New York Specious Cash Sales Act

The New York Legislature recently moved to protect consumers in that state from unscrupulous retailers of consumer goods and financers of consumer loans by enacting the Specious Cash Sales Act. The new law is the third in a series of measures designed to remedy certain perceived inequities to which the holder in due course doctrine gives rise in the consumer goods field. Earlier this year, the Legislature undercut complicated mechanisms whereby a finance company could procure from a retailer contracts and obligations containing a waiver-of-defenses provision executed by the buyer-consumer. This law in turn complemented a still earlier statute which stripped assignees of consumer paper of their status as holders in due course. As a result of these two laws, in a suit brought by an assignee of consumer paper against the consumer-buyer, the consumer can assert against the assignee any defenses he has against the original retailer (including failure of consideration and breach of warranty). The intended result was to force finance companies to investigate their sources of credit with an eye toward accepting paper only from those who were reputable and solvent. Certain finance companies, however, were indefatigable in their search for legal loopholes. Seeking to avoid consumer defenses, they developed the “specious cash sale.” Under this arrangement the retailer does not extend credit to the buyer. Rather, he merely helps the buyer locate a willing and available creditor, sometimes by recommendation, frequently by providing the appropriate forms. Some went so far as to assist the buyer in filling out the forms. The immediate effect is two separate paper transactions: (1) a loan by the creditor to the consumer, and (2) a cash sale by the retailer to the consumer. Thus the procedure technically loses its identity as a retail credit transaction. Once again the consumer is left without any product or service related defenses against his creditor since the latter has only lent him funds with which to purchase. the defective goods or services. New York enacted the Specious Cash Sales Act in order to close this loophole. A similar provision is included in the National Consumer Act (NCA) published by the National Consumer Law Center. Under the new law the creditor in the specious cash sale transaction is subject to consumer defenses provided that “he knowingly participated in or was directly connected with such consumer sale.” This note will critically analyze the necessity of the enactment of the Specious Cash Sales Act, the adequacy of the law’s coverage, its possible extensions, and its likely economic impact.