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After A Wild Ride, California Court of Appeal Gives Consumers Back A Leg To Stand On Against Shady Used-Car Dealers

Often, when a consumer purchases a vehicle, the deal is initially financed by the dealership, and then the dealership assigns (i.e., sells) the contract and the right to collect the consumers’ monthly payments to a third-party finance company, bank, or credit union, called the “holder.” Under the holder-in-due-course doctrine, this practice effectively licensed dealerships to defraud consumers, close shop, and reopen as a new business, leaving consumers in debt for defective goods.
The impact was particularly devastating with respect to vehicles, upon which consumers rely for transportation. If the dealership closed, unless the consumer could afford two car payments, she would be stuck paying for an unreliable, defective vehicle. If the vehicle did not provide reliable transportation, the consumer would eventually lose her job. This would not stop the unforgiving holder from seeking to collect the debt owed. The vehicle would eventually be repossessed, leaving the consumer with no vehicle, no job, and damaged credit.
In the 1970s, the Federal Trade Commission promulgated a rule to combat this disturbing result. This rule permitted consumers to assert against the holder all claims and defenses they could assert against the seller. (16 C.F.R. § 433.2.) By preserving the consumer’s defenses against the seller, if a holder brought an action to collect a debt owed by a consumer for a defective good, the consumer could defend the action on the ground the good was defective. Meanwhile, by preserving the consumer’s claims against the seller, the consumer could bring a lawsuit against the holder based on misconduct by the dealer in the sale.
The caveat: the holder is only liable up to amounts paid by the consumer under the sale contract. (16 C.F.R. § 433.2.) Thus, buyers of defective automobiles, for example, could get their vehicles bought back from holders, but they could not recover repair costs, rental expenses, etc.
After the Holder Rule was enacted, California law had allowed consumers to recover their attorneys’ fees and costs from holders in addition to the amounts paid under the sale contract. (See, e.g., Music Acceptance Corp. v. Lofing (1995) 32 Cal.App.4th 610; accord Assem. Comm. on Judiciary, AB 1821 (Committee on Judiciary) – As Introduced March 6, 2019, Assem. Bill. No. 1821 (2019-2020 Reg. Sess.) (Apr. 7, 2019), at p. 4.)
This changed in 2018, when the Third Appellate District published its opinion in Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398. In that case, the Court of Appeal determined holders were not liable for attorneys’ fees in excess of the amounts paid under the contract. Thus, if the consumer prevailed and recovered everything he had paid under the sale contract, attorneys’ fees had to be paid out of his recovery.
The decision discouraged consumer lawyers from accepting cases against smaller dealerships. Even if the dealership were open for business, it probably could not afford an attorney fee bill. A firm could invest hundreds of thousands of dollars into a lawsuit involving a $20,000 car, get the client a full recovery, and get hardly anything to show for it. (See, e.g., Warren v. Kia Motor Am., Inc. (2018) 30 Cal.App.5th 24 [plaintiff incurred over $350,000 in attorneys’ fees in case involving $17,000 car].) Especially in the midst of a pandemic, if there were any doubt as to a dealer’s solvency, any law firm concerned about keeping its lights on would decline the case. Because it is often lower-income consumers who purchase cars from fly-by-night sellers, Lafferty left low-income consumers particularly disadvantaged.
In an attempt to undo the aberration that was Lafferty, the California Legislature passed Assembly Bill 1821, which added the following as Civil Code section 1459.5:
A plaintiff who prevails on a cause of action against a defendant named pursuant to [the Holder Rule], or pursuant to the contractual language required by [the Holder Rule], 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 bill took effect on January 1, 2020. Unfortunately, its effects didn’t last long.
Six months later, without even considering the FTC’s intent in promulgating the Holder Rule, the First Appellate District found Civil Code section 1459.5 was preempted by the FTC’s recent interpretation of the decades-old rule. (Spikener v. Ally Financial, Inc. (2020) 50 Cal.App.5th 151.) On that basis, the First Appellate District reached the same conclusion as the Lafferty court. The decision placed consumers back in the position they were in before Assembly Bill 1821 took effect.
However, just last week, in a well-reasoned analysis, the Second Appellate District in Los Angeles reached a contrary decision in Pulliam v. HNL Automotive Inc. (2021) — Cal.App.5th —. In that case, the Court of Appeal expressed strong unanimous dissent for both Lafferty and Spikener and held consumers may recover from holders attorneys’ fees in excess of the amounts paid under the sale contract. Thus, the fact Ms. Pulliam only paid $22,000 under her sale contract did not mean TD Auto Finance was not liable for the $141,000 she incurred in attorneys’ fees.
As it stands, there are conflicting appellate decisions on holders’ liability for attorneys’ fees in excess of amounts paid under the contract. Until the California Supreme Court decides the matter, trial courts are free to choose which line of precedent to follow. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 456.) Auto Fraud Legal Center’s Auto Fraud Legal Center will continue to fight holders on the extent of their liability against aggrieved consumers to ensure all consumers are given equal opportunities under the law, because nobody should be cheated.