Reyes v. Beneficial State Bank

Decision Date22 March 2022
Docket NumberF080827
Citation76 Cal.App.5th 596,291 Cal.Rptr.3d 657
Parties Digna REYES et al., Plaintiffs and Appellants, v. BENEFICIAL STATE BANK, Defendant and Respondent.
CourtCalifornia Court of Appeals Court of Appeals

Rosner, Barry & Babbit, Hallen D. Rosner, San Diego, Christopher P. Barry, and Arlyn L. Escalante, San Diego, for Plaintiffs and Appellants.

Steven A. Silver, Porterville; Severson & Werson and Jan T. Chilton, San Francisco, for Defendant and Respondent.


Plaintiffs Digna Reyes and Sylvester Fulton IV, purchasers of a used vehicle, appeal the trial court's denial of their motion for attorney fees against defendant Beneficial State Bank (Beneficial) following plaintiffs' acceptance of Beneficial's offer to compromise plaintiffs' lemon law claims. Beneficial was the holder of the retail installment sale contract by which plaintiffs purchased the vehicle. Plaintiffs argue the trial court erred by denying their motion for attorney fees. Plaintiffs further argue this court should reject case law holding that recovery of attorney fees against a holder is capped under title 16, section 433.2 of the Federal Regulations (Holder Rule) and that a recent statute providing otherwise is preempted. We believe plaintiffs' contentions have merit. We reverse the trial court's denial of their motion for attorney fees and remand to the trial court for further proceedings consistent with this opinion.


Because this matter was settled prior to trial, the facts recited in this opinion are drawn primarily from the allegations of plaintiffs' first amended complaint.

On February 24, 2016, plaintiffs purchased a used motor vehicle for personal use from Iad Hamdi Manna (Manna) doing business as Auto Cruz (Auto Cruz). A salesperson at Auto Cruz told plaintiffs that if they were not happy with the vehicle, they could return it within seven days subject to payment of a $500 restocking fee. The salesperson also told plaintiffs the vehicle came with a 30-day warranty on the engine and transmission.

To complete the purchase, plaintiffs made a down payment of $3,000 and executed a retail installment sale contract to finance the remainder of the purchase price. The contract contained a provision allowing Auto Cruz to cancel the contract if Auto Cruz was unable to assign it to one of the financial institutions with which Auto Cruz regularly does business.

Auto Cruz submitted the contract to defendant Pan American Bank (Pan American) for its approval. However, Pan American declined to accept the loan terms set forth in the contract and, instead, proposed different financing terms for the loan. As a result, on March 1, 2016, Manna informed plaintiffs they would need to return to the dealership to sign a new contract.

By this time, plaintiffs had been experiencing mechanical problems with the vehicle and no longer wanted it. On March 2, 2016, they returned the vehicle to Auto Cruz, requested return of their down payment, and offered to pay Auto Cruz the $500 restocking fee.

Manna spoke with plaintiffs and convinced them that the vehicle was otherwise in good condition and that his mechanic could fix the problems they had been experiencing. Based on those representations, plaintiffs signed a new retail installment sale contract (Contract), and Auto Cruz applied their down payment to the Contract.

On March 7, 2016, plaintiffs took the vehicle to Auto Cruz for the necessary repairs. On March 9, 2016, a representative of Auto Cruz called plaintiffs to let them know the vehicle was ready to be picked up. However, the vehicle continued to malfunction. Two days later, plaintiffs called Manna to advise the vehicle was still not performing properly. They told Manna they wanted to cancel the Contract, but Manna refused.

Unsatisfied, plaintiffs took the vehicle to another dealership to have it diagnosed. The second dealership informed plaintiffs the vehicle had serious mechanical defects that impaired its use, value, and safety. Among other things, one of the vehicle's engine mounts was held up only by a chain and the transmission needed to be replaced. Plaintiffs returned to Auto Cruz with the results of the second dealership's diagnosis of the vehicle, but Auto Cruz again refused to accept return of the vehicle.

On January 11, 2017, plaintiffs filed suit against defendants Manna doing business as Auto Cruz, Pan American, and Philadelphia Indemnity Insurance Company (Philadelphia Indemnity).1 Plaintiffs filed a first amended complaint which set forth new allegations but retained the same causes of action as the original complaint. Among the new allegations was that Pan American had merged with its successor in interest, Beneficial. Beneficial answered the first amended complaint as Pan American's successor in interest.

Plaintiffs' first amended complaint alleged causes of action against Manna and Beneficial for (1) violation of the Consumers Legal Remedies Act (CLRA) ( Civ. Code § 1750, et seq. );2 (2) fraud; (3) negligent misrepresentation; (4) violation of the Song-Beverly Consumer Warranty Act (Song-Beverly) (§ 1790 et seq.); (5) violation of Business & Professions Code section 17200, et seq ; and (6) violation of Vehicle Code section 11713. The first amended complaint alleged a single cause of action against Philadelphia Indemnity for violation of Vehicle Code section 11711.

Each of plaintiffs' claims against Beneficial were premised on the Holder Rule provision contained in the Contract. Per a regulation of the Federal Trade Commission (FTC), the Holder Rule provision must be included in consumer credit contracts. The provision reads:


In addition, the Contract contained an attorney fee provision which reads: "You may have to pay collection costs. You will pay our reasonable costs to collect what you owe, including attorney fees, court costs, collection agency fees and fees paid for other reasonable collection efforts...."

Plaintiffs eventually dismissed Manna from the lawsuit after he purportedly filed for bankruptcy protection. Plaintiffs also dismissed Philadelphia Indemnity from the lawsuit after they arrived at a settlement on the bond claim.

On or about January 24, 2019, Beneficial served plaintiffs with an offer to compromise pursuant to Code of Civil Procedure section 998 which plaintiffs timely accepted. On July 18, 2019, the trial court entered judgment pursuant to the offer. Relevant to this appeal, the offer to compromise, and the resulting judgment, each provided:

"5. Beneficial [ ] will reimburse [p]laintiffs' costs, other than attorney[ ] fees pursuant to Code of Civil Procedure § 1032(b) in the amount determined by the Court according to law and proof.
"6. Beneficial [ ] will reimburse [p]laintiffs' reasonable attorney[ ] fees, if any, in the amount determined by the Court according to law and proof."

On October 4, 2019, plaintiffs filed a motion for attorney fees, costs, and expenses seeking $53,134.50 in attorney fees and $6,629.41 in costs and expenses for a total award of $59,763.91.

On November 25, 2019, the trial court granted plaintiffs' request for costs and denied their request for attorney fees.

An order conforming to the trial court's ruling was issued on December 5, 2019. On December 13, 2019, Beneficial served plaintiffs with notice of entry of the order. On February 11, 2019, plaintiffs timely appealed.


Plaintiffs contend that the trial court erred by denying their motion for attorney fees, that they are entitled to an award of reasonable attorney fees under sections 1459.5, 1717 and 2983.4, and that this court should reject the reasoning of two recent appellate decisions, Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398, 235 Cal.Rptr.3d 842 ( Lafferty ) and Spikener v. Ally Financial, Inc. (2020) 50 Cal.App.5th 151, 263 Cal.Rptr.3d 726 ( Spikener ) which, if followed, would defeat their fee claim. In 2021, a third appellate decision, Pulliam v. HNL Automotive Inc. (2021) 60 Cal.App.5th 396, 274 Cal.Rptr.3d 547 ( Pulliam ), review granted April 28, 2021, S267576,3 issued and held contrary to the holdings in Lafferty and Spikener. Plaintiffs argue we should follow Pulliam. Before this appeal was heard, a fourth appellate decision, Melendez v. Westlake Services, LLC (2022) 74 Cal.App.5th 586, 290 Cal.Rptr.3d 11 ( Melendez ), issued and found Pulliam to be the better reasoned decision. ( Melendez, supra , 74 Cal.App.5th at p. 589, 290 Cal.Rptr.3d 11.)

Upon review, we agree with the result of Pulliam although our reasoning differs from that case in certain respects. We conclude plaintiffs are entitled to an award of attorney fees, reverse the trial court's order denying the same, and remand the case to the court for further proceedings consistent with this opinion.

I. Standard of Review

At issue is the proper interpretation of the Holder Rule provision and several California statutes which authorize the recovery of attorney fees in various situations. " [I]ssues of statutory construction and contract interpretation that do not turn on extrinsic evidence are subject to independent review.’ " ( Lafferty, supra , 25 Cal.App.5th at p. 409, 235 Cal.Rptr.3d 842.) Although attorney fee awards are typically reviewed for abuse of discretion, " "a determination of the legal basis for an attorney fee award is a question of law to be reviewed de novo." [W]here the material facts are largely not in dispute, our review is de novo.’ " ( Orozco v. WPV San Jose, LLC (2019) 36 Cal.App.5th 375, 406, 248 Cal.Rptr.3d 623.) Moreover, " "a disposition that rests on an error of law constitutes an abuse of discretion." " ( Id. at p. 401, 248...

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