Spikener v. Ally Fin., Inc.

• Decision Date: 09 June 2020
• Docket Number: A157301
• Citation: 263 Cal.Rptr.3d 726,50 Cal.App.5th 151
• Parties: Damon SPIKENER, Plaintiff and Appellant, v. ALLY FINANCIAL, INC., Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

50 Cal.App.5th 151

263 Cal.Rptr.3d 726

Damon SPIKENER, Plaintiff and Appellant,

v.ALLY FINANCIAL, INC., Defendant and Respondent.

A157301

Court of Appeal, First District, Division 5, California.

Filed June 9, 2020

Law Office of Kevin Faulk and Kevin M. Faulk, Santa Clara; Rosner, Barry & Babbitt, Hallen D. Rosner, Arlyn L. Escalante, San Diego, and Tsolik Kazandjian, for Plaintiff and Appellant.

Severson & Werson, John B. Sullivan, Andrew S. Elliott, and Jan T. Chilton, San Francisco, for Defendant and Respondent.

SIMONS, J.

Title 16, section 433.2 of the Code of Federal Regulations (the Holder Rule), promulgated by the Federal Trade Commission (FTC), 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."

Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398, 410–414, 235 Cal.Rptr.3d 842 (Lafferty ) held that the limitation on recovery contained in the second sentence of the Holder Rule notice applies to attorney fees a debtor seeks to recover pursuant to a claim asserted under the Holder Rule. In other words, Lafferty held 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. After Lafferty issued, the FTC construed the Holder Rule in the same manner. In response to Lafferty , the California Legislature enacted Civil Code section 1459.5,¹ effectively providing, in part, that the Holder Rule's limitation on recovery does not apply to attorney fees.

We conclude the FTC's construction of the Holder Rule is entitled to deference. We further conclude that, 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. Accordingly, when a debtor asserts a claim against a holder pursuant to the Holder Rule, the debtor's recovery—including any attorney fees based on the Holder Rule claim—cannot exceed the amount the debtor paid under the contract.

BACKGROUND

In February 2018, Damon Spikener (Plaintiff) filed a complaint alleging that in 2016, he purchased a car from Premier Automotive of Oakland, LLC (Seller) by means of a credit sales contract (the Contract). At the time of the purchase, Seller did not inform Plaintiff that the car had been in a major collision resulting in a severe reduction in its value. After the purchase, but before Plaintiff learned about the collision, the Contract was assigned to Ally Financial, Inc. (Ally). The Contract included the notice required by the Holder Rule.

Plaintiff sued Ally under the Consumers Legal Remedies Act (§§ 1750–1784; hereafter CLRA), based on Seller's misrepresentations about the car's condition. In August 2018, the parties entered into a settlement agreement in which Ally agreed to rescind the Contract and pay Plaintiff a sum equal to the amount he had paid under the Contract, approximately $3,500. The settlement agreement preserved Plaintiff's claim for attorney fees and declared Plaintiff the prevailing party for purposes of such a claim, but otherwise preserved Ally's right to oppose a fee motion.

Plaintiff filed a fee motion, seeking more than $13,000 in attorney fees pursuant to CLRA's fee shifting provision ( § 1780, subd. (e) ).² The trial court denied the motion, finding Plaintiff was not entitled to fees under Lafferty, supra, 25 Cal.App.5th 398, 235 Cal.Rptr.3d 842. This appeal followed.

DISCUSSION

I. The Holder Rule

The parties first dispute whether Lafferty correctly construed the Holder Rule's limitation on recovery.

A. Background

"The FTC promulgated the Holder Rule in 1975 as a consumer protection measure to abrogate the holder in due course rule for consumer installment sale contracts that are funded by a commercial lender. [Citations.] ‘Under the holder in due course principle, the creditor could "assert his right to be paid by the consumer despite misrepresentation, breach of warranty or contract, or even fraud on the part of the seller, and despite the fact that the consumer's debt was generated by the sale." ’ [Citation.] ‘Before the FTC rule, if a seller sold goods on credit and transferred the credit contract to a lender, the lender could enforce the buyer's promise to pay even if the seller failed to perform its obligations under the sales contract. Similarly, despite a seller's breach, the buyer was obligated to pay the lender under a consumer loan contract that directly financed the purchase of goods or services from the seller.’ " (Lafferty, supra, 25 Cal.App.5th at pp. 410–411, 235 Cal.Rptr.3d 842.)

" ‘ " ‘In abrogating the holder in due course rule in consumer credit transactions, the FTC preserved the consumer's claims and defenses against the creditor-assignee. The FTC rule was therefore designed to reallocate the cost of seller misconduct to the creditor. The commission felt the creditor was in a better position to absorb the loss or recover the cost from the guilty party—the seller.’ [Citation.]" ’ [¶] In addition to preventing the creditor from continuing to collect on a debt for a defective product or deficient service, the FTC also provided consumers with a new cause of action against their creditors. This new cause of action allows consumers to assert against the creditors "all claims and defenses which the debtor could assert against the seller of goods or services" to which the Holder Rule applies. [¶] This new cause of action, however, was expressly constrained. The Holder Rule language delineates the new cause of action by declaring: ‘RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.’ ( 40 Fed. Reg. 53506 (Nov. 18, 1975) ; 16 C.F.R. § 433.2 (2018).)" (Lafferty, supra, 25 Cal.App.5th at pp. 411–412, 235 Cal.Rptr.3d 842.)

B. Lafferty

In Lafferty , the plaintiffs bought a vehicle under an installment contract that was subsequently assigned to a holder.

(Lafferty, supra, 25 Cal.App.5th at p. 405, 235 Cal.Rptr.3d 842.) The plaintiffs sued the holder pursuant to the Holder Rule, asserting claims for negligence and under the CLRA (additional claims were dismissed by the court). (Id. at pp. 406–407, 235 Cal.Rptr.3d 842.) The plaintiffs and the holder entered into a settlement agreement pursuant to which the holder paid the plaintiffs the amount the plaintiffs had paid under the installment contract. (Id. at p. 407, 235 Cal.Rptr.3d 842.) The plaintiffs moved for attorney fees, and the trial court denied fees as barred by the Holder Rule's limitation on recovery in excess of the amount paid by the debtor under the assigned contract. (Id. at p. 408, 235 Cal.Rptr.3d 842.)

Lafferty analyzed the Holder Rule's limitation on recovery by looking at its three component parts: "recovery," "shall not exceed amounts paid by the debtor," and "hereunder." (Lafferty, supra, 25 Cal.App.5th at pp. 412–413, 235 Cal.Rptr.3d 842.) It found "[t]he term ‘recovery’ is broad and regularly used to include compensatory damages, punitive damages, attorney fees, and costs." (Id. at p. 412, 235 Cal.Rptr.3d 842.) Lafferty considered the FTC's statements about the phrase "shall not exceed amounts paid by the debtor," made at the time it promulgated the Holder Rule and shortly thereafter. (Id. at pp. 412–413, 235 Cal.Rptr.3d 842.) Based on these comments, Lafferty reasoned, " ‘the purpose of this language is clearly to "not permit a consumer to recover more than he [or she] has paid...." [Citations.] A rule of unlimited liability would place the creditor in the position of an insurer or guarantor of the seller's performance.’ " (Id. at p. 413, 235 Cal.Rptr.3d 842.) With the word "hereunder," the Lafferty court found, based in part on statements made by the FTC shortly after promulgating the Holder Rule, "the FTC indicated the Holder Rule constraint does not apply to independent causes of action accruing under state and local law.... However, recovery under the Holder Rule is capped to amounts paid regardless of additional recovery that may be independently available under state or local law." (Id. at p. 413, 235 Cal.Rptr.3d 842.) Lafferty concluded: "To sum up, the language of the Holder Rule plainly defines the amount subject to the rule broadly by using the word ‘recovery’ to include more than just compensatory damages but narrows the amount that may be recovered to those monies actually paid by the consumer under the contract. And the Holder Rule constraint on recovery does not apply to separate causes of action that might exist independently under state or local law.

However, a consumer cannot recover more under the Holder Rule cause of action than what has been paid on the debt regardless of what kind of a component of the recovery it might be—whether compensatory damages, punitive damages, or attorney fees." (Id. at p. 414, 235 Cal.Rptr.3d 842.)³

C. The FTC's Confirmation of the Holder Rule

In 2015, the FTC requested public comments on "the overall costs and benefits, and regulatory and economic impact, of" the Holder Rule. ( 80 Fed.Reg. 75018 (Dec. 1, 2015).) In 2019—after Lafferty issued—the FTC issued a confirmation of the Holder Rule (the Rule Confirmation). ( 84 Fed.Reg. 18711 (May 2, 2019).)

As relevant here, the Rule Confirmation noted that several of the comments received "addressed whether the Rule's limitation on recovery to ‘amounts paid by the debtor’ allows or should allow consumers to recover attorneys’ fees above that cap ...." (84 Fed.Reg., supra, at p. 18713.) After discussing the substance of the comments, the Rule Confirmation provided as follows: "We conclude that if a federal or state law...