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FTC Holder Rule & Attorney Fees

Where a state statute provides for attorney’s fees, does the FTC Holder Rule limit the amount?

On May 26, 2022, the Supreme Court of California, in Pulliam v. HNL Automotive Inc. et al., decided that the Federal Trade Commission (“FTC”)’s Holder Rule does not limit the award of attorney’s fees where a customer seeks fees from a holder under a state prevailing party statute (Pulliam v. HNL Automotive Inc. et al. (2022) 13 Cal. 5th 127, thereby eliminating the confusions caused by the directly conflicting appellate decisions, between Lafferty v. Wells Fargo Bank, N.A.(2018) 25 Cal.App.5th 398, and Spikener v. Ally Financial, Inc.(2020) 50 Cal.App.5th 151 on the one hand, and Pulliam v. HNL Automotive Inc. et al (2021) 60 Cal.App.5th 396, on the other.

The first critical issue lies with the second sentence of the Notice required under the Holder Rule.  The Notice provides, “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.” (16 C.F.R. § 433.2(a) (1975), emphasis added.)  The ultimate question is whether ‘recovery hereunder’ includes attorneys’ fees.

Another critical issue is whether to give deference to the Rule Confirmation publicized by the FTC.  It provides, in pertinent part, “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.” (84 Fed.Reg. 18711 (May 2, 2019), 19713, emphasis added.)  While the conflicting appellate decisions reached opposite conclusions as to whether to give deference to the above-referenced statement, the Supreme Court interpreted differently the phrase ‘based on’ and thereby obviated the need to address the ‘deference’ issue.

As to the meaning of ‘recovery,’ the Supreme Court concluded the language of ‘recovery’ was ambiguous in that ‘recovery’ could mean damages, excluding attorneys’ fees, or mean any award from a judgment, including attorneys’ fees.  Thus, after examining extrinsic sources, such as the FTC’s Statement of Basis and Purposes, and guidance issued by the FTC at the effective date, the Court found that the FTC had damages in mind when it referred to ‘recovery.’  Further, the Court pointed out that the FTC, at the time of promulgation of the Holder Rule, had been aware that many poor consumers could not afford legal costs including attorneys’ fees.  Based on this finding, the Court reasoned that it is unlikely that the FTC, mindful of poor consumers’ frustration due to high legal costs, intended the Holder Rule to limit consumers’ opportunity to obtain attorneys’ fees.

Regarding interpretation of the 2019 Rule Confirmation, the Supreme Court focuses on the phrase ‘based on claims against the seller.’  While the literal meaning of ‘based on’ can be very broad in that (something) is formed or made, using (something else) as a starting point, the Court narrowly construed ‘based on’ as citing legal authority.  Thus – even though it is true that the holder’s liability for attorney’s fees, in this case, has been formed from the claims against the seller, in that the original lawsuit dealt with the seller’s misconduct, and that only because the original court found seller misconduct, the holder became liable for the damages and attorney’s fees – the Court declared that the holder’s liability for attorney’s fee is not ‘based on’ the claims against the seller but ‘based on’ the statute, namely, Cal. Civ. Code § 1794 (d).  From this narrow reading of ‘based on,’ the Supreme Court concluded that the Rule Confirmation is in accord with the Court’s understanding of the Holder Rule.  Notwithstanding, the FTC Advisory Opinion issued on January 18, 2022, clearly supports the Court’s conclusion.  It states, in pertinent part, “the Holder Rule does not limit recovery of attorney’s fess and costs when state law authorizes awards against a holder.”  Since a state law, namely, Cal. Civ. Code § 1459.5, authorizes attorney’s fees awards against a holder, the Holder Rule’s limit does not apply to this situation.

The Supreme Court wrapped up its opinion by disapproving of Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398, and Spikener v. Ally Financial, Inc. (2020) 50 Cal.App.5th 151 to the extent of inconsistency with Pulliam.  In sum, where there is independent basis for attorney’s fees such as a statute, the Holder Rule does not limit consumer’s recovery of attorney’s fees against a holder.

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