The California Supreme Court ruled in Pulliam v. HNL Automotive Inc. that the FTC Licensee’s rule limit on a consumer’s “recovery” to “amounts paid by debtor” under the contract includes consumer attorney fees where a buyer seeks fees from a Licensee under a party statute in force in the State. The ruling has the potential to significantly increase the amount of money a plaintiff can recover when suing a dealer/vendor under the FTC’s Holder Rule.

Officially titled the “Business Regulatory Rule Regarding the Preservation of Consumer Claims and Defenses,” the Holder Rule requires sellers who arrange or offer credit to finance the purchase of consumer goods or services to include a “Notice of holder” specified in the credit agreement. The notice must state that any contract holder is subject to all claims and defenses that the consumer may have against the seller of the financed goods or services, and that the consumer’s “reimbursement” [under the contract] must not exceed the amounts paid by the debtor [under the contract].”

In Pulliam, after purchasing a vehicle under a retail contract with the dealership, the plaintiff brought a lawsuit against the dealership and the auto finance company to which the dealership had assigned the contract. The plaintiff asserted various claims based on her discovery that the vehicle lacked cruise control and other features shown in advertisements. The jury found in favor of the plaintiff for breach of the implied warranty of merchantability under the California Song-Beverly Consumer Warranty Act (Song-Beverly Act) and, in a judgment rendered jointly and severally against the dealer and the company auto finance company, awarded him approximately $22,000 in damages. On post-trial motions, the court awarded the plaintiff nearly $170,000 in attorneys’ fees based on Section 1794(d) of the Song-Beverly Act, which allows a prevailing buyer in an action under the law to recover attorneys’ fees.

On appeal, the auto finance company argued that it was not responsible for the plaintiff’s attorney fees under the Holder’s Rule. First, the Court of Appeal observed that the dictionary definition of ‘recovery’ “focuses on damages, i.e. the return of money which has been taken from the plaintiff, and does not does not expressly deal with attorneys’ fees”. Based on its review of the incumbent rule’s regulatory history, the court concluded that the incumbent rule’s recovery limit applied to consequential damages and not attorneys’ fees.

With Pulliam having created a split between the Appellate Districts of California, the California Supreme Court agreed to decide whether “recovery” under the Holder Rule includes consumer attorney fees and limits the amount of costs a plaintiff can recover from a Holder to the amount paid under the contract. The Supreme Court first found that the wording of the holder rule was ambiguous, observing that the phrase “recovery hereunder by debtor” could be limited to compensatory or consequential damages that a debtor receives in ultimately or could mean any amount of money that a debtor receives, even if the money does not stay with the debtor.

Having concluded that the wording of the Rule was ambiguous, the court then turned to the extrinsic sources. Based on the regulatory history of the incumbent rule, the court found that the FTC had damages in mind when limiting recovery under the rule and found no indication that the attorney’s fees were intended to be included within the scope of the rule. He found that the rule’s regulatory history also demonstrated that the FTC expected buyers to be able to use the holder rule not only to assert defenses against creditor claims, but also to pursue affirmative action against holders for fault of the seller. This expectation, along with statements by the FTC that the court viewed as an acknowledgment by the FTC that affirmative litigation would not be economically feasible for most purchasers if legal costs were not recoverable, led the court to conclude that it was “unlikely that the FTC intended the limitation of recovery rule to apply to attorney fees sought by a consumer from a licensee under state law.”

The court also considered the impact of the FTC’s interpretation of the incumbent rule in a 2019 Federal Register opinion and a 2022 advisory opinion. The 2019 opinion followed the FTC’s systemic review of the rule. In its discussion of the review, the FTC said that several of the comments it had received focused on whether the rule’s recovery limitation to “amounts paid by the debtor” prevented consumers from recovering fees. avocado beyond this ceiling. The FTC concluded that if a licensee’s liability for attorney’s fees was based on claims against the seller that were preserved by the licensee’s rule notice, then the amount the consumer could recover – including 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 incumbent rule’s recovery cap would limit the amount of attorneys’ fees and costs that a consumer can recover from an incumbent. The FTC said the incumbent rule does not eliminate any rights a consumer may have under federal or separate state law. Accordingly, the question of whether attorneys’ fees and expenses could be attributed to the holder of a contract was determined by the applicable law governing fees and expenses. According to the FTC, where applicable law only allows costs and fees to be recovered from the seller, the seller’s liability for costs and fees can only be asserted against a licensee because of the rule of the owner. In this case, the holder’s obligation to pay the fees and commissions available against the seller would be limited by the limit of the holder’s rule. However, if applicable law permits costs or charges against a cardholder, the cardholder rule cap would not apply because the consumer’s right to recover costs and fees is unfounded. on the holder’s rule.

The court found that it was not necessary 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’s rule that allowed 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 charges under the holder’s rule. He stated:

Section 1794 contains no language limiting the award of fees to sellers as opposed to any other party against whom a buyer has prevailed…It provides fees against any losing defendant who has chosen to oppose the claim of a consumer. Thus, Section 1794, subdivision (d) provided the basis for [the plaintiff’s] claim against [the finance company] and has not been affected by the limitation of the holder’s rule on “recovery hereunder” for claims asserted by a buyer against a seller and extended to a holder.

Lenders and sales finance companies that hold incumbent rule agreements should review their procedures for due diligence on merchant partners and for 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 merchants resolve all complaints to the satisfaction of consumer buyers. Where possible, it may also be useful to review program agreements, particularly provisions relating to indemnification and dispute management.

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