The California Supreme Court recently agreed to hear an appeal in Pulliam v. HNL Automotive Inc., a case with significant implications for 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, with the consumer's recovery limited to the amount paid by the consumer 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.
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 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.
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 legislative history, the court concluded that the Holder Rule's limit on recovery applied to consequential damages and not attorney's fees. The court was unwilling to give deference to the FTC's conclusion in the May 2019 notice, stating that "the FTC's statement regarding attorney's fees in [the notice] was not an exercise of its substantive expertise, but simply a position taken after limited arguments were made on each side." (The court noted that the FTC had not solicited comments on this issue and received six comments from commenters who "had volunteered the information.")
The decision in Pulliam creates a split among California's appellate districts, with the Courts of Appeal in two other districts having issued decisions concluding that the Holder Rule's limit on recovery does include attorney's fees. These cases are Lafferty v. Wells Fargo Bank, N.A., 25 Cal. App.5th 398 (2018) and Spikener v. Ally Financial, Inc., 50 Cal. App. 5th 151 (2020).
Last month, almost 45 years after the Holder Rule and corresponding FTC staff guidance were issued, the FTC issued a "staff note" in which FTC staff concluded that the TILA exemption for large transactions ( $58,300 for 2021) does not apply to the FTC's Holder Rule.
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