Auto buyers sue Lithia, allege fraud.

Byline: Stories by Diane Dietz The Register-Guard

In a test for the high-flying Lithia Motors car dealership chain, 32 Oregon car buyers are suing the Oregon-based company for more than $40 million, contending that Lithia employees lied on loan documents to boost profits.

Three lawsuits filed in U.S. District Court in Eugene over the past eight months charge that Lithia employees used a complex scheme to defraud buyers.

The lawsuits allege that employees would persuade consumers to buy used cars at excessive prices, then secretly and falsely inflate buyers' income figures on loan applications to justify bigger loans, and secretly boost the values of the vehicles on loan applications by penciling in nonexistent amenities on the vehicles.

The plaintiffs contend that the dealership added the bogus value to justify the inflated sales prices to the lending institution that would hold the loan.

The Lithia car buyers said these dummy features were listed on their paperwork: rear air conditioning, power windows, cruise control, CD stacker/changer and premium sound, court records show. Lithia even claimed vehicles had features that would alter their shape, such as moon roofs on cars and extended cabs on trucks, the buyers contend in court records.

"They get you into spending more money than you have to," said David Buck, who bought a van for his family from Lithia. "They get you better credit than you should have." The Medford-area resident is suing Lithia, alleging it falsified information on his loan application.

For Medford-based Lithia, the lawsuits are a blow, after years of rapid growth with acquisitions throughout the West that made the company the eighth-largest dealership in the nation.

The company has denied the allegations in the lawsuits and is preparing a vigorous defense.

The lawsuits are "a very unusual problem for us to have," said Joe Davis, Lithia's attorney.

"It's unfortunate that these people are dissatisfied, but I certainly don't view it as a customer revolt," he said. "We continue to grow. We continue to have more satisfied customers."

The company works hard to train employees in ethical conduct, Davis said.

A report by the national consumer advocacy group Public Citizen, meanwhile, says the scams alleged in the lawsuits are common at auto dealerships nationally.

The salesman presents to the customer paperwork reflecting the inflated price and distracts the car buyer from thinking very hard about the price by focusing the negotiations on the monthly payment amount, critics say.

Eugene resident Aimee Phillips said she tried to negotiate for a sliding rear window when she bought a pick-up at Lithia Toyota of Springfield two years ago. She owns a Great Dane, Violet, who rides in the bed, and Phillips wanted the ability to check on her dog while she was traveling.

But the salesman said no dice, Phillips remembers, so she settled for buying a truck with no rear window.

Then, when Lithia applied for a loan for Phillips, it claimed in the paperwork that her pickup had $1,965 worth of amenities that it in fact didn't have, including a $300 sliding rear window, her lawsuit filed in November claims. That added insult to injury, Phillips said.

"They charge me for one and refuse to put one on my truck. It's like, `Oh my gosh. You have no shame,' ' she said. "You go in, and they say `Trust us, trust us, trust us.' And if you do, you're punished."

Lithia's Davis responds: "These types of suits are becoming more common in the auto retail industry - and we're aware that we've become a larger target due to our success."

Lithia Motors is the second-largest publicly traded company in Oregon, with $2.5 billion in sales last year and an ambition to become the "preferred provider" of vehicles in North America. The company owns 80 stores and 148 franchises in a dozen states. That includes four outlets in Eugene-Springfield.

"Every employee in the company has to sign an integrity policy that would make it quite clear that it was a violation of company policy to mislead customers or lenders," Davis said.

"It's something we spend money on ourselves to investigate ourselves on - because we want to find the employees that may be acting in contravention of our policies. And if they are, that's something at odds with our company philosophy and what we try to do and how we try to benefit our customers," he said.

Public Citizen, with the help of an industry whistle-blower, last December published a study describing the falsifying of loan and credit applications by car dealers. Since then, the Washington, D.C.-based group says it has been deluged with examples, more than 850 at last count.

The practice is common enough in Lane County that Oregon Community Credit Union loan department telephones a sampling of its customers in order to verify whether the cars they bought actually have the features listed on the loan application submitted by the dealer.

"We want to make sure there aren't things missing like sun roofs and air conditioning, major trim packages - that sort of thing - that would have a substantial impact on the value of the vehicle," said Jerry Liudahl, who is vice president of lending at the Eugene-based institution.

On the national level, Laura MacCleery, a lawyer who wrote the Public Citizen report, said consumers faced the most problems with companies that made a lot of their profit from their spot financing operations, compared with profits on their car sales.

Lithia emphasizes its financing operations. More than 75 percent of Lithia customers arrange financing on-site, whereas the industry average is about 57 percent, according to the company.

Phillips, the Eugene customer, might never have suspected that Lithia allegedly falsified her paperwork, if not for Joseph Kiefer II, a Kansan who went to work at Lithia Honda in Medford in July 2000.

After working for Lithia for nine months, Kiefer quit and filed a wrongful dismissal lawsuit in federal court in Eugene claiming that Lithia had required him to "assist in the perpetration of lender and consumer fraud."

When he left, he took along Lithia documents for proof, court records show. The "deal files" submitted during the trial show that sales staff altered their customers' income figures on credit application forms, changing 1s to 2s and 3s to 8s, Kiefer charged.

The income of a toy store clerk went from $1,300 to $2,800 with a few strokes of a pen, the lawsuit alleges. A "substantial portion" of the deals also involved adding nonexistent vehicle amenities on the paperwork, Kiefer said in testimony.

Kiefer settled the case in 2003 for a $300,000 payment from Lithia, court records show.

In that case, Lithia asked that Kiefer be barred from testifying in future consumer lawsuits as part of the settlement, but U.S. District Judge Ann Aiken, who oversaw the negotiations, refused to allow that, saying such a prohibition would be unethical and possibly illegal, one attorney's account filed in the court case showed.

Lithia officials will not discuss Kiefer or his case, saying that would be contrary to a confidentiality clause in the settlement. The company may have a new opportunity to confront Kiefer in court if the cases against Lithia go to trial. He is likely to be the star witness for the plaintiffs.

The publicity surrounding the Kiefer case tipped off many car buyers that the loans they arranged at Lithia when Kiefer was finance manager were faulty, several plaintiffs in the current batch of Lithia lawsuits said.

The newer cases include the one filed last November by Phillips of Eugene; another filed in April by the daughter of a U.S. District Court clerk to whom Lithia sold a $15,000 vehicle when she was a teenager; and a third suit, also filed in April, with 23 plaintiffs - including six couples - who are asking a total of $40 million for reimbursement and damages. Most of them live in Southern Oregon.

Several plaintiffs say that false incomes that Lithia listed on their credit applications got them into vehicles they couldn't afford, and that sparked cascading credit problems.

David and Darlene Buck, a couple in their early 30s, bought a red Pontiac Trans Sport minivan at Lithia Volkswagen in Medford for about $18,000. He's a lathe operator at a Boise Cascade mill, and she manages a telephone answering service. The arrival of their third child spurred them into the purchase.

The lawsuit contends that to justify getting a loan for the Bucks at that price, Lithia added these nonexistent amenities on the loan application: wide tires, premium wheels, premium sound and rear air conditioning.

Those amenities were worth $1,965, which means Lithia overcharged the Bucks by that amount, the lawsuit contends. Also, the interest the Bucks would pay on that overcharge would total $1,065 over the life of the loan, the lawsuit contends.

Darlene Buck said she doesn't know if she could sign an agreement to keep quiet about her experiences with Lithia, even if the company offered a settlement check.

"Somebody needs to teach them a lesson: You can't just do that to people," she said. "You can't change things. You can't commit fraud. You can't talk people into buying vehicles they can't afford. You can't forge documents so they can purchase vehicles they don't really have enough money to buy."

CAPTION(S):

David Buck of Medford and his wife, Darlene, shown with their children, Jesse, 13, and Robert, 3, say that to justify a loan for their minivan, Lithia listed nonexistent features on the application such as wide tires, premium wheels and rear air conditioning.