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May 31, 2022

By: Stephen J. Newman, Arjun P. Rao

The Federal Trade Commission requires that certain consumer sales contracts contain specific language allowing the consumer to assert any claims or defenses, against a creditor financing the purchase, that the consumer could assert against the seller of the goods. This is known as the “Holder Rule,” 16 C.F.R. § 433.2, and it is intended to protect consumers against having to repay money borrowed to finance the purchase of goods that ultimately turn out to be shoddy. It applies most frequently in the context of the sale of automobiles and other consumer durable goods, such as furniture and appliances. Importantly, as drafted by the FTC, the Holder Rule attempts to strike a balance between consumer protection and the need to encourage consumer finance, by limiting the consumer’s “recovery” to amounts actually paid pursuant to the terms of the contract. Recently, however, the California Supreme Court upset that balance by ruling in Pulliam v. HNL Auto. Inc., No. S267576, 2022 WL 1672918 (Cal. May 26, 2022), that the Holder Rule’s limit on “recovery” from the creditor does not apply to attorneys’ fees even if such fees greatly exceed the amount paid. 

Thus, a company that financed the purchase of a $30,000 automobile could potentially face the prospect of losing the ability to recover the debt as well as having to pay tens of thousands of dollars or more, above and beyond what was financed, if the vehicle turns out not to perform as advertised. Santana v. FCA US, LLC, 56 Cal. App. 5th 334, 345 (2020) (affirming award of $510,637.87 in attorneys’ fees arising under Song-Beverly Act). 

In Pulliam, plaintiff Pulliam purchased a “Certified Pre-Owned” vehicle pursuant to a retail installment contract that contained a Holder Rule notice. 2022 WL 1672918, at *2. After purchasing the vehicle, Pulliam discovered that the vehicle did not meet the requirements to be considered “Certified Pre-Owned” and subsequently sued the dealership, HNL Automotive (“HNL”), and the dealership’s assignee, TD Auto Finance (“TDAF”), asserting multiple causes of action, including breach of implied warranty under California’s lemon law statute, the Song-Beverly Act. Id. At the subsequent jury trial, HNL was found liable under the Song-Beverly Act and the court entered judgment jointly and severally against both HNL and TDAF, awarding approximately $22,000 in damages and nearly $170,000 in attorneys’ fees against both defendants. Id. On appeal, TDAF argued that it was not liable for attorneys’ fees under the Holder Rule.

TDAF first pointed to the language of the Holder Rule, which states that “recovery by the debtor shall not exceed amounts paid by the debtor” under a retail installment contract. Pulliam v. HNL Auto. Inc., 60 Cal. App. 5th 396, 410 (2021), aff'd, No. S267576, 2022 WL 1672918 (Cal. May 26, 2022). Interpreting the word “recovery” broadly, TDAF argued that the plain language of the rule limited Pulliam’s recovery of both damages and attorneys’ fees to the amount paid under the contract. Id. Unsurprisingly, Pulliam argued that the limit imposed by the Holder Rule applied only to compensatory damages. Id. Siding with plaintiff, the Court of Appeal affirmed the trial court’s award of attorneys’ fees—despite longstanding jurisprudence holding that the Holder Rule capped the amount recoverable by consumers, as argued by TDAF.  Id. at 422.

Subsequently, the California Supreme Court granted review. TDAF again argued that the plain language of the Holder Rule precluded recovery of attorneys’ fees, and that to the extent the Holder Rule was ambiguous, the interpretative guidance set forth by the FTC suggesting the same was entitled to deference. Pulliam, 2022 WL 1672918, at *4. TDAF argued that the scope of “recovery” within the Holder Rule’s meaning included all recoverable litigation costs—including attorneys’ fees—and further, to the extent the Rule imposed limitations on consumer recovery, it did so not by kind, but by the total amount recoverable. Id. at *5-*6. The Court, however, was unpersuaded.

Ultimately, the Court concluded that the rule specifically contemplated limitations only on damages and that “there is no indication that attorney’s fees were intended to be within its scope.” Id. at *7. Rather, the Court reasoned that attorneys’ fees are merely costs, entitled to recovery by a prevailing party under California law where an applicable “contract, statute, or law” provides as such. \ Id. at *7, *11 (“Neither the language of the Holder Rule nor its history suggest that it was intended to displace or prevent state law from authorizing greater recovery than what a plaintiff may recover based on the language of the Notice alone.”). Making clear its position on the importance of consumer protections, the Court noted that the Holder Rule was implemented to allow consumers to “pursue affirmative litigation against creditors for seller misconduct, which would be financially infeasible . . . if attorney’s fees were not recoverable.” Id. at *7. 

The Pulliam decision resolves a prior split of authority among the California intermediate appellate courts. See Lafferty v. Wells Fargo Bank, 213 Cal. App. 4th 545 (Cal. Ct. App. 3d Dist. 2013); Spikener v. Ally Financial, Inc., 50 Cal. App. 5th 151 (Cal. Ct. App. 1st Dist. 2020).

As a result of this decision, we expect to see an increase in Holder Rule litigation asserted against finance companies. We continue to work with our clients to develop strategies to minimize any added risk as a result. For example, finance companies may wish to review their indemnity agreements with sellers and seek revisions as necessary to confirm that any additional attorneys' fee liability will be borne by the seller.  Companies also may wish to take steps to ensure that sellers have sufficient financial resources to meet their indemnity commitments in light of the additional risk imposed on finance companies by the Pulliam ruling.

May 31, 2022

By: Stephen J. Newman, Arjun P. Rao

The Federal Trade Commission requires that certain consumer sales contracts contain specific language allowing the consumer to assert any claims or defenses, against a creditor financing the purchase, that the consumer could assert against the seller of the goods. This is known as the “Holder Rule,” 16 C.F.R. § 433.2, and it is intended to protect consumers against having to repay money borrowed to finance the purchase of goods that ultimately turn out to be shoddy. It applies most frequently in the context of the sale of automobiles and other consumer durable goods, such as furniture and appliances. Importantly, as drafted by the FTC, the Holder Rule attempts to strike a balance between consumer protection and the need to encourage consumer finance, by limiting the consumer’s “recovery” to amounts actually paid pursuant to the terms of the contract. Recently, however, the California Supreme Court upset that balance by ruling in Pulliam v. HNL Auto. Inc., No. S267576, 2022 WL 1672918 (Cal. May 26, 2022), that the Holder Rule’s limit on “recovery” from the creditor does not apply to attorneys’ fees even if such fees greatly exceed the amount paid. 

Thus, a company that financed the purchase of a $30,000 automobile could potentially face the prospect of losing the ability to recover the debt as well as having to pay tens of thousands of dollars or more, above and beyond what was financed, if the vehicle turns out not to perform as advertised. Santana v. FCA US, LLC, 56 Cal. App. 5th 334, 345 (2020) (affirming award of $510,637.87 in attorneys’ fees arising under Song-Beverly Act). 

In Pulliam, plaintiff Pulliam purchased a “Certified Pre-Owned” vehicle pursuant to a retail installment contract that contained a Holder Rule notice. 2022 WL 1672918, at *2. After purchasing the vehicle, Pulliam discovered that the vehicle did not meet the requirements to be considered “Certified Pre-Owned” and subsequently sued the dealership, HNL Automotive (“HNL”), and the dealership’s assignee, TD Auto Finance (“TDAF”), asserting multiple causes of action, including breach of implied warranty under California’s lemon law statute, the Song-Beverly Act. Id. At the subsequent jury trial, HNL was found liable under the Song-Beverly Act and the court entered judgment jointly and severally against both HNL and TDAF, awarding approximately $22,000 in damages and nearly $170,000 in attorneys’ fees against both defendants. Id. On appeal, TDAF argued that it was not liable for attorneys’ fees under the Holder Rule.

TDAF first pointed to the language of the Holder Rule, which states that “recovery by the debtor shall not exceed amounts paid by the debtor” under a retail installment contract. Pulliam v. HNL Auto. Inc., 60 Cal. App. 5th 396, 410 (2021), aff'd, No. S267576, 2022 WL 1672918 (Cal. May 26, 2022). Interpreting the word “recovery” broadly, TDAF argued that the plain language of the rule limited Pulliam’s recovery of both damages and attorneys’ fees to the amount paid under the contract. Id. Unsurprisingly, Pulliam argued that the limit imposed by the Holder Rule applied only to compensatory damages. Id. Siding with plaintiff, the Court of Appeal affirmed the trial court’s award of attorneys’ fees—despite longstanding jurisprudence holding that the Holder Rule capped the amount recoverable by consumers, as argued by TDAF.  Id. at 422.

Subsequently, the California Supreme Court granted review. TDAF again argued that the plain language of the Holder Rule precluded recovery of attorneys’ fees, and that to the extent the Holder Rule was ambiguous, the interpretative guidance set forth by the FTC suggesting the same was entitled to deference. Pulliam, 2022 WL 1672918, at *4. TDAF argued that the scope of “recovery” within the Holder Rule’s meaning included all recoverable litigation costs—including attorneys’ fees—and further, to the extent the Rule imposed limitations on consumer recovery, it did so not by kind, but by the total amount recoverable. Id. at *5-*6. The Court, however, was unpersuaded.

Ultimately, the Court concluded that the rule specifically contemplated limitations only on damages and that “there is no indication that attorney’s fees were intended to be within its scope.” Id. at *7. Rather, the Court reasoned that attorneys’ fees are merely costs, entitled to recovery by a prevailing party under California law where an applicable “contract, statute, or law” provides as such. \ Id. at *7, *11 (“Neither the language of the Holder Rule nor its history suggest that it was intended to displace or prevent state law from authorizing greater recovery than what a plaintiff may recover based on the language of the Notice alone.”). Making clear its position on the importance of consumer protections, the Court noted that the Holder Rule was implemented to allow consumers to “pursue affirmative litigation against creditors for seller misconduct, which would be financially infeasible . . . if attorney’s fees were not recoverable.” Id. at *7. 

The Pulliam decision resolves a prior split of authority among the California intermediate appellate courts. See Lafferty v. Wells Fargo Bank, 213 Cal. App. 4th 545 (Cal. Ct. App. 3d Dist. 2013); Spikener v. Ally Financial, Inc., 50 Cal. App. 5th 151 (Cal. Ct. App. 1st Dist. 2020).

As a result of this decision, we expect to see an increase in Holder Rule litigation asserted against finance companies. We continue to work with our clients to develop strategies to minimize any added risk as a result. For example, finance companies may wish to review their indemnity agreements with sellers and seek revisions as necessary to confirm that any additional attorneys' fee liability will be borne by the seller.  Companies also may wish to take steps to ensure that sellers have sufficient financial resources to meet their indemnity commitments in light of the additional risk imposed on finance companies by the Pulliam ruling.