Filed 3/22/22

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIFTH APPELLATE DISTRICT

DIGNA REYES et al.,

Plaintiffs and Appellants,

v.

BENEFICIAL STATE BANK, 

Defendant and Respondent.

F080827

(Kern Super. Ct.

No. BCV-17-100082)

OPINION

APPEAL from an order of the Superior Court of Kern County. David R. Lampe, 

Judge.

Rosner, Barry & Babbit, Hallen D. Rosner, Christopher P. Barry, and Arlyn L. 

Escalante for Plaintiffs and Appellants.

Steven A. Silver; Severson & Werson and Jan T. Chilton for Defendant and 

Respondent.

-ooOooPlaintiffs Digna Reyes and Sylvester Fulton IV, purchasers of a used vehicle, 

appeal the trial court’s denial of their motion for attorney fees against defendant 

Beneficial State Bank (Beneficial) following plaintiffs’ acceptance of Beneficial’s offer 

to compromise plaintiffs’ lemon law claims. Beneficial was the holder of the retail 

installment sale contract by which plaintiffs purchased the vehicle. Plaintiffs argue the 
2.

trial court erred by denying their motion for attorney fees. Plaintiffs further argue this 

court should reject case law holding that recovery of attorney fees against a holder is 

capped under title 16, section 433.2 of the Federal Regulations (Holder Rule) and that a 

recent statute providing otherwise is preempted. We believe plaintiffs’ contentions have 

merit. We reverse the trial court’s denial of their motion for attorney fees and remand to 

the trial court for further proceedings consistent with this opinion.

FACTUAL AND PROCEDURAL BACKGROUND

Because this matter was settled prior to trial, the facts recited in this opinion are 

drawn primarily from the allegations of plaintiffs’ first amended complaint.

On February 24, 2016, plaintiffs purchased a used motor vehicle for personal use 

from Iad Hamdi Manna (Manna) doing business as Auto Cruz (Auto Cruz). A 

salesperson at Auto Cruz told plaintiffs that if they were not happy with the vehicle, they 

could return it within seven days subject to payment of a $500 restocking fee. The 

salesperson also told plaintiffs the vehicle came with a 30-day warranty on the engine and 

transmission.

To complete the purchase, plaintiffs made a down payment of $3,000 and 

executed a retail installment sale contract to finance the remainder of the purchase price. 

The contract contained a provision allowing Auto Cruz to cancel the contract if Auto 

Cruz was unable to assign it to one of the financial institutions with which Auto Cruz 

regularly does business.

Auto Cruz submitted the contract to defendant Pan American Bank (Pan 

American) for its approval. However, Pan American declined to accept the loan terms set 

forth in the contract and, instead, proposed different financing terms for the loan. As a 

result, on March 1, 2016, Manna informed plaintiffs they would need to return to the 

dealership to sign a new contract.

By this time, plaintiffs had been experiencing mechanical problems with the 

vehicle and no longer wanted it. On March 2, 2016, they returned the vehicle to Auto 
3.

Cruz, requested return of their down payment, and offered to pay Auto Cruz the $500

restocking fee.

Manna spoke with plaintiffs and convinced them that the vehicle was otherwise in 

good condition and that his mechanic could fix the problems they had been experiencing. 

Based on those representations, plaintiffs signed a new retail installment sale contract 

(Contract), and Auto Cruz applied their down payment to the Contract.

On March 7, 2016, plaintiffs took the vehicle to Auto Cruz for the necessary 

repairs. On March 9, 2016, a representative of Auto Cruz called plaintiffs to let them

know the vehicle was ready to be picked up. However, the vehicle continued to 

malfunction. Two days later, plaintiffs called Manna to advise the vehicle was still not 

performing properly. They told Manna they wanted to cancel the Contract, but Manna 

refused.

Unsatisfied, plaintiffs took the vehicle to another dealership to have it diagnosed. 

The second dealership informed plaintiffs the vehicle had serious mechanical defects that 

impaired its use, value, and safety. Among other things, one of the vehicle’s engine 

mounts was held up only by a chain and the transmission needed to be replaced. 

Plaintiffs returned to Auto Cruz with the results of the second dealership’s diagnosis of 

the vehicle, but Auto Cruz again refused to accept return of the vehicle.

On January 11, 2017, plaintiffs filed suit against defendants Manna doing business 

as Auto Cruz, Pan American, and Philadelphia Indemnity Insurance Company 

(Philadelphia Indemnity).1 Plaintiffs filed a first amended complaint which set forth new 

1 Philadelphia Indemnity had issued a $50,000 bond to Auto Cruz pursuant to 

Vehicle Code section 11710 which provides, in part: “Before any dealer’s or 

remanufacturer’s license is issued or renewed by the department to any applicant 

therefor, the applicant shall procure and file with the department a bond executed by an 

admitted surety insurer, approved as to form by the Attorney General, and conditioned 

that the applicant shall not practice any fraud or make any fraudulent representation 

which will cause a monetary loss to a purchaser, seller, financing agency, or 

governmental agency.” (Veh. Code, § 11710, subd. (a).)
4.

allegations but retained the same causes of action as the original complaint. Among the 

new allegations was that Pan American had merged with its successor in interest, 

Beneficial. Beneficial answered the first amended complaint as Pan American’s 

successor in interest.

Plaintiffs’ first amended complaint alleged causes of action against Manna and 

Beneficial for (1) violation of the Consumers Legal Remedies Act (CLRA) (Civ. Code 

§ 1750, et seq.);2(2) fraud; (3) negligent misrepresentation; (4) violation of the SongBeverly Consumer Warranty Act (Song-Beverly) (§ 1790 et seq.); (5) violation of 

Business & Professions Code section 17200, et seq; and (6) violation of Vehicle Code 

section 11713. The first amended complaint alleged a single cause of action against 

Philadelphia Indemnity for violation of Vehicle Code section 11711.

Each of plaintiffs’ claims against Beneficial were premised on the Holder Rule 

provision contained in the Contract. Per a regulation of the Federal Trade Commission 

(FTC), the Holder Rule provision must be included in consumer credit contracts. The 

provision reads:

“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.” (16 C.F.R. § 433.2, subd. (a).)

In addition, the Contract contained an attorney fee provision which reads: “You 

may have to pay collection costs. You will pay our reasonable costs to collect what you 

owe, including attorney fees, court costs, collection agency fees and fees paid for other 

reasonable collection efforts....”

2 All further statutory references are to the Civil Code unless otherwise noted.
5.

Plaintiffs eventually dismissed Manna from the lawsuit after he purportedly filed 

for bankruptcy protection. Plaintiffs also dismissed Philadelphia Indemnity from the 

lawsuit after they arrived at a settlement on the bond claim.

On or about January 24, 2019, Beneficial served plaintiffs with an offer to 

compromise pursuant to Code of Civil Procedure section 998 which plaintiffs timely 

accepted. On July 18, 2019, the trial court entered judgment pursuant to the offer. 

Relevant to this appeal, the offer to compromise, and the resulting judgment, each

provided:

“5. Beneficial [ ] will reimburse [p]laintiffs’ costs, other than 

attorney[] fees pursuant to Code of Civil Procedure § 1032(b) in the amount 

determined by the Court according to law and proof.

“6. Beneficial [] will reimburse [p]laintiffs’ reasonable attorney[]

fees, if any, in the amount determined by the Court according to law and 

proof.”

On October 4, 2019, plaintiffs filed a motion for attorney fees, costs, and expenses 

seeking $53,134.50 in attorney fees and $6,629.41 in costs and expenses for a total award 

of $59,763.91. 

On November 25, 2019, the trial court granted plaintiffs’ request for costs and 

denied their request for attorney fees.

An order conforming to the trial court’s ruling was issued on December 5, 2019. 

On December 13, 2019, Beneficial served plaintiffs with notice of entry of the order. On 

February 11, 2019, plaintiffs timely appealed.

DISCUSSION

Plaintiffs contend that the trial court erred by denying their motion for attorney 

fees, that they are entitled to an award of reasonable attorney fees under sections 1459.5, 

1717 and 2983.4, and that this court should reject the reasoning of two recent appellate 

decisions, Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398 (Lafferty) and 

Spikener v. Ally Financial, Inc. (2020) 50 Cal.App.5th 151 (Spikener) which, if followed, 
6.

would defeat their fee claim. In 2021, a third appellate decision, Pulliam v. HNL 

Automotive Inc. (2021) 60 Cal.App.5th 396 (Pulliam), review granted April 28, 2021, 

S267576,3issued and held contrary to the holdings in Lafferty and Spikener. Plaintiffs 

argue we should follow Pulliam. Before this appeal was heard, a fourth appellate 

decision, Melendez v. Westlake Services, LLC (2022) 74 Cal.App.5th 586 (Melendez), 

issued and found Pulliam to be the better reasoned decision. (Melendez, supra, 74 

Cal.App.5th at p. 589.)

Upon review, we agree with the result of Pulliam although our reasoning differs 

from that case in certain respects. We conclude plaintiffs are entitled to an award of 

attorney fees, reverse the trial court’s order denying the same, and remand the case to the 

court for further proceedings consistent with this opinion.

I. Standard of Review

At issue is the proper interpretation of the Holder Rule provision and several 

California statutes which authorize the recovery of attorney fees in various situations. 

“ ‘[I]ssues of statutory construction and contract interpretation that do not turn on 

extrinsic evidence are subject to independent review.’ ” (Lafferty, supra, 25 Cal.App.5th 

at p. 409.) Although attorney fee awards are typically reviewed for abuse of discretion, 

“ ‘ “a determination of the legal basis for an attorney fee award is a question of law to be 

reviewed de novo.” [W]here the material facts are largely not in dispute, our review is de 

novo.’” (Orozco v. WPV San Jose, LLC (2019) 36 Cal.App.5th 375, 406.) Moreover, 

“ ‘ “a disposition that rests on an error of law constitutes an abuse of discretion.” ’ ” (Id. 

at p. 401.)

Here, the material facts are largely undisputed and none of the interpretive issues 

presented turn on extrinsic evidence. Accordingly, our review on appeal is de novo.

3 A case pending review in the California Supreme Court has “no binding or 

precedential effect, and may be cited for potentially persuasive value only.” (Cal. Rules 

of Court, rule 8.1115(e)(1).)
7.

II. The Holder Rule

The FTC “promulgated the Holder Rule in 1975 as a consumer protection 

measure to abrogate the holder in due course rule for consumer installment sale contracts 

that are funded by a commercial lender. [Citations.] ‘Under the holder in due course 

principle, the creditor could “assert his right to be paid by the consumer despite 

misrepresentation, breach of warranty or contract, or even fraud on the part of the seller, 

and despite the fact that the consumer’s debt was generated by the sale.” ’ ” (Lafferty, 

supra, 25 Cal.App.5th at pp. 410–411.)

A seller could confer holder in due course status upon a commercial lender, for 

example, by having a consumer/buyer sign a promissory note for the outstanding 

purchase price amount during the initial stages of a transaction and then assigning the 

promissory note to a third party lender willing to finance the purchase. (Preservation of 

Consumers’ Claims and Defenses, 40 Fed.Reg. 53506, 53507 (Nov 18. 1975).) As 

explained by the FTC:

“The use of a promissory note entails the execution and subsequent 

assignment of what commercial law calls a ‘negotiable instrument.’ Under 

Article Three of the Uniform Commercial Code, pre-existing equities are 

foreclosed when a negotiable instrument is purchased by a third party in 

good faith and without notice of claims, defenses, or infirmities arising 

from the transaction between the makers. When a third party purchases a 

consumer’s promissory note, he will receive the note as a ‘holder in due 

course’ free and clear of any claim or grievance that the consumer may 

have with respect to the seller.” (Id. at p. 53507.)

Other mechanisms were sometimes employed to accomplish the same goal of 

separating the consumer’s obligation to pay from the seller’s obligation to perform. 

(40 Fed.Reg., supra, at pp. 53507–53508.) For example, a seller could include a waiver

of defenses clause in its retail installment sales contract and then assign that contract to a 

third party lender. (Id. at p. 53507.) The FTC explained:

“An assignee of a retail sale contract, as distinguished from a note because 

of the inclusion of mutual promises and obligations, may, under UCC 9-
8.

206, assert rights analogous to those of a holder in due course if the 

contract contains an ‘agreement not to assert defenses against an 

assignee....’ If the same tests of good faith and lack of notice are met, the 

creditor who buys the contract is in the same position as a holder in due 

course.” (Id. at p. 53508, fn. omitted.)

The FTC considered it “an unfair practice for a seller to employ procedures in the 

course of arranging the financing of a consumer sale which separate the buyer’s duty to 

pay for goods or services from the seller’s reciprocal duty to perform as promised.” 

(40 Fed.Reg., supra, at p. 53522.) The effect of the practice was to leave consumers with 

limited recourse in the event a seller failed to perform his or her end of the bargain. 

(Guidelines on Trade Regulation Rule Concerning Preservation of Consumers’ Claims 

and Defenses, 41 Fed.Reg. 20022 (May 14, 1976.) In those instances, the consumer 

would be obligated to continue to pay the lender despite not having received the 

consideration he or she was due from the seller. (Ibid.) Thus, the consumer no longer 

had the leverage it otherwise would have had to secure the seller’s performance – the 

withholding of payment. (Ibid.; Music Acceptance Corp. v. Lofing (1995) 32 

Cal.App.4th 610, 628.)

With the adoption of the Holder Rule, a consumer now has recourse against both 

the seller and commercial lender in transactions involving retail installment sale 

contracts. (Music Acceptance Corp. v. Lofing, supra, 32 Cal.App.4th at p. 628.) 

However, the second sentence of the Holder Rule provision places a limitation on the 

recourse that may be obtained against a commercial lender. (16 C.F.R. § 433.2, 

subd. (a).) The scope of that limitation is at issue here.

In 2015, the FTC “request[ed] public comment on the overall costs and benefits, 

and regulatory and economic impact” of the Holder Rule “as part of the agency’s regular 

review of all its regulations and guides.” (Rules and Regulations Under the Trade 

Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, 80 

Fed.Reg. 75018 (Dec. 1, 2015).) The FTC conducts such periodic reviews to determine 

whether its rules and guides “warrant modification or rescission.” (Id. at p. 75019.) As 
9.

part of its review, the FTC solicited comment on 15 specific questions (plus subparts). 

None of the questions posed directly concerned whether a successful consumer litigant 

was, or should be, limited in the amount of attorney fees it could be awarded under the 

Holder Rule. (Ibid.)

In 2019, the FTC completed its review and “determined to retain the [Holder] Rule 

without modification” (2019 Rule Confirmation). (Trade Regulation Rule Concerning 

Preservation of Consumers’ Claims and Defenses, 84 Fed.Reg. 18711 (May 2, 2019).) 

Although the FTC’s 2015 request for public comment did not expressly solicit comments 

related to the recovery of attorney fees under the Holder Rule, the FTC received six 

comments related thereto. In response, the FTC wrote, “We conclude that if a federal or 

state law separately provides for recovery of attorney[] fees independent of claims or 

defenses arising from the seller’s misconduct, nothing in the [Holder] Rule limits such 

recovery. Conversely, if the holder’s liability for fees is based on claims against the 

seller that are preserved by the Holder Rule [provision], the payment that the consumer 

may recover from the holder – including any recovery based on attorney[] fees – cannot 

exceed the amount the consumer paid under the contract.” (84 Fed.Reg., supra, at 

p. 18713.)

III. Relevant Case Law, Legislation, and FTC Publications

We have the benefit of four recent, published decisions involving the 

interpretation of the Holder Rule provision, Lafferty, Spikener, Pulliam, and Melendez. 

We discuss those cases below.

A. Lafferty

In Lafferty, the Third District Court of Appeal concluded “a consumer cannot 

recover more under the Holder Rule cause of action than what has been paid on the debt 

regardless of what kind of a component of the recovery it might be – whether 

compensatory damages, punitive damages, or attorney fees.” (Lafferty, supra, 25 

Cal.App.5th at p. 414, second italics added.) It arrived at this conclusion by examining 
10.

the “three main parts” of the second sentence of the Holder Rule provision – i.e., 

“recovery,” “shall not exceed amounts paid by the debtor,” and “hereunder.” (Lafferty, at 

p. 412, capitalization omitted.)

The Lafferty court consulted Black’s Law Dictionary which defined “ ‘recovery’ ”

to mean: “ ‘An amount awarded in or collected from a judgment or decree.’ ” (Lafferty, 

supra, 25 Cal.App.5th at p. 412.) Citing, as examples, various judicial opinions that have 

used the term, the court noted the term is “broad and regularly used to include 

compensatory damages, punitive damages, attorney fees, and costs[;]” courts have used it 

“to include attorney fees and interest awarded as part of a judgment[;]” and one court has 

used the term to “ ‘include the entire remedy effectuated ... encompass[ing] the total 

benefit conferred upon [a party] through the efforts of counsel.’ ” (Ibid.) 

In examining the language “ ‘shall not exceed amounts paid by the debtor,’ ” 

Lafferty noted the FTC’s description of the “limitation on consumer recovery from a

creditor as follows: ‘From the consumer’s standpoint, this means that a consumer can ... 

maintain an affirmative action against a creditor who has received payments for a return 

of monies paid on account.’ ” (Lafferty, supra, 25 Cal.App.5th at pp. 412–413, quoting 

40 Fed.Reg., supra, at p. 53524, italics added in original.) The court further noted that 

the year after promulgation of the Holder Rule, the FTC explained the limitation on such 

recovery, as follows: “ ‘This limits the consumer to a refund of monies paid under the 

contract, in the event that an affirmative money recovery is sought. [T]he consumer will 

not be entitled to receive from the creditor an affirmative recovery which exceeds the 

amounts of money the consumer has paid in.’ [Citation.]” (Id. at p. 413, citing 41 

Fed.Reg., supra, at p. 20023.)

As for the term “hereunder,” the Lafferty court stated, “By using the word 

‘hereunder’ to modify the amount and type of recovery a consumer can assert under the 

Holder Rule, the FTC indicated the Holder Rule constraint does not apply to independent 

causes of action accruing under state and local law.” (Lafferty, supra, 25 Cal.App.5th at 
11.

p. 413.) In support of this statement, the court cited the FTC guidelines which state, 

“ ‘The limitation on affirmative recovery does not eliminate any other rights the 

consumer may have as a matter of local, state, or federal statute. The words “recovery 

hereunder” which appear in the text of the Notice refer specifically to a recovery under 

the Notice. If a larger affirmative recovery is available against a creditor as a matter of 

state law, the consumer would retain this right.’ ” (Ibid., quoting 41 Fed.Reg., supra, at 

p. 20023.)

Although Lafferty held a consumer’s recovery of attorney fees is capped by the 

Holder Rule provision, it held the consumer’s recovery of costs under subdivision (b) of 

Code of Civil Procedure section 1032 – which provides ‘[e]xcept as otherwise expressly 

provided by statute, a prevailing party is entitled as a matter of right to recover costs in 

any action or proceeding’ ” – is not limited by the provision. (Lafferty, supra, 25 

Cal.App.5th at pp. 414–415, italics added in original.) In support of the different 

treatment afforded these two types of recovery, the court drew a distinction between 

recovery on a “cause of action” which it said, “ ‘refers to the obligation itself’ ” and 

recovery on an “action” which it said, “ ‘refers to the entire judicial proceeding at least 

through judgment ....’ ” (Id. at p. 414–415.) Under the reasoning of Lafferty, the Holder 

Rule provision caps recovery on a Holder Rule “cause of action” but does not limit 

recovery of costs which are awarded to a prevailing party “ ‘in any action or 

proceeding.’ ” (Lafferty, at pp. 414–415, italics added in original.) 

B. Legislative Response to Lafferty

In 2019, in direct response to the Lafferty decision, the California Legislature 

enacted Assembly Bill No. 1821 codified at section 1459.5. (Sen. Rules Com., Off. of 

Sen. Floor Analyses, 3d reading analysis of Assem. Bill No. 1821 (2019–2020 Reg. 

Sess.) June 12, 2019, pp. 3–5 (Senate Floor Analysis).) Section 1459.5 provides:

“A plaintiff who prevails on a cause of action against a defendant 

named pursuant to Part 433 of Title 16 of the Code of Federal Regulations 
12.

or any successor thereto, or pursuant to the contractual language required 

by that part or any successor thereto, may claim attorney[] 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.”

Section 1459.5 was intended to counter the holding in Lafferty and enable a 

prevailing consumer the ability to recover attorney fees (in addition to costs and 

expenses) from a nonprevailing holder of a retail installment contract even if such a 

recovery would cause the total amount awarded to exceed the amount the consumer paid 

to the lender. (Senate Floor Analysis, supra, at pp. 3–5.)

C. Spikener

In 2020, the First District Court of Appeal also considered whether the Holder 

Rule provision capped recovery of attorney fees. (Spikener, supra, 50 Cal.App.5th at 

pp. 154–155.) The Spikener court relied primarily upon the FTC’s interpretation of the 

provision in its 2019 Rule Confirmation which reads: “We conclude that if a federal or 

state law separately provides for recovery of attorney[] fees independent of claims or 

defenses arising from the seller’s misconduct, nothing in the [Holder] Rule limits such 

recovery. Conversely, 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 attorney[] fees – cannot 

exceed the amount the consumer paid under the contract.” (84 Fed.Reg., supra, at 

p. 18713.) Spikener concluded the 2019 Rule Confirmation was entitled to deference and 

dispositive. (Spikener, supra, 50 Cal.App.5th at pp. 158–159.) 

Having determined the FTC’s 2019 Rule Confirmation was controlling, the 

Spikener court further held section 1459.5 conflicts with the Holder Rule and is 

preempted. (Spikener, supra, 50 Cal.App.5th at p. 160.) Spikener concluded the FTC’s 

construction of the Holder Rule provision’s limitation on recovery of attorney fees in the 

2019 Rule Confirmation “demonstrates a clear intent to prohibit states from authorizing a 

recovery that exceeds this amount on a Holder Rule [provision] claim.” (Spikener, at 
13.

p. 162.) Spikener explained, “the [2019] Rule Confirmation expressly preserves a state’s 

ability to authorize attorney fees against holders independent of Holder Rule claims, and 

clarifies that such fee claims are not constrained by the Holder Rule’s limitation on 

recovery.” (Ibid.)

D. Pulliam

In Pulliam, Division Five of the Second District Court of Appeal was called upon 

to interpret the Holder Rule provision and to determine whether an award of attorney fees 

is capped by the provision’s limitation on recovery. The Pulliam court noted a lack of 

uniformity among other state and federal courts in interpreting the Holder Rule provision 

with some jurisdictions capping the amount of attorney fees that may be awarded under 

the provision, and others not limiting such recovery. (Pulliam, supra, 60 Cal.App.5th at 

pp. 410–411.)

Pulliam disagreed with Lafferty’s interpretation of the word “recovery” as used in 

the Holder Rule. As noted, Lafferty determined the term included compensatory 

damages, punitive damages, and attorney fees. See Lafferty, supra, 25 Cal.App.5th at 

p. 414. Pulliam consulted Black’s Law Dictionary and noted the following definitions 

“ ‘1. The regaining or restoration of something lost or taken away. [¶] ... [¶] 2. The 

obtainment of a right to something (esp. damages) by a judgment or decree.... 4. An 

amount awarded in or collected from a judgment or decree.’ ” (Pulliam, supra, 60 

Cal.App.5th at p. 413, citing “ ‘recovery’ ” definition, Black’s Law Dict. (11th ed. 2019)

p. 1528.) Pulliam concluded the definition “focuses on damages, i.e.[,] restoring money 

that was taken away from the plaintiff, and does not expressly address attorney 

fees.” (Pulliam, at p. 413.)

The Pulliam court also disagreed with Spikener and concluded that the 2019 Rule 

Confirmation was not entitled to dispositive deference. (Pulliam, supra, 60 Cal.App.5th 

at pp. 419–422.) To afford deference to an agency’s interpretation of its own ambiguous 

regulations, Pulliam noted, four factors must be considered: 
14.

“First, the ‘regulatory interpretation must be one actually made by the 

agency. In other words, it must be the agency’s “authoritative” or “official 

position,” rather than any more [sic] ad hoc statement not reflecting the 

agency’s views. [Citation.]’ [Citation.] ‘Next, the agency’s interpretation 

must in some way implicate its substantive expertise.’ [Citation.] ‘Finally, 

an agency’s reading of a rule must reflect “fair and considered judgment” to 

receive ... deference. [Citation.]’ [Citation.] A court should decline to 

defer to a convenient litigation position or post hoc rationalization. 

[Citation.] Moreover, a court may not ‘defer to a new interpretation, 

whether or not introduced in litigation, that creates “unfair surprise” to

regulated parties. [Citation.] That disruption of expectations may occur 

when an agency substitutes one view of a rule for another.’ [Citation.] 

Such an upending of reliance may occur without an explicit interpretive 

change; we will not defer to an interpretation that would impose retroactive 

liability on parties for long-standing conduct the agency never before 

addressed.” (Pulliam, supra, 60 Cal. App. 5th at pp. 419–420, citing Kisor 

v. Wilkie (2019) ___ U.S. ___, ___ [139 S.Ct. 2400, 2416–2418, 204 

L.Ed2d 841].)

For purposes of its analysis, Pulliam assumed that the first factor was met – i.e., 

the FTC’s interpretation of the Holder Rule was “ ‘actually made by the agency.’ ” 

(Pulliam, supra, 60 Cal.App.5th at p. 420.) However, Pulliam did not agree the 

interpretation involved the “FTC’s substantive expertise” because “(1) Resolution of the 

issue may turn on the particular state statute providing for attorney fee recovery at issue, 

and whether that statute is intended to be punitive against the payor or simply to make the 

payee whole. (2) As illustrated by the FTC’s request for comments which led to the 

[2019 Rule Confirmation], the FTC sought to exercise its judgment based on data 

regarding the effect of the rule (or any proposed rule change) on consumers and 

businesses. No commenter provided the FTC with data on the costs and benefits to 

consumers or businesses in different jurisdictions based on the availability of attorney 

fees or any limitations placed on them.” (Ibid.) Pulliam concluded “the FTC’s statement 

regarding attorney fees in its rule confirmation was not an exercise of its substantive 

expertise, but simply a position taken after limited arguments were made on each side.” 

(Ibid., fn. omitted.)
15.

Pulliam also rejected the notion that the 2019 Rule Confirmation “truly 

represented the ‘ “fair and considered judgment” [necessary] to receive ... deference’ ” 

based on the fact the FTC never solicited comments on the issue of attorney fees under 

the Holder Rule as part of its rule confirmation process and only six comments on the 

issue were supplied to the FTC. (Pulliam, supra, 60 Cal.App.5th at p. 420.)

Finally, Pulliam considered whether the 2019 Rule Confirmation disrupted the 

expectations of regulated parties by issuing a new interpretation. (Pulliam, supra, 60

Cal.App.5th at pp. 419–420.) The court wrote: “[A]lthough we cannot say the position 

taken in the [2019 Rule Confirmation] was a change in interpretation – as the FTC had 

not previously interpreted the rule at all – it did, in fact, address an issue never previously 

addressed, and undermined the existing practice in those jurisdictions in which attorney 

fees in excess of the cap had been, and were being, imposed as a matter of course.” (Id. 

at p. 420.)

Pulliam concluded the Holder Rule provision did not limit the recovery of attorney 

fees. (Pulliam, supra, 60 Cal.App.5th at p. 422.) As a result, it determined that section 

1459.5 was consistent with the Holder Rule and that it was unnecessary to “address 

whether section 1459.5 independently applie[d].” (Pulliam, at p. 422.)

E. 2022 FTC Advisory Opinion

On January 18, 2022, the FTC issued an advisory opinion on the “Holder Rule, 

and its impact on consumers’ ability to recover costs and attorneys’ fees.” (FTC,

Commission Statement on the Holder Rule and Attorneys’ Fees and Costs (Jan. 18, 

2022), p. 1, at <https://www.ftc.gov/policy/advisory-opinions>, archived at 

https://perma.cc/54G3-2F5Q (FTC Advisory Opinion).) The FTC Advisory Opinion 

noted that certain courts have “misinterpret[ed] the Holder Rule as a limitation on the 

application of state cost-shifting laws to holders”4 whereas others have “conclude[ed] 

4 FTC Advisory opinion, page 1, footnote 2, citing, without limitation: Spikener, 

supra, 50 Cal.App.5th at p. 152 [for its conclusion that “statements by the Commission 
16.

correctly that the Holder Rule does not limit recovery of attorney[] fees and costs when 

state law authorizes awards against a holder.”5 (Ibid.)

The FTC Advisory Opinion goes on to state in its analysis, “The Holder Rule does 

not eliminate any rights the consumer may have as a matter of separate state, local, or 

federal law. Consequently, whether costs and attorney[] fees may be awarded against the 

holder of the credit contract is determined by the relevant law governing costs and fees. 

Nothing in the Holder Rule states that application of such law to holders is inconsistent 

with Section 5 of the FTC Act or that holders should be wholly or partially exempt from 

these laws.” (FTC Advisory Opinion, p. 2.) The FTC Advisory Opinion further states 

that where “the applicable law requires or allows costs or attorney[] fee awards against a 

holder, the Holder Rule does not impose a cap on such an award.” (Id. at p. 3.)

F. Melendez

In Melendez, Division Eight of the Court of Appeal, Second Appellate District 

considered whether the Holder Rule provision capped attorney fees on facts similar to 

those here. The plaintiff in Melendez, a purchaser of a used vehicle under a retail 

installment contract, sued the dealer and the defendant creditor/holder of the contract, for 

alleged violations of Song-Beverly, the CLRA, Business & Professions Code sections 

17200, section 1632 (requiring contracts negotiated in a foreign language be translated)

and for fraud and negligent misrepresentation. (Melendez, supra, 74 Cal.App.5th at 

[in its 2019 Rule Confirmation] demonstrate ‘clear intent’ to preempt attorney fee 

recovery ‘regardless of whether state claim being asserted pursuant to the Holder Rule 

contains fee-shifting provisions’, but declining to express opinion whether costs are 

preempted for the same reason”]; and Lafferty, supra, 25 Cal.App.5th at pp. 414–416 [for 

its conclusion that the “second sentence of the Holder Rule Notice caps attorneys’ fees 

claim against defendant-holder unless ‘another state or local cause of action can be found 

to support such a claim,’ but that costs are not subject to the same cap”].) 

5 FTC Advisory opinion, page 1, footnote 1, citing, without limitation Pulliam, 

supra, 60 Cal.App.5th 396 [for its conclusion that the Holder Rule does not limit attorney 

fee recovery from holder; rejecting contrary position attributed to FTC and ruling that 

such an agency interpretation would not be entitled to deference].)
17.

p. 589.) The plaintiff and the defendant creditor/holder settled their dispute and agreed 

that plaintiff could move for recovery of “attorney fees, costs, expenses, and prejudgment 

interest” but preserved the defendant/creditor’s ability to dispute the plaintiff’s 

entitlement thereto “ ‘including the defense that no fees at all should be awarded against 

[the defendant creditor/holder] as a Holder as that term is defined at law.’ ” (Ibid.) The 

trial court granted the motion, awarded the plaintiff the relief he requested, and defendant 

appealed. (Id. at p. 590.)

Melendez recounted much of the case law and FTC publication history set forth in 

this opinion. (Melendez, supra, 74 Cal.App.5th at pp. 590–592.) It agreed with Pulliam

that the Holder Rule “limitation on recovery does not preclude recovery of attorney fees, 

and the FTC’s contrary interpretation [in the 2019 Rule Confirmation] is not entitled to 

deference.”

6

 (Melendez, at p. 595, fn. omitted.) As a result, it concluded it need not 

consider the defendant creditor/holder’s argument that section 1459.5 is preempted by the 

Holder Rule since that code section is consistent with its interpretation of the Holder 

Rule. (Melendez, supra, 74 Cal.App.5th at pp. 592, 595.) 

IV. Attorney Fee Awards Against a Holder Are Not Capped If a Separate State 

Law So Provides

A. Attorney Fees are Included Within the Term “Recovery”

“ ‘Quasi-legislative regulations are construed using the same principles as for the 

interpretation of statutes. [Citation.] For regulations and statutes, our guiding principle 

“ ‘is to ascertain the intent of the lawmakers so as to effectuate the purpose of the law.’ ” 

(Lafferty, supra, 25 Cal.App.5th at p. 410.) Courts “ ‘ “must look first to the words of the 

statute [or regulation], ‘because they generally provide the most reliable indicator of 

legislative [or regulatory] intent.’ [Citation.]” ’ ” (Ibid.) “ ‘ “[W]ords are to be given 

6 Melendez also held the Holder Rule “limitation does not preclude recovery of 

costs, nonstatutory costs, or prejudgment interest.” (Melendez, supra, 74 Cal.App.5th at 

p. 589.)
18.

their plain and commonsense meaning. [Citation.] ... Only when the statute’s language 

is ambiguous or susceptible of more than one reasonable interpretation may the court turn 

to extrinsic aids to assist in interpretation.” ’ ” (Ibid.)

We agree with Lafferty that the plain meaning of the word “recovery,” as used in 

the Holder Rule, includes attorney fees. “ ‘When a term goes undefined in a statute, we 

give the term its ordinary meaning.’ ” (De Vries v. Regents of University of California

(2016) 6 Cal.App.5th 574, 590–591.) “In divining a term’s ‘ordinary meaning,’ courts 

regularly turn to general and legal dictionaries.” (Id. at p. 591.)

As Lafferty notes, Black’s Law Dictionary defines “ ‘recovery’ to mean ‘An 

amount awarded in or collected from a judgment or decree.’ [Citation.]” (Lafferty, 

supra, 25 Cal.App.5th at p. 412.) Merriam-Webster’s online dictionary includes the 

following legal definition of recovery: “2[.]a: the obtaining, getting back, or vindication 

of a right or property by judgment or decree [¶] especially: the obtaining of damages [¶] 

b: an amount awarded by or collected as a result of a judgment or decree[.]” 

(www.merriam-webster.com/dictionary/recovery.) The online Cambridge Dictionary 

includes the following definition: “Law [¶] the process of getting money from a person 

or company that has caused you loss or damage by order of a court of law:” 

(https://dictionary.cambridge.org/dictionary/english/recovery.)

Because the Holder Rule provision contemplates legal action, the foregoing 

definitions are particularly appropriate for use in construing the term “recovery.”

Moreover, the definitions found in general (as opposed to legal) dictionaries for 

the term “recovery” are either consistent with or, at a minimum, not inconsistent with a 

construction that includes attorney fees within the scope of the term. For example, 

Merriam-Webster’s online thesaurus defines the term “recovery” as “the act or process of 

getting something back ...” and provides several examples of synonyms, namely: 

“recapture, reclamation, recoupment, repossession, retrieval.” 

(www.merriam-webster.com/thesaurus/recovery.) The relevant entry for the word 
19.

“recovery” in the online Cambridge Dictionary is “the process of getting something 

back[.]” (https://dictionary.cambridge.org/dictionary/english/recovery.)

Undoubtedly, the recovery of attorney fees restores a claimant to his previous state 

or condition and, absent recovery, attorney fees are lost to the claimant. Consequently, 

we conclude the term “recovery,” as used in the Holder Rule provision, is sufficiently 

broad to include attorney fees. 

Our conclusion is also consistent with the FTC’s interpretation of the Holder Rule 

in both the FTC Advisory Opinion and the 2019 Rule Confirmation (as clarified in the 

FTC Advisory Opinion). In its FTC Advisory Opinion, the FTC makes clear that 

recovery of attorney fees against a holder in excess of amounts paid on the contract is 

contingent upon the existence of a separate federal or state law providing for such a 

recovery – otherwise recovery of such fees is limited by the Holder Rule provision. (See 

FTC Advisory Opinion, p. 3 [noting that if an applicable federal or state law “permits 

assessing costs or attorneys’ fees exclusively against the seller” then “[t]he holder’s 

obligation to pay costs or fee awards ... would be limited to the amount paid by the 

consumer.”]; see also id., at pp. 3–4 [clarifying that “the 2019 Rule Confirmation says 

that nothing in the Holder Rule limits recovery of attorney fees if a federal or state law 

separately provides for recovery of attorneys’ fees independent of claims or defenses 

arising from the seller’s misconduct,” italics added].)

B. Section 1459.5 Is Not Preempted and Plaintiffs Are Entitled to Its Benefit

As discussed above, Pulliam concluded the 2019 Rule Confirmation was not 

entitled to deference on the issue of attorney fee recovery. (Pulliam, supra, 60 

Cal.App.5th at p. 421–422.). We agree with Pulliam’s deference analysis. Moreover, as 

we now know, the FTC contends that courts applying the deference doctrine to the 2019 

Rule Confirmation to arrive at the conclusion that section 1459.5 is preempted have 

misconstrued the 2019 Rule Confirmation. (FTC Advisory Opinion, p. 1.) The FTC has 
20.

expressly stated its disagreement with those cases. (Id., at p. 1, fn. 1 & 2.) As a result, 

we conclude section 1459.5 is not preempted.7

But for the enactment of section 1459.5, we would likely view the Holder Rule 

provision as limiting a prevailing party’s ability to recoup attorney fees from a holder in 

excess of amounts paid pursuant to a retail installment contract. With the passage of 

section 1459.5, however, such a prevailing party may now obtain an award of attorney 

fees even if it exceeds the amount he or she has paid under the contract. We conclude 

there is no conflict between section 1459.5 and the Holder Rule provision.8

Here, the trial court, having followed Lafferty in ruling on plaintiff’s motion for 

attorney fees, indicated it was “unwilling to apply” section 1459.5 because it had not yet 

taken effect and was preempted by the [2019] Rule Confirmation – thereby applying a 

similar rationale as Spikener which had not yet been decided. We conclude, however,

7 While the FTC Advisory Opinion presents itself as consistent with the 2019 Rule 

Confirmation, we do not read the two as completely harmonious. However, despite their 

friction points, the 2019 Rule Confirmation, the FTC Advisory Opinion and the Holder 

Rule are consistent on at least this point: the FTC did not intend for the Holder Rule to 

preempt all state statutes and rules of contract in unyielding pursuit of its policy 

objective. Instead, the Holder Rule means no more and no less than what it says: 

consumer contracts must include a particular provision.

The FTC presumably could have promulgated the Holder Rule as a direct, 

substantive rule of law, rather than as a mandatory provision in contracts. But it did not. 

And because the Holder Rule manifests solely as contract language, it is inherently 

subject to all the ways in which litigation outcomes might differ from what is expressly 

contemplated by a contract. One such example is when a state statute overrides a 

contractual provision. Here, section 1459.5 does just that. While we assume the Holder 

Rule could have been formulated in a fashion that would preempt statutes like section 

1459.5, we remain unconvinced it has that effect here.

8 Of course, abrogation of a rule or principle that limits attorney fee recoveries 

may result in exploitive action and lead to awards that are substantially larger than the 

actual damages suffered by a claimant. It is up to our courts to assure the just evaluation 

of such awards.
21.

there is no bar to application of section 1459.5 to the matter before us even though it had 

not taken effect when the trial court initially ruled on plaintiffs’ fee motion.9

Absent a legislative directive to the contrary, California courts generally apply 

newly enacted cost and fee statutes to cases pending at the time of enactment. (USSPosco Industries v. Case (2016) 244 Cal.App.4th 197, 220–222.) This is true even 

though the costs or fees at issue were incurred prior to the effective date of the new 

statute. (Id. at p. 201; Stockton Theatres, Inc. v. Palermo (1956) 47 Cal.2d 469, 477.) It 

is also true where a trial court has denied a fee motion and the issue is pending appeal. 

(Woodland Hills Residents Association., Inc. v. City Council of Los Angeles (1979) 23 

Cal.3d 917, 925–926, 929.) “Under California Supreme Court precedent, statutory 

provisions that alter the recovery of attorney fees are deemed procedural in nature and 

apply to pending litigation.” (USS-Posco Industries v. Case, at p. 201.)

Because section 1459.5 is currently in effect, plaintiffs are entitled to its benefit.

V. Section 1717

Plaintiffs contend their lawsuit was an “action on a contract” as that phrase is used 

in section 1717 and that, as prevailing parties, they are entitled to an award of attorney 

fees under the statute. Seemingly, plaintiffs broadly argue that any action premised on 

the Holder Rule provision is an “action on a contract” by virtue of the fact the provision 

is contained in the Contract. Beneficial contends plaintiffs’ first amended complaint sets 

forth only tort and statutory claims, does not allege breach of contract, and therefore is 

not an “action on a contract.” We conclude certain causes of action asserted by plaintiffs 

fall within the scope of section 1717 whereas others do not.

9 Section 1459.5 was enacted during the California Legislature’s 2019–2020 

regular session and signed into law on July 12, 2019. (Legis. Counsel’s Dig., Assem. Bill 

No. 1821 (2019–2020 Reg. Sess.).) Subject to exceptions not relevant here, a statute 

enacted during a regular session “shall go into effect on January 1 next following a 90-

day period from the date of enactment ....” (Cal. Const., art. IV, § 8, subd. (c), par. 1; 

Gov. Code, § 9600.)
22.

Section 1717 provides, in relevant part:

“(a) In any action on a contract, where the contract specifically 

provides that attorney[] fees and costs, which are incurred to enforce that 

contract, shall be awarded either to one of the parties or to the prevailing 

party, then the party who is determined to be the party prevailing on the 

contract, whether he or she is the party specified in the contract or not, shall 

be entitled to reasonable attorney[] fees in addition to other costs.

“Where a contract provides for attorney[] fees, as set forth above,

that provision shall be construed as applying to the entire contract, unless 

each party was represented by counsel in the negotiation and execution of 

the contract, and the fact of that representation is specified in the contract.” 

(§ 1717, subd. (a).)

Auto Cruz assigned the Contract to Beneficial. As a result, Beneficial succeeded 

to the rights of Auto Cruz under the Contract including the right to enforce the Contract 

and its attorney fee provision. (Johnson v. County of Fresno (2003) 111 Cal.App.4th 

1087, 1096 [“assignment carries with it all the rights of the assignor”]; see U. Comm. 

Code, § 3203, subd. (d) [same for assignments of negotiable instruments]; Finalco, Inc. v. 

Roosevelt (1991) 235 Cal.App.3d 1301, 1306–1308 [assignee of promissory note entitled 

to benefit of its attorney fee provision].) 

Here, the attorney fee provision was one-sided – conferring upon the seller 

(Manna/Auto Cruz) or its assignee (Beneficial), the right to seek an award of attorney 

fees incurred through successful efforts “to collect what [plaintiffs] owe ...” under the 

Contract. Section 1717, subdivision (a) makes the remedy mutual as to plaintiffs. 

Moreover, because there is no evidence, nor any notation, in the Contract that plaintiffs 

were represented by counsel in negotiating the Contract, the “provision shall be construed 

as applying to the entire contract.” (Ibid.) Thus, the provision is not limited to fees 

incurred in collection efforts. (See Harbor View Hills Community Association v. Torley

(1992) 5 Cal.App.4th 343, 348–349 [although prior case law held a provision “may limit 

an award of attorney fees to certain actions or specific provisions of the contract,” section 

1717 now provides otherwise].)
23.

Both parties agree section 1717 has been liberally construed by California courts. 

(See, e.g., Milman v. Shukhat (1994) 22 Cal.App.4th 538, 544 [legislative history of 

section 1717 requires liberal interpretation of phrase “ ‘on a contract’ ”]; Dell Merk, Inc. 

v. Franzia (2005) 132 Cal.App.4th 443, 455 [same].) “It is now settled that a party is 

entitled to attorney fees under section 1717 ‘even when the party prevails on grounds the 

contract is inapplicable, invalid, unenforceable or nonexistent, if the other party would 

have been entitled to attorney[] fees had it prevailed.’ ” (Hsu v. Abbara (1995) 9 Cal.4th 

863, 870.) “To achieve [section 1717’s] goal, the statute generally must apply in favor of 

the party prevailing on a contract claim whenever that party would have been liable under 

the contract for attorney fees had the other party prevailed.” (Id. at pp. 870–871.)

Tort claims or other noncontract claims may, or may not, trigger a contractual 

attorney fee provision depending on the wording of the provision. (Santisas v. Goodin

(1998) 17 Cal.4th 599, 602, 608.) “If a contractual attorney fee provision is phrased 

broadly enough, ... it may support an award of attorney fees to the prevailing party in an 

action alleging both contract and tort claims: ‘[P]arties may validly agree that the 

prevailing party will be awarded attorney fees incurred in any litigation between 

themselves, whether such litigation sounds in tort or in contract.’ ” (Id. at p. 608.)

Here, the fee provision was narrowly worded to apply only to attorney fees 

incurred in collecting amounts owed under the Contract. Although section 1717 operates 

to broaden the fee provision to apply to the entire Contract, it remains limited to contract 

claims and claims sounding in contract. (Santisas v. Goodin, supra, 17 Cal.4th at p. 615

[claim sounding in contract is an “ ‘action on a contract’ within the meaning of section 

1717”].) The fee provision, as worded and broadened by section 1717, cannot rationally 

be interpreted to extend to claims sounding in tort.

As some courts have acknowledged, “ ‘ “[i]t is difficult to draw definitively from 

case law any general rule regarding what actions and causes of action will be deemed to 

be ‘on a contract’ for purposes of [section] 1717.” ’ ” (Douglas E. Barnhart, Inc. v. CMC 
24.

Fabricators, Inc. (2012) 211 Cal. App. 4th 230, 241, citing Hyduke’s Valley Motors v. 

Lobel Financial Corp. (2010) 189 Cal.App.4th 430, 435.) 

“The phrase ‘action on a contract’ includes not only a traditional action for 

damages for breach of a contract containing an attorney fees clause 

[citation], but also any other action that ‘involves’ a contract under which 

one of the parties would be entitled to recover attorney fees if it prevails in 

the action [citation]. ‘In determining whether an action is “on the contract” 

under section 1717, the proper focus is not on the nature of the remedy, but 

on the basis of the cause of action.’ ” (Douglas E. Barnhart, Inc. v. CMC 

Fabricators, Inc., supra, 211 Cal.App.4th at pp. 240–241.)

Courts have determined that actions for rescission or cancellation of a contract 

may be considered actions “on a contract” for purposes of section 1717. (See, e.g., Leaf 

v. Phil Rauch, Inc. (1975) 47 Cal.App.3d 371, 378 [rescission of motor vehicle 

conditional sale contract]; Hastings v. Matlock (1985) 171 Cal.App.3d 826, 841 

[rescission] (Hastings); Star Pacific Investments, Inc. v. Oro Hills Ranch, Inc. (1981) 121 

Cal.App.3d 447, 463 [cancellation based on lack of consideration and intentional 

misrepresentation].) 

Here, plaintiffs alleged the vehicle they purchased was subject to express 

warranties on the engine and transmission and the implied warranty of merchantability.10 

They alleged that the vehicle did not conform to the warranties provided, that Auto Cruz 

failed to fix the vehicle’s mechanical defects, and that the vehicle stopped running and 

became inoperable. They further allege that Auto Cruz violated the CLRA by, among 

other things, misrepresenting the vehicle’s condition, selling a vehicle that was not 

merchantable, and refusing and failing to repair the vehicle as warranted. They allege 

Auto Cruz violated Song-Beverly by breaching the express warranty on the vehicle and 

the implied warranty of merchantability.

10 “Unless excluded or modified ([U. Comm. Code,] § 2316), a warranty that the 

goods shall be merchantable is implied in a contract for their sale if the seller is a 

merchant with respect to goods of that kind.” (U. Comm. Code, § 2314.) 
25.

Claims for breach of an express warranty are based on the parties’ agreement and 

sound in contract. (Hauter v. Zogarts (1975) 14 Cal.3d 104, 117.) Conversely, “the 

implied warranty of merchantability arises by operation of law.” (Ibid.) Courts have 

held that the breach of obligations implied at law in contract matters, and the breach of 

contractual obligations implied in fact, fall within the scope of section 1717. (Hjelm v. 

Prometheus Real Estate Group, Inc. (2016) 3 Cal.App.5th 1155, 1168–1160 [§ 1717 

applicable to claim for breach of implied warranty of habitability]; Schoolcraft v. Ross

(1978) 81 Cal.App.3d 75, 82 [§ 1717 applicable to claim for breach of implied covenant 

of good faith and fair dealing]; A&M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 

473, 495 [§ 1717 applicable to claim for breach of implied warranty of fitness for 

particular purpose].) “The parties’ ‘total legal obligation’ may be a composite of written 

terms, oral expression and responsibilities implied by law. All may be enforced by an 

‘action on [the] contract.’ ” (A&M Produce Co. v. FMC Corp., at p. 495, fn. omitted.)

That plaintiffs styled their causes of action as violations of the CLRA and SongBeverly does not alter the fact that the primary right at issue was contractual in nature. 

(See Perry v. Robertson (1988) 201 Cal.App.3d 333, 339–344 [drafting cause of action as 

“negligence” is not dispositive, and claim may still sound in contract thereby permitting 

application of § 1717].) Similarly, the fact the California Legislature has seen fit to 

provide consumers with additional remedies for certain contractual claims does not alter 

the nature of the action. Notably, the remedies provided under the CLRA and SongBeverly are cumulative and are in addition to any remedies otherwise provided under the 

law. (§§ 1752, 1790.4.)

We conclude plaintiffs’ first and fourth causes of action under the CLRA and 

Song-Beverly, respectively, sound in contract. Moreover, it is not unreasonable to 

suspect that, had Beneficial been successful in defending against these causes of action, it 

would have been entitled to an award of attorney fees against plaintiffs because it would 
26.

have vindicated its right to payment under the Contract.11 The mutuality of remedy 

doctrine espoused in section 1717 requires that plaintiffs be afforded the same right to an 

award of attorney fees.

Our conclusion is different with respect to plaintiffs’ causes of action for fraud and 

negligent misrepresentation. A cause of action for fraudulent inducement is not “on the 

contract” for purposes of section 1717. (Schlocker v. Schlocker (1976) 62 Cal.App.3d 

921, 922–923, italics omitted.) “A tort action for fraud arising out of a contract is not, 

however, an action ‘on a contract’ within the meaning of [section 1717].” (Stout v. 

Turney (1978) 22 Cal.3d 718, 730.) “[A]n action for negligent misrepresentation is not 

an action to enforce the provisions of a contract.” (McKenzie v. Kaiser-Aetna (1976) 55 

Cal.App.3d 84, 89.) 

Plaintiffs contend “when the plaintiff’s claim seeks rescission based on fraud, the 

courts have concluded such claim does sound in contract and permits the award of fees 

under section 1717.” In support of this contention, plaintiffs cite to Super 7 Motel 

Associates v. Wang (1993) 16 Cal.App.4th 541, 549 (Super 7), citing Hastings, supra, 

171 Cal.App.3d at p. 841 and In re: Mac-Go Corporation (Bankr.N.D.Cal 2015) 541 

B.R. 706, 715–716 (Mac-Go). These cases do not aid plaintiffs.

Super 7 is relevant only to the extent it cites Hastings, supra, 171 Cal.App.3d at 

p. 841 for the legal principle asserted by plaintiffs. Otherwise, the case is inapposite in 

that the holding of the court was that the attorney fee claimant was not a party to the 

11 The California Supreme Court has noted that the provision in Song-Beverly that 

“ ‘costs and expenses, including attorney[] fees’ ” are to be awarded to a prevailing buyer 

(§ 1794, subd. (d)) is silent as to a prevailing seller and, thus, does not preclude a 

prevailing seller from obtaining an award of costs and expenses. (Murillo v. Fleetwood 

Enterprises, Inc. (1998) 17 Cal.4th 985, 991, 999.) By parity of reasoning, the same 

would hold true for an award of attorney fees. Moreover, a prevailing seller under the 

CLRA may recover fees if the consumer’s action was not brought in good faith. (§ 1780, 

subd. (e); Corbett v. Hayward Dodge, Inc. (2004) 119 Cal.App.4th 915, 920.)
27.

contract containing the attorney fee provision and, thus, any potential liability was not 

premised on the contract. (Super 7, supra, 16 Cal.App.4th at pp. 549–550.)

In Hastings, the fee provision stated “ ‘[i]f any party to this agreement, ... shall 

institute any legal action against any other party to this agreement, the prevailing party 

shall be entitled to court costs and reasonable attorney[] fees ....” (Hastings, supra, 171 

Cal.App.3d at p. 831.) Because the contractual provision did “not limit recovery of such 

fees to any particular form of action involving the contract,” the court allowed recovery 

of attorney fees. (Id. at 841.) Thus, it appears Hastings was predicated on the breadth of 

the attorney fee provision at issue. Here, the attorney fee provision is much narrower 

than in Hastings.

In Mac-Go, the court premised its holding on several facts distinguishable from 

the case at bar. Mac-Go involved adversary proceedings by a bankruptcy trustee to 

recover alleged preferential transfers made to a creditor bank (11 U.S.C.A § 547), and to 

avoid fraudulent transfers allegedly made to the bank in fraud of other creditors (id. at 

§ 548). (Mac-Go, supra, 541 B.R. at pp. 715–717.) Unlike plaintiffs’ claims, the alleged 

“fraud” at issue in Mac-Go was not fraud in the inducement of the relevant contracts. 

Moreover, in determining that section 1717 applied to the adversary proceedings, the 

court noted that several of the creditor bank’s affirmative defenses were contractually 

based and were successfully relied upon by the bank. (Mac-Go, at p. 715.) The Mac-Go

court held the contractual fee provisions at issue “were sufficiently broad to include the 

fees and costs that [the bank] incurred in defending against the Trustee’s preference 

claim, since [the bank’s] defense was premised on its ‘enforcement’ of [the underlying 

contracts].” (Id. at p. 716.) The facts of Mac-Go bear little, if any, similarity to present 

case.

We conclude plaintiffs are not entitled to an award of attorney fees in connection 

with plaintiffs’ second and third causes of action for fraud and negligent 
28.

misrepresentation, respectively.12 We acknowledge that it may be difficult or impractical 

to segregate plaintiffs’ attorney fees among the claims for which an attorney fee award is 

proper (i.e., the CLRA and Song-Beverly causes of action) and those for which such an 

award is not proper. However, it is not for this court to make that determination.

VI. Section 2983.4

Plaintiffs admit they did not seek an award of attorney fees under section 2983.4 

in their motion for attorney fees. Citing Ward v. Taggart (1959) 51 Cal.2d 736, 742, 

plaintiffs contend this court should consider the argument they are entitled to a fee award 

under said section because “[n]ew, purely legal arguments based on undisputed facts may 

be raised for the first time on appeal.” In response, Beneficial contends the argument has 

been waived and “[e]ven if this final argument raises only legal questions,” this court 

should not consider plaintiffs arguments because “[d]oing so would be unfair to the trial 

court which never had an opportunity to rule on the question.”

“ ‘It is the general rule that a party to an action may not, for the first time on 

appeal, change the theory of the cause of action. [Citations.] There are exceptions but 

the general rule is especially true when the theory newly presented involves controverted 

question of fact or mixed questions of law and fact. If a question of law only is presented 

on the facts appearing in the record the change in theory may be permitted. [Citation.]’ 

[Citation.]” (Retzloff v. Moulton Parkway Residents’ Association, No. One (2017) 14 

Cal.App.5th 742, 747.) However, an appellate court is not required to consider a new 

theory on appeal even if the issue is purely one of law. (Greenwich S.F., LLC v. Wong

(2010) 190 Cal.App.4th 739, 767; Hussey-Head v. World Savings & Loan Assn. (2003) 

111 Cal.App.4th 773, 783, fn. 7.) 

12 Plaintiffs do not contend on appeal that they are entitled to attorney fees in 

connection with their causes of action for violation of Vehicle Code section 11713 and 

Business and Professions Code section 17200. Accordingly, we express no opinion in 

that regard.
29.

Plaintiffs waived the argument that section 2983.4 entitles them to an award of 

attorney fees by failing to raise it below in its motion for attorney fees. Moreover, we 

note plaintiffs did not allege a cause of action under the Automobile Sales Finance Act

(§ 2981 et seq.) of which section 2983.4 is a part. Given that this matter was resolved by 

settlement in reliance of the causes of action asserted, we believe it would be 

inappropriate to consider the argument for the first time on appeal.

DISPOSITION

We reverse the trial court’s denial of plaintiffs’ motion for attorney fees and 

remand to the trial court for further proceedings consistent with this opinion. Plaintiffs 

are awarded their costs on appeal.

POOCHIGIAN, ACTING P. J.

WE CONCUR:

SMITH, J.

SNAUFFER, J.