In Medina v. Performance Automotive Group, Inc.,  2012 WL 219308 (E.D.Cal. 2012), Judge Karlton remanded to state court a class action alleging that a car dealer illegally ‘backdated’ retail installment contracts.  The defendant finance company had removed the matter to federal court, and then moved to compel arbitration (and the class action waiver) under Concepcion.   Judge Karlton found that neither the federal FTC Holder Rule nor Plaintiff’s ASFA claim (incorporating issues related to Regulation Z) involved a ‘substantial federal question’ so as to support federal jurisdiction. 


As to whether the defendant could hinge federal question jurisdiction on the FTC Holder Rule, Judge Karlton explained:


Plaintiff’s complaint does not refer to the Federal Trade Commission’s Holder Clause Rule in pursuing claims against Patelco, as the current holder of his sales contract, and California law provides independent grounds for asserting claims against the holder of a sales contract. California Civil Code § 2983.5(a) provides:  “An assignee of the seller’s right is subject to all equities and defenses of the buyer against the seller, notwithstanding an agreement to the contrary, but the assignee’s liability may not exceed the amount of the debt owing to the assignee at the time of the assignment.”  Cal. Civ. Code § 2983.5(a). Furthermore, the express provisions of Plaintiff’s actual contract with Defendant Elk Grove Ford provides in bold type, “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.” Def’s Not., ECF No. 2, at Ex. 3.    Therefore, Plaintiff could pursue a claim against Patelco based on the express provisions of his contract, thus relying upon state common law principles regarding the interpretation of contractual provisions, or Plaintiff could pursue a claim against Patelco based on the California Civil Code.    Because there are state law grounds upon which Plaintiff can pursue a claim against Patelco, Plaintiff’s claims against Patelco do not rely upon resolution of a substantial question of federal law. Thus, the second prong of Christianson is not met and Defendant has failed to meet its burden of establishing federal jurisdiction premised upon the FTC’s Holder Rule.


As to whether ASFA’s incorporation of Regulation Z’s requirements supported federal question jurisdiction, Judge Karlton explained:


Even though Plaintiff’s claim regarding the backdating of RISCs is specifically premised upon the ASFA, Defendant argues that “[d]etermination of whether the backdating allegation amounts to a violation of Regulation Z, and thereby a violation of the ASFA … turns on a federal question of law.” Def’s Opp’n, ECF No. 17, 5.     The ASFA does reference Regulation Z, which implements the Truth in Lending Act (“TILA”). See Cal. Civ. Code § 2982 (“A conditional sale contract subject to this chapter shall contain the disclosures required by Regulation Z, whether or not Regulation Z applies to the transaction”); Cal. Civ. Code § 2982(m) ( “any information required to be disclosed in a conditional sale contract under this chapter may be disclosed in any manner, method, or terminology required or permitted under Regulation Z”). However, the fact that the federal provisions was incorporated into and made a part of the state law does not automatically transform an ASFA claim into a federal claim. See, e.g., Merrell Dow Pharm. v. Thompson, 478 U.S. 804, 813, 106 S.Ct. 3229, 3234–35, 92 L.Ed.2d 650 (1986) (“the mere presence of a federal issue in a state cause of action does not automatically confer federal-question jurisdiction”); Britz v. Cowan, 192 F.3d 1101, 1103 (7th Cir.1999) (Posner, J.) (“[A] state cannot expand federal jurisdiction by deciding to copy a federal law…. If it incorporates federal law into state law and then gets the federal law wrong, it has made a mistake of state law”). Thus, the fact that the disclosure requirements of Regulation Z are incorporated into the ASFA does not, in itself, confer federal jurisdiction over Plaintiff’s ASFA claim.    In support of its argument, Defendant asserts that “plaintiff alleges backdating a contract can result in an inaccurate calculation of the APR, which may violate Regulation Z and thereby also violate the ASFA.” Def’s Opp’n, ECF No. 17, at 5. However, the accuracy of the calculation of the Annual Percentage Rate in a particular sales transaction does not raise a substantial question of federal law, but is, instead, based on a straightforward numerical calculation. See 12 C.F.R. § 226.14. Furthermore, determining which date to use as the starting date on the contract in order to calculate an accurate APR relies upon an interpretation of state law, not Regulation Z. See Bragg v. Bill Heard Chevrolet, Inc., 374 F.3d 1060, 1065–66 (11th Cir.2004) (“Regulation Z also provides that, when determining the point at which a consumer becomes contractually obligated to a credit agreement, state law should govern.”) (citing 12 C.F.R. § 226, Official Staff Commentary 2(a)(13)). Thus, the need to evaluate the accuracy of the APR in Plaintiff’s contract does not confer federal question jurisdiction over Plaintiff’s ASFA claim.

Ed.:  See also Glovier v. Barton Homes, LLC 452 F.Supp.2d 657 (W.D.La. 2006) (“Plaintiffs’ allegation in their petition that the FTC Holder Rule serves as a conduit by which they may assert state law claims does not convert their causes of action to ones that arise under federal law, so removal is not permitted.”); Frischkorn v. Lake County Chrysler, Inc. 2006 WL 2970236 (N.D.Ohio 2008)(“Fifth Third Bank has not established that federal jurisdiction exists by virtue of the FTC Anti-Holder Rule. Fifth Third fails to cite any law in support of its argument and instead relies on conclusory statements that the resolution of Plaintiffs’ derivative-liability claims “could establish a rule applicable to numerous federal FTC Anti-Holder Rules cases.” ); Mathis v. Gibson, 2008 WL 2330537 (D.S.C. 2008) (“Reference to 16 C.F.R. 433.2 in paragraph 11 of the complaint, which embodies the Federal Trade Commission (“FTC”) Holder Rule, does not create any substantial federal issue… Therefore, the Plaintiffs’ reference in their complaint to 16 C.F.R. 433.2, the FTC Holder rule, does not confer federal question jurisdiction in this action.”).