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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.”
On April 14, the FTC filed a complaint against a Caribbean for-profit medical school and its Illinois-based operators alleging the defendants violated the Telemarketing Sales Rule, Holder Rule, and Credit Practices Rule (CPR) in connection with its marketing and credit practices. According to the complaint, the defendants improperly marketed the school’s medical license exam pass rate and residency match success. In addition, financing contracts omitted a legally-mandated Holder Rule notice in their credit agreements, among other things. Under the Holder Rule, “any seller that receives the proceeds of a purchase money loan [must] include, in the underlying credit contract, a specific notice informing the consumer of their right to assert claims against any holder of the credit contract.” In addition to omitting the required notice, the defendants also allegedly attempted to waive consumers’ legal rights by inserting language in the credit agreements stating, “ALL PARTIES, INCL[U]DING BOTH STUDENT BORROWER AND COSIGNER. . .WAIVE ANY CLAIM OR CAUSE OF ACTION OF ANY KIND WHATSOEVER THAT THEY MAY HAVE WITH RESPECT TO [DEFENDANT]…” The FTC also contended that the defendants included a notice informing cosigners of their liability in the middle of the contract, instead of providing a separate document containing specific language required by the CPR.
Under the terms of the proposed stipulated order, the defendants are required to pay a $1.2 million judgment that will go towards refunds and debt cancellation for affected consumers, and also cease collection of approximately $357,000 in consumer debt covered by the proposed order. Defendants are also required to notify each consumer that their debt is being cancelled and that consumer reporting agencies will be directed to delete the debt from the consumers’ credit reports. Additionally, defendants are prohibited from misrepresenting their pass rates and residency matches, and from making unsubstantiated claims or violating federal law. The order also provides Holder Rule protections, including prohibiting defendants from selling, transferring, or assigning any consumer credit contracts unless the recipient of such contract agrees, in writing, “that its rights are subject to the borrowers’ claims and defenses against [d]efendants” and requiring defendants to notify each borrower whose credit contract is sold.
On January 20, the FTC issued an advisory opinion addressing the FTC’s Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses’ impact on consumers’ ability to recover costs and attorneys’ fees. Commonly known as the Holder Rule, the provisions protect “consumers who enter credit contracts by preserving their right to assert claims and defenses against any holder of certain loans and credit sales contracts, even if the loans or contracts are assigned to a third party.” Because a seller’s use of practices to foreclose these rights constitutes an unfair practice under Section 5 of the FTC Act, the Holder Rule requires sellers to include a notice in credit contracts of a consumer’s right to claims and defenses related to a seller’s misconduct. While courts have addressed the issue of whether consumers are able to recover costs and attorneys’ fees from the holder of a credit contract, the FTC noted that some courts and finance companies have misinterpreted previous FTC statements to suggest that the Holder Rule preempts state laws that authorize attorney fee awards against loan holders. According to the advisory opinion, the “Holder Rule does not eliminate any rights the consumer may have as a matter of separate state, local, or federal law. Consequently, whether costs and attorneys’ fees may be awarded against the holder of the credit contract is determined by the relevant law governing costs and fees.” Noting that “[n]othing in the Holder Rule states that application of such laws to holders is inconsistent with Section 5 of the FTC Act or that holders should be wholly or partially exempt from these laws,” the FTC added that “if the applicable law requires or allows costs or attorneys’ fee awards against a holder, the Holder Rule does not impose a cap on such an award.” While it is not clear how much deference courts would give to the advisory opinion, companies may choose to consider the Commission’s statement.
On April 14, the FTC issued a note correcting prior staff guidelines on the FTC’s Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, commonly known as the Holder Rule. The Holder Rule “protects consumers who enter into credit contracts by preserving their right to assert claims and defenses against any holder of the contract,” including those later assigned to a third party. The note corrects the statement in a 1976 pamphlet by FTC staff that the Holder Rule “did not apply to transactions larger than $25,000.” Those staff guidelines stated that “the Rule incorporates the transaction cap that was present in the Truth in Lending Act (TILA).” However, the recent note points out that the language of the Rule includes no such incorporation nor does it contain any exemption based on transaction amount. Additionally, the note clarifies that the previous “erroneous guidance contradicts a statement by the Commission that the application of the Rule does not depend on the amount of the transaction.”
California Court of Appeal: FTC Holder Rule preempts state law authorizing recovery of certain attorney fees
On June 9, the California Court of Appeal for the First Appellate District affirmed a trial court’s judgment in favor of a bank (defendant), holding that the FTC’s 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. According to the court, the plaintiff sued the defendant (who was assigned the vehicle credit sale contract) after he discovered that the seller failed to disclose that the vehicle had been in a major collision, thus reducing its value. The parties settled for a sum equal to the vehicle’s purchase price, and the plaintiff filed a motion for attorney fees. The trial court denied the motion, determining that the plaintiff was not entitled to fees under a holding in Lafferty v. Wells Fargo Bank, which stated 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. The plaintiff appealed.
The Court of Appeal agreed with the trial court, determining that it did not need to resolve the parties’ dispute as to whether Lafferty correctly construed the Holder Rule’s limitation on recovery because the FTC’s construction of the Holder Rule is entitled to deference. The Court of Appeal referenced the FTC’s 2019 confirmation of the Holder Rule (Rule Confirmation), after Lafferty issued, which addressed, among other things, several comments related to whether the Holder Rule’s “limitation on recovery to ‘amounts paid by the debtor’ allows or should allow consumers to recover attorneys’ fees above that cap.” The FTC provided the following statement within the Rule Confirmation: “We conclude that if a federal or state law separately provides for recovery of attorneys’ fees independent of claims or defenses arising from the seller’s misconduct, nothing in the Rule limits such recovery. Conversely, if the holder’s liability for fees is based on claims against the seller that are persevered by the Holder Rule Notice, the payment that the consumer may recover from the holder—including any recovery based on attorneys’ fees—cannot exceed the amount the consumer paid under the contract.”
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