The California Supreme Court has ruled in Pulliam v. HNL Automotive Inc. that the FTC Holder Rule’s limit on a consumer’s “recovery” to the “amounts paid by the debtor” under the contract does include the consumer’s attorney’s fees where a buyer seeks fees from a holder under a state prevailing party statute. The decision has the potential to significantly increase the amount of money a plaintiff can recover when proceeding against a dealer/seller under the FTC Holder Rule.
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 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 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].”
In Pulliam, after purchasing a vehicle pursuant to a retail installment contract with the dealer, the plaintiff filed a lawsuit against the dealer and auto finance company to which the dealer had assigned the contract. The plaintiff asserted various claims based on her discovery that the vehicle did not have cruise control and other features shown in advertisements. The jury found for the plaintiff on her claim of violation of the implied warranty of merchantability under California’s Song-Beverly Consumer Warranty Act (Song-Beverly Act) and, in a judgment entered jointly and severally against the dealer and auto finance company, awarded her approximately $22,000 in damages. On post-trial motions, the court awarded the plaintiff nearly $170,000 in attorney’s fees based on Section 1794(d) of the Song-Beverly Act, which permits a buyer who prevails in an action under the Act to recover attorney’s fees
On appeal, the auto finance company argued that it was not liable for the plaintiff’s attorney’s fees under the Holder Rule. As an initial matter, the Court of Appeal observed that the dictionary definition of “recovery” “focuses on damages, i.e. restoring money that was taken away from the plaintiff, and does not expressly address attorney’s fees.” Based on its review of the Holder Rule’s regulatory history, the court concluded that the Holder Rule’s limit on recovery applied to consequential damages and not attorney’s fees.
With Pulliam having created a split among California’s appellate districts, the California Supreme Court agreed to decide whether “recovery” under the Holder Rule includes the consumer’s attorney’s fees and limits the amount of fees that a plaintiff can recover from a holder to the amount paid under the contract. The Supreme Court first found the Holder Rule’s language to be ambiguous, observing that the phrase “recovery hereunder by the debtor” could be limited to compensatory or consequential damages that a debtor ultimately receives or could mean any money a debtor receives, even if the money does not remain with the debtor.
Having found the Rule’s language to be ambiguous, the court then looked at extrinsic sources. Based on the Holder Rule’s regulatory history, the court concluded that the FTC had damages in mind when limiting recovery under the Rule and found no indication that attorney’s fees were intended to be included within the Rule’s scope. It found that the Rule’s regulatory history also demonstrated that the FTC expected that buyers would be able use the Holder Rule not only to assert defenses against creditor claims but also to pursue affirmative litigation against holders for seller misconduct. This expectation, together with FTC statements that the court viewed as recognition by the FTC that affirmative litigation would not be economically feasible for most buyers if litigation costs were not recoverable, led the court to conclude that it was “unlikely that the FTC intended the Rule’s limitation on recovery to apply to attorney’s fees sought by a consumer from a holder under state law.”
The court also considered the impact of the FTC’s interpretation of the Holder Rule in a 2019 Federal Register notice and a 2022 advisory opinion. The 2019 notice followed the FTC’s systemic review of the Rule. In its discussion of the review, the FTC indicated that several of the comments it received addressed whether the Rule’s limitation on recovery to “amounts paid by the debtor” precluded consumers from recovering attorney’s fees above that cap. The FTC expressed its conclusion that if a holder’s liability for attorney’s fees was based on claims against the seller that were preserved by the Holder Rule notice, then the amount the consumer could recover—including any recovery based on attorney’s fees—could not exceed the amount the consumer paid under the contract.
In the 2022 advisory opinion, the FTC also addressed the circumstances in which the Holder Rule’s cap on recovery would limit the amount of attorney’s fees and costs that a consumer can recover from a holder. The FTC stated that the Holder Rule did 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 could be awarded against the holder of a contract was 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 court concluded that it was unnecessary to decide whether the FTC’s interpretation was entitled to deference because it was consistent with the court’s interpretation. According to the court, although it was the Holder Rule that enabled the plaintiff to sue the auto finance company, the trial court’s award of attorney’s fees was not based on the seller’s liability for fees under the Holder Rule. It stated:
Section 1794 contains no language limiting fee awards to sellers as opposed to any other parties against whom a buyer has prevailed….It provides for fees against any losing defendant who chose to oppose a consumer’s claim. Thus, section 1794, subdivision (d) provided the basis for [the plaintiff’s] claim against [the finance company] and was unaffected by the Holder Rule’s limitation on ‘recovery hereunder’ for claims asserted by a buyer against a seller and extended to lie against a holder.
Lenders and sales finance companies who hold agreements subject to the Holder Rule should review their procedures for performing diligence on merchant partners and tracking and responding to consumer complaints. Holders of such agreements should also monitor complaints received by their merchant partners and take steps to ensure that the merchants resolve all complaints to the satisfaction of consumer buyers. To the extent applicable, it may also be helpful to revisit program agreements, particularly provisions relating to indemnification and disputes handling.