Thanks to Governor Newsom, California Consumers Can Again Vindicate Their Rights Against Out-of-Business Dealerships

Often, when a consumer purchases a vehicle, the deal is initially financed by the dealership. After the transaction, the dealership assigns (i.e., sells) the contract (and the right to the consumers’ monthly payments) to a finance company. The finance company is considered the “holder” of the contract.


Before 1975, this practice left many consumers without recourse. Dealerships could commit fraud in the sale of a defective vehicle and assign the contract to a third party before closing shop. At that point, there was no one for the consumer to sue. Following public outcry, in 1975, the Federal Trade Commission promulgated the “Holder Rule.” This rule held holders liable to the consumer for amounts paid under the sale contract.


Since then, California law had allowed consumers to recover their attorneys’ fees 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 on July 19, 2018, when the Third Appellate District published its opinion in Lafferty v. Wells Fargo Bank (2018) 25 Cal.App.5th 398. In that case, the Court of Appeal concluded holders were not liable beyond amounts paid under the sale contract, with the sole exception of costs. Thus, if the consumer prevailed and recovered everything she had paid under the contract, attorneys’ fees had to be paid out of her recovery.


Lafferty effectively discouraged consumer lawyers from accepting cases against smaller dealerships. Even if the dealership was open, it probably could not afford an attorney fee bill. A firm could invest tens of thousands of dollars into a case involving a $10,000 car, get the client everything he asked for, and get hardly anything to show for it. Especially considering it is often lower-income consumers who purchase cars from smaller corner lots, Lafferty left low-income consumers at a severe disadvantage.


Shortly after Lafferty was handed down, consumer advocates including Rosner, Barry & Babbitt, LLP’s Auto Fraud Legal Center started work to pass legislation overturning Lafferty. Their efforts proved successful. On July 12, 2019, Governor Gavin Newsom signed Assembly Bill No. 1821 into law. This bill adds 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 foregoing legislation will take effect January 1, 2020.


Rosner, Barry & Babbitt, LLP’s Auto Fraud Legal Center does not condone deceptive practices by dealerships, big or small, because nobody should be cheated.