Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—CalCtApp: Defective Motor Home Purchaser Could Sue Lender under FTC Holder Rule, but Most Claims Fail, (Feb 6, 2013)

By E. Darius Sturmer, J.D.

The purchasers of an allegedly defective motor home were not precluded under the FTC Holder Rule from pursuing the same legal claims against their lender—Wells Fargo Bank—that they could pursue against the dealer that sold them the vehicle after it failed to make the demanded repairs, a California appellate court has decided (Lafferty v. Wells Fargo Bank, February 4, 2013, Hoch, A.). A trial court’s judgment in favor of Wells Fargo on the basis that the Rule did not permit the purchasers to assert claims against the assigned lender was, therefore, reversed, as was an order awarding attorney fees to the bank.

The Holder Rule is required by the FTC for every consumer installment sale contract that is assigned to a lender. It requires the contract to include the following “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.”

The appellate court disagreed with the trial court’s conclusion that the consumers could not assert claims against a lender that pertained only to the responsibilities of the seller. The plain meaning of the Rule allowed the consumers to assert all of the same claims they might otherwise have had against the dealer, in the appellate court’s view. As stated by an appellate court of a different state in Oxford Financial Companies, Inc. v. Velez (Tex.App. 1991), 807 S.W.2d 460, “[T]he clear and unambiguous language of the contractual provision notifies all potential holders that, if they accept an assignment of the contract, they will be ‘stepping into the seller’s shoes,’ thereby becoming subject to any claims or defenses the debtor can assert against the seller.”

The court declined to follow reported decisions of other jurisdictions that departed from this conclusion, stating that those cases “resort to the secondary authority of the FTC’s stated intent in 1975 for the Holder Rule [indicating claims were limited to instances in which the consumer received little or nothing in value for the transaction] rather than adhering to the plain language employed by the rule.”

Pursuant to the Rule, however, the consumers were limited to a recovery of no more than what they actually paid toward the installment contract.

Although the Holder Rule allowed the same claims against a lender that could be brought against a seller, it did not create any new causes of action, the court noted. However, the consumers did have causes of action against Wells Fargo that arose from other sources, the court added. The complaint sufficiently stated claims against Wells Fargo under the California Consumers Legal Remedies Act and for negligence.

The consumers lacked standing to pursue declaratory and injunctive relief, though, and their allegation of negligent defamation of credit was preempted by the federal Fair Credit Reporting Act, according to the court. Further, the court found that they had forfeited their causes of action for breach of warranty, breach of contract, breach of the covenant of good faith and fair dealing, violation of the California Song-Beverly Consumer Warranty Act, violation of the California Tanner Consumer Protection Act, and unfair business practices. The consumers had failed to address in their appellate filings how the trial court erred in concluding legal grounds separate from the evidentiary issues that the consumers had challenged supported summary adjudication, the court stated.

The case is No. C067812.

Attorneys: Timothy D. Murphy (Law Offices in Timothy D. Murphy) for Patrick Lafferty. Jan T. Chilton (Severson & Werson) for Wells Fargo Bank.

Companies: Wells Fargo Bank.

Cases: ConsumerProtection StateUnfairTradePractices CaliforniaNews