Holder Rule cases could impact many states

A recent California appellate court decision and January Federal Trade Commission guidance indicate consumers could pursue attorneys fees against indirect auto lenders despite the limitations on recovery described in the federal Holder Rule.

Lenders might seek to recoup those attorneys fees from the dealerships that sold the creditors the loans, according to Ignite Consulting Partners compliance attorney Randy Henrick.

"It's a hidden risk," Henrick told the Ethical F&I Managers Conference on April 20.

The Holder Rule is the prominent legalese found at the start of a retail installment sales contract, Hendrick said. The mandatory federal language states that any "holder" who created or received rights to a credit contract for a financed sale — such as a loan for a vehicle sold at a dealership — is subject to the same claims and defenses as the seller in the case of a dispute. However, the rule also says recovery by the borrower after a dispute can't exceed "amounts paid by the debtor hereunder."

One interpretation states that this federal language means a borrower who succeeds in a dispute couldn't collect their attorneys' fees from the lender. Under this analysis, the lender only owes up to the amount paid out in the disputed contract — even if state law specifically allows additional attorneys fees.

This is incorrect, according to a Jan. 18 FTC advisory opinion. The agency said a 2019 FTC comment that discusses the rule put forth similar guidance.

"Some courts have read the commission's statements in a 2019 Rule Confirmation notice regarding the Holder Rule as mandating a different result," the FTC wrote in January. "Insofar as these decisions conclude that the Holder Rule precludes state law from providing for costs or attorneys' fees against the holder, they misconstrue the commission's statements. Neither the rule itself nor the 2019 Rule Confirmation notice say that the Holder Rule invalidates state law or that there is a federal interest in limiting state remedies."

A similar controversy over the Holder Rule's meaning was decided in favor of a California borrower two months after the FTC's advisory opinion.

The California Fifth Circuit Court of Appeals on March 22 ruled in favor of plaintiffs Digna Reyes and Sylvester Fulton IV, who alleged to the trial court that they bought a lemon of a used vehicle from a dealership in 2016 but were unable to return the vehicle.

Reyes and Fulton settled the case for $11,196 and the vehicle. They filed a motion for $6,629.41 in costs and expenses and $53,134.50 in legal fees from Beneficial State Bank. The trial court awarded the costs but denied the fees.

"Attorney fees are what kills you," Henrick said in April.

A California trial court had approved the costs but not the fees, prompting Reyes and Fulton to appeal to the Fifth Circuit.

"The FTC presumably could have promulgated the Holder Rule as a direct, substantive rule of law, rather than as a mandatory provision in contracts," the Fifth Circuit opinion by then-acting Presiding Justice Charles Poochigian states. "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."

California's First, Second and Third appellate districts have also in recent years offered interpretations of the treatment of legal fees under the Holder Rule.

The FTC in January said the First and Third California districts made errors in their respective 2020 and 2018 decisions. It also said the Second District was right to have upheld attorneys fees in 2021.

Defendant TD Auto Finance has appealed that Second District opinion, which awarded plaintiff Tania Pulliam $169,602 in attorneys fees and $21,957.25 in damages. The California Supreme Court heard arguments March 1.

If the Supreme Court overturns the Pulliam appellate decision, "everyone can breathe a sigh of relief," Nisen & Elliott Managing Partner Kenneth Rojc told an Auto Finance Summit audience last fall.

If the verdict is upheld, "there would be tremendous incentives for attorneys to No. 1, run up the fee, and No. 2, don't settle," he said then.