A state agency was allowed Wednesday to join a pending Orange County lawsuit to help win a court order that would declare an automobile subleasing business illegal.
The state Department of Consumer Affairs filed an eight-count civil complaint, alleging that the former owners and operators of the defunct National Security Financial Services violated state business, vehicle and anti-fraud statutes in a scheme that has spawned at least two dozen imitators from Sacramento to San Diego.
Violations of the state laws carry fines of up to $2,500 for each instance.
"We think this is a significant consumer problem," said John C. Lamb, staff attorney for the state agency. "The purpose of our intervention is to seek a declaratory judgment saying this business is unlawful in California. If we get it, we hope to spread the word to other prosecuting agencies to halt this practice."
He said subleasing companies exist in Orange, Los Angeles, Sacramento and San Diego counties and in the San Francisco Bay area.
Lamb said one reason his agency intervened is that he believes he could get "a widespread result."
While a favorable ruling by an Orange County Superior Court judge would be binding only in Orange County, Lamb said, such a decision would provide "good, persuasive authority" for other courts in the state. A favorable ruling also could be used by banks and other lenders and original leasing agents to put a stop to such businesses.
Operators of subleasing firms claim that they provide a service by taking over car and insurance payments from those who no longer can afford them--thus protecting the original owners' credit ratings--and subleasing the cars to those who cannot otherwise lease or buy automobiles because they have never established credit or have bad ratings.
Payments Reportedly Kept
It is a cash-rich business, but the companies usually do not stay around for more than six months or so, investigators claim. And the payments that are supposed to be made to banks and other original lenders--who generally are not told that the car is being subleased--often are not made, bankers and investigators allege.
National Security, for instance, opened three branches in Los Angeles and Orange counties in six months of operation and collected an estimated $400,000 in non-refundable service fees and monthly sublease payments, according to lawyers for the Legal Aid Society, which brought the suit. The disposition of the money, most of it in cash from about 400 customers, is one of the issues in the lawsuit.
It is that lawsuit--filed after National Security closed its doors in April, 1985, and its president, James Trawick II, dropped out of sight--that the consumer affairs agency joined with its own complaint Wednesday.
Commissioner Ronald L. Bauer, who approved the state's intervention, said in an interview that the agency already had the authority to file its own lawsuit alleging the violations of state laws and that joining it with the plaintiff in the pending action was "efficient and economical."
State law also authorizes the agency to intervene whenever issues in a suit "may substantially affect the interests of consumers in California," Lamb said.
None of the defendants or their attorneys were present at the hearing.
The lawsuit, filed on behalf of Farida Omari of San Juan Capistrano, already has led to a preliminary injunction. Superior Court Judge Judith M. Ryan ruled on March 10 that Trawick, his chief associate, E.T. Strickland and other National Security agents can no longer sublease cars unless they first get the approval of banks and other lenders who hold the original leases or liens.
Bankers say they are unlikely to give such an operation permission to sublease the cars that they have financed or leased, adding that typical financing and leasing contracts specifically prohibit subleasing.
Even if a subleasing firm is shut down, it reopens elsewhere, said Marvin Benowitz, a Security Pacific National Bank vice president, in an interview two months ago.
"It seems to me that you've got to get on the record that it's inhospitable in California for this kind of business to exist," he said then.