California Appeals Court Permits Borrowers' Claims against Lender Based on Auto Dealer's Alleged Breach of Installment Contract

FTC FCRA

On February 4, the California Court of Appeal, Third District, held the FTC's Holder Rule allows borrowers to assert claims against a lender assignee that they might otherwise have against the auto dealer with whom the borrowers entered the installment contract. Lafferty v. Wells Fargo Bank, No. C0678812, 2013 WL 412900 (Cal. App. Ct. Feb. 4, 2013). The borrowers stopped making payments on their motor home, disclaimed their ownership interest, and filed suit against the dealer with whom they financed the purchase of the vehicle after the dealer refused to make repairs to the vehicle. Relying upon the FTC's Holder Rule, which requires language in every consumer installment contract to state that any holder of the consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of the goods, the borrowers sued the bank to whom their loan had been assigned. After a trial court dismissed the case, the borrowers appealed. The appeals court reversed the judgment, holding that the "plain meaning of the Holder Rule allows the [borrowers] to assert claims against [the bank] they might otherwise have against [the dealer]," but limited the borrowers' recovery to the actual amounts paid under the installment contract. The appeals court declined to follow courts in other jurisdictions that looked beyond the plain meaning of the rule to assess the FTC's original intent in adopting the rule, and rejected the bank's argument that the Reese-Levering Act limits the borrowers' right to rescission of the contract. The appeals court also held that the borrowers stated causes of action against the bank under the CLRA and for negligence, but that their claim for negligent defamation of credit was preempted by the Fair Credit Reporting Act. The appeals court reversed the trial court order.