The FTC has issued an advisory opinion that addresses the impact of its Holder Rule on the ability of consumers to recover attorney’s fees and costs.

Officially titled the “Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses,” the Holder Rule requires sellers that arrange for or offer credit to finance the purchase of consumer goods or services to include (or require the lender to include) a specified “holder notice” in the credit contract.  The notice must state that any holder of the contract is subject to all claims and defenses that the consumer could assert against the seller of the financed goods or services, and that the consumer’s “recovery [under the contract] shall not exceed amounts paid by the debtor [under the contract].”

Following a systemic review of the Holder Rule, the FTC published a notice in the Federal Register in May 2019 announcing that it had decided to retain the Holder Rule without modification.  In its discussion of the review, the FTC indicated that several of the comments addressed whether the Rule’s limitation on recovery to “amounts paid by the debtor” precludes consumers from recovering attorney’s fees above that cap.  The FTC expressed its conclusion that if a holder’s liability for attorney’s fees is based on claims against the seller that are preserved by the Holder Rule notice, then the amount the consumer can recover—including any recovery based on attorney’s fees—cannot exceed the amount the consumer paid under the contract.

The advisory opinion addresses the circumstances in which the Holder Rule’s cap on recovery to “amounts paid by the debtor” limits the amount of attorney’s fees and costs that a consumer can recover from a holder.  The FTC states that the Holder Rule does not eliminate any rights that a consumer may have as a matter of separate state or federal law.  As a result, whether attorney’s fees and costs can be awarded against the holder of a contract is determined by the relevant law governing costs and fees.  According to the FTC, where applicable law only allows recovery of costs and fees against the seller, the seller’s liability for costs and fees can be raised only against a holder because of the Holder Rule.  In that circumstance, the holder’s obligation to pay costs and fees available against the seller would be limited by the Holder Rule cap.  However, if applicable law allows costs or fees against a holder, the Holder Rule cap would not apply because the consumer’s right to recover costs and fees is not based on the Holder Rule.

The question whether the Holder Rule’s limit on a consumer’s recovery to the “amounts paid by the debtor” under the contract includes the consumer’s attorney’s fees is currently before the California Supreme Court in Pulliam v. HNL Automotive Inc. to resolve a split in the state’s appellate courts.  In Pulliam, the appellate court was unwilling to give deference to the FTC’s conclusion in the May 2019 notice and ruled that the Holder Rule’s cap does not apply to attorney’s fees.  For that reason, the court did not reach whether the consumer had an independent right to attorney’s fees under CA Civil Code Section 1459.5.

Section 1459.5 specifically addresses the recovery of attorney’s fees in connection with a Holder Rule claim.  It provides:

[A] plaintiff who prevails on a cause of action against a defendant named pursuant to [the Holder Rule] … 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.

In one of the appellate decisions that produced the split, the court ruled that Section 1459.5 was preempted by the Holder Rule.  However, since the question before the California Supreme Court in Pulliam is only whether the Holder Rule’s cap applies to attorney’s fees, the Supreme Court may not reach the preemption question.  In its advisory opinion, the FTC asserts that the decision that found Section 1459.5 was preempted “misinterpret[s] the Holder Rule.”

The American Bankers Association, American Financial Services Association, California Financial Services Association, and Consumer Bankers Association filed a joint amicus brief in Pulliam in which they argue that if  the California Supreme Court chooses to go beyond the question of whether the Holder Rule’s cap applies to attorney’s fees, it should also hold that Section 1459.5 is preempted.  The trade groups argue that while the California Legislature is free to enact more protective consumer protection statutes, it cannot authorize greater recovery under the Holder Rule than what the Rule allows.  They assert that Section 1459.5 is conflict preempted because by allowing a consumer to obtain an award of attorney’s fees in addition to the amount the consumer paid under the contract, it directly contradicts the Holder Rule’s cap limiting a consumer’s recovery to the amount the consumer paid under the contract.  Stated differently, they argue:

[W]here the Holder Rule provides that recovery of attorney fees is capped at the amount the debtor paid under the contract, section 1459.5 says the opposite; namely, fee recovery is not capped.  Attorney fee recovery cannot be both limited and unlimited, capped and uncapped.  The FTC has decreed that attorney fee recovery under its Holder Rule is limited, capped.  Section 1459.5 states the opposite, allowing recovery of attorney fees beyond the Holder Rule’s limit or cap.  For that reason, the statute is conflict preempted.

The trade groups also argue that Section 1459.5 is obstacle preempted because it stands as an obstacle to the Rule’s purpose of imposing only limited liability by authorizing added recovery against the holder.

The FTC has not filed an amicus brief in Pulliam.