A California appellate court has ruled that bail bond premium financing agreements are consumer credit contracts for which cosigners must be given a statutorily prescribed notice that warns of the potential consequences of acting as a cosigner.

In BBBB Bonding Corporation v. Caldwell, Kiara Caldwell, to bail a friend out of jail, signed an “Unpaid Premium Agreement” (Premium Agreement) in which she became legally responsible for the bail bond premium of $5,000, representing 10% of her friend’s bail.  Under the Agreement, Ms. Caldwell agreed to make a downpayment of $500 and pay the balance of $4500 in monthly installments of $450 until paid in full.  After she was unable to make any of the monthly payments, BBBB Bonding Corporation, the bail agent, began making phone calls to collect the balance and subsequently filed a collection lawsuit against Ms. Caldwell.

Ms. Caldwell thereafter filed a class action cross-complaint against BBBB alleging claims for violation of the California Unfair Competition Law (UCL).  She alleged that BBBB had engaged in an unfair business practice in violation of the UCL by failing to provide the cosigner notice to her.  Her cross-complaint sought restitution of the money she and other putative class members had paid for bail bond premiums, a declaratory judgment that the Premium Agreements are unenforceable, and an injunction prohibiting BBBB from enforcing the agreements and requiring it to provide the cosigner notice.  She also filed a motion for a preliminary injunction seeking to enjoin BBBB from enforcing or attempting to collect on Premium Agreements signed by cosigners who were not provided with the required notice.

The trial court granted the preliminary injunction motion, finding that the Premium Agreements were consumer credit contracts subject to the cosigner notice requirement.  BBBB sought a writ of supersedeas from the Court of Appeal which stayed the trial court’s ruling and ordered expedited briefing.

California’s cosigner notice requirement applies to any “consumer credit contract,” which is defined as an “obligation[] to pay money on a deferred payment basis, where the money, property, or services or other consideration which is the subject matter of the contract is primarily for personal, family or household purposes” and the obligation falls within one of the following categories: retail installment contracts; retail installment accounts; conditional sales contracts; loans or extensions of credit that are unsecured or secured by other than real property; loans or extensions of credit subject to certain Business and Professions Code provisions related to real property loans; and lease contracts.  If the required cosigner notice is not given, a creditor or assignee may not enforce the underlying consumer credit contract against the person who was entitled to receive the notice.

While noting that “we appreciate that this decision may upend business expectations for bail bond agents,” the appellate court nevertheless affirmed the issuance of the preliminary injunction.  It concluded that the Premium Agreement qualified as a consumer credit contract for purposes of the cosigner notice requirement because Ms. Caldwell signed an agreement (1) “to pay money on a deferred basis,” (2) the subject matter of the contract was “primarily for personal, family or household purposes,” (3) the obligation involved an “extension[] of credit” because Ms. Caldwell could satisfy her obligation by making a series of monthly payments, and (4) her obligation was “unsecured.”  As a result, it found that the Premium Agreement was subject to the cosigner notice requirement.

Among BBBB’s arguments rejected by the appellate court was its argument that consumer protection laws did not apply to bail bond transactions because the bail bond industry is governed by a separate statutory scheme—the Bail Bond Regulatory Act and its implementing regulations.  According to BBBB, because the legislature created a comprehensive scheme to regulate the conduct of bail bond licensees, it intended to exclude such transactions from the consumer protections applicable to other types of contracts.

It should be noted that while the decision only addresses the cosigner notice requirement, the conclusion that the Premium Agreements are consumer credit contracts carries other potential consequences.  Most significantly, it means that other consumer protection requirements applicable to consumer credit are potentially applicable to the Premium Agreements such as state usury laws and federal and state disclosure and fair lending laws.

Bail-related agreements are also the subject of a CFPB enforcement action filed in February 2021.  In that lawsuit, the Bureau alleges that Libre by Nexus, Inc. (Libre) and its owners operated a scheme in which Libre obtains immigration bonds to secure the release of immigrants held in federal detention centers in exchange for large upfront fees and monthly payments.  Specifically, the Bureau alleges that Libre and its owners engaged in deceptive and abusive acts or practices in violation of the CFPA through conduct that included taking advantage of the immigrants’ limited English proficiency and making false threats about the consequences of non-payment.

The complaint alleges that Libre is a “covered person” under the CFPA because its transactions with consumers are “consumer financial products or services.”  According to the complaint, the transactions are “consumer financial products or services” because Libre leads consumers to believe “that Libre has paid cash bonds, that consumers owe a debt to Libre in the amount of the cash bonds, and that monthly payments pay down that debt.”  A motion to dismiss filed by the defendants is currently pending in which the defendants argue that Libre is not a “covered person” because it does not offer consumer financial products or services, does not offer or extend credit, and does not make loans.

We see the California decision and the CFPB lawsuit as part of an overall trend to treat transactions that are not extensions of credit as being covered by consumer financial protection laws.  Companies with similar arrangements with customers, that were designed to fall outside of the scope of credit-related consumer protection statutes, should evaluate their positions and prepare to defend them if challenged by a regulator or private litigant.