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Considerations for Sureties Facing Motor Vehicle Dealer Surety Bond Claims in Oregon

By: Vicki Smith

Motor vehicle dealer surety bonds are a discrete and specialized category in the world of surety and fidelity. The primary purpose of surety bonds is to protect the public – and one area where the public needs to be protected is in the purchase of vehicles. Like many states, Oregon requires all automobile dealers to obtain a motor vehicle dealer surety bond (“MVD bond”). Yet, states differ on the amount of the bond, what triggers a bond claim, and the surety’s liability in conjunction with the dealer’s liability.

In Oregon, the MVD bond must be in the amount of $40,000 for each year. However, a lesser bond amount is required for dealers who exclusively deal in motorcycles, mopeds, Class I all-terrain vehicles or snowmobiles. Also, the bond amount is limited to $20,000 for claims by non-retail claimants.

A bond claim is triggered if the dealer commits fraud, makes a fraudulent representation or violates certain provisions of the vehicle code relating to vehicle registration, permits or transfer.  ORS 822.030(2). Unlike some other states, a claimant may raise a claim against an Oregon dealer’s MVD bond without first obtaining a judgment against the dealer. This means a claimant can bring a bond claim without even notifying the dealer, or they can bring the claim against the dealer and surety simultaneously. This raises a number of issues for the surety.

A surety is not jointly and severally liable for the dealer’s liability. The surety is only jointly and severally liable for payments made under the bond – not for the underlying conduct. While the dealer’s alleged conduct may form the basis for a statutory bond claim, it cannot form the basis for a direct claim against the surety for that alleged conduct. The surety did not commit the alleged wrongful conduct.

Since the surety’s liability will oftentimes be different and more limited than the dealer’s liability, the surety should carefully analyze whether to tender its defense to a dealer. A surety should consider whether the dealer has retained counsel and that counsel’s experience with surety law. The surety needs to consider whether the claims and allegations against it are proper and whether the alleged damages are covered under the bond. The only claim raised against a surety should be a statutory bond claim, and the damages limited to those permitted by the bond statute. If the dealer’s attorney who accepts a tender does not consider these defenses, the surety could easily find itself facing claims with punitive damages that are not covered under the bond, or even having a judgment against it for punitive relief that the surety is then bound to pay.

It is a good idea to tender a surety’s defense to a dealer in cases where the MVD bond liability is fairly certain, when there appears to be no conflict between the dealer and the surety in their defense strategy, and the surety does not have concerns about the dealer’s attorney’s ability to adequately represent it. However, when there are concerns, the surety should consider providing its own defense or retaining counsel to monitor and advise the dealer’s attorney in its defense. This will ensure the surety’s interests are protected.