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FRESNO, Calif. (Legal Newsline) - Lawyers who represented a couple who sought to reverse the purchase of a used car that turned out to be a lemon may collect nearly $60,000 in fees and costs from the lender, a California appeals court ruled.
Digna Reyes and Sylvester Fulton IV bought a used car from Auto Cruz in 2016, signing a finance contract under which the loan was sold to Beneficial State Bank. The car turned out to have serious mechanical problems and Reyes and Fulton sought to reverse the transaction, but Auto Cruz refused. The couple sued the dealer and Beneficial under California’s lemon law.
The lemon law includes a provision referring to the Federal Trade Commission’s Holder Rule, a 1975 regulation requiring lenders to refund loan payments plus attorneys’ fees if the seller engaged in fraud or misrepresentation.
Beneficial agreed to a compromise in January 2019, under which it would pay fees and costs as determined by the court. The plaintiffs submitted a request for $53,134.50 in fees and $6,629.41 in costs but the trial court awarded only costs, citing a provision of the Holder Rule limiting recoveries to the amount the consumer paid against a loan.
California’s Fifth Appellate District reversed and remanded in a March 22 decision, ruling that California law allows consumers to collect legal fees in excess of what they paid on a loan.
The Federal Trade Commission implemented the Holder Rule in 1975 so that lenders couldn’t collect on loans that were taken out in fraudulent transactions, but it limited recoveries to the amount borrowers paid to the lender. After a California appeals court held that borrowers couldn’t recover legal fees in excess of that, the California legislature passed a law in 2019 specifying that lenders could be required to pay attorney fees in addition to refunding the amount paid on the loan.
The Trump administration FTC in 2019 issued a “Rule Confirmation” stating that consumers could recover attorney fees under state or federal law for reasons unrelated to seller misconduct but otherwise were limited to the amount they paid on the loan. California appeals courts then divided over whether the FTC rule preempted California law. Finally, the FTC under the Biden administration this year issued an advisory opinion saying the Holder Rule doesn’t prevent consumers from recovering fees under state law.
The trial court ruled against the plaintiffs in part because the California law was passed after it ruled on the plaintiffs’ request for fees. But the appeals court said the law was in effect when the issue came before it and should apply. A separate California law allows borrowers to collect attorney fees if the loan contract includes a one-sided provision allowing the lender to recover fees if it takes legal action to collect a loan.