Law & Order

Five top legal issues to consider before purchasing a collector car.

Car collecting – as friendly and collegial a pursuit as it is – should be the last bastion of the “handshake deal,” unfettered by lawyers, messy contracts and legalese, right? Maybe in Pleasantville or Fantasyland. In reality, serious legal issues and consequences can intrude and quickly spoil the fun for the unwary. Here’s a look at the top five pitfalls:

Sale contracts and arbitration clauses

One practice spreading from new car dealers to used and collector car dealers is the inclusion of an “arbitration clause” in the sale contract, which means that in the event of a dispute with the dealer, your recourse is with an arbitrator rather than the courts. Be warned that the arbitrator can consider things like hearsay – second-hand statements used to argue the truth of the matter asserted in them – or unauthenticated documents.

Also, it can be more expensive to file for arbitration. In many cases, you will have to agree up front to pay for half the costs of the arbitration, which can easily exceed $1,500. Contrast this with the filing fee for a small claims case, which can be as little as $25 or $150 for filing in a circuit court. Also, the drafter of the contract gets to dictate where the arbitration will take place, and the arbitrator’s decision is final – there are no appeals.

However, an arbitration clause in a car sale contract shouldn’t be a deal-breaker unless it’s simply unconscionable. If anything, it should make you more diligent in your pre-purchase inspection of the car.

Restoration shop contracts

Even seasoned collectors have stories about restorations gone awry. Problems can arise because you’re paying in advance for services and often have no control over whether the money is being used by the shop to fund your restoration or somebody else’s.

There are several things you can do to protect yourself. A written contract is a must. You may insist on purchasing parts yourself, or disbursing money in stages upon verified satisfactory completion.

If you are a victim of out-and-out deception or shoddy work, consider your state’s Unfair and Deceptive Trade Practices Act, which typically declares unlawful the use of any deception, fraud, false pretense, false promise, misrepresentation or the concealment or omission of any material fact in connection with the sale of any merchandise in trade or commerce. If it applies to the provision of services, you have a powerful weapon. If not, you may be limited to conventional fraud or conversion theories of recovery.

Keep in mind that litigating even a highly meritorious claim and obtaining a judgment is only half the battle – you still have to collect. If the shop is uninsured and has few assets beyond tools, you may be out of luck. Piercing the corporate veil to get at the shop owner’s personal assets (if any) will be tough. Settling for a fraction of what you feel you are owed is a bitter pill to swallow, but, in the end, it’s sometimes the best course of action after attorney fees and the uncertainties of collection are considered.

Title issues

Since most states require a title to pass as evidence of ownership, always insist on seeing a copy of the front and back of the title before parting with any cash. If you purchase a car on which the seller owes money and you pay the seller directly, and he or she fails to pay the lender, the lender can come after you for the balance owed by the seller.

When there is a lien on the car, it’s best to deal with the lender and the seller together. You pay the balance owed directly to the lender and the remainder to the seller. The lender takes care of releasing the lien and letting the DMV know it’s OK to issue a title to you free and clear.

When completing a transaction, always make sure the VIN on the title and the car match. Ask to see the seller’s ID so you can verify that you are dealing with the person named on the title. If the person is purporting to sell the car on behalf of an estate, insist on verifying that he or she is legally empowered to act on behalf of an estate. Keep copies of all relevant affidavits and probate documents.

Tax issues

For most of us, simply being able to enjoy a collector car for a few years and not lose anything is just fine. However, there is no denying the market has been hot lately. For example, the Fall 2006 issue of Cars That Matter Price Guide placed the value of 289 Shelby Cobras from $240,000 to $425,000. The May-August 2008 issue of the same price guide showed that values had risen as high as $664,000 – a potentially large capital gain for a seller.

While a detailed discussion of tax law is beyond the scope of this article, be aware that detailed recordkeeping is essential to blunt some of the tax ramifications of a sale. For example, expenses related to the acquisition of the car, such as travel, inspection fees, transport and money spent on restoration, may be properly added to your cost basis in the car. Consultation with a tax attorney is essential if you are faced with a potentially large gain on the sale of a car.

Emissions laws

States are all over the board as far as which cars will be subject to annual or biennial smog checks. Some have no smog checks at all, while others mandate them for relatively late-model cars only.

Those that do mandate checks for older cars generally follow one of two formats – a cutoff date or a rolling exemption. A cutoff date simply fixes an arbitrary model year beyond which cars do not have to pass a smog test. The rolling exemption exempts cars more than a certain number of years old so that each calendar year another model year becomes exempt.

The results of failing an emissions test vary from state to state. In some states, if you can prove that you have spent a certain amount trying to rectify the problem, you can register your car. In other states, such as Oregon, the rule is absolute: If your car was built after 1974, it must pass an emissions test to register it. California is also particularly strict.

Since you don’t want to find yourself in the position of having to locate and refit missing or broken pieces of your car’s smog equipment, it’s always a good idea to check your state’s laws before purchasing a car. If you do buy a car that is subject to emissions testing, insist that the seller provide evidence that the car has recently passed. It is something that is often overlooked but can cause you a great deal of trouble and grief when you go to register the car.

A licensed attorney, Rob Sass is the former vice president and general counsel for Sports Car Market magazine. His comments are general in nature, do not constitute legal advice and are not intended to substitute for consultation with an attorney licensed in your state.
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To see this article in its original format, view the pdf version of the Winter 2008 issue of Hagerty magazine.