You are ready to put down money on a big-ticket item – maybe a vacation home, new vehicle, RV, or boat. You may think it is a good idea to create an LLC so you can claim the purchase is business related and pay less taxes. But in addition to the risk of tax fraud, that strategy could trigger a hidden lemon law cost if your big purchase turns out to be defective.
Consumer Goes Through Cross-Country Trip to Repair Lemon RV
In 2012, Nicholas Knopick bought himself a luxury recreational vehicle (RV) for $414,583. To cut down on taxes, he created a business entity, Montana Freedom Rider, LLC, and signed the purchase documents on behalf of that company.
Unfortunately, Mr. Knopick’s new, very expensive RV was also very poorly made. Almost immediately after purchasing it, he discovered the RV:
- Smelled like sewage
- Had paint problems
- Had bedspreads screwed into the furniture
- Had staples sticking out of the carpet
Mr. Knopick then engaged in a cross-country, months-long expedition to repair his defective RV. Even after months of repairs, ultimately, Knopick was still unhappy with the quality of the vehicle and requested a full refund, but Jayco refused.
RV Purchased for LLC Voided Consumer Warranty, Court Says
Knopick sued Jayco for violating federal and state consumer protection laws, specifically the Magnuson-Moss Warranty Act. He said the company had violated its warranty on the vehicle by refusing to buy it back.
But Jayco said that as an owner of a company, Knopick didn’t have the same rights under the contract as a consumer would. The limited warranty on the RV said it “does not cover … any RV used for rental or other commercial purposes.” The contract defined commercial purposes to include any time “the RV owner or user files a tax form claiming any business or commercial tax benefit related to the RV, or if the RV is purchased, registered or titled in a business name.” Any repairs made to an RV held for commercial purposes were deemed “good will” and did not change the terms of the contract.
According to the Seventh Circuit Court of Appeals in Knopick v Jayco Inc., Jayco was right. The court said the plain language of the contract meant that by purchasing the RV as the sole member of the LLC, Knopick cheated himself out of lemon law protections designed to safeguard consumers against manipulative business practices.
Consumer protection laws, including the Magnuson-Moss Warranty Act, generally only apply to people who bought or leased goods, services, or real estate for “personal, family, or household purposes.” By listing the RV as a company asset, even if the company’s only purpose was to possess the vehicle and avoid higher consumer taxes, Knopick triggered hidden lemon law costs by removing himself from the definition of a consumer.
Anti-Consumer Decision Could Convince RV Dealers to Push Business Purchases
When the Seventh Circuit took a black-and-white approach to who qualifies as a consumer it created an incentive for RV dealerships to push buyers into creating these single-purpose LLCs. A similar situation happened several years ago when loan companies adopted policies where they would invite consumers to incorporate shell companies to receive their loans. This would allow the loan company to charge a higher interest rate without violating consumer loan interest laws.
The lemon laws connected to a big-ticket item like a luxury RV can cost hundreds of thousands of dollars per vehicle. The court even signaled the use of the practice in its opinion, saying:
“The exclusion clause serves as a defense, shielding Jayco from liability under the express warranty, based on Knopick’s (and perhaps the dealer’s) choice about how to handle the purchase and title of the RV.”
Typically, an RV buyer would never see that clause until after the purchase is done. Those warranties are included in the owner’s manual, which is delivered along with the vehicle after the deal is done. That means buyers would have no way to know the hidden lemon law costs to creating an LLC to purchase their big-ticket items until it was too late to protect their consumer protection rights.