TANIA PULLIAM, Plaintiff and Respondent, v. HNL AUTOMOTIVE INC. et al., Defendants and Appellants.
S267576
IN THE SUPREME COURT OF CALIFORNIA
May 26, 2022
Second Appellate District, Division Five B293435; Los Angeles County Superior Court BC633169
Justice Liu authored the opinion of the Court, in which Chief Justice Cantil-Sakauye and Justices Corrigan, Kruger, Groban, Jenkins, and Robie* concurred.
* Associate Justice of the Court of Appeal, Third Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
Opinion of the Court
The Federal Trade Commission’s “Holder Rule” requires consumer credit contracts to include specific language permitting a consumer to assert against third party creditors all claims and defenses that could be asserted against the seller of a good or service. (
Tania Pulliam (Pulliam) purchased a used vehicle from HNL Automotive Inc. (the dealership) pursuant to an installment sales contract that included this notice. The contract was subsequently assigned to TD Auto Finance (TDAF; now merged into TD Bank), which became the “holder” of the
We granted review to address whether “recovery” under the Holder Rule (hereafter sometimes Rule) includes attorney’s fees and limits the amount of fees plaintiffs can recover from holders to amounts paid under the contract. The Courts of Appeal are divided on this issue. (Compare Pulliam, supra, 60 Cal.App.5th at p. 401 [Holder Rule does not limit the attorney’s fees a plaintiff may recovеr] with Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398, 418–419 (Lafferty) [Holder Rule’s limitation on recovery applies to attorney’s fees sought under
We conclude that the Holder Rule does not limit the award of attorney’s fees where, as here, a buyer seeks fees from a holder under a state prevailing party statute. The Holder Rule’s limitation extends only to “recovery hereunder.” This caps fees only where a debtor asserts a claim for fees against a seller and the claim is extended to lie against a holder by virtue of the Holder Rule. Where state law provides for recovery of fees from a holder, the Rule’s history and purpose as well as the Federal Trade Commission’s repeated commentary make clear that nothing in the Rule limits the application of that law.
I.
In July 2016, Pulliam bought a “Certified Pre-Owned” 2015 Nissan Altima from HNL Automotive Inc. pursuant to a retail sales contract that included the Holder Rule Notice (Notice). The dealership advertised the car as having cruise control and six-way powеr-adjustable seats. After buying the car,
In September 2016, Pulliam filed suit against the dealership and TDAF, which had accepted assignment of the contract. She alleged six causes of action based on the dealership’s misconduct, including violation of the CLRA, breach of implied warranty under the Song-Beverly Act, fraud and deceit, negligent misrepresentation, violation of
Following trial in April 2018, a jury found that the dealership failed to adequately package and label the car at issue and that the vehicle failed to conform to the promises of fact made on the label, in violation of the Song-Beverly Act. The jury awarded Pulliam $21,957.25 in damages. The court entered judgment in this amount jointly and severally against the dealership and TDAF.
Pulliam filed a posttrial motion seeking $169,602 in attorney’s fees against both defendants under
The Court of Appeal affirmed the trial court’s award, concluding that the Holder Rule does not limit liability for attorney’s fees. (Pulliam, supra, 60 Cal.App.5th at p. 401.) We granted review.
II.
The Federal Trade Commission (FTC) promulgated the Holder Rule in 1975 in response to rapid growth in consumer installment debt in the United States. (Promulgation of Trade Regulation Rule and Statement of Basis and Purpose, 40 Fed.Reg. 53506–53507 (Nov. 18, 1975); Guidelines on Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, 41 Fed.Reg. 20022 (May 14, 1976).) Before the Holder Rule, a third party who purchased a consumer’s promissory note did so “free and clear of any claim or grievance that the consumer may have with respect to the seller.” (40 Fed.Reg. 53506.) This “holder in due course rule” meant a creditor could seek payment from a buyer оn goods never delivered
The FTC recognized that the application of the holder in due course rule to consumer credit sales was “anomalous” because consumers are not “in an equivalent position [to commercial entities] to vindicate their rights against a payee.” (40 Fed.Reg., supra, at p. 53507.) “Between an innocent consumer, whose dealings with an unreliable seller are, at most, episodic, and a finance institution qualifying as ‘a holder in due course,’ the financer is in a better position both to protect itself and to assume the risk of a seller’s reliability.” (Id. at p. 53509.) The FTC recognized that “[c]reditors and sellers are in a position to engage in meaningful, arms-length, bargaining,” which differentiates them from buyers who sign adhesion contracts with sellers. (Id. at p. 53523.) Allocating the costs of seller misconduct to the creditor makes it much more likely that the “market will be policed” of “unscrupulous mеrchant[s],” that the market will reflect “a more accurate price for consumer goods,” and that “all parties will benefit accordingly.” (Ibid.)
To effect this allocation, the Holder Rule requires that the following Notice appear in consumer credit contracts “[i]n connection with any sale or lease of goods or services to consumers, in or affecting commerce“:
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.
(
In 2015, the FTC requested public comment on “the оverall costs and benefits, and regulatory and economic impact” of the Holder Rule “as part of the agency’s regular review of all its regulations and guides.” (Rules and Regulations Under the Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, 80 Fed. Reg. 75018 (Dec. 1, 2015).) In 2019, following completion of that review, the FTC “determined to retain the Rule in its present form.” (Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, 84 Fed.Reg. 18711 (May 2, 2019) (Rule Confirmation).)
In its Rule Confirmation, the FTC noted that it had received six comments addressing “whether the Rule’s limitation on recovery to ‘amounts paid by
In January 2022, the FTC issued an advisory opinion to address the Holder Rule’s “impact on consumers’ ability to recover costs and attorneys’ fees.” (FTC, Commission Statement on the Holder Rule and Attorneys’ Fees and Costs (Jan. 18, 2022) p. 1 (FTC Advisory Opinion).) The opinion observed that the issue “has arisen repeatedly in court cases, with some courts correctly concluding that the Holder Rule does not limit recovery of attorneys’ fees and costs when state law authorizes awards against a holder, and others misinterpreting the Holder Rule as a limitation on the application of state cost-shifting laws to holders.” (Ibid., fn. omitted.)
III.
Several recent Court of Appeal decisions have considered an award of attorney’s fees in the context of a claim against a seller under the Holder Rule.
In Lafferty, the Laffertys sued the seller of a motor home and Wells Fargo, which had accepted assignment of their installment sales contract. (Lafferty, supra, 25 Cal.App.5th at p. 405.) The parties entered into a stipulated judgment awarding recovery to the Laffertys based on negligence and violation of the CLRA in the amount of $68,000, the “total amount Plaintiffs actually paid toward (or under) their installment contract for the purchase of [the] motorhome.” (Id. at p. 407.) The Laffertys then moved for an award of attorney’s fees and costs. Wells Fargo opposed the motion as exceeding the Holder Rule’s cap on recovery. The trial court awarded the Laffertys costs but denied their request for fees. (Id. at pp. 407–408.) The Court of Appeal affirmed, holding that costs awarded to the Laffertys under
In response to Lafferty, the Legislature enacted
In Spikener, the court considered whether a buyer who prevailed on a CLRA cause of action against a holder could subsequently recover attorney’s fees based on section 1459.5. (Spikener, supra, 50 Cal.App.5th 151.) It assumed that the Holder Rule was ambiguous and determined that the FTC’s interpretation in its Rule Confirmation was entitled to deference. (Id. at p. 159.) The court considered the FTC to have construed the Holder Rule as “limit[ing] 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.” (Id. at p. 162.) The court found that “[t]his demonstrates a clear intent to prohibit states from authorizing a recovery that exceeds this amount on a Holder Rule claim” and concluded that “to the extent section 1459.5 authorizes a plaintiff’s total recovery — including attorney fees — for a Holder Rule claim tо exceed the amount the plaintiff paid under the contract, it directly conflicts with the Holder Rule and is therefore preempted.” (Id. at pp. 162–163.)
In the case before us, the Court of Appeal disagreed with Lafferty’s conclusion that the Holder Rule’s limitation on recovery applies to attorney’s fees. (Pulliam, supra, 60 Cal.App.5th at pp. 412–416.) It also disagreed with Spikener’s conclusion that the FTC’s Rule Confirmation was entitled to deference. (Pulliam, at pp. 416–422.) Because it concluded that “the Holder Rule cap does not include attorney fees within its limit on recovery and that the FTC’s interpretation to the contrary is not entitled to deference,” it found the Holder Rule consistent with section 1459.5 and did “not address whether section 1459.5 independently applies.” (Pulliam, at p. 422.)
The parties’ dispute before us centers on two main arguments. First, TDAF argues that the Holder Rule, by capping “recovery” to “amounts paid by the debtor,” limits a plaintiff’s ability to recover attorney’s fees based on the Rule’s plain language. Pulliam maintains, as did the Court of Appeal, that “recovery” under the Rule does not include attorney’s fees and relies on the regulatory history and purpose of the Rule. Second, TDAF argues that if the meaning of the Rule is ambiguous, the FTC’s interpretation in its Rule Confirmation is entitled to deference and precludes recovery of attorney’s fees. Pulliam contends that under Kisor v. Wilkie (2019) 588 U.S. ___ [139 S.Ct. 2400] (Kisor), the FTC’s interpretation does not warrant deference.
We must exhaust “all the standard tools of interpretation” to determine if a regulation is “genuinely ambiguous” before considering deference to an agency’s own interpretation of its regulation. (Kisor, supra, 588 U.S. at p. ___ [139 S.Ct. at p. 2414].) As explained below, we find that the most persuasive reading of the Rule, in light of its history and purpose, is that its cap on “recovery hereunder” does not include attorney’s fees for which a holder may be liable under state law, as long as the existence of such liability is not due to the Holder Rule extending the seller’s liability for attorney’s fees to the holder. And we need not decide whether the FTC’s interpretation in the Rule Confirmation is entitled to deference because the FTC’s statements on the topic are consistent with our interpretation.
A.
We begin with the text of the Holder Rule. ” ‘We interpret relevant terms in light of their ordinary meaning, while also taking account of any related provisions and the overall structure of the statutory scheme to determine what interpretation best advances the Legislature’s underlying purpose.’ [Citation.] ‘If we find the statutory language ambiguous or subject to more than one interpretation, we may look to extrinsic aids, including legislative history or purpose to inform our views.’ ” (In re A.N. (2020) 9 Cal.5th 343, 351–352.) We “must construe [remedial provisions] broadly, not... restrictively” (Kelly v. Methodist Hospital of So. California (2000) 22 Cal.4th 1108, 1114), ” ‘so as to afford all the relief that their language indicates the Legislature intended to grant’ ” (Skidgel v. California Unemployment Ins. Appeals Bd. (2021) 12 Cal.5th 1, 23). (See Kisor, supra, 588 U.S. at p. ___ [139 S.Ct. at p. 2415] [courts interpreting agency regulations take the ” ‘traditional’ ” approach of ” ‘carefully consider[ing]’ the [regulation’s] text, structure, history, and purpose“].)
In ordinary parlance, the phrase “recovery hereunder by the debtor” might be interpreted to limit a consumer’s recovery for compensatory or consequential damages, i.e., the amount the debtor ultimately receives. (See 40 Fed.Reg., supra, at p. 53526 [“While the wording of the notice is legalistic, we believe that it will be understood by most consumers.“].) Attorney’s fees would not be considered part of a consumer’s recovery because any fees collected end up not with the consumer but with the consumer’s attorney. This interpretation has particular salience in the consumer fraud context where contingency fees are commonplace. When plaintiffs represented under contingency arrangements recover attorney’s fees based on fee-shifting provisions, they are not recouping an amount they have already paid to their attorneys; instead, they are being awarded fees that “belong to the attorneys who labored to earn them.” (Flannery v. Prentice (2001) 26 Cal.4th 572, 575.)
At the samе time, “recovery hereunder by the debtor” could mean any money a debtor receives, even if the money does not come to rest with the debtor. TDAF contends that “[c]ommon usage by courts and in statutes confirms that ‘recovery’ means all ‘recoverable litigation costs,’ and that ‘recoverable litigation costs do include attorney fees.’ ” (Quoting Santisas v. Goodin (1998) 17 Cal.4th 599, 606.) The Court of Appeal in Lafferty similarly relied on the fact that “[c]ourts have used the term ‘recovery’ to include attorney fees and interest awarded as part of a judgment.” (Lafferty, supra, 25 Cal.App.5th at p. 412.) But we do not find instructive the use of the term “recovery” by courts in contexts where the meaning of the term was not at issue.
TDAF also relies on the current version of Black’s Law Dictionary in arguing that the Notice’s language is unambiguous in limiting recovery of attorney’s fees to amounts paid under the contract. Black’s Law Dictionary defines “recovery” as: “1. The regaining or restoration of something lost or taken away.... 2. The obtainment of a right to something (esp. damages) by a judgment or decree.... 4. An amount awarded in or collected from a judgment or decrеe.” (Black’s Law Dict. (11th ed. 2019) p. 1528.) Westlake Services, LLC (Westlake), appearing as amicus curiae, argues that
Neither of these definitions conclusively answers our inquiry. Attorney’s fees are more naturally characterized as something earned or awarded after a party prevails in an action than as a right or property “which has been taken or withheld.” (Black’s Law Dict. (4th rev. ed. 1968) p. 1440.) Moreover, the meaning of “recovery” in the context of the Holder Rule must be considered in light of the words that surround it. The question is whether the Holder Rule’s limitation on “recovery hereunder by the debtor” applies to the circumstances here. (
Finally, TDAF argues that the meaning of the Rule is unambiguous because the Rule “limits a consumer’s ‘recovery,’ ... not by kind, but by amount.” In TDAF’s view, limiting “recovery” to “amounts paid by the debtor hereunder” confirms the “broad sweep” of the word “recovery.” But the limitation on recovery to amounts paid by the debtor under the contract is readily understood to support the opposite conclusion — namely, that the FTC had damages rather thаn attorney’s fees in mind. After all, the quantity of attorney’s fees sought after judgment bears little relationship to the amount of the cap, while the “amounts paid by the debtor” under the contract may often be exactly the quantity sought in damages. (See, e.g., 40 Fed.Reg., supra, at p. 53527 [“In a case of nondelivery, total failure of performance, or the like, we believe that the consumer is entitled to a refund of monies paid on account.“].)
B.
Because the language of the Rule is ambiguous with regard to the issue before us, we turn to extrinsic sources. (See, e.g., Gardebring v. Jenkins (1988) 485 U.S. 415, 428, fn. 14 [examining regulation’s adoption history].) We look first to materials shedding light on the Rule’s history and purpose before considering the agency’s own interpretation of the Rule in its 2019 and 2022 statements. (Kisor, supra, 588 U.S. at p. ___ [139 S.Ct. at p. 2415].)
In examining the history of the Holder Rule, we observe that attorney’s fees are absent from the FTC’s discussions of what constitutes recovery under the Rule until its 2019 Rule Confirmation. The regulatory materials issued prior to the Rule Confirmation do not refer to attorney’s fees. Instead, they suggest that the FTC had damages in mind when it referred to “recоvery” in the Holder Rule Notice. In its Statement of Basis and Purpose, the FTC referred to the recovery of consumers’ damages when discussing why affirmative suits by consumers against sellers were an inadequate remedy for seller misconduct. (40 Fed.Reg., supra, at pp. 53511–53512 [“The amount of a consumer’s damages in such a case may be substantial in real terms, ... but such damages are rarely enough to attract competent representation.“].) And in surveying the record, the FTC was troubled by the “magnitude or extent of consumer injury from forfeited claims and defenses in credit sale transactions.” (Id. at p. 53510.) When discussing the affirmative actions against creditors that would be available under the Holder Rule, the FTC referred repeatedly to a return of monies paid on account. (See id. at p. 53524 [“[A] consumer can ... maintain an affirmative action against a creditor who has received payments for a return of monies paid on account.“]; id. at p. 53527 [“In a case of nondelivery, total failure of performance, or the like, we believe that the consumer is entitled to a refund of monies paid on account.“].)
Guidance issued by the FTC on the day the Rule went into effect suggests that “consequential damages and the like” are considered “recovery” under the Holder Rule and available up to the “amount[] paid by the debtor” under the contract. (41 Fed.Reg., supra, at p. 20023.) While the guidance notes that it has “not been formally reviewed or adopted by the Commission” (id. at p. 20022), the FTC later highlighted its statements without disagreement in its 2019 Rule Confirmation. (84 Fed.Reg., supra, at p. 18713, fn. 30; see Kisor, supra, 588 U.S. at p. ___ [139 S.Ct. at p. 2416] [published staff guidance can be an appropriate source of insight], citing Ford Motor Credit Co. v. Milhollin (1980) 444 U.S. 555, 566, fn. 9, 567, fn. 10.) The guidance said: “[T]he consumer may assert, by way of claim or defense, a right not to pay all or part of the outstanding balance owed the creditor under the contract; but the consumer will not be entitled to receive from the creditor an affirmative recovery which exceeds the amounts of money the consumer has paid in. [¶] Thus, if a seller’s conduct gives rise to damages in an amount exceeding the amounts paid under the contract, the consumer may (1) sue to liquidate the unpaid balance owed to the creditor and to recover the
During congressional testimony shortly after the Rule’s passage, the acting director of the FTC’s Bureau of Consumer Protection similarly described the “one express cautionary limitation on a creditor’s exposure[:] The consumer may never recover consequential damages under the provision which exceed the amount of the credit contract.” (Consumer Claims and Defenses, Hearings before House Com. on Interstate and Foreign Commerce, Subcom. on Consumer Protection and Finance, 94th Cong., 2d Sess., at p. 23 (1976).) “The cоnsumer, in all cases, is limited to the exact amount of legal damages. Only when a consumer’s legal damages exceed the amounts he still owes a creditor under the contract will the consumer be in a position to seek a return of all or part of the monies he has already paid.” (Ibid.)
Amici curiae in support of TDAF argue that the FTC’s repeated references to damages in its Statement of Basis and Purpose demonstrate that “if the FTC had intended to limit only damage awards it would have rewritten the Rule’s second sentence thus: ‘Recovery of damages hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.’ ” (Italics added.) Amici curiae argue that the FTC “deliberately began the Holder Rule’s second sentence with a different word having a broader meaning.” But they cite nothing in the regulatory history of the Rule that would lead us to so conclude; there is no discussion of recovery of costs, attorney’s fees, or anything but damages. Had the FTC intended its Rule to sweep so broadly, we would expect to see some discussion of other types of awards, not just damages.
In sum, the FTC had damages in mind when limiting recovery under the Rule, and there is no indication that attorney’s fees were intended to be included within its scope.
The FTC was aware of the diversity among states when it came to consumer protection and other laws. (See, e.g., 40 Fed.Reg., supra, at pp. 53510, 53512, 53520–53521.) In California, “attorney’s fees qua attorney’s fees” — that is, the fees “attributable to the bringing of the . . . action itself” — are not an element of damages. (Brandt v. Superior Court (1985) 37 Cal.3d 813, 818, 817.) Instead, they are defined as “costs.” (
C.
The Holder Rule’s regulatory history also demonstrates the FTC’s expectation that buyers would be able to assert defenses against creditor claims based on the Holder Rule as well as pursue affirmative litigation against creditors for seller misconduct, which would be financially infeasible for many buyers if attorney’s fees were not recoverable.
The Holder Rule was designed to abrogate “[t]he insulation obtained by creditors in consumer transactions” and to address “the loss of legitimate consumer claims” by the application of the holder in due course doctrine. (40 Fed.Reg., supra, at pp. 53509–53510.) The FTC’s “primary concern” in promulgating the Rule was “the distribution or allocation of costs occasioned by seller misconduct in credit sale transactions.” (Id. at p. 53522.) Rather than allocate these costs to the consumer, as the holder in due course rule had done, the new rule recognized that “the creditor is always in a better position than the buyer to return seller misconduct costs to sellers, the guilty party,” аnd was designed to “compel[] creditors to either absorb seller misconduct costs or return them to sellers.” (Id. at p. 53523.)
The FTC recognized that “the problems associated with the holder in due course doctrine are most keenly felt by the poor in our society ....” (40 Fed.Reg., supra, at p. 53510.) It considered the challenges, including high legal costs, for consumers associated with bringing suits against sellers as an impetus to adopting the new rule: “[A]ggrieved consumers are often not in a position to take advantage of the legal system. Where seller misconduct in a credit sale transaction has given rise to consumer injury, the consumer is theoretically in a position to seek damages or other relief from the seller in court.... The amount of a consumer’s damages in such a case may be substantial in real terms ... but such damages are rarely enough to attract competent representation. The sheer costs of recourse to the legal system to vindicate a small claim, together with the days of work that must be missed in order to prosecute such a claim to judgment, render recourse to the legal system uneconomic. In addition, the worst sellers are likely to be the most
The FTC recognized similar costs associated with defending against a creditor’s suit for payment under the old rule: When responding to a creditor’s assertion of ” ‘holder in due course status,’ ” a consumer’s “success depends on obtaining skilled counsel; and heavy expenses must be incurred to obtain the discovery and documentation needed to show concerted efforts on the part of the seller and creditor.” (40 Fed.Reg., supra, at p. 53512.) The FTC highlighted a comment by a private attorney describing the experience of оne Northern Virginia family that was “unable to provide themselves with counsel” in defending against a claim by a creditor because of the legal costs “necessary to establish a link between the lender, the financier and the seller of the goods. Most attorneys, especially in a case of this kind where ‘new ground is being plowed[,]’ require a sizeable deposit for costs . . . . Additionally, [] the total attorney’s fee in a matter such as this may be well over $500.00. When faced with this set of realistic facts most clients who get into such a situation in the first place are unable to provide themselves with protection in the form of adequate counsel.” (Ibid.)
Based in part on these challenges, the FTC determined that a creditor “is always in a better position than the buyer to return seller misconduct costs to sellers . . . because (1) he engages in many transactions where consumers deal infrequently; (2) he has access to a variety of information
systems which are unavailable to consumers; (3) he has recourse to contractual devices which render the routinе return of seller misconduct costs to sellers relatively cheap and automatic; and (4) the creditor possesses the means to initiate a lawsuit and prosecute it to judgment where recourse to the legal system is necessary.” (40 Fed.Reg., supra, at p. 53523, italics added.)
The Holder Rule reallocates seller misconduct costs by placing the creditor “in the shoes of the seller,” subjecting the creditor “to all claims and defenses which the debtor could assert against the seller.” (41 Fed.Reg., supra, at p. 20023, italics added, capitalization omitted.) Thus, the FTC provided two ways for buyers to effect this reallocation: by “defend[ing] a creditor suit for payment of an obligation by raising a valid claim against the seller as a set-off” or by “maintain[ing] an affirmative action against a creditor who has received payments for a return of monies paid on account.” (40 Fed.Reg., supra, at p. 53524.) The FTC expressly rejected requests to limit the rule to
The Holder Rule therefore took shape with the FTC contemplating affirmative suits while expressly recognizing that the cost of suit in a case involving consumer damages may “render recourse to the legal system uneconomic.” (40 Fed.Reg., supra, at p. 53512.) It nonetheless expected affirmative claims against sellers and creditors — not just defenses to debt collection — to help allocate risks and rationalize the market. Given these expectations, it seems unlikely that the FTC intended without comment or explanation tо include attorney‘s fees in its limitation on creditor liability under the Rule. A consumer‘s ability to obtain attorney‘s fees often proves critical for consumers to access the judicial system. It is true that by obviating the need for lengthy legal proceedings over a creditor‘s status, the Rule might decrease the legal costs consumers must incur. But it is unlikely that this would materially alter many consumers’ ability to vindicate their rights given the high costs that remain “to vindicate a small claim.” (40 Fed.Reg., supra, at p. 53512; see, e.g., Assem. Com. on Judiciary, Analysis of Assem. Bill No. 1821 (2019–2020 Reg. Sess.) as introduced Mar. 6, 2019, p. 6 [“The vast majority of customers who pay for items such as cars and furniture in monthly installments can‘t afford to hire attorneys.“].) Were attorney‘s fees part of the Holder Rule‘s limit on recovery, the effective result for many, if not most, consumers would be the same as their options were under the holder in due course rule that the FTC sought to supplant.
TDAF argues that if attorney‘s fees were “so central to the Holder Rule‘s success,” the Rule‘s text or guidance would have “expressly remove[d] attorney‘s fees from the Rule‘s use of the otherwise broad term ‘recovery.‘” But the history of the Rule leaves us no reason to believe that the FTC thought it was addressing attorney‘s fees at all by reference to “recovery.” To the contrary, given the FTC‘s discussion of the legal costs facing consumers, one would expect the FTC to have expressly stated a limitation on collection of attorney‘s fees if that is what it had intended the Rule to encompass.
TDAF also argues that recovery of uncapped attorney‘s fees would be contrary to the Rule‘s express constraint on liability and its consumer protection purposes because it could jeopardize the availability of consumer
D.
In any event, the history of the Holder Rule indicates that the FTC intended the Rule to serve as a national floor, not to restrict the application of state laws authorizing additional awards of damages or attorney‘s fees against a seller or holder. (See FTC, FTC Finds Broad Compliance Among Auto Dealers with Rule That Protects Consumers with Car Loans (May 16, 2011) [“Without the Rule, consumers would not have this protection in states that preclude them from asserting against lenders the claims and defenses they have against dealers if the lenders bought the credit contracts in good faith and without knowledge of these claims and defenses.“].)
In promulgating the Rule, the FTC detailed the patchwork of state laws in existence and anticipated further state action. (40 Fed.Reg., supra, at p. 53521.) Around the time the FTC was considering the Holder Rule, Congress created the National Commission on Consumer Finance (NCCF) “to study and make recommendations on the need for further regulation of the consumer finance industry.” (Pub.L. No. 90-321 (May 29, 1968) 82 Stat. 146.) In the FTC‘s initial proceedings, it declined to “withhold action until the report of the [NCCF] was completed and published.” (40 Fed.Reg., supra, at p. 53521.) In promulgating the Rule, the FTC again declined to wait until “the individual states [] have an opportunity to enact the NCCF recommendations.” (Ibid.) Importantly, the NCCF not only “recommended abolition of the holder in due course doctrine,” as the FTC sought to accomplish with the Holder Rule, but also “urged restrictions on remedies such as garnishment, repossession, and wage assignment,” and “recommended abolition of . . . confessions of judgment[] and harassing tactics in debt collections.” (NCCF, Consumer Credit in the United States (Dec. 31, 1972) p. iii.) The FTC clearly anticipated that states implementing NCCF recommendations could and would take actions more proteсtive than the Holder Rule.
In promulgating the Rule, the FTC also addressed the argument that “state action has made Commission action unnecessary.” (40 Fed.Reg., supra, at
The staff guidance reaffirms that the FTC contemplated that state law might offer greater protections for consumers. It describes how under the Notice, “[t]he creditor stands in the shoes of the seller” subject to “an important limitation on the creditor‘s liability.” (41 Fed.Reg., supra, at p. 20023.) The last sentence of the Notice — that “recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder” — “limits the consumer to a refund of monies paid under the contract, in the event that an affirmative money recovery is sought.” (Ibid., capitalization omitted.) But, it explained, “[t]he limitation on affirmative recovery does not eliminate any other rights the consumer may have as a matter of local, state, or federal statute. The words ‘recovery hereunder’ which appear in the text of the Notice refer specifically to a recovery under the Notice. If a larger affirmative recovery is available against a creditor as a matter of state law, the consumer would retain this right.” (Ibid., italics added.) The FTC highlighted these statements without disagreement in its 2019 Rule Confirmation. (84 Fed.Reg., supra, at p. 18713, fn. 30.) Where the FTC has disagreed with the guidance, it has expressly said so. (See FTC, FTC Staff Issues Note on Holder Rule and Large Transactions (Apr. 14, 2021) [“The new staff note corrects an erroneous statement in [the] 1976 pamphlet by FTC staff that the Holder Rule did not apply to transactions larger than $25,000.“].)
This understanding of the Holder Rule also flows naturally from the text of the Notice which provides that “recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.” (
TDAF argues that the Rule “does not allow uncapped attorney‘s fees because doing so would run contrary to the Rule‘s goal of efficiently allocating the risks of seller misconduct without making creditors the guarantors of sellers’ performance.” Westlake similarly maintains that creditor
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. In repudiating the holder in due course doctrine and expanding creditor liability up to a point, the FTC made clear it was setting a national floor, not a ceiling that states may not exceed. It cited several states’ preexisting consumer protection statutes — including California‘s Unruh Act (
In sum, the FTC was cognizant of the challenges facing consumers bringing suit, including high legal costs, and it intended and expected affirmative suits by consumers to help correct the market failures it identified. In light of this history, it would be antithetical to the purpose of the Holder Rule to conclude that the FTC intended to “render . . . uneconomic” one of the two ways it providеd to address the concerns it sought to alleviate by implicitly limiting a consumer‘s ability to obtain attorney‘s fees. (40 Fed.Reg., supra, at p. 53512.) The FTC was focused on consumers’ recovery of damages and intended the Rule to provide a minimum, not maximum, liability rule for the nation. In light of the FTC‘s contemporaneous explanation of the Rule‘s purposes, we find it unlikely that the FTC intended the Rule‘s limitation on recovery to apply to attorney‘s fees sought by a consumer from a holder under state law.
TDAF argues that to the extent the Holder Rule‘s language is ambiguous, we should defer to the FTC‘s interpretation. But whether or not deference is warranted, the result is the same in this case because, as we now explain, the FTC‘s interpretation in its 2019 Rule Confirmation, insofar as it relates to what qualifies as “recovery hereunder,” accords with our own.
The FTC wrote that “if a federal or state law separately provides for recovery of attorneys’ fees independent of claims or defenses arising from the seller‘s misconduct, nothing in the Rule limits such recovery. Conversely, if the hоlder‘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.” (84 Fed.Reg., supra, at p. 18713.)
We understand these statements to mean that if there is no federal or state law authorizing fees against the holder, a buyer cannot use the Holder Rule to secure from the holder a claim for fees against the seller in excess of amounts paid on the contract. It is significant that the FTC uses the phrase “if the holder‘s liability for fees is based on claims against the seller that are preserved by the Holder Rule Notice.” (84 Fed.Reg., supra, at p. 18713, italics added.) The sentence that immediately follows likewise provides: “Claims against the seller for attorneys’ fees or other recovery may also provide a basis for set off against the holder that reduces or eliminates the consumer‘s obligation.” (Ibid., italics added.) In other words, the FTC‘s interрretation is that the Holder Rule‘s cap on recovery applies to attorney‘s fees where a plaintiff‘s claim to attorney‘s fees lies against a seller and, by virtue of the Holder Rule, is extended to lie against third party creditors. It does not apply where the claim for fees lies against the third party creditor in the first instance. If state law authorizes fees against a holder, the FTC agrees that the Holder Rule places no limitation on their recovery. In such circumstances, it is of no moment that the buyer‘s substantive claims against the holder may be related to the seller‘s misconduct.
TDAF interprets the Song-Beverly Act‘s fee-shifting provision to allow a prevailing party buyer to recover attorney‘s fees from the holder “based on claims against the seller that are preserved by the Holder Rule Notice” (84 Fed.Reg., supra, at p. 18713) because TDAF was only brought into the suit based on Pulliam‘s claims against the dealership that were extended to lie against TDAF under the Holder Rule. But Pulliam‘s claim for attorney‘s fees against TDAF is based on
The parties do not dispute that Pulliam could pursue an action under the Song-Beverly Act against TDAF because of the Holder Rule. (See
This understanding of the Rule and the Rule Confirmation is in agreement with a recent Advisory Opinion issued by the FTC, which states that “the Holder Rule does not limit recovery of attorneys’ fees and costs when state law authorizes awards against a holder.” (FTC Advisory Opn., supra, at p. 1.) The opinion further explains that “whеther costs and attorneys’ fees may be awarded against the holder . . . is determined by the relevant law governing costs and fees,” and “[n]othing in the Holder Rule states that application of [prevailing party statutes] to holders is inconsistent with Section 5 of the FTC Act or that holders should be wholly or partially exempt from these laws.” (Id. at p. 2.) “Further, if the applicable law requires or allows costs or attorneys’ fee awards against a holder, the Holder Rule does not impose a cap on such an award. The sentence in the Holder Rule Notice that limits
The FTC gave the example of a consumer authorized to recover fees from parties that unsuccessfully oppose the consumer‘s claims. “In this scenario,” which is squarely on point, “the . . . fee award is separate and supported by a law that is independent of the Holder Rule. Thus, the Holder Rule Notice does not limit . . . attorneys’ fees that the applicable law directs or permits a court to award against a holder because of its role in litigation.” (FTC Advisory Opn., supra, at p. 3.) It is only where a “consumer is awarded fees in a suit solely against the seller, or the law allows awards only against a seller that has engaged in specified conduct,” that “the seller‘s liability for . . . fees may be raised against the holder because of the Holder Rule Notice“; in that case, the Holder Rule “authorizes the consumer to recover such an award from the holder up to the amount paid.” (Ibid.)
TDAF argues that the FTC Advisory Opinion “lacks any persuasive effect,” citing Christensen v. Harris County (2000) 529 U.S. 576, 587. But the FTC‘s interpretation of the Rule and the Rule Confirmation is consistent with the Rule‘s text, history, and purpose, including the FTC‘s repeated statements that it did not intend to interfere with state laws authorizing additional awards. (See 40 Fed.Reg., supra, at p. 53521; 41 Fed.Reg., supra, at p. 20023; 84 Fed.Reg., supra, at p. 18713.)
It is clear that the FTC contemplated that state law might offer greater protections for consumers and that these protections might be accompanied by recovery in excess of the amounts paid on the contract. We have found no reason to interpret the Rule‘s limitation on “recovery hereunder” to extend more broadly than its plain language suggests or more broadly than the FTC intended. Where state law provides for attorney‘s fees against a holder, nothing in the Rule prevents their award to the full extent provided by state law. We disapprove of Lafferty v. Wells Fargo Bank, N.A., supra, 25 Cal.App.5th 398 and Spikener v. Ally Financial, Inc., supra, 50 Cal.App.5th 151 to the extent they are inconsistent with this opinion.
We affirm the judgment of the Court of Appeal.
LIU, J.
We Concur:
CANTIL-SAKAUYE, C. J.
CORRIGAN, J.
KRUGER, J.
GROBAN, J.
JENKINS, J.
ROBIE, J.*
* Associate Justice of the Court of Appeal, Third Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.