August 5, 2019

Civil Code § 1459.5: The California Legislature Responds to Lafferty —And Takes On Both Federal Trade Commission and the Judiciary In The Process
What Happened?  On July 12, 2019 Governor Newsom approved AB 1821, adding section 1459.5 to California’s Civil Code.  The new statute purports to impose unlimited liability for attorneys’ fee awards on the assignee or “holder” of certain consumer finance contracts—even where liability is based exclusively on the seller’s misconduct, and despite language in those contracts explicitly limiting the holder’s liability.  The statute reads in its entirety:

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 [the Holder Rule] 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. 

 Why Did This Happen?  Consumer protection attorneys were dismayed by Severson’s victory in Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398 (“Lafferty”), which interpreted the “Holder Rule” commonly found in consumer finance contracts. 

The Holder Rule was first promulgated by the FTC in 1975 and is intended to protect consumers by preserving their claims or defenses against the seller of goods or services, even after the assignment of the finance contract by the seller.  In imposing limited vicarious liability, the FTC balanced the interests of harmed consumers and innocent assignees by limiting the amounts that can be recovered from the assignee under the Holder Rule, requiring as a matter of federal law that the following language must be included in a variety of consumer finance contracts:  “RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR.” 

In Lafferty, a California Court of Appeal was called upon to interpret this language in the context of an attorneys’ fee claim against the innocent assignee of a defunct car dealer.  Rejecting the plaintiffs’ request for a $2 million fee award, the court interpreted the Holder Rule to mean that the assignee’s liability for attorneys’ fees was capped by the amounts received under the contract.  The California Supreme Court denied plaintiffs’ petition for review in Lafferty, and also denied a request to depublish the opinion. 

Outraged plaintiffs’ attorneys turned to the Legislature for help.  And, help they received.  Civil Code §1459.5 declares that, in a Holder Rule case, a prevailing plaintiff may claim attorneys’ fees and costs from a holder “to the fullest extent permissible” (as) if the plaintiff had prevailed against the seller.  The statute’s legislative history proves without a doubt that its purpose was to overrule the Lafferty court’s interpretation of the Holder Rule language: 

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.  (Sen. Rules Com., Bill Analysis for Assem. Bill No. 1821 (Jul. 12, 2019).) 

Contrary to this suggestion in the legislative history, Lafferty was not the product of some rogue court overturning well-reasoned legal precedent.  No published decision addressed this issue in California prior to Lafferty.  In other jurisdictions courts have interpreted this contractual language to mean that attorneys’ fee recoveries against holders were “capped” by the amount paid under the contract.  (Alduridi v. Community Trust Bank, N.A. (1999) 1999 Tenn. App. LEXIS 718 *32-34; Simpson v. Anthony Auto Sales, Inc. (W.D. La. 1998) 32 F. Supp. 2d 405, 410; State ex rel. Stenberg v. Consumer's Choice Foods, Inc. (2008) 276 Neb. 481, 495.)  And, as recently as May 2, 2019, the FTC reaffirmed its rule that “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.”  (84 FR 18711, 18713; emphasis added.) 

What Happens Next?  State law can of course provide a separate basis for recovery of attorneys’ fees against holders, independent of claims arising from the seller’s misconduct and operation of the federal Holder Rule.  But here, the California Legislature is attempting to dictate how courts should interpret language that must be included in certain consumer finance contracts per federal law.  And the mandated interpretation is contrary to the interpretation of courts in California and other states, as well as the FTC’s own interpretation of the language it drafted. 

The Legislature’s approach to this issue is very likely to lead to legal challenges, whether by litigants and/or affected trade groups.  Such challenges are likely to turn on the principles such as separation of powers, the supremacy or contract clauses, or an attempted retroactive application of the new law.  Until such challenges are resolved, however, finance companies would do well to defend holder cases the same way they did before Lafferty was decided.   

For more information regarding Civil Code § 1459.5, the Lafferty opinion and the defense of “holder” cases generally, please contact Kerry Franich at or Mark Lonergan at

This Alert was drafted to provide accurate and authoritative information with respect to the subject matter covered.  In publishing this Alert, neither the author nor the publisher is engaging in rendering legal or other professional services.  If legal advice or other expert assistance is required, the individualized services of a professional should be sought.

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