Banking and Finance Law Daily FTC Holder Rule preempts state law authorizing recovery in excess of contract payment
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Friday, June 12, 2020

FTC Holder Rule preempts state law authorizing recovery in excess of contract payment

By Nicole D. Prysby, J.D.

The FTC’s Holder Rule preempts a state law that authorizes a plaintiff to recover attorney fees on a Holder Rule claim even if it results in a total recovery greater than the amount the plaintiff paid under the contract.

To the extent California Civil Code section 1459.5 authorizes a plaintiff’s total recovery, including attorney fees, for a Holder Rule claim to exceed the amount the plaintiff paid under the contract, it directly conflicts with the Holder Rule and is therefore preempted, held the California Court of Appeal. A consumer sued the holder of his vehicle loan after learning that the seller failed to disclose that the car had been in a major collision. The parties settled for approximately the amount the consumer paid for the vehicle, and the consumer motioned for attorney fees. The court held that the Federal Trade Commission’s position, that if the holder’s liability for fees is based on claims preserved by the Holder Rule Notice, the payment that the consumer may recover—including attorney fees—cannot exceed the amount the consumer paid under the contract, is entitled to deference. And the consumer cannot rely on a California state law to recover attorney fees. To the extent section 1459.5 authorizes a plaintiff to recover attorney fees on a Holder Rule claim even if that results in a total recovery greater than the amount the plaintiff paid under the contract, section 1459.5 conflicts with, and is therefore preempted by, the Holder Rule (Spikener v. Ally Financial, Inc., June 9, 2020, Simons, M.).

The FTC’s Holder Rule requires consumer credit contracts to include the following notice: "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." A California court (Lafferty v. Wells Fargo Bank, N.A., 25 Cal. App. 5th 398 (2018)) and the FTC construed the Holder Rule to mean that a debtor cannot recover damages and attorney fees for a Holder Rule claim that collectively exceed the amount paid by the debtor under the contract. In response, the California legislature enacted Civil Code section 1459.5, effectively providing that the Holder Rule’s limitation on recovery does not apply to attorney fees.

A consumer filed a lawsuit over a vehicle purchase in which the seller failed to tell the consumer that the car had been in a major collision. The purchase contract was assigned to Ally Financial, Inc., which the consumer named as the defendant. The consumer and Ally settled, and Ally agreed to pay the consumer a sum equal to the car purchase (about $3,500). The consumer filed a fee motion, seeking more than $13,000 in attorney fees. The district court denied the motion and the consumer appealed.

The parties disputed whether Lafferty correctly construed the Holder Rule’s limitation on recovery, but the court found that issue irrelevant because the FTC’s confirmation of the Holder Rule controls. The Rule Confirmation noted that the FTC had received comments asking it to address whether the Rule’s limitation on recovery to ‘amounts paid by the debtor’ allows consumers to recover attorneys’ fees above that cap. The Rule Confirmation went on to state that 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. The FTC’s interpretation is entitled to deference, as the Rule Confirmation is the FTC’s official position, published in the Federal Register, and issued after soliciting public comment. The court also rejected an argument from the consumer that a claim for Consumers Legal Remedies Act (CLRA) attorney fees against a holder is independent of claims or defenses arising from the seller’s misconduct and therefore not limited by the Holder Rule’s limitation on recovery. Where a CLRA claim is filed against a holder based on misconduct by a seller of goods or services, it is filed pursuant to the Holder Rule; in the absence of the Holder Rule, the claim would be barred.

The consumer cannot rely on Civil Code section 1459.5 to recover attorney fees. The legislative history for the statute makes clear that the intent was to reverse the decision in Lafferty. But the law conflicts with, and is therefore preempted by, the Holder Rule. The FTC has construed the Holder Rule’s limitation on recovery to limit a plaintiff’s total recovery, including attorney fees, on a claim asserted pursuant to the Holder Rule to the amount the plaintiff paid under the contract, regardless of whether the state claim being asserted pursuant to the Holder Rule contains fee-shifting provisions. This demonstrates a clear intent to prohibit states from authorizing a recovery that exceeds this amount on a Holder Rule claim. The Rule Confirmation expressly preserves a state’s ability to authorize attorney fees against holders independent of Holder Rule claims, and clarifies that such fee claims are not constrained by the Holder Rule’s limitation on recovery. But where 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.

This case is No. A157301.

Attorneys: Kevin M. Faulk (Law Offices of Kevin Faulk) and Hallen D. Rosner (Rosner, Barry & Babbitt, LLP) for Damon Spikener. Andrew S. Elliott (Severson & Werson, PC) for Ally Financial, Inc.

Companies: Ally Financial, Inc.

MainStory: TopStory CaliforniaNews ConsumerCredit Preemption StateBankingLaws

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