following requirements:

1. A claimant must first secure a final judgment from a court of competent jurisdiction.
2. A claimant must exhaust all available remedies in attempting to collect the judgment, prior to making a bond claim with the department.
3. A claimant must submit the following items to the department:
   • A complaint relating to the violation of the conditions of a contract made in connection with the sale or exchange of a motor vehicle; or the violation of any provision of law relating to the conduct of the business of a motor vehicle dealer, automotive dismantler and parts recycler, wholesale auction, designated agent, or title service provider;
   • A final judgment relating to the complaint in subparagraph (a) above. The certificate or any documents must be signed by the judge; and,
   • A description of efforts made to enforce the judgment; along with a statement of all amounts recovered, or a statement that no amount has been recovered.

See Ala. Admin. Code r. 810-5-12-.02(6)(c).

After this information and these materials are submitted, the Alabama Department of Revenue is charged with determining if the dealership has violated the terms of its motor vehicle surety bond. See Ala. Admin. Code r. 810-5-12-.02(6)(d). Then, assuming a violation is found, the Alabama Department of Revenue will file the bond claim with the surety company who issued the bond, See Ala. Admin. Code r. 810-5-12-.02(7), at which point the surety company will have thirty (30) days to respond or request an extension to further investigate the claim. See Ala. Admin. Code r. 810-5-12-.02(7).

CONCLUSION

Floor plans are carefully thought out agreements and, when they work as intended, offer a mostly seamless mechanism for an automobile dealer to finance its operations. But as described by the Scottish poet, Robert Burns, "[t]he best-laid schemes o' mice an' men gang aft agley an lea's us nought but grief an' pain for promis'd joy,"[3] which translates to the modern axiom that even the best laid plans often go awry. If your floor plan has suffered this fate and any recovery against the dealership is unlikely, you should consider following the steps above to file a claim against the dealership's motor vehicle surety bond. The aggregate amount paid on all bond claims made against a single bond is $50,000, See Ala. Admin. Code r. 810-5-12-.02(8), so make sure to prosecute your civil action efficiently and file your claim on the earliest date possible after meeting all of the filing requirements.

[1] Robert Burns, Tae a Moose, in The Best Laid Schemes: Selected Poetry & Prose of Robert Burns 48 (Robert Crawford & Christopher MacLachlan eds., 2009).

[2] See Old Republic Sur. Co. v. Auction Way Sales, Inc., 733 So. 2d 878 (Ala. Civ. App. 1997) ("We conclude that the legislature intended for the bond requirement … to serve as a remedy for any person who recovers any judgment as a result of any violation of the conditions pertaining to the initial granting of the license. The statute creates a cause of action in favor of 'any person who shall recover any judgment for any loss as a result of any violation of the conditions hereinabove contained'").

[3] See Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11^th Cir. 1981) (adopting as binding precedent in the 11^th Circuit all decisions of the former Fifth Circuit handed down prior to October 1, 1981).

About Christian & Small

Christian & Small LLP represents a diverse clientele throughout Alabama, the Southeast, and the nation with clients ranging from individuals and closely-held businesses to Fortune 500 corporations. By matching highly experienced lawyers with specific client needs, Christian & Small develops innovative, effective, and efficient solutions for clients. With offices in Birmingham, metro-Jackson, Mississippi, and the Alabama Gulf Coast, Christian & Small focuses on the areas of litigation and business, is a member of the International Society of Primerus Law Firms, and is the only Alabama-based member firm in the Leadership Council on Legal Diversity. Our corporate social responsibility program is focused on education, and diversity is one of Christian & Small's core values.

No representation is made that the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.