Wisconsin Auto Dealer Bonds and Letters of Credit

Wisconsin Auto Dealer Bonds

Wisconsin requires all licensed motor vehicle dealers to maintain a surety bond or irrevocable letter of credit for the benefit of any person—including consumer retail purchasers—who sustains a loss because of an act of a motor vehicle dealer that constitutes grounds for the suspension or revocation of a license under the statutes regulating motor vehicle dealers.

This article will identify and discuss the law related to Wisconsin’s requirement that licensed motor vehicle dealers maintain a surety bond or irrevocable letter of credit and the legal framework governing claims against those bonds and letters of credit.  In doing so, the following topics will be addressed: 1) the requirement to maintain a bond or letter of credit; 2) the types of claims allowed; 3) the priority of claims; 4) payments on allowed claims; 5) making claims; 6) payment by the surety or financial institution; 7) procedures and requirements for determining claims; 8) late claims; and 9) alternative procedures for determining claims

I.  Requirement to Maintain Bond or Letter of Credit

Wis. Stat. § 218.0114(5)(a) requires licensed motor vehicle dealers, except those selling only motorcycles, to provide and maintain in force a surety bond or irrevocable letter of credit of not less than $50,000.   Dealers who sell only motorcycles must provide and maintain a bond or irrevocable letter of credit of not less than $5,000.

The bond or letter of credit must be executed in the name of the Wisconsin Department of Transportation for the benefit of any person who sustains a loss because of an act of a motor vehicle dealer that constitutes grounds for the suspension or revocation of a license under Wis. Stat. §§ 218.0101 to 218.0163, the statutes regulating Wisconsin motor vehicle dealers and salespeople.

The administrative rules interpreting Wis. Stat. § 218.0114(5)(a) are found in Wis. Admin. Code Chapter Trans 140.  These administrative rules set forth the procedure related to claims against motor vehicle dealer bonds and letters of credit.

II.  Types of Claims Allowed

A claim against a dealer bond is allowable if it satisfies all of the following requirements and is not otherwise specifically excluded by other provisions of the administrative rule:

  • The claim is for monetary damages in the amount of the actual loss suffered by the claimant
  • The claim arose during the period covered by the security
  • The claimant’s loss is caused by an act of the licensed motor vehicle dealer which is grounds for suspension or revocation of the dealer’s license
  • The claim is made within 3 years of the last day of the period covered by the security

The following claims are disallowed:

  • Any claim by a claimant that is licensed under Chapter 218 of the Wisconsin Statutes, the chapter governing Wisconsin motor vehicle dealers and salespeople
  • Any claim by the licensed motor vehicle dealer or its agents or employees
  • Any claim arising from activities of the licensed motor vehicle dealer which are not regulated by the Wisconsin Department of Transportation, specifically including, without limitation, claims for rent, mortgage payments, wages, commissions, personal services rendered, and commercial transactions not directly related to the sale or purchase of a motor vehicle
  • Any claim by a manufacturer, factory branch, factory representative, distributor or distributor representative involving the sale or delivery of a new motor vehicle to the dealer
  • Any claim for interest or penalties, legal costs, attorney fees, or punitive damages—except as otherwise expressly provided by the regulations
  • Any claim by a financial institution or secured party

Any of the following acts by a claimant, as determined by the Wisconsin Department of Transportation, may be grounds for disallowing a claim:

  • Making or offering a false statement, false or altered document, or other misrepresentation in support of a claim against the security
  • Making a claim based in whole or in part upon a transaction or an act by the claimant which is unlawful or contrary to statute, regulation or administrative rule, as determined by the Wisconsin Department of Transportation
  • Failing to make a claim in the manner provided by administrative rules pertaining to claims against motor vehicle dealer bonds or letters of credit
  • Failure of the claimant to cooperate in the investigation of the claimant’s claim, including failure to provide additional supporting documentation or evidence for a claim or to provide other explanatory materials when that information is requested by the Wisconsin Department of Transportation and is readily available to, or known to, the claimant or is in the claimant’s possession or control

A claim may be allowed in part and disallowed in part.

When a claimant is unable to obtain title to a motor vehicle because the licensed motor vehicle dealer who held the vehicle for sale created a security interest in the motor vehicle and a manufacturer or financial institution is holding the title or manufacturers certificate of origin to ensure payment by the dealer at the time of sale, the claimant’s reasonable expenses, including legal costs and attorney fees, in obtaining requisite title documentation, are allowable claims against the security of the licensed dealer.

As an alternative to seeking reasonable expenses, including legal costs and attorney fees, a claimant who is unable to obtain title to a motor vehicle may do any of the following:

  • Rescind the purchase contract and make a claim against the security of the licensed dealer for the full purchase price of the vehicle
  • Make a claim against the security of the licensed dealer for the cost of a title bond prescribed by Wis. Stat. § 342.12(3)(b)
  • Make any other allowable claim for damages

III.  Priority of Claims

The priority classes of allowable claims against the security of a licensed motor vehicle dealer, in order of their priority, are as follows:

  • Claims of retail customers including, without limitation, claims arising from a particular motor vehicle purchase from the licensed dealer or from a particular motor vehicle sale by the dealer, claims for repairs warranted by the dealer, claims for failure to furnish title to a motor vehicle, claims for deposits against an uncompleted motor vehicle purchase transaction, and claims for the failure of the dealer to pay the claimant for a trade-in, a motor vehicle purchased by the dealer, or a consigned vehicle not returned to the consignor upon request
  • Claims of commercial customers including, without limitation, claims arising from a particular motor vehicle purchase from the licensed dealer or from a particular motor vehicle sale by the dealer, claims for repairs warranted by the dealer, claims for failure to furnish for repairs warranted by the dealer, claims for failure to furnish title to a motor vehicle, claims for deposits against an uncompleted motor vehicle purchase transaction, and claims for the failure of the dealer to pay the claimant for a trade-in, a motor vehicle purchase by the dealer, or a consigned vehicle not returned to the consignor upon request
  • Claims of the Wisconsin Department of Transportation for title and registration fees

IV.  Payments on Allowed Claims

The amount paid on each allowed claim shall be determined by the priority class of the claim.  All claims in the same priority class shall be treated alike, beginning with the claim of the first priority class, as follows:

  • The total amount necessary to pay all claims of the class in full shall be determined
  • If enough funds are available under the bond or letter of credit to do so, all claims of the class shall be paid in full
  • If, after all allowed claims of a class have been paid in full, funds remain available to pay additional claims, the allowed claims of the next priority class shall be paid
  • If insufficient funds are available to pay all claims in a class, then each claim of the class shall be prorated according to the formula set forth in Wis. Admin. Code § Trans 140.23(1)(d)

When a class of claims has been prorated because there are insufficient funds available to pay the claims of the class in full, no payments shall be made upon allowed claims of the successive priority classes.  The aggregate total of all payments on all claims may not exceed the total amount of the bond or letter of credit available for payment of the claims.

V.  Making Claims

Each claim must be made in writing and must include all of the following information:

  • The name and address of the claimant and a telephone number where the claimant can be reached during normal business hours
  • A description of the nature of the claim and the transaction from which the claim arose, including any specific acts of the motor vehicle dealer which are grounds for suspension or revocation of the dealer’s license under Chapter 218 of the Wisconsin Statutes
  • The date on which the claim arose
  • The dollar amount of each separate loss or item of damage included in the total amount of the claim
  • Copies of all documents related to the transaction from which the claim arose
  • A statement of the status of any lawsuit regarding the claim and filed by the claimant against the licensed motor vehicle dealer, including the name of the case, case number, court and a copy of any judgment entered
  • A description of the security interest, if any, held by the claimant including a copy of any security agreement related to the transaction from which the claim arose and a description of the secured property
  • A description of any licenses held by the claimant, if the claimant is licensed under Chapter 218 of the Wisconsin Statutes
  • A statement of whether the claimant is a retail customer, commercial customer, motor vehicle manufacturer, factory branch, factory representative, distributor, distributor representative, dealer, salesperson or a financial institution
  • A statement of whether the claimant is the licensed motor vehicle dealer

VI.  Payment by Surety or Financial Institution

The surety or financial institution may, at any time, pay the amount of the bond or letter of credit to the Wisconsin Department of Transportation.  The department shall hold all payments on a particular bond or letter of credit in a separate account.  The separate account may be interest bearing.  The department may retain interest earned, if any, but shall not otherwise make any charges against the bond or letter of credit for administering the bond or letter of credit and determining claims against it.

If payment from the surety or financial institution is not received prior to, or during, the determination of claims by the department as provided in Wis. Admin. Code § Trans 140.26—the rule governing the procedures and requirements for determining claims—the department shall, after the final determination of timely claims, demand payment on the bond or letter of credit from the surety in an amount equal to the lesser of the face value of the bond or the aggregate total of the claims determined to be allowed.

The surety or financial institution shall pay the amount demanded to the department within 30 days.  The department may execute an appropriate written release for the surety or financial institution, if the surety or financial institution so requests, after payment is received.

If a surety or financial institution fails to tender the amount of the bond or the letter of credit to the department, or to make timely payment of the amount demanded by the department, or otherwise fails to observe the provisions governing motor vehicle dealer bonds and letters of credit, then the department may—in addition to any other available remedy—revoke its acceptance of the surety or financial institution as adequate to provide any bond or letter of credit of any persons secured under any statute or rule administered by the department.

The department shall notify the surety company or financial institution of its intent to revoke its acceptance of the surety or financial institution.  The surety company or financial institution may, within 30 days of such notice, request a hearing before the secretary or the secretary’s designee, prior to revocation of the department’s acceptance of the surety or financial institution.

VII.  Procedures and Requirements for Determining Claims

A.  Petition for Ruling

Any claim made against the bond or letter of credit of a licensed motor vehicle dealer, any request by a surety for a department determination of a claim, any notification of the department by a licensed motor vehicle dealer of the dealer’s termination of business, any filing of a bankruptcy petition by a dealer, or any payment of any part of a bond or letter of credit by the surety or financial institution to the department may be regarded by the department as a petition for declaratory ruling pursuant to Wis. Stat. § 227.41.

If the petition does not initially comply with the required format of Wis. Stat. § 227.41(2), the department may request that the additional materials needed to satisfy that statute be furnished.

B.  Notice of Petition

The department must provide notice to all interested parties by publishing notice, pursuant to Wis. Stat. § 985.07(1), in a newspaper of general circulation in the area of the licensed address of the dealer and by mailing notice to all interested parties known to the department.  The notice must include all of the following:

  • The name of the licensed motor vehicle dealer
  • The amount of the bond or letter of credit
  • The period of time covered by the bond or letter of credit
  • The deadline for the submission of claims against the bond or letter of credit
  • The address from which to request claims forms and to which to submit claims
  • The date and place for a hearing on all timely but disputed claims

C.  Deadline for Claims

The deadline for the submission of claims is 60 days after the notice is published.

D.  Evaluation and Investigation

The department must evaluate each claim received, request additional documentation or clarification from the claimant, as necessary, and make a preliminary determination of the allowance, amount and priority class of the claim.

In determining the allowance, amount and priority class of a claim, the department shall give full faith and credit to applicable findings of fact and judgments entered by a court in an action involving the claim in which the claimant and the licensed motor vehicle dealer were opposing parties.

E.  Disputed Claims

     1.  Preliminary Determination of Claims

When a preliminary determination of all claims received prior to the deadline for filing claims is completed, the compilation of all those preliminary determinations shall be sent to each claimant, the surety, if any, and the licensed motor vehicle dealer, who shall all be parties to any hearing.  The compilation of preliminary determinations may include an estimate of the amount which would be paid on each claim, in accordance with Wis. Admin. Code § Trans 140.23, if the preliminary determinations are not contested.

     2.  Deadline for Objection

Each claimant, the surety, if any, and the dealer shall have 30 days from the date the preliminary determination is mailed to him or her to object to the preliminary determination of the allowance, amount or priority class of any claim.

     3. Notice of Objection

Any party objecting to a preliminary determination must furnish timely notice of the grounds for the objection to the department, the surety, if any, and the dealer.  If the preliminary determination objected to is of a claim by another claimant, timely notice of the grounds for the objections shall also be made by the objector to that claimant.

     4.  Adoption of Preliminary Determinations

If the preliminary determinations are not disputed, the scheduled public hearing may be cancelled and the preliminary determinations must be adopted by the department.

F.  Hearing on Claims

If there is a dispute of a preliminary determination, a hearing must be held before a hearing examiner appointed by the department.  The claimant, surety, licensed motor vehicle dealer and any party objecting to the preliminary determination of the claim may present evidence, including witnesses and argument.

The hearing shall be scheduled for a date within 120 days of the publication of the required notice.  The hearing may subsequently be rescheduled to another date, time or place at the discretion of the department and upon notice to all claimants, the dealer and the surety, if any.

The determination of the hearing examiner regarding the allowance, amount and priority of each claim shall be the final decision of the department.

G.  Final Decision and Payment

The final decision of the department shall be in writing and sent to each claimant, the surety or financial institution and the dealer.  Payments from the bond, in accordance with the final decision, shall not be made until at least 10 days after the final decision is sent to each party.  The amount paid on an allowed claim shall be determined as provided by Wis. Admin. Code § Trans 140.23.

VIII.  Late Claims

If any funds remain in a separate bond or credit account are available under the remaining liability of the surety or financial institution after payment of all timely and allowed claims, the department may accept late claims for determination.  After determining all claims received prior to the third anniversary of the end of the period covered by the bond or letter of credit—and after appropriate payment to each claimant has been made—any remaining funds held by the department from the particular bond or letter of credit, excluding interest earned, shall be refunded to the surety or financial institution.

IX.  Alternative Procedure for Determining Claims

As an alternative to the procedures set forth in the administrative rules pertaining to claims against motor vehicle dealer bonds or letters of credit, the department may, at its discretion, proceed as necessary to allow any Wisconsin circuit court, or any federal court—having appropriate jurisdiction over any claim by any claimant against the licensed motor vehicle dealer—to hear the claims of all claimants known to the department, to determine the allowance, amount and priority class of each claim and to make awards against the bond or letter of credit in accordance with Wis. Admin. Code § Trans 140.21 to Wis. Admin. Code § Trans 140.23.