FYI: Cal App Ct (1st Dist) Holds HBOR Does Not Require Borrower to Own the Collateral Property

The Court of Appeals of California, First District, recently reversed entry of judgment on the pleadings in favor of a mortgage loan servicer and the named trustee under the deed of trust against claims raised by a borrower alleging violations of California's Homeowners' Bill of Rights (HBOR).

 

In so ruling, the Appellate Court held that the HBOR's requirement that the collateral property be "owner-occupied" did not require the borrower to be the owner of the collateral property, but instead only required "that the property is the principal residence of the borrower and is security for a loan made for personal, family, or household purposes".

 

A copy of the opinion is available at:  Link to Opinion

 

In August 2006, a borrower ("Borrower") obtained a loan from a lender ("Bank") secured by a deed of trust ("Senior Loan") upon residential property ("Property").  Later that month, she obtained a $28,000 loan from an individual ("individual Lender"), secured by a separate deed of trust upon the Property ("Junior Loan"). 

 

She subsequently defaulted on the Junior Loan.  Foreclosure of the Junior Loan resulted in a trustee's sale of the Property to the Individual Lender in March 2008.  The Property remained subject to the first priority lien of the Senior Loan. 

 

The Borrower filed for Chapter 7 bankruptcy in March 2017, and a discharge order was entered in September 2017.

 

In December 2017 the Borrower filed suit against the servicer of the Senior Loan and the trustee under the deed of trust ("Mortgagees") primarily alleging violations of California's Homeowners' Bill of Rights (HBOR) for: (i) purported improper 'dual tracking' while engaged in good faith negotiations towards a modification of the Senior Loan; (ii) the lienholder's failure to provide a single point of contract during the loan modification process.  The Borrower's complaint further alleged that Mortgagees violated various other provisions of the HBOR and sought injunctive and declaratory relief.

 

The Mortgagees moved for judgment on the pleadings arguing that the complaint failed to state facts sufficient to constitute a cause of action under the HBOR, to which Borrower filed no response in opposition.  The trial court granted the Mortgagees' motion without leave to amend, and the clerk subsequently rejected the Borrower's attempt to file an amended complaint.  After the Borrower's motion for rehearing was denied, the instant appeal followed.

 

Under California law, a motion for judgment on the pleadings is equivalent to a demurrer and is governed by the same de novo standard of review.  Kapsimallis v. Allstate Ins. Co. (2002) 104 Cal.App.4th 667, 672.  All properly pleaded, material facts are deemed true, but not contentions, deductions, or conclusions of fact or law (Id.) and Courts may consider judicially noticeable matters in the motion as well.  Id.; People ex rel. Harris v. Pac Anchor Transportation, Inc. (2014) 59 Cal.4th 772, 777.)  When a demurrer is sustained without leave to amend, the appellate court is tasked with determining whether there was a reasonable possibility that the defect can be cured by amendment.  Sanchez v. Truck Ins. Exchange (1994) 21 Cal.App.4th 1778, 1781.

 

Accordingly, the issue before the Appellate Court was whether the facts alleged by Borrower together with matters subject to judicial notice were sufficient to state a cause of action under California's HBOR.

 

As you may recall, the HBOR: (i) prohibits dual tracking, whereby a financial institution continues to pursue foreclosure while evaluating a borrower's loan modification application (Cal. Civ. Code § 2923.6, subd. (c).), and; (ii) requires that a mortgage servicer establish a single point of contact and provide a borrower who requests a foreclosure prevention alternative with one or more direct means of communication with the single point of contact. Cal. Civ. Code § 2923.7, subd. (a).  However, these provisions do not apply to all mortgages and deeds of trust—only to "first lien mortgages or deeds of trust that are secured by owner-occupied residential real property containing no more than four dwelling units."  Cal. Civ. Code § 2924.15. 

 

The HBOR defines 'owner-occupied' to mean "that the property is the principal residence of the borrower and is security for a loan made for personal, family, or household purposes" (Cal. Civ. Code § 2924.15) and this statutory definition is controlling under California law.  Great Lakes Properties, Inc. v. City of El Segundo (1977) 19 Cal.3d 152, 156 ("When a statute prescribes the meaning to be given to particular terms used by it, that meaning is generally binding on the courts.") (internal citation omitted).

 

On appeal, the Mortgagees argued that the Borrower's HBOR claims failed as a matter of law because the Property had been sold at the foreclosure sale of the Junior Loan, and the Borrower did not own the Property, and thus failed to meet the definition of "owner-occupied" under the statute. 

 

Specifically, Mortgagees contended that: (i) section 2924.15's definition of "owner-occupied" only applies to the word "occupied" and not to the full term; (ii) the Senate Rules Committee's discussion of the "restriction to owner-occupied residences' " as " 'on the whole already contained in existing law, Civil Code Section 2923.5. . . ." provides legislative support to their position; (iii) the HBOR's provision of pre-foreclosure injunctive relief suggests that it must apply to property owners or otherwise such relief would provide no benefit, and; (iv) the HBOR contains an implicit requirement of ownership because the term "borrower" is limited to those who are also owners.

 

The First District rejected all of these arguments, because although the Borrower did not own the Property, the statutory definition provided no such requirement of ownership, and she met the definition of "borrower" on the Senior Loan as the term is defined under the statute.

 

Given the HBOR's definition of "owner-occupied," the First District next needed to determine whether the facts alleged in the complaint or subject to judicial notice were sufficient to satisfy the "principal residence of the borrower" requirement.

 

The Appellate Court noted that the complaint itself made no allegations that the Property was the Borrower's principal residence, nor did any documents submitted by Mortgagees in support of their motion for judgment on the pleadings. 

 

Although filings in the Borrower's bankruptcy proceedings claimed that she "continues in possession of his [sic] estate and, in particular lives in her single family residence located at [the Property's address]", as do documents submitted by the Borrower on appeal, these assertions are not subject to judicial notice (Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1569–1570) and merely residing at the Property does not mean that it is necessarily her principal residence.  Because the facts alleged in the complaint together with matters subject to judicial notice did not establish that the Property is the Borrower's principal residence as required under section 294.15, the Appellate Court concluded that she failed to state a cause of action to support her HBOR claims.

 

Lastly, the First District turned to the question of whether the trial court abused its discretion by denying the Borrower leave to amend the complaint — i.e., whether on the pleaded and noticeable facts there was a reasonable possibility of an amendment that would cure the complaint's legal defect or defects. Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.

 

On appeal, the Borrower maintained that the Property was her principal residence, as provided in various court filings, and that her proposed amended complaint rejected by the trial court expressly alleged that she 'continued to reside on the property."  At oral argument, the Borrower's counsel representation that the Borrower could plead and prove that the Property was her principal address at all relevant times, and counsel for the Mortgagees agreed that leave to amend would be appropriate if the Court determined the HBOR's definition of "owner-occupied" to mean the "principal residence of the borrower." 

 

Because this was the First District's holding regarding the meaning of "owner-occupied", the Court concluded that a reasonable possibility existed that amendment of the complaint to allege that the Property was Borrower's principal residence would cure the defect.

 

Accordingly, judgment in the Mortgagees' favor was reversed and the matter was remanded to the trial court to grant the Borrower leave to file an amended complaint.

 

 

 

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
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 3rd Cir Rejects Allegations That Hazard Insurance Premiums Were Fraudulently Inflated

The U.S. Court of Appeals for the Third Circuit recently affirmed the dismissal of allegations that a mortgage lender illegally concluded with an insurance company and insurance agent to inflate the rate of the borrowers' force-placed hazard insurance policies in violation of various consumer protection statutes, RICO, and the common law.

 

In so ruling, the Third Circuit agreed that the borrowers' challenges to their policies' rates were barred by the "filed-rate doctrine," which requires insurers to file their rates with an administrative agency and prohibits charging premium rates other than the filed rates, and prevents courts from deciding whether the rate is unreasonable, even if the insurance company defrauded an administrative agency to obtain approval of the rate.

 

A copy of the opinion is available at:  Link to Opinion

 

Plaintiff borrowers' ("Borrowers") reverse-mortgage lender ("Lender") purchased forced-placed hazard insurance policies to protect its interest in the Borrowers' properties.  The Lender charged the Borrowers amounts consistent with the rates filed with New Jersey's filed-rate doctrine.

 

As you may recall, New Jersey's filed-rate doctrine requires insurers to file rates they will charge with an administrative agency, and forbids an insurer from "charg[ing] rates . . . other than those properly filed with the appropriate . . . regulatory authority." Ark. La. Gas Co. v. Hall, 453 U.S. 571, 577 (1981). 

 

The Borrowers filed suit in federal court alleging that their Lender illegally concluded with a hazard insurance company ("Insurer") and insurance agent ("Agent") to pocket kickbacks on force-placed insurance policies asserting claims for alleged breach of their mortgages (or in the alternative New Jersey law prohibiting unjust enrichment), as well as violations of: (i) New Jersey's implied covenant of good faith and fair dealing; (ii) the New Jersey Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8-1–56:8-20; (iii) New Jersey law preventing tortious interference with a business relationship; (iv) the federal Truth in Lending Act, 15 U.S.C. §§ 1601–1665 (TILA), and; (v) the federal Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961–1968 (RICO). 

 

Although the Borrowers concedes they paid an amount consistent with the filed rate, they argued that the Insurer inflated the rate filed with state regulators such that it and the Agent could return a portion of the profits to the Lender to induce its continued business.

 

The trial court dismissed the allegations, holding that the Borrowers' claims were barred by the filed-rate doctrine. The Borrowers timely appealed.

 

On appeal, the Borrowers argued that the Third Circuit's ruling in Alston v. Countrywide Financial Corporation, 585 F.3d 753 (3d Cir. 2009) guided the adjudication of the facts at bar.  In Alston, the plaintiffs filed a putative class action suit against their mortgage lender alleging that it referred its customers to obtain mortgage insurance (PMI) policies from insurers whom the lender agreed to assume some risk in exchange for some of the plaintiffs' premiums.  The Alston plaintiffs alleged that the lender violated their rights under the federal Real Estate Settlement Procedures Act, 12 U.S.C. 2605, et seq. ("RESPA") by receiving unlawful kickbacks and unearned fees.  Alston, 585 F.3d at 755.

 

However, the Third Circuit reasoned that Alston was distinguishable, because in that case, the plaintiffs were not seeking damages tied to the amount of an alleged overcharge as the Borrowers here, but instead sought statutory damages, which allowed them to dodge the filed-rate doctrine.  Id. see also, Patel v. Specialized Loan Servicing, LLC, 904 F.3d 1314, 1327 n.8 (11th Cir. 2018). 

 

The Third Circuit reiterated that "there is no fraud exception to the filed rate doctrine" (AT&T Corporation v. JMC Telecommunications, LLC 470 F.3d 525, 535 (3d Cir. 2006)) and the doctrine holds no distinction between challenging a filed rate as unreasonable and challenging a fraudulent overcharge included in a filed rate, as it did in its prior decisions involving allegations that insurance companies ""collectively set and charge[d] uniform and supra- competitive rates," and "embed[ded] within th[o]se . . .rates payoffs, kickbacks, and other charges that are unrelated to the issuance of [] insurance."  In re N.J. Title Ins. Litig., 683 F.3d at 454; McCray v. Fidelity National Title Insurance Co., 682 F.3d at 234-35.

 

Instead, the filed-rate doctrine seeks to "preserv[e] the exclusive role of . . . agencies in approving rates . . . by keeping courts out of the rate-making process." In re N.J. Title Ins. Litig., 683 F.3d at 455-56 (internal citations omitted). 

 

The Third Circuit cautioned that anything to the contrary would require courts to calculate damages based upon a determination of how much they think they should have been charged for their force-placed insurance, and would also be giving the Borrowers a better priced for their policies than other borrowers using a different lender, but still obtaining force-placed policies from the Insurer.  Keogh v. Chicago & N.R. Co., 260 U.S. 156, 163 (1922) (observing that allowing "damages resulting from the exaction of a[n inflated filed] rate" would, "like a rebate, operate to give [a plaintiff] a preference over his . . . competitors").  The Third Circuit further noted that this reasoning has  been upheld throughout other circuits.  See Patel, 904 F.3d 1314 (11th Cir.) (filed-rate doctrine barred challenges to reasonableness of force-placed insurer's premiums) ; Rothstein v. Balboa Ins. Co., 794 F.3d 256 (2d Cir. 2015) (striking borrowers' RICO claim alleging RICO claim alleging fraud for filed force-placed insurance rates that did not reflect secret 'rebates' and 'kickbacks.'); H.J. Inc. v. Nw. Bell Tel. Co., 954 F.2d 485, 492 (8th Cir. 1992) (filed-rate doctrine prevents a RICO suit for damages relating to a fraudulent rate).

 

Because the filed-rate doctrine prevents courts from deciding whether the rate is unreasonable or fraudulently inflated, the trial court's dismissal of the Borrower's claims 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
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 9th Cir Holds Quiet Title Claims By GSEs Subject to 6-Year HERA Statute of Limitations

The U.S. Court of Appeals for the Ninth Circuit recently held that, under the federal Housing and Economic Recovery Act ("HERA") statute of limitations provisions, a quiet title action brought by Freddie Mac or Fannie Mae is a "contract" claim with a 6-year statute of limitations, and not a "tort" claim subject to a 3-year statute of limitations.

 

A copy of the opinion is available at:  Link to Opinion

 

A consumer purchased a home in Las Vegas ("the Property") with a loan secured by a first deed of trust. In January 2007, Freddie Mac acquired the loan and deed of trust.

 

As you may recall, in response to the 2008 financial crisis, Congress enacted the Housing and Economic Recovery Act ("HERA"), 12 U.S.C. § 4511 et seq., which created the Federal Housing Finance Agency (FHFA) among other things to oversee Freddie Mac. In 2008, the FHFA placed Freddie Mac into conservatorship. As conservator, the FHFA has "all rights, titles, powers, and privileges" of Freddie Mac. 12 U.S.C. § 4617(b)(2)(A)(i).

 

HERA also enacted the Federal Foreclosure Bar. Id. at § 4617(j)(3).  The Federal Foreclosure Bar provides that "[n]o property of the [Federal Housing Finance Agency] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Agency, nor shall any involuntary lien attach to the property of the Agency."

 

In May 2012, Freddie Mac assigned the deed of trust to a bank ("Bank") under a servicing agreement.

 

In July 2012, the Property was sold to an investment company ("Buyer") at a non-judicial foreclosure sale to satisfy unpaid home owners association (HOA) assessments. As you may recall, Nevada law grants HOAs a "superpriority" lien on a property for unpaid assessments which is superior even to a previously recorded first deed of trust. The FHFA never consented to the extinguishment of the first deed of trust through the 2012 foreclosure sale.

 

In July 2017, Freddie Mac filed an action seeking quiet title in the property. The Buyer moved to dismiss the complaint, claiming that it was time-barred under the 3-year statute of limitations applicable to "tort" claims in 12 U.S.C. § 4617(b)(12)(A)(ii). In response, Freddie Mac contended that the governing statute of limitations was the 5-year statute in Nevada Revised Statutes ("N.R.S") § 11.070 applicable to "an action, founded upon the title to real property."

 

The trial court held that Nevada's 5-year statute of limitations applied, and later granted summary judgment to Freddie Mac, finding that because the FHFA never consented to the foreclosure sale, Freddie Mac's interest in the Property through the deed of trust survived under the Federal Foreclosure Bar.

 

The Buyer appealed.

 

On appeal, all parties and the FHFA as amicus agreed that the HERA statute of limitations, 12 U.S.C. § 4617(b)(12)(A), controls.  In relevant part, HERA provides that the statute of limitations for "any action brought by the [FHFA] as conservator . . . shall be":

 

(i) in the case of any contract claim, the longer of—

(I) the 6-year period beginning on the date on which the claim accrues; or

(II) the period applicable under State law; and

(ii) in the case of any tort claim, the longer of—

(I) the 3-year period beginning on the date on which the claim accrues; or

(II) the period applicable under State law.

 

The Ninth Circuit began its analysis acknowledging the applicability of the statute through FDIC v. Bledsoe, in which the Fifth Circuit held that that a similarly worded statute of limitations —facially applying only to actions brought by a federal agency — also applied to actions brought by a private entity acting as an assignee for the federal agency. 989 F.2d 805, 809–11 (5th Cir. 1993).

 

In Bledsoe, the Fifth Circuit held that the common law was "loud and consistent," in providing that "an assignee stands in the shoes of his assignor, deriving the same but no greater rights and remedies than the assignor then possessed" and therefore receives the same limitations period as the assignor. Id. at 810.

 

The Ninth Circuit adopted the Fifth Circuit's reasoning in United States v. Thornburg, 82 F.3d 886, 891 (9th Cir. 1996).

 

Here, the Ninth Circuit noted that Freddie Mac is under the FHFA conservatorship, and the FHFA thus has "all rights, titles, powers, and privileges" of Freddie Mac "with respect to [its] . . . assets." 12 U.S.C. § 4617(b)(2)(A)(i). Like an assignee, Freddie Mac thus "stands in the shoes of" the FHFA with respect to its current claims to quiet title to the deed of trust, which is property of the conservatorship. Bledsoe, 989 F.2d at 809.

 

Next, the Court acknowledged that although § 4617(b)(12)(A) only explicitly addresses "tort" and "contract" claims, it applies to all claims brought by the FHFA as conservator. See 12 U.S.C. § 4617(b)(12)(A) (stating that it "provides" what "the statute of limitations" "shall be" for "any action brought by the [FHFA] as conservator"), and thus, "if neither description is a perfect fit, we must decide when applying the statute whether a claim is better characterized as sounding in contract or in tort."

 

The Ninth Circuit concluded that the claims in this action are "contract" claims under 12 U.S.C. § 4617(b)(12)(A)(i). The Court reasoned that, although there was no contract between Buyer and the plaintiffs, the quiet title claims are entirely "dependent" upon Freddie Mac's lien on the Property, an interest created by contract. Additionally, Freddie Mac did not seek damages or claim a breach of duty resulting in injury to person or property, two of the traditional hallmarks of a torts action.

 

Finally, the Ninth Circuit noted, generally "[w]hen choosing between multiple potentially-applicable statutes, as a matter of federal policy the longer statute of limitations should apply." Wise v. Verizon Commc'ns, Inc., 600 F.3d 1180, 1187 n.2 (9th Cir. 2010).

 

Accordingly, the Ninth Circuit held that plaintiffs had at least six years to bring their claims after the foreclosure sale, and the judgment of the trial court 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
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Cal App Ct (1st Dist) Rules FTC's Holder Rule Preempts State Fee Shifting Laws

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
Email: rwutscher@MauriceWutscher.com

 

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:

 

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and

 

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