In our February 16, 2021, Client Alert (“Holders Beware”), we noted recent California caselaw expanding consumer plaintiffs’ rights to seek attorneys’ fees and court costs from creditors pursuant to the Federal Trade Commission’s “Holder Rule,” 16 C.F.R. § 433.2. Since then, the California Supreme Court has agreed to consider the fee and cost issue. Additionally, the FTC recently issued new guidance rejecting transaction-size exemptions from the Holder Rule. Both developments may increase creditors’ liability risk associated with financing consumer purchases.
The “Holder Rule” requires creditors that finance the purchase of consumer goods, by taking an assignment of the purchase contract, to include within the contract a clause preserving the right of the debtor-purchaser, in the event the goods are defective, to sue the creditor-assignee (or a subsequent assignee). The contract also must provide that the debtor can defend against the assignee’s collection claim on the grounds that the goods are defective. Thus, the FTC’s Holder Rule reverses the common-law rule that a holder in due course, who receives an assignment of the contract in good faith and for value, is not liable for the acts and omissions of the original seller. To protect assignees against excessive liability, however, the Holder Rule limits the debtor’s affirmative recovery against the assignee to the total amount the debtor paid under the contract. Additionally, since 1976, the FTC interpreted the Holder Rule to apply only to financing transactions less than the “large transaction” exemption from certain provisions of the Truth in Lending Act (“TILA”), as set forth in 15 U.S.C. § 1603 (originally $25,000, and later increased to $50,000, with further increases tied to the rate of consumer price inflation). Both of these protections are now in jeopardy.
Longstanding California appellate jurisprudence held that the cap on the creditor’s total liability included potential claims for attorneys’ fees and costs. See Spikener v. Ally Financial, Inc., 50 Cal. App. 5th 151 (Cal. Ct. App. 1st Dist. 2020); Lafferty v. Wells Fargo Bank, 213 Cal. App. 4th 545, 563 (Cal. Ct. App. 3d Dist. 2013). This protection was extremely important to finance companies, as often the attorneys’ fees associated with a disputed claim could greatly exceed the original purchase price under the contract. However, the California Legislature purported to abrogate this protection, to wholly exclude attorneys’ fees and costs from the liability cap. See Cal. Civ. Code § 1459.5. Earlier this year, the California Court of Appeal’s Second District...
