Court Opinion

ID: 6113669
Source: CourtListenerOpinion
Date Created: 2022-01-28 20:01:47.289407+00
Date Added: 2024-06-11T08:03:00.021291
License: Public Domain

Filed 1/28/22
                CERTIFIED FOR PUBLICATION

 IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                 SECOND APPELLATE DISTRICT

                         DIVISION EIGHT

 JONATHAN ALEJANDRO                    B306976
 MELENDEZ,

       Plaintiff and Respondent,       Los Angeles County
                                       Super. Ct. No. BC722737
         v.

 WESTLAKE SERVICES, LLC,

      Defendant and Appellant.

     APPEAL from a judgment of the Superior Court of Los
Angeles County, Michael L. Stern, Judge. Affirmed.

      Madison Law, Jenos Firouznam-Heidari, James S. Sifers and
Brett K. Wiseman for Defendant and Appellant.

     Rosner, Barry & Babbitt, Hallen D. Rosner, Arlyn L.
Escalante and Michael A. Klitzke for Plaintiff and Respondent.

                ____________________________________
                              SUMMARY
      The Federal Trade Commission’s “holder rule” makes the
holder of a consumer credit contract subject to all claims the debtor
could assert against the seller of the goods or services obtained
under the contract (or its proceeds). The holder rule also caps the
debtor’s recovery from the holder to the amount paid by the debtor
under the contract. The question in this and several recent or
pending cases is whether this limitation on recovery precludes the
debtor from recovering attorney fees the debtor incurs in obtaining
redress from the holder. We hold, agreeing with Pulliam v. HNL
Automotive Inc. (2021) 60 Cal.App.5th 396, review granted April 28,
2021, S267576 (Pulliam), that the limitation does not preclude
recovery of attorney fees. We further hold the limitation does not
preclude recovery of costs, nonstatutory costs, or prejudgment
interest.
      We affirm the trial court’s judgment.
                                 FACTS
      In March 2018, plaintiff Jonathan Alejandro Melendez
purchased a used 2015 Toyota Camry from Southgate Auto, Inc.,
doing business as Express Auto Lending, under a retail installment
sales contract. Southgate assigned the contract to defendant
Westlake Services, LLC, doing business as Westlake Financial
Services.
      In September 2018, plaintiff sent defendant a notice alleging
Southgate violated the Consumer Legal Remedies Act (CLRA;
Civ. Code, § 1750 et seq.) and demanding rescission, restitution and
an injunction. Plaintiff later sued both Southgate and defendant.
Plaintiff alleged violations of the CLRA, the Song-Beverly
Consumer Warranty Act (Civ. Code, § 1790 et seq.), Civil Code
section 1632 (requiring translation of contracts negotiated primarily
in Spanish), and the unfair competition law (Bus. & Prof. Code,

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§ 17200 et seq.), plus causes of action for fraud and negligent
misrepresentation.
      During the litigation, defendant assigned the contract back to
Southgate. In December 2019, default was entered against
Southgate, and plaintiff and defendant settled the case.
      Under the settlement, defendant agreed to pay plaintiff
$6,204.68 (representing a $2,500 down payment and $3,704.68
plaintiff paid in monthly payments). The parties acknowledged
that Southgate was the current holder of the contract and would
waive any balance due, so that plaintiff would have no further
obligations under the contract. The parties further agreed plaintiff
could file a motion for attorney fees, costs, expenses and
prejudgment interest with respect to his claims against defendant;
plaintiff was the prevailing party on all claims; defendant was not
precluded from disputing plaintiff’s entitlement to attorney fees and
the other items; and defendant was entitled to assert all available
defenses to plaintiff’s motion, “including the defense that no fees at
all should be awarded against it as a Holder as that term is defined
at law.”
       The trial court granted plaintiff’s motion. The court awarded
$115,987.50 in attorney fees; $2,956.62 in prejudgment interest;
and costs of $14,295.63, for a total of $133,239.75, jointly and
severally against defendant, Southgate and two other defendants.
      Defendant filed a timely appeal.
                            DISCUSSION
1.    The Legal Background
      The holder rule is contained in a regulation issued by the
Federal Trade Commission (FTC) in 1975. It is a consumer
protection measure that “abrogate[s] the holder in due course rule
for consumer installment sale contracts that are funded by a
commercial lender.” (Lafferty v. Wells Fargo Bank, N.A. (2018)

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25 Cal.App.5th 398, 410 (Lafferty).) The regulation (16 C.F.R.
§ 433.2 (2022)) makes it an unfair or deceptive act or practice for a
seller to take or receive a consumer credit contract which does not
contain the following provision in large, boldface type: “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.” (Capitalization omitted.)
       “ ‘ “ ‘In abrogating the holder in due course rule in consumer
credit transactions, the FTC preserved the consumer’s claims and
defenses against the creditor-assignee. The FTC rule was therefore
designed to reallocate the cost of seller misconduct to the creditor.
The commission felt the creditor was in a better position to absorb
the loss or recover the cost from the guilty party—the seller.’ ” ’ ”
(Lafferty, supra, 25 Cal.App.5th at p. 411.)
       As mentioned at the outset, the principal point at issue is
whether the limitation on recovery to “amounts paid by the debtor
hereunder” means a consumer cannot recover attorney fees from
the creditor-assignee. (16 C.F.R. § 433.2 (2022).) In California,
there were no published precedents on this issue for the 40 years
after the rule was issued. Then, in 2018, Lafferty held that the
plaintiffs were “limited under the plain meaning of the Holder Rule
to recovering no more than” the amount they paid under terms of
their loan. (Lafferty, supra, 25 Cal.App.5th at p. 405; ibid. [“the
trial court properly denied the [plaintiffs’] request for attorney fees
and nonstatutory costs in excess of their recovery of the amount
they actually paid under the loan”].)
       The Legislature promptly passed a statute “to restore
California courts’ interpretation of the Holder Rule . . . to the
meaning it had for more than 40 years until [the Lafferty] decision.”

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(Assem. Com. on Judiciary, Analysis of Assem. Bill No. 1821 (2019–
2020 Reg. Sess.) Apr. 9, 2019, pp. 1, 3–6.) The legislative analysis
explains that holder-rule cases “typically settle before trial,” and
“the relatively low actual damages against lenders make appeals
uneconomical,” so “there are few pre-Lafferty California appellate
decisions addressing whether attorney’s fees are limited by the
Holder Rule.” (Analysis of Assem. Bill No. 1821, supra, at p. 4.)
One exception was an unpublished case concluding the holder-rule
limitation did not apply to attorney fees; the legislative analysis
concluded that case’s holding “represents the consensus among
California courts before 2018: that the Holder Rule does not cap
attorney’s fees, only the plaintiff’s damages.” (Analysis of Assem.
Bill No. 1821, supra, at p. 5.)
        Assembly Bill No. 1821 became law and went into effect on
January 1, 2020. It is codified as Civil Code section 1459.5 and
states: “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 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.” (Stats. 2019, ch. 116, § 1, as
amended by Stats. 2020, ch. 370, § 28.)
        Meanwhile, in other states, some courts found the holder
rule’s cap precluded recovery of attorney fees, others found it did
not, and others imposed attorney fees on holders without
addressing the issue. (See Pulliam, supra, 60 Cal.App.5th at p. 411
(citing cases).)
        Also, in December 2015 the FTC requested comments 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

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regulations and guides.” (80 Fed.Reg. 75018 (Dec. 1, 2015).) In
May 2019, the FTC completed its regulatory review, and
determined to retain the holder rule in its present form.
(84 Fed.Reg. 18711 (May 2, 2019).) In issuing its “[c]onfirmation of
rule,” among other things the FTC discussed six comments it
received addressing “whether the Rule’s limitation on recovery to
‘amounts paid by the debtor’ allows or should allow consumers to
recover attorneys’ fees above that cap.” (Id. at p. 18713.) The FTC
stated: “Four comments supported having no cap on recovery of
attorneys’ fees, while one opposed it and one proposed a set fee
schedule in some circumstances. According to the comments, some
courts have permitted fees above the cap, while others have not.”
(Id. at p. 18713, fn. omitted.)
       After describing the comments and its view of the rule, the
FTC summarized: “The Commission does not believe that the
record supports modifying the Rule to authorize recovery of
attorneys’ fees from the holder, based on the seller’s conduct, if that
recovery exceeds the amount paid by the consumer.” (84 Fed.Reg.,
supra, at p. 18713.) The FTC explained: “We conclude that if a
federal or state law separately provides for recovery of attorneys’
fees independent of claims or defenses arising from the seller’s
misconduct, nothing in the 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 attorneys’ fees—cannot exceed the amount the consumer
paid under the contract. Claims against the seller for attorneys’
fees or other recovery may also provide a basis for set off against
the holder that reduces or eliminates the consumer’s obligation.”
(Ibid.)

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       In 2020, the First District decided Spikener v. Ally Financial,
Inc. (2020) 50 Cal.App.5th 151 (Spikener). Spikener held the FTC’s
interpretation of the holder rule in 2019 was entitled to deference,
and was “dispositive on the Holder Rule’s application to attorney
fees.” (Spikener, at pp. 158, 158–160.) Spikener held that, “to the
extent [Civil Code] section 1459.5 authorizes a plaintiff’s total
recovery—including attorney fees—for a Holder Rule claim to
exceed the amount the plaintiff paid under the contract, it directly
conflicts with the Holder Rule and is therefore preempted.” (Id. at
pp. 162–163.)
       Finally, in Pulliam, supra, 60 Cal.App.5th 396, review
granted, Division Five disagreed with Lafferty, concluding “the
Holder Rule’s cap itself does not apply to attorney fees.” (Pulliam,
at pp. 412, 412–416.) Pulliam also disagreed with Spikener
(Pulliam, at pp. 421–422), concluding “the FTC’s interpretation to
the contrary is not entitled to deference [and] the Holder Rule is
consistent with [Civil Code] section 1459.5.” (Pulliam, at pp. 422,
416–422.)
2.     Contentions and Conclusions
       a.    Attorney fees
       We conclude, consonant with Pulliam, that the holder-rule
limitation on recovery does not apply to attorney fees, and the
FTC’s contrary interpretation is not entitled to deference. As in
Pulliam, we need not consider Civil Code section 1459.5, which is
consistent with our construction of the holder rule.
       We summarize the pertinent points, which are elaborated in
detail in Pulliam.
       Pulliam begins by addressing the statutory interpretation
issue: whether the word “recovery” as used in the holder rule
includes attorney fees. Pulliam concludes it does not, first citing
the dictionary definition of “recovery” as the “ ‘regaining or

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restoration of something lost or taken away.’ ” (Pulliam, supra,
60 Cal.App.5th at p. 413.) This definition, the court says, “focuses
on damages, i.e. restoring money that was taken away from the
plaintiff, and does not expressly address attorney fees.” (Ibid.)
(Defendant argues that Pulliam relied on the current definition of
“recovery” in Black’s Law Dictionary (11th ed. 2019, available at
Westlaw), but should have relied on the definition in the edition
used in 1975 when the holder rule was issued. This gets defendant
nowhere, because that definition includes similar language: “the
obtaining, by [a] judgment, of some right or property which has
been taken or withheld from [a person].” (Black’s Law Dict. (rev.
4th ed. 1968) p. 1440, col. 1.)
      Next, Pulliam rejects precedents relied on in Lafferty, in
contexts outside the holder rule, that discuss recovery as a broad
term including attorney fees. (Pulliam, supra, 60 Cal.App.5th at
p. 413.) Pulliam describes the legislative history of the holder rule
in detail (Pulliam, at pp. 413–415), and recounts subsequent
statements at a 1976 congressional hearing by the acting director of
the FTC’s Bureau of Consumer Protection (id. at pp. 414–415).
Among other things, the acting director recounted “one express
cautionary limitation on a creditor’s exposure. The consumer may
never recover consequential damages under the provision which
exceed the amount of the credit contract.” (Pulliam, at p. 415.)
      Pulliam observed that the acting director’s comments
“indicate that at the time the FTC’s position on the limitation on
recovery was that the rule limited consequential damages, not
attorney’s fees.” (Pulliam, supra, 60 Cal.App.5th at p. 415.)
Including attorney fees in the limitation on recovery, the court said,
“would be out of sync with [the holder rule’s] objective of
reallocating the costs of the seller’s misconduct from the consumer
back to the seller and creditor.” (Ibid.) Similarly, in staff

                                  8
guidelines on the rule issued in 1976, the staff, discussing the
limitation on the creditor’s liability, stated that “[t]he consumer
may not assert [against] the creditor any rights he might have
against the seller for additional consequential damages and the
like.” (41 Fed.Reg. 20023 (May 14, 1976).)
       Pulliam ultimately concludes that “[b]oth consumer rights
and the rule’s purpose would be frustrated if attorney fees were not
recoverable from both the seller and the creditor-assignee.”
(Pulliam, supra, 60 Cal.App.5th at p. 416.) We agree with this
analysis.
       Pulliam then addresses the FTC’s 2019 rule confirmation,
described above, and concludes the FTC’s contrary interpretation of
the holder rule is not entitled to deference. (Pulliam, supra,
60 Cal.App.5th at pp. 419–422.) We agree with this analysis as
well.
       After describing the rule confirmation proceeding and
comments the FTC received (Pulliam, supra, 60 Cal.App.5th at
pp. 416–419), Pulliam analyzed the doctrine of deference to an
agency’s interpretation of its own regulations, as described by the
high court in Kisor v. Wilkie (2019) 588 U.S. ___ [139 S.Ct. 2400]
(Kisor). (Pulliam, at pp. 419–420.) Kisor reaffirmed the doctrine
and its limitations, instructing courts to “make an independent
inquiry into whether the character and context of the agency
interpretation entitles it to controlling weight,” and indicated there
is no “exhaustive test.” (Kisor, supra, 139 S.Ct. at p. 2416.) Kisor
describes several “especially important markers for identifying”
when deference “is and is not appropriate.” (Ibid.) Briefly, the
regulatory interpretation must be the agency’s authoritative or
official position; must “in some way implicate its substantive
expertise”; must reflect “fair and considered judgment”; and must
not create unfair surprise to regulated parties, which may occur

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when an agency substitutes one view of a rule for another. (Kisor,
supra, 139 S.Ct. at pp. 2416–2418.)
       Pulliam analyzes each of the Kisor factors (Pulliam, supra,
60 Cal.App.5th at p. 420), and rejects Spikener’s analysis as
incorrect (Pulliam, at p. 421). Among other points, the court in
Pulliam was not convinced the FTC’s rule confirmation “truly
represented the ‘ “fair and considered judgment” [necessary] to
receive . . . deference.’ ” (Pulliam, at p. 420.) The court’s conclusion
is persuasive:
       “[W]e find significant that the agency initially had not
previously spoken on the issue, and chose to express its opinion
without seeking formal input on it. Instead, the FTC had requested
comments on the Holder Rule in general terms, seeking arguments
on modifying the rule only if supported by data setting forth the
impact of any proposed modifications on consumers and businesses.
It did not receive that data. Had the FTC issued a modification
based on an analysis of submitted data, or after consideration of
arguments submitted in response to an express notice, it would
have made a stronger case for deference. Instead, the agency, based
on no data and limited argument, spoke on an issue on which it had
previously remained silent for decades, and had not given notice of
an intent to speak. This falls short of the type of considered
analysis entitled to dispositive deference.” (Pulliam, supra,
60 Cal.App.5th at p. 421.)
       Accordingly, we conclude the holder-rule limitation on
recovery does not preclude recovery of attorney fees, and the FTC’s
contrary interpretation is not entitled to deference.1 These

1      After briefing in this case and before oral argument, plaintiff
notified the court and defendant that the FTC has issued an
advisory opinion addressing the holder rule. The advisory opinion
states that Pulliam and cases in other states “correctly conclud[e]

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conclusions eliminate any need to consider defendant’s further
contention that Civil Code section 1459.5 is preempted by the
holder rule.
      b.     Costs, expenses, and prejudgment interest
      Defendant contends the trial court erred in awarding plaintiff
his costs, expenses, and prejudgment interest, objecting to “any
amounts awarded as against [defendant] that exceed the amounts
paid by the consumer under the contract.” These items were not at
issue in Pulliam. However, the rationale described in Pulliam, and
that we adopt here, likewise supports the availability of costs and
expenses to a plaintiff who prevails on a claim based on the holder
rule. (See also Lafferty, supra, 25 Cal.App.5th at p. 415 [concluding
costs of suit under Code of Civil Procedure section 1032,
subdivision (b), “are not curtailed by the Holder Rule”].)
      We likewise agree with the Lafferty court that prejudgment
interest is available to plaintiff. Civil Code section 3287,
subdivision (a) states that “[a] person who is entitled to recover
damages certain, or capable of being made certain by calculation,
and the right to recover which is vested in the person upon a
particular day, is entitled also to recover interest thereon from that

that the Holder Rule does not limit recovery of attorneys’ fees and
costs when state law authorizes awards against a holder,” and
“whether costs and attorneys’ 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 laws to holders is inconsistent with Section 5 of
the FTC Act or that holders should be wholly or partially exempt
from these laws.” (FTC, Commission Statement on the Holder Rule
and Attorneys’ Fees and Costs (Jan. 18, 2022), pp. 1 & 2,
fn. omitted, at  [as of
Jan. 28, 2022] archived at .)

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day . . . .” As Lafferty concludes, “Civil Code section 3287 applies to
every person entitled to recover damages—without reference to the
underlying cause(s) of action for which damages are awarded.”
(Lafferty, supra, 25 Cal.App.5th at p. 416; ibid. [“the limitation on
recovery under the Holder Rule cause of action does not affect
entitlement to prejudgment interest”].)
                             DISPOSITION
       The judgment is affirmed. Plaintiff shall recover his costs on
appeal.

                         GRIMES, Acting P. J.

      WE CONCUR:

                         WILEY, J.

                         HARUTUNIAN, J.*

*     Judge of the San Diego Superior Court, assigned by the Chief
Justice pursuant to article VI, section 6 of the California
Constitution.

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