DAMON SPIKENER, Plaintiff and Appellant, v. ALLY FINANCIAL, INC., Defendant and Respondent.
A157301
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION FIVE
Filed 6/9/20
CERTIFIED FOR PUBLICATION; (Alameda County Super. Ct. No. HG18893481)
Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398, 410–414 (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
We conclude the FTC‘s construction of the Holder Rule is entitled to deference. We further conclude that, to the extent
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 (
Plaintiff filed a fee motion, seeking more than $13,000 in attorney fees pursuant to CLRA‘s fee shifting provision (
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.)
” ’ ” ‘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);
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.) 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.) 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.) 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.)
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.) 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.) 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.) 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.) 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.) 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.)3
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 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 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. 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. The Commission does not believe that the record supports modifying the Rule to authorize recovery of attorneys’ fees from the holder, based on the seller‘s conduct, if that recovery exceeds the amount paid by the consumer.” (Ibid.)
D. Analysis
Plaintiff attacks Lafferty‘s reasoning and urges us to disagree with it. We need not address Plaintiff‘s challenges to Lafferty because we conclude the Rule Confirmation is dispositive on the Holder Rule‘s application to attorney fees.
“Because we are applying a federal [regulation], we follow rules of . . . construction enunciated by the United States Supreme Court.” (Kilroy v. Superior Court (1997) 54 Cal.App.4th 793, 801.) The United States Supreme Court recently reaffirmed, and discussed the limitations of, the doctrine by which federal courts “defer[] to agencies’ reasonable readings of genuinely ambiguous regulations,” known as “Auer deference.” (Kisor v. Wilkie (2019) 139 S.Ct. 2400, 2408 (Kisor).) The Court explained, “a court should not afford Auer deference
The FTC‘s construction of the Holder Rule is a reasonable one, for the reasons set forth in Lafferty, supra, 25 Cal.App.5th at pages 410–414. We will assume, without deciding, that Plaintiff‘s construction is also reasonable, rendering the regulation ambiguous. The Rule Confirmation was issued by the FTC and published in the Federal Register, and was indisputably the FTC‘s official position. Interpretation of the Holder Rule, which provides that taking a consumer credit contract without the prescribed language is an unfair or deceptive act or practice, falls within the substantive expertise of the FTC. (See
Plaintiff argues a claim for CLRA attorney fees against a holder is “independent of claims or defenses arising from the seller‘s misconduct” (the Rule Confirmation, 84 Fed. Reg., supra, at p. 18713), and therefore not limited by the Holder Rule‘s limitation on recovery, because it is based on the holder‘s litigation conduct rather than any conduct by the seller. We disagree. The CLRA‘s fee-shifting provision authorizes a fee award “to a prevailing plaintiff in litigation filed pursuant to this section.” (
Accordingly, the Holder Rule‘s limitation on recovery applies to attorney fees based on a claim asserted pursuant to the Holder Rule, such that a plaintiff‘s total recovery on a Holder Rule claim—including attorney fees—cannot exceed the amount paid by the plaintiff under the contract.
II. Section 1459.5
Plaintiff next relies on
Ally argues
” ‘The supremacy clause of the United States Constitution establishes a constitutional choice-of-law rule, makes federal law paramount, and vests Congress with the power to preempt state law.’ [Citations.] . . . Preemption is foremost a question of congressional intent: did Congress, expressly or implicitly, seek to displace state law? [Citations.] [¶] . . . The burden is on . . . the party asserting preemption[] to demonstrate [preemption] applies.” (Quesada v. Herb Thyme Farms, Inc. (2015) 62 Cal.4th 298, 307–308 (Quesada).) “[B]oth federal statutes and regulations may have preemptive effect.” (Olszewski v. Scripps Health (2003) 30 Cal.4th 798, 814 (Olszewski).)
“[C]onflict preemption will be found when simultaneous compliance with both state and federal directives is impossible.” (Viva! Internat. Voice for Animals v. Adidas Promotional Retail Operations, Inc. (2007) 41 Cal.4th 929, 936; see also Olszewski, supra, 30 Cal.4th at p. 815 [“state law actually conflicts with federal law ‘where it is impossible for a private party to comply with both state and federal requirements’ “].) For example, in Olszewski, our Supreme Court considered whether state laws “authorizing a health care provider to assert and collect on a lien for the full cost of its services against ‘any judgment, award, or settlement obtained by’ a Medicaid beneficiary” were preempted by federal law. (Olszewski, at p. 804.) The Supreme Court concluded that federal Medicaid statutes and regulations “limit provider collections from a Medicaid beneficiary to, at most, the cost-sharing charges allowed under the state plan, even when a third party tortfeasor is later found liable for the injuries suffered by that beneficiary.” (Id. at p. 820.) Because the state laws “allow the provider to recover more than these cost-sharing charges from the beneficiary, they cannot coexist with federal law” and therefore are preempted. (Id. at pp. 820–821.)
In contrast, in People v. Guiamelon (2012) 205 Cal.App.4th 383 (Guiamelon), the Court of Appeal considered whether a state statute making it unlawful for physicians to offer kickbacks for patient referrals, which had no specific intent requirement, conflicted with the federal Medicaid antikickback statute, which required such violations be committed knowingly or willfully. (Id. at pp. 390, 396, 398–399.) The Court of Appeal reasoned that the different scienter requirement “is not dispositive. Conflict preemption is not demonstrated simply because a state statute prohibits what is allowed under a federal statute.” (Id. at p. 399.) Instead, the Court of Appeal found significant the enforcing federal agency‘s position that ” ‘conduct that is lawful under the federal anti-kickback statute or this regulation may still be illegal under State law.’ ” (Id. at p. 406, added italics omitted.) Under this interpretation, the state statute did not conflict with, and was not preempted by, the federal law. (Id. at pp. 407–408.)
The FTC‘s interpretation of the Holder Rule informs our preemption analysis. (See Olszewski, supra, 30 Cal.4th at p. 821 [if federal law is ambiguous, an agency‘s interpretation, if entitled to deference, can clarify whether the state law “conflict[s] with federal law“]; Guiamelon, supra, 205 Cal.App.4th at p. 405 [“In determining whether we may infer a Congressional intent to preempt state law, we may rely on a federal agency‘s interpretation of the relevant statute: ’ “In general, an agency‘s interpretation of statutes within its administrative jurisdiction is given presumptive value as a consequence of the agency‘s special familiarity and presumed expertise with . . . legal and regulatory issues.” ’ “].) As discussed above, the FTC has construed the Holder Rule‘s limitation on recovery to limit 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. This demonstrates a clear intent to prohibit states from authorizing a recovery that exceeds this amount on a Holder Rule claim.
Of course, the Rule Confirmation expressly preserves a state‘s ability to authorize attorney fees against holders independent of Holder Rule claims, and clarifies that such fee claims are not constrained by the Holder Rule‘s limitation on recovery. (84 Fed. Reg., supra, at p. 18713 [“[I]f a . . . 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.“].) But where “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.” (Ibid.)
Accordingly, we conclude that, to the extent
DISPOSITION
The judgment is affirmed. Ally is awarded its costs on appeal.
SIMONS, J.
We concur.
JONES, P.J.
NEEDHAM, J.
(Spikener v. Ally Financial, Inc. / A157301)
A157301 / Spikener v. Ally Financial, Inc.
Trial Court: Superior Court of Alameda County
Trial Judge: Honorable Stephen Pulido
Counsel: Law Office of Kevin Faulk and Kevin M. Faulk; Rosner, Barry & Babbitt, Hallen D. Rosner, Arlyn L. Escalante, and Tsolik Kazandjian, for Plaintiff and Appellant.
Severson & Werson, John B. Sullivan, Andrew S. Elliott, and Jan T. Chilton, for Defendant and Respondent.