FYI: Cal App Ct (2d Dist) Holds "Holder Rule" Allows Attorney Fees and Oher Amounts Against Assignees

The 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 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 (Lafferty)), 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 court's 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 rational 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.

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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: Nevada Sup Ct Holds Challenges to HOA Liens Subject to 4-Year SOL, Which May Not Be Triggered by HOA Sale

In response to certified questions from the U.S. Court of Appeals for the Ninth Circuit, the Nevada Supreme Court recently held that:

 

(1) an action seeking to determine the validity of a homeowners association lien under NRS 40.010 is subject to NRS 11.220's four year statute of limitations; and

 

(2) the four year statute of limitations does not begin to run until the titleholder "affirmatively repudiates" the lien; and

 

(3) a homeowners association's foreclosure sale, standing alone, does not trigger the applicable four-year statute of limitations.

 

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

 

The appellant ("Bank") is the holder of a first priority deed of trust recorded against real property located in Nevada (the "Lien").  Non-party borrower ("Borrower") allegedly fell behind on his home owner's association's ("HOA") assessments resulting in the HOA foreclosing on the property at issue in 2011 (the "HOA Foreclosure Sale").  The property was subsequently transferred to the respondent titleholder ("Titleholder").

 

In 2016, and five years after the HOA Foreclosure Sale occurred, the Bank sued the Titleholder seeking a declaration to quiet title pursuant to state and federal declaratory judgments acts, as well as Nevada's quiet title statute.  The Titleholder argued that the statute of limitations on the Bank's declaratory relief claim began running on the date of the HOA Foreclosure Sale occurred, meaning the Bank's claim for declaratory relief should be dismissed as being time barred. 

 

The federal trial court agreed and dismissed the Bank's claim.  The Bank appealed, and the Ninth Circuit certified the following questions of law to the Nevada Supreme Court:

 

(1) When a lienholder whose lien arises from a mortgage for the purchase of a property brings a claim seeking a declaratory judgment that the lien was not extinguished by a subsequent foreclosure sale of the property, is that claim exempt from statute of limitations under City of Fernley v. Nevada Department of Taxation, 366 P.3d 699 (Nev. 2016) ("City of Fernley")?

(2) If the claim described in (1) is subject to a statute of limitations:

        (a) Which limitations period applies?

        (b) What causes the limitations period to begin to run?

 

Concerning the first certified question, the Nevada Supreme Court held that City of Fernley does not "necessarily allow declaratory relief in an action that is otherwise time-barred, because framing an action as seeking declaratory relief does not provide a categorical exception to the statute of limitations." 

 

As you may recall, City of Fernley held that an action for declaratory or injunctive relief seeking to prevent a future constitutional violation is not subject to a statute of limitations that began to run when the first constitutional violation occurred. The Court in City of Fernley did not hold that declaratory relief "is categorically exempt from statutes of limitation."

 

Here, the Nevada Supreme Court clarified that "a claim for declaratory relief cannot be used to circumvent the statute of limitations absent an alleged ongoing violation of a party's constitutional rights."  In fact, the Court found that City of Fernley does not apply to prospective statutory claims as the Bank contended.

 

Thus, the Nevada Supreme Court concluded that requesting "declaratory relief does not exempt a time-barred claim from the statute of limitations where there is not an ongoing violation of a party's constitutional rights."   

 

Next, the Court examined what statute of limitations applied to the Bank's declaratory relief claim. Specifically, the Nevada Supreme Court examined the nature of the Bank's claim, and found that although the Bank framed its claim as declaratory relief, the substantive relief actually sought was a "declaration to quiet title resolving the status of the Bank's interest in the Property." 

 

The Nevada Supreme Court proceeded to examine what statute of limitations applies to a quiet title claim under Nevada state law concluding that "no statute of limitations specifically addresses a quiet title action involving a nonpossessory lien."  As a result, the Court held NRS 11.220's four year "catch-all" statute of limitations applies to quiet title claims, such as the Bank's claim here. 

 

Lastly, the Court considered the Ninth Circuit's question as to when the statute of limitations began running on the Bank's declaratory relief claim.  In response, the Nevada Supreme Court held the applicable limitations period does not begin run "until the lienholder receives notice of some affirmative action by the titleholder to repudiate the lien or that is otherwise inconsistent with the lien's continued existence." 

 

Importantly, the Nevada Supreme Court explained that an HOA foreclosure sale, standing alone, is insufficient to trigger the four-year statute of limitations as a "foreclosure sale does not necessarily extinguish the [Bank's] lien."  Thus, to trigger the statute of limitations, "something more [than a HOA foreclosure sale] is required."  However, the Court declined to elaborate on what qualifies as "something more" in the context of triggering the applicable statute of limitations. 

 

Accordingly, and in response to the Ninth Circuit's certified questions, the Nevada Supreme Court held: (1) the City of Fernley does not establish that declaratory judgment actions are categorially exempt from statutes of limitations; (2) a claim seeking to quiet title by declaring the validity of a lien is subject to a four-year statute of limitations; and (3) because an HOA foreclosure sale may or may not extinguish a lien, an HOA foreclosure sale does not, without more, trigger the applicable statute of limitations period.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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: 5th Cir Vacates $4MM+ Attorney Fee Award in Class Action Settlement

The U.S. Court of Appeals for the Fifth Circuit recently vacated and remanded a lower court's award of over $4 million dollars in attorney's fees in connection with a class action settlement.

 

In so ruling, the Fifth Circuit held that the trial court:

 

(a)  Improperly failed to "find the facts specifically and state its conclusions of law separately"; and

(b)  Improperly failed to consider the degree of success obtained

 

as required when awarding reasonable attorneys' fees in a certified class action.

 

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

 

The appeal arose out of a putative class action lawsuit filed by buyers of toilet tanks against two companies who manufactured the tanks. The consumers sought damages on behalf of themselves and those similarly situated for defective toilet tanks manufactured by the companies. An amended complaint was filed adding several plaintiffs and an additional defendant ("Manufacturer").

 

After the original two consumers and several other named plaintiffs settled, a second amended complaint was filed and Manufacturer was the only defendant. The second amended complaint sought injunctive relief and damages, including punitive and treble damages on behalf of the plaintiff class ("Consumers").

 

Eventually, the original class was severed and the parties entered into a classwide settlement of one of the remaining classes. The settlement class involved only he purchasers of certain models of toilets, and the agreement required attorneys' fees to be determined by the court. 

 

A second class was limited to owners of certain models of the toilets that were produced in a specific plant by Manufacturer.  The claims in this second class were also eventually settled, with attorneys' fees to be determined by the court.

 

After settlement was approved, class counsel filed a motion seeking attorneys' fees and expenses from the two cases. They requested almost $13MM in fees and almost $400,000 in expenses.

 

Manufacturer challenged the request, disputing the number of hours spent on the claims. Specifically, Manufacturer argued that the lodestar calculation should have been limited to the hours worked for only the successful settlement class members, and not every putative class member. Manufacturer also sought a downward adjustment because of the limited results achieved.

 

The trial court declined to address the dispute in the computation of the lodestar award itself but instead weighed a possible reduction based on the Johnson factors. The trial court slightly reduced the proposed lodestar by omitting duplicative billing entries but rejected Manufacturer's request for a downward adjustment.

 

The trial court awarded $4,333,949.50 in attorneys' fees and $371,354.98 in expenses. Manufacturer appealed.

 

On review, the Fifth Circuit reviewed the standard for determining reasonable attorney's fees. First the trial court must calculate the lodestar – "the number of hours reasonably expended multiplied by the prevailing hourly rate in the community for similar work." Combs v. City of Huntington, 829 F.3d 391, 392 (quoting Jimenez v. Wood Cty., 621 F.3d 372, 379 (5th Cir. 2010), revised on other grounds, 660 F.3d 841 (5th Cir. 2011) (en banc)).

 

Although the lodestar calculation is presumed reasonable, the court can enhance or decrease it after consideration of the twelve factors detailed in Johnson v. Ga. Highway Express, Inc., 488 F.2d 714, 717–19 (5th Cir. 1974), the most critical of which is the degree of success obtained.  Id. at 391, 394 (quoting Hensley v. Eckerhart, 461 U.S. 424, 436, 103 S. Ct. 1933, 1941 (1983)).

 

No fee may be awarded for work on unsuccessful claims (Hensley, 461 U.S. at 435, 103 S. Ct. at 1940), but "when claims…share a 'common core of facts' or 'related legal theories,' a fee applicant may claim all hours reasonably necessary to litigate those issues." Louisiana Power, 50 F.3d at 327 (quoting Hensley, 461 U.S. at 434–35, 103 S. Ct. at 1940).

 

The initial action sought relief for owners of seven different tank models manufactured over a nine year period.  However, the case resulted in two much narrower settlements, with recovery being restricted to two tank models with limited compensatory damages for a year and limited replacement costs for five years.

 

Thus, the Fifth Circuit held, per Hensley's instruction, that class counsel was not entitled to any fee recovery for hours expended on the unsuccessful claims unless the trial court found a "common core of facts" or "related legal theories." See Hensley 461 U.S. at 434-35, 103 S. Ct. at 1940.

 

Upon review of the record, the Court of Appeals found the trial court's conclusory ruling on this issue insufficient to satisfy the standards set out in Rule 23(h) and 52(a) which required the trial court to "find the facts specifically and state its conclusions of law separately" when awarding reasonable attorneys' fees in a certified class action. Fed. R. Civ. P. 23(h), 52(a).

 

The Fifth Circuit found that trial court's failure to make any factual findings regarding the nature of the unsuccessful claims an abuse of discretion.

 

The Appellate Court specifically noted that the unsuccessful claims were related to tank models manufactured at a different plant and one tank model was from a different product line.  The Court noted that class counsel could not obscure the factual distinctions with overly broad theories of liability. The Court held that to allow recovery on the unsuccessful claims "would incentivize fishing expeditions into every tangentially related product after the discovery of a singular defective item."

 

The Fifth Circuit further held that even if the trial court had adequately supported its conclusion that the claims were intertwined, the trial court still failed to properly analyze the award in relation to results obtained.

 

In other words, the Fifth Circuit found that the trial court failed to consider the amount awarded in relation to the amount sought. The Fifth Circuit noted that the Supreme Court of the United States has twice stated that "degree of success obtained" is "the most critical factor" in determining the reasonableness of attorneys' fees. Farrar v. Hobby, 506 U.S. 103, 114, 113 S. Ct. 566, 574 (1992) (quoting Hensley, 461 U.S. at 436, 103 S. Ct. at 1941). The Fifth Circuit found the trial court misconstrued precedent in its ruling that not receiving every bit of relief requested was not a reason to reduce the lodestar.

 

The Fifth Circuit found further error in the trial court's justification of the award in comparing the proportion of the fee award to the class benefit with that of other cases. Instead, the Fifth Circuit instructed the lower court, on remand, to consider the amount of damages and non-monetary relief sought compared to what was actually received by the class in this case.

 

Thus, the Fifth Circuit vacated the trial court's ruling and remanded for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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