On July 12, the Governor chartered AB 1821, which seeks to overturn Lafferty’s cap on the Holder Rule. AB 1821 adds Civil Code 1459.5 to the Civil Code, which now states
A plaintiff who prevails on a cause of action against a defendant named pursuant to Title 16, Part 433 of the Code of Federal Regulations or any successor thereto, or pursuant to the contractual language required by that part or any successor thereto, may claim attorney’s fees, costs, and expenses from that defendant to the fullest extent permissible if the plaintiff had prevailed on that cause of action against the seller.
The representations to the legislature as reflected in the Legislative history is, frankly, false — particularly in light of the FTC’s affirmation of Lafferty’s holding. The Senate Floor Analysis states:
Federal Trade Commission (FTC) regulations make it an unfair or deceptive act or practice for a seller to take or receive a consumer credit contract in connection with the sale or lease of goods or services without including a specified provision regarding the obligations of all holders of that contract. This is known as the “Holder Rule,” and it ensures future holders of the consumer contracts are subject to all claims and defenses which the debtor could assert against the original seller. The prevailing rule in California for many years was that consumers exercising the rights afforded by the Holder Rule were eligible to receive attorneys’ fees in excess of the amounts paid on the underlying contract. However, a recent California appellate court ruling overturned this longstanding precedent. This bill returns the law to its previous form, allowing the award of attorneys’ fees in these consumer protection cases. This bill is brought by the Assembly Committee on Judiciary. It has no known opposition. A coalition of consumer groups writes in strong support.
According to the Assembly Committee on Judiciary, the author of this bill:The Federal Trade Commission’s (FTC’s) Trade Regulation Rule Concerning Preservation of Consumer Claims and Defenses, aka the “Holder Rule,” makes it an unfair or deceptive sales practice, within the meaning of the Federal Trade Commission Act, for a seller to take or receive a consumer credit contract which fails to contain the following provision in at least 10 point bold-faced type:
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.
The Holder Rule was enacted by President Gerald Ford’s FTC on November 14, 1975, and was recently retained, without modification, by President Donald Trump’s FTC. AB 1821 (Judiciary) would restore California’s interpretation of the Holder Rule to the meaning it had from 1975-2018, during which time it helped defrauded consumers obtain compensation for their losses. Consumers often finance the purchase of goods like cars and appliances, whether used or new, from a seller, who then sells the contract to a financial institution in exchange for a fee. If the goods turn out to be defective, or if the consumers are fraud victims, and the seller goes out of business, the Holder Rule allows consumers to recover damages and attorney’s fees from the financial institution that financed the purchase. This understanding of the Holder Rule was overturned by the Third District Court of Appeal last year in Lafferty v. Wells Fargo (2018) 25 Cal. App. 5th 398 (Lafferty), which interpreted the Rule to mean that attorney’s fees are capped at the amount paid to date under the consumer credit contract.
This bill would legislatively correct Lafferty by restoring California’s original interpretation of the “Holder Rule,” ensuring fairness and legal recourse to defrauded consumers.
Restoring the Previous Interpretation of the Holder Rule
As detailed above, the Holder Rule is part of regulations promulgated by the FTC that require consumer credit contracts to include a provision making any holder of such contracts subject to the same claims and defenses as the original seller. (16 C.F.R. § 433.2.) This rule ensures that consumers are protected from unscrupulous sellers by holding the financers of these contracts equally liable for consumer claims. The rationale is that the creditors of such contracts, not the consumers, are in a better position to hold the seller accountable or otherwise absorb the cost. The issue relevant here is whether consumers bringing actions against defendants pursuant to the Holder Rule in California are able to claim attorneys’ fees uncapped by the amount paid by the consumer on the underlying credit contract. The longstanding interpretation of the rule in California was that such awards were available to consumers and that courts “should not artificially cap the consumer’s recovery of attorney fees” because “[s]uch a rule effectively insulate[s] holders from paying fees and costs, even if they refused to refund payment made or reach reasonable settlements”on consumer claims. (Duran v. Quantum Auto Sales,Inc. (2017) ___Cal.App.5th___ [2017 Cal. App. Unpub. LEXIS 8476, at *14] (“Duran”).). However, a recent appellate court case, Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398, 414, overturned the previously prevailing interpretation that was applied to causes of actions brought pursuant to the Holder Rule and limited “the amount that may be recovered to those monies actually paid by the consumer under the contract.” This bill reverses the decision in Lafferty and makes consumers eligible for attorneys’ fees, costs, and expenses against a Holder Rule defendant to the fullest extent permissible if the plaintiff had prevailed on that cause of action against the seller. This effectuates the intent of the Holder Rule and makes the vindication of consumers’ rights financially feasible. The Lafferty interpretation stands as a barrier to making consumers whole. (See Duran at *14-15 [finding an interpretation that the Holder Rule caps fees “would frustrate the Holder Rule’s purpose to protect consumers and preserve their rights”].) In addition,“if the holder is not responsible for attorney fees and costs, there may be incentive to intentionally prolong litigation and cause a consumer to spend more prosecuting the case than what is available under the contract.” (Duran at *14-15.)