A recent Metropolitan News story, “FTC’s ‘Holder Rule’ Doesn’t Bar Attorney Fee Award” reports that the Federal Trade Commission’s “Holder Rule”—under which an assignee of a consumer credit contract cannot be held liable for a breach by the seller for more than what the purchaser has paid—does not preclude the award of attorney fees in excess of that amount under California’s “lemon law,” the California Supreme Court held.
Justice Goodwin H. Liu authored the opinion which affirms a Jan. 29, 2021 decision by Div. Five of this district’s Court of Appeal. Div. Five, in an opinion by Presiding Justice Laurence D. Rubin, upheld a $169,602 award of attorney fees against TD Auto Finance, LLC, declaring that “the Holder Rule does not limit the attorney fees that a plaintiff may recover from a creditor-assignee.” Yesterday’s opinion resolves a conflict among the courts of appeal.
Under a provision of the Code of Federal Regulations, a consumer credit contract must include this 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.”
The contract that Tania Pulliam signed when she purchased a used Nissan from HNL Automotive Inc. in Beverly Hills contained that language. Dissatisfied with the vehicle she purchased, Pulliam sued HNL and the assignee of the contract, TD Auto Finance, under the Song-Beverly Consumer Warranty Act (the “lemon law”) and was awarded $21,957.25 in damages. TD insisted that the award against it of attorney fees, under the act’s fee-shifting provision, was improper because Pulliam was entitled to nothing in excess of what she had paid under the credit contract.
Disagreeing, Liu wrote: “We conclude that the Holder Rule does not limit the award of attorney’s fees where, as here, a buyer seeks fees from a holder under a state prevailing party statute. The Holder Rule’s limitation extends only to ‘recovery hereunder.’ This caps fees only where a debtor asserts a claim for fees against a seller and the claim is extended to lie against a holder by virtue of the Holder Rule. Where state law provides for recovery of fees from a holder, the Rule’s history and purpose as well as the Federal Trade Commission’s repeated commentary make clear that nothing in the Rule limits the application of that law.”
Before the FTC enacted its rule in 1975, Liu recited, a consumer was liable to the holder in due course of a note even for goods that were not delivered. The rule places the holder in the shoes of the seller, subjecting it to all claims against, and defenses available to, the seller, limiting damages against the seller, and consequently against the assignee, he explained. In formulating the rule, Liu said, “the FTC had damages in mind when limiting recovery under the Rule, and there is no indication that attorney’s fees were intended to be included within its scope.”
Attorney fees, in California, where awardable, are costs, not an element of damages, he noted. The FTC, itself, has issued an advisory opinion declaring, “the Holder Rule does not limit recovery of attorneys’ fees and costs when state law authorizes awards against a holder,” Liu said. The justice pointed out: “Were attorney’s fees part of the Holder Rule’s limit on recovery, the effective result for many, if not most, consumers would be the same as their options were under the holder in due course rule that the FTC sought to supplant.”