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Calif. App. Court (2nd Dist) Holds ‘Holder Rule’ Allows Attorney Fees, Other Amounts Against Assignees

auto financeThe Court of Appeals of the State of California, Second Appellate District, recently affirmed a trial court’s judgment holding that the limitation on recovery under the Federal Trade Commission’s “holder rule” does not preclude recovery of attorney fees, costs, nonstatutory costs, or prejudgment interest against the assignee.

A copy of the opinion in Melendez v. Westlake Services, Inc. is available at:  Link to Opinion.

The matter arose out of the sale of a vehicle to purchaser (“Purchaser”) by a car dealership (“Seller”) under a retail installment sales contract (the “RISC”). The RISC was later assigned by the seller to a third party (“Assignee”).

Purchaser later sued both Seller and Assignee alleging violations of the CLRA, the Song-Beverly Consumer Warranty Act, Civil Code 1632, and the unfair competition law. During the course of the litigation, Assignee assigned the RISC back to Seller. Assignee and Purchaser settled the case.

Pursuant to the settlement, the parties agreed that Purchaser could file a motion for attorney fees, costs and expenses and prejudgment interest with respect to the claims against Assignee, but also agreed that Assignee was entitled to assert all available defense to the motion, “including the defense that no fees at all should be awarded against it as a Holder as that term is defined by the law.”

The trial court granted Purchaser’s motion awarding attorney fees, prejudgment interest, and costs, jointly and severally against Seller, Assignee and two other defendants. Assignee appealed.

The principal question addressed on appeal was whether the limitation on recovery under the FTC’s holder rule to “amounts paid by the debtor hereunder” meant a consumer cannot recover attorney fees from the assignee.

As you may recall, the regulation in which the holder rule is contained (16 C.F.R. § 433.2 (2022)) makes it an unfair or deceptive act or practice for a seller to take or receive a consumer credit contract which does not contain the following provision in large, boldface type:

“Notice [¶] Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.” (Capitalization omitted.)

In 2018, after a court found plaintiffs to be “limited under the plain meaning of the holder rule to recovering no more than” the amount they paid under the terms of their loan (Lafferty v. Wells Fargo Bank, N.A. (2018)4 25 Cal.App.5th 398, 405), the California legislature passed a statute “restor[ing] California courts’ interpretation of the Holder Rule…to the meaning it had for more than 40 years until [the Lafferty] decision.” (Assem. Com. on Judiciary, Analysis of Assem. Bill No. 1821 (2019– 2020 Reg. Sess.) Apr. 9, 2019, pp. 1, 3–6.).

The bill, codified as California Civil Code section 1459.5, states:

“A plaintiff who prevails on a cause of action against a defendant named pursuant to Part 433 of Title 16 of the Code of Federal Regulations or any successor thereto, or pursuant to the contractual language required by that part or any successor thereto, may claim attorney’s fees, costs, and expenses from that defendant to the fullest extent permissible if the plaintiff had prevailed on that cause of action against the seller.” (Stats. 2019, ch. 116, § 1, as amended by Stats. 2020, ch. 370, § 28.)

However, in a May 2019 review of the rule, the FTC found no support for modifying the Rule to authorize recovery of attorneys’ fees from the holder, based on the seller’s conduct. The FTC noted 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 recovery. Conversely, if the holder’s liability for fees is based on claims against the seller that are preserved 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. Claims against the seller for attorneys’ fees or other recovery may also provide a basis for set off against the holder that reduces or eliminates the consumer’s obligation.” (Ibid. 84 Fed. Reg., supra, 15 p. 18713).

The Appellate Court here noted a prior First District Case, Spikener v. Ally Financial, Inc. (2020), which held that the FTC’s interpretation of the Rule was entitled to deference and was “dispositive on the Holder Rule’s application to attorney fees.” 50 Cal.App.5th 151 (Spikener).

Another case, Pulliam v. HNL Automotive Inc. (2021) 60 Cal.App.5th 396, disagreed, holding that the cap did not apply to attorneys’ fees and “the FTC’s interpretation to the contrary is not entitled to deference [and] the Holder Rule is consistent with [Civil Code] section 1459.5” Pulliam, at pp. 412, 412-416; 4422, 416-422.

The Appellate Court here agreed with Pulliam. The Court first noted that Pulliam found the word “recovery” as used in the holder rule did not include attorney fees. The Court noted that the definition “focuses on damages, i.e. restoring money that was taken away from the plaintiff, and does not expressly address attorney fees.” Pulliam, supra, 60 Cal.App.5th at p. 413.

The Appellate Court here further noted Pulliam’s reasoning that including attorney fees in the limitation on recovery “would be out of sync with [the holder rule’s] objective of reallocating the costs of the seller’s misconduct from the consumer back to the seller and creditor.” Pulliam, supra, 60 Cal.App.5th at p. 115).

The Court next looked to Pulliam’s determination that the FTC’s contrary interpretation was not entitled to deference. Pulliam relied on the court’s decision in Kisor v. Wilkie in which the court instructed courts to “make an independent inquiry into whether the character and context of the agency interpretation entitles it to controlling weight.” (2019) 588 U.S. ___ [139 S.Ct. 2400] (Kisor); Pulliam, at pp. 419-420.

In applying the factors in Kisor, the Pulliam court held “we find significant that the agency initially had not previously spoken on the issue, and chose to express its opinion without seeking formal input on it. Instead, the FTC had requested comments on the Holder Rule in general terms, seeking arguments on modifying the rule only if supported by data setting forth the impact of any proposed modifications on consumers and businesses. It did not receive that data. Had the FTC issued a modification based on an analysis of submitted data, or after consideration of arguments submitted in response to an express notice, it would have made a stronger case for deference. Instead, the agency, based on no data and limited argument, spoke on an issue on which it had previously remained silent for decades, and had not given notice of an intent to speak. This falls short of the type of considered analysis entitled to dispositive deference.” (Pulliam, supra, 60 Cal.App.5th at p. 421.)

Thus, the Appellate Court here held the holder rule limitation on recovery did not preclude recovery of attorney fees and that the FTC’s contrary interpretation was not entitled to deference.

The Court further held that the rationale described in Pulliam supports the availability of costs and expenses to a plaintiff who prevails on a claim based on the holder rule.  The Court also found that prejudgment interest was available to Purchaser.

Accordingly, the Appellate Court affirmed the trial court’s ruling.

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Jenna Tersteegen is an Associate in Maurice Wutscher's New York City office, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Prior to joining the firm, Jenna was an associate attorney at a litigation law firm in New York City. Her practice covered New York state labor and employment laws, premises liability and property damage cases. She conducted all pre-trial aspects of litigation, including preparing case strategy and evaluation reports, taking and defending depositions, and drafting dispositive pre- and post-trial motions. She is admitted to practice law in Illinois and New York, and the U.S. District Court for the Eastern District of New York.

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