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Financial Services Law Insights and Observations

California Supreme Court: FTC Holder Rule does not limit attorney’s fees

Courts State Issues Holder Rule FTC Attorney Fees

Courts

On May 26, the California Supreme Court affirmed a trial court’s ruling that the FTC’s Holder Rule does not limit liability for attorney’s fees. According to the opinion, the plaintiff bought a used vehicle from the dealership (defendant) pursuant to an installment sales contract, which was subsequently assigned to a bank that became the “holder” of the contract. The plaintiff filed suit against the defendant and the bank, alleging misconduct by the dealership in the sale of the car regarding advertised features she needed due to a disability. A jury found for the plaintiff on one of her causes of action — breach of the implied warranty of merchantability under the Song-Beverly Consumer Warranty Act and awarded her $21,957.25 in damages. The plaintiff filed a posttrial motion seeking attorney’s fees in the amount of $169,602 under the Song-Beverly Act. The bank argued that it could not be liable for attorney’s fees based on the provision of the Holder Rule limiting recovery to the “amount[] paid by the debtor.” The trial court disagreed and granted the plaintiff’s motion.

The California Supreme Court granted review to resolve a split among the appellate courts on whether ‘“recovery’ under the Holder Rule includes attorney’s fees and limits the amount of fees plaintiffs can recover from holders to amounts paid under the contract.” The opinion noted the divide among the state’s appellate courts on this issue, citing on the one hand Pulliam v. HNL Automotive Inc. (holding that the Holder Rule does not limit the attorney’s fees a plaintiff may recover), and on the other hand, Lafferty v. Wells Fargo Bank, N.A. (stating that a debtor cannot recover damages and attorney fees for a Holder Rule claim that collectively exceed the amount paid by the debtor under the contract) and Spikener v. Ally Financial, Inc., (finding that the Holder Rule preempts California Civil Code section 1459.5, which authorizes a plaintiff to recover attorney fees on a Holder Rule claim even if it results in a total recovery that exceeds the amount the plaintiff paid under the contract, covered by InfoBytes here).

On appeal, the California Supreme Court unanimously concluded that “the Holder Rule does not limit the award of attorney’s fees where, as here, a buyer seeks fees from a holder under a state prevailing party statute,” as opposed to seeking fees under the Holder Rule itself.  Specifically, “[t]he Holder Rule’s limitation extends only to ‘recovery hereunder.’” The California Supreme Court continued that “[t]his caps fees only where a debtor asserts a claim for fees against a seller and the claim is extended to lie against a holder by virtue of the Holder Rule. Where state law provides for recovery of fees from a holder, the [Holder] Rule’s history and purpose as well as the Federal Trade Commission’s repeated commentary make clear that nothing in the Rule limits the application of that law.”