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SACRAMENTO, Calif. (Legal Newsline) - Settling a split among California appellate courts, the state Supreme Court affirmed an attorney fee award of nearly eight times what the client recovered in a dispute over a car purchase, saying state law trumps a federal rule limiting how much consumers can win by suing their lenders.
California’s Second Appellate District last year approved the windfall for attorneys at Rosner, Barry & Babbit in a lawsuit against HNL Automotive, which is accused of selling plaintiff Tania Pulliam a defective “Certified Pre-Owned” 2015 Nissan Altima, and lender TD Auto Finance. Under the “Holder Rule” promulgated by the Federal trade Commission in 1975, lenders that assume ownership of a consumer-finance contract can be liable for damages related to seller misconduct.
A jury in 2018 returned a verdict in favor of Pulliam for violation of the implied warranty of merchantability under the Song-Beverly Consumer Warranty Act, awarding her $21,957.25. The court then awarded Pulliam’s lawyers $169,602 in fees, which was upheld on appeal.
The California Supreme Court affirmed that judgment in a May 26 decision, overturning parts of two prior appellate decisions that limited the amount of fees consumers can recover in lawsuits against finance companies.
TD Auto Finance argued the FTC’s Holder Rule says recoveries “shall not exceed amounts paid by the debtor,” meaning Pulliam was entitled to no more than what she paid for the car. The California Supreme Court said it took the case to resolve what the word “recovery” means in that context, ruling that it doesn’t include legal fees.
“The FTC had damages in mind when limiting recovery under the Rule, and there is no indication that attorney’s fees were intended to be included within its scope,” the court ruled in an opinion by Justice Goodwin Liu. The agency said in a 2019 review that if state law separately provides for attorney fees – as does California law – the Holder Rule limits don’t apply.
“When plaintiffs represented under contingency arrangements recover attorney’s fees based on fee-shifting provisions, they are not recouping an amount they have already paid to their attorneys; instead, they are being awarded fees that `belong to the attorneys who labored to earn them,’” the Supreme Court said, citing an earlier opinion.
The decision partly overturned Lafferty v. Wells Fargo Bank, a 2018 decision of the Fifth District Appellate Court denying fees in an installment sales contract dispute, and Spikener v. Ally Financial, a 2020 decision by the same court.
In response to Lafferty, the California Legislature enacted Civil Code section 1459.5, designed to “legislatively correct Lafferty by restoring the courts’ previous interpretation of the Holder Rule, thereby ensuring fairness and legal recourse to defrauded consumers.”
The Holder Rule was designed to level the playing field between consumers and sellers by making the ultimate holder of a loan contract liable for seller misconduct, under the theory lenders are in a better position to observe and police improper sales practices than consumers who may only deal with a seller once.
Car dealers and lenders are particularly vulnerable to such suit under lemon laws allowing buyers to recover everything they paid plus attorney fees if a vehicle proves defective. Earlier this year, the Fifth Appellate Division awarded attorneys $53,000 in fees in a lawsuit over a dealer’s refusal to buy back a used car.