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February 16, 2021

Stroock Client Alert

By: Julia B. Strickland, Brian C. Frontino, John R. Loftus, Stephen J. Newman, Arjun P. Rao, Quyen T. Truong

Despite existing California appellate jurisprudence and Federal Trade Commission (“FTC”) authority limiting all recovery, including attorneys’ fees, by a debtor pursuant to the “Holder Rule” to the amount paid pursuant to the contract, a recent decision by a California Court of Appeal held that a debtor’s recovery of attorneys’ fees is not subject to this limit.  Given the split in authority, the scope of exposure of creditors – and in particular those financing the purchase of automobiles – may need to be addressed by the California Supreme Court.

Promulgated by the FTC in 1975, the “Holder Rule,” 16 C.F.R. § 433.2, is a consumer protection measure enacted to ensure that creditors cannot continue to collect from debtors when the goods in question were defective at the time of sale.  The rule requires sellers of goods financed through retail installment contracts or similar documents to include within the document a notice to assignees that the purchaser retains, as to the assignee, all claims and defenses that he or she might assert against the original seller of the goods.  Importantly, however, the Holder Rule limits the assignee-creditor’s exposure to the loss of amounts financed as follows:  “RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.”  

A recent ruling of the California Court of Appeal, Pulliam v. HNL Automotive Inc., No. B293435, 2021 WL 302885 (Cal. Ct. App. 2d Dist. Jan. 29, 2021), however, declares that this language does not restrict a debtor’s right to seek attorneys’ fees from the creditor.  In other words, Pulliam held that creditors may be liable for both the amount financed and the attorneys’ fees incurred by the debtor to pursue his or her rights.  

The Holder Rule was construed earlier by two different California appellate decisions.  First, in Lafferty v. Wells Fargo Bank, 213 Cal. App. 4th 545, 563 (Cal. Ct. App. 3d Dist. 2013), the court held that the Holder Rule’s limit on “recovery” included all recovery, whether actual damages, attorneys’ fees or otherwise.  In other words, the debtor could not recover attorneys’ fees in addition to amounts paid or avoided on the debt.  And recently,  in Spikener v. Ally Financial, Inc., 50 Cal. App. 5th 151 (Cal. Ct. App. 1st Dist. 2020), another appellate district reached the same conclusion.  The Spikener court’s analysis was based in significant part on 2019 guidance from the FTC on how to interpret the Holder Rule.  See Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, 84 Fed. Reg. 18711, 18713 (May 2, 2019) (“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”).  Further, the Spikener court held that 2019 legislation purporting to override the Holder Rule and permit broader recovery (California Civil Code section 1459.5) was preempted by federal law.  The Pulliam court, in contrast, rejected Lafferty and Spikener, holding that the Holder Rule places no restrictions on debtor-plaintiff’s potential attorneys’ fee recovery.

Pulliam, which involved vehicle finance, declined to follow the FTC guidance on the grounds that it was merely informal and thus not entitled to preemptive effect.  And in the absence of preemption, the Pulliam court concluded that the better application of the Holder Rule’s pro-consumer purpose was to permit attorneys’ fee recovery for successful Holder Rule claims, even if the consequence was to expose lenders to liability in excess of amounts financed.  It remains to be seen whether Lafferty/Spikener or Pulliam will be accepted among California courts; the deadline for a petition for review to be filed in Pulliam is March 10, 2021.  

Ultimately, the California Supreme Court may consider the split in authority important enough to resolve, particularly because Pulliam follows so soon after the decision in Spikener and squarely rejects its analysis – unusual in the California appellate court system, where published decisions in one district are supposed to be precedential in all districts.  In the meantime, creditors, particularly those who finance the purchase of motor vehicles in California, should be mindful of the potential additional exposure pending resolution of this split in authority.


For More Information:

Julia B. Strickland

Brian C. Frontino

John R. Loftus

Stephen J. Newman

Arjun P. Rao

Quyen T. Truong

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.