The California Court of Appeal, First District, recently affirmed a trial court’s denial of a request for attorneys’ fees, after a consumer prevailed under the Consumers Legal Remedies Act against an assignee of his consumer credit contract. The Court of Appeal deferred to the Federal Trade Commission’s 2015 Rule Confirmation interpreting the Holder Rule, which allows consumers to sue holders of certain consumer credit contracts. The Court of Appeal held that the Holder Rule limits a consumer’s total recovery, including attorney’s fees, to the amount the consumer paid under the contract. In so ruling, the First District found that the Holder Rule preempts Civil Code section 1459.5 which rejected the attorney fee limits.
In 2016, the consumer purchased a car pursuant to a credit sales contract (Contract). The seller did not inform the consumer that the car had been in a major collision resulting in a severe reduction in its value. After the purchase, but before the consumer learned about the collision, the seller assigned the Contract to the holder, Ally Financial, Inc.
In 2018, the consumer sued the holder under the Consumers Legal Remedies Act (CLRA), Civil Code §§ 1750-1784, based on the seller’s misrepresentations. The consumer brought his claim against the holder pursuant to the Holder Rule Notice contained in the Contract.
As you may recall, in 1975, the Federal Trade Commission (FTC) promulgated the Holder Rule (Title 16, section 433.2 of the Code of Federal Regulations) which requires consumer credit contracts to include the following 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
Before 1975, if a seller sold goods on credit and transferred the credit contract to a lender, the lender could enforce the buyer’s promise to pay even if the seller failed to perform its obligations under the sales contract, as a holder due course. Similarly, despite a seller’s breach, the buyer was obligated to pay the lender under the consumer loan contract that directly financed the purchase of goods or services from the seller.
The Holder Rule now limits the holder in due course rule in consumer credit
transactions. Essentially, the Holder Rule preserves a consumer’s claims and defenses against a creditor-assignee.
The parties entered into a settlement agreement whereby the holder agreed to rescind the Contract. The parties punted on the issue of attorneys’ fees: the settlement agreement declared the consumer to be the prevailing party but preserved the holder’s right to oppose a fee motion.
The consumer then sought a fee award in the trial court pursuant to the CLRA’s fee shifting provision. The trial court denied the consumer’s fee motion. The trial court relied on Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398, 410-414 which held that the Holder Rule barred any recovery in excess of the amount paid by the debtor under an assigned contract. Lafferty found that “a consumer cannot recover more under [a] Holder Rule cause of action than what has been paid on the debt regardless of what kind of a component of the recovery it might be—whether compensatory damages, punitive damages, or attorney fees.”
In its ruling, the trial court refused to apply Civil Code section 1459.5, which the California legislature enacted to overrule Lafferty. The trial court reasoned that the Federal Trade Commission’s interpretation of the Holder Rule preempted Section 1459.5.
The Court of Appeal affirmed the trial court and found that the Holder Rule prohibits a consumer from obtaining attorneys’ fees against a holder in due course, in excess of the amount the consumer paid under the contract. In its analysis, the Court of Appeal first noted that in 2015 the FTC issued a confirmation of the Holder Rule (Rule Confirmation), determining that:
“[I]f 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 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.” (84 Fed.Reg. 18711 (May 2, 2019).)
The Court of Appeal analyzed whether to defer to the FTC’s Rule Confirmation in its interpretation of the Holder Rule. The Court of Appeal observed that courts generally defer to federal agencies’ regulatory interpretations where the regulation is genuinely ambiguous, the agency’s reading of the regulation is reasonable, the agency’s interpretation is authoritative or official (rather than an ad hoc statement not reflecting the agency’s views), the interpretation implicates the agency’s substantive expertise, and reflects a fair and considered judgment.
The Court of Appeal held that FTC’s 2015 Rule Confirmation is entitled to deference. The Court of Appeal noted that the FTC issued its Rule Confirmation and published it in the Federal Register, after soliciting and reviewing public comments. The Court of Appeal also found that the Holder Rule is ambiguous and the FTC’s interpretation is reasonable and falls within the FTC’s substantive expertise.
The Court of Appeal rejected the consumer’s argument that a claim for CLRA attorneys’ fees is “independent of claims or defenses arising from the seller’s misconduct” because the fee award is based upon the holder’s litigation conduct, rather than any conduct by the seller. The Court of Appeal found that a claim based upon a seller’s misconduct is brought pursuant to the Holder Rule because such a claim would be barred altogether against a holder in due course, in the absence of the Holder Rule.
The Court of Appeal then held that the Holder Rule preempts Civil Code section 1459.5, pursuant to the Constitution’s Supremacy Clause. The Court of Appeal found that the FTC intended to prohibit states from authorizing a recovery that exceeds the amount the plaintiff paid under the contract. The Court of Appeal noted that the Rule Confirmation rejected any recovery of attorneys’ fees in excess of the amount the consumer paid under the contract, where “the holder’s liability for fees is based on claims against the seller that are preserved by the Holder Rule Notice.”