The Court of Appeals of California, First District, recently held that the Federal Trade Commission's "Holder Rule" limitation on recovery applies to attorney fees, such that a plaintiff's total recovery on a Holder Rule claim —- including attorney fees -— cannot exceed the amount paid by the plaintiff under the contract.
In addition, the Court held that to the extent a State statute authorizes a total recovery -— including attorney fees —- for a claim brought under the FTC's Holder Rule to exceed the amount the plaintiff paid under the contract, it directly conflicts with the Holder Rule and is therefore preempted.
A copy of the opinion is available at: Link to Opinion
A consumer purchased a car from a card dealership. At the time of sale, the dealer allegedly failed to inform consumer of a major collision the car was involved that supposedly significantly reduced its value. After the car was purchased but before consumer learned about the collision, the motor vehicle retail installment sales contract was assigned to a bank. The contract included the notice required by the FTC's Holder Rule.
As you may recall, the Holder Rule is a consumer protection measure promulgated by the FTC to abrogate the Uniform Commercial Code's holder in due course rule for consumer installment sales contracts.
The Holder Rule requires consumer installment sales 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 HEREUNDER."
In abrogating the UCC's holder in due course rule, the FTC preserved the consumer's claims and defenses against the creditor-assignee and provided consumers with a new cause of action against their creditors which allowed consumers to assert against the creditors 'all claims and defenses which the debtor could assert against the seller of goods or services' to which the Holder Rule applies. The Holder Rule language delineates the new cause of action by declaring: 'RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.' (40 Fed. Reg. 53506 (Nov. 18, 1975); 16 C.F.R. § 433.2(2018).)"
The consumer sued the assignee under California's Consumer Legal Remedies Act (CLRA) based on the dealership's misrepresentations and omissions about the car. The parties settled with the assignee agreeing to rescind the contract and pay consumer the sum equal to the amount he had paid under the contract, which was approximately $3,500. The settlement agreement preserved the consumers claim for attorney fees. The consumer filed a fee motion seeking $13,000 in attorney fees pursuant to the CLRA's fee shifting provision.
The trial court denied the consumer's motion pursuant to Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398, 410–414 (Lafferty) which held that the limitation on recovery contained in the second sentence of the FTC's Holder Rule notice applies to attorney fees a debtor seeks to recover pursuant to a claim asserted under the Holder Rule.
The consumer appealed.
The Appellate Court began its analysis by examining Lafferty. In Lafferty, the plaintiffs sued the assignee pursuant to the Holder Rule, asserting claims for negligence and under the CLRA. As is the case in the present matter, the plaintiffs and the assignee entered into a settlement agreement pursuant to which the assignee paid the plaintiffs the amount the plaintiffs had paid under the installment contract.
The plaintiffs in Lafferty moved for attorney fees, and the trial court denied fees as barred by the Holder Rule's limitation on recovery in excess of the amount paid by the debtor under the assigned contract. Lafferty considered the FTC's statements about the phrase "shall not exceed amounts paid by the debtor," and reasoned, " 'the purpose of this language is clearly to "not permit a consumer to recover more than he [or she] has paid. . . ." In sum, the court in Lafferty held that the language of the Holder Rule plainly defines the amount subject to the rule broadly by using the word 'recovery' to include more than just compensatory damages but narrows the amount that may be recovered to those monies actually paid by the consumer under the contract.
The Court next noted that in 2019, after Lafferty was decided, the FTC issued a confirmation of the Holder Rule which concluded "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 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." The FTC noted that it "does not believe that the record supports modifying the Rule to authorize recovery of attorneys' fees from the holder, based on the seller's conduct, if that recovery exceeds the amount paid by the consumer."
The Appellate Court concluded the FTC's rule confirmation is dispositive on the Holder Rule's application to attorney fees, finding "the Holder Rule's limitation on recovery applies to attorney fees based on a claim asserted pursuant to the Holder Rule, such that a plaintiff's total recovery on a Holder Rule claim—including attorney fees—cannot exceed the amount paid by the plaintiff under the contract."
In response, the consumer argued the California Legislature enacted Civil Code § 1459.5 effectively providing, in part, that the Holder Rule's limitation on recovery does not apply to attorney fees.
Section 1459.5, which was enacted after Lafferty, provides: "A plaintiff who prevails on a cause of action against a defendant named pursuant to Title 16, Part 433 of the Code of Federal Regulations [the Holder Rule] 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." The legislative history makes clear that the Legislature's intent was to "reverse the decision in Lafferty" and "restor[e] California's original interpretation of the 'Holder Rule' . . . ." (Sen. Rules Com., Off. Of Sen. Floor Analyses, Rep. on Assem. Bill No. 1821 (2019–2020 Reg. Sess.)
The bank responded that section 1459.5's authorization of attorney fees conflicts with, and is therefore preempted by, the Holder Rule.
The Appellate Court agreed, noting the Supremacy Clause of the United States Constitution establishes a constitutional choice-of-law rule, makes federal law paramount, and vests Congress with the power to preempt state law.
Where Congress has legislated in a field traditionally occupied by the states, 'we start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress,' " known as "[t]he presumption against preemption." (Olszewski v. Scripps Health (2003) 30 Cal.4th 798, 814, at pp. 815–816.) " '"[C]onsumer protection laws such as . . . CLRA, are within the states' historic police powers and therefore are subject to the presumption against preemption." ' " (Paduano v. American Honda Motor Co., Inc. (2009) 169 Cal.App.4th 1453, 1474.) We therefore "conduct our analysis from the starting point of a presumption that displacement of state regulation in areas of traditional state concern was not intended absent clear and manifest evidence of a contrary congressional intent." Quesada v. Herb Thyme Farms, Inc. (2015) 62 Cal.4th 298, 315.
Here, the Court noted that the FTC construed the Holder Rule's limitation on recovery to limit a plaintiff's total recovery, including attorney fees, on a claim asserted pursuant to the Holder Rule to the amount the plaintiff paid under the contract, regardless of whether the state claim being asserted pursuant to the Holder Rule contains fee-shifting provisions. The Appellate Court held that this demonstrates a clear intent to prohibit states from authorizing a recovery that exceeds this amount on a Holder Rule claim.
Therefore, the Appellate Court concluded that to the extent section 1459.5 authorizes a plaintiff's total recovery —- including attorney fees -— for a Holder Rule claim to exceed the amount the plaintiff paid under the contract, it directly conflicts with the Holder Rule and is therefore preempted.
Accordingly, the trial court's judgment was affirmed.
Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Admitted to practice law in Illinois
Alabama | California | Florida | Georgia | Illinois | Massachusetts | New Jersey | New York | Ohio | Pennsylvania | Tennessee | Texas | Washington, DC
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates and webinar presentations are available on the internet, in searchable format, at:
Financial Services Law Updates
The Consumer Financial Services Blog™
California Finance Law Developments