Center Files Amicus Brief Explaining Consumers’ Ability To Recover Attorneys’ Fees In Cases Against Holders Of Credit Contracts

November 17, 2021

The Center filed an amicus brief in Pulliam v. HNL Automotive, a case before the California Supreme Court that will determine whether defrauded consumers may collect attorneys’ fees against third-party finance companies pursuant to the FTC Holder Rule. The FTC Rule allows consumers to bring claims and defenses against holders of their credit contracts, but limits a consumer’s “recovery” to what was paid on the contract. Availability of fees is a critical factor in determining whether defrauded consumers can bring these cases at all. Without fees, few consumers could get the legal help they need. 

Prior to 1975, consumers were left in the lurch if they purchased a defective product from a fly-by-night seller and the sale was financed by a third party, because there was no recourse for them against the only solvent party: the third party holder. The common law “holder-in-due-course doctrine” meant that a company that purchased a financing contract (or “holder”) could not be held liable for the acts and omissions of the original seller, even if that seller originated the contract based on fraud, misrepresentation, or the sale of a defective product. As a result, a seller would routinely use deceptive sales tactics to sell a faulty product to consumers on credit, then turn around and sell the repayment contracts to a finance company. Later, when consumers discovered the product was faulty, they would find the seller had gone out of business — and that there was no recourse against the holder. The holder, however, had the right to sue the consumers if they stopped paying for the useless product. 

To combat this problem, in 1975 the FTC crafted the Rule to give defrauded consumers a pathway to vindicate their claims. The Rule establishes that it is an unfair business practice for a credit contract not to provide consumers the ability to bring claims against a holder of that contract. The Rule provides that a consumer’s “recovery” against the holder of a credit contract is limited to what she paid on the contract. 

The key question, today, is whether the limitation on “recovery” prevents consumers from getting attorneys’ fees above what they paid on the contract. In California, courts have traditionally awarded attorneys’ fees to prevailing plaintiffs against holders of their credit contracts. However, in the last few years two California appellate decisions have held that consumers could not recover attorneys’ fees above what they had paid – and a 2019 Rule Confirmation from the FTC appeared to agree. When the court of appeal in Pulliam held differently, it created a split in California authority – and the California Supreme Court determined that the split should be resolved.  

The Center’s brief argues that the 2019 FTC Rule Confirmation that opined that the Rule generally does not permit attorneys’ fees is at odds with the purpose of the Rule and should not be accorded deference. The brief highlights the reality that the recovery of attorneys’ fees is a critical factor in whether consumers are able to bring these cases at all. The brief presents evidence from the Federal Register that the FTC was well aware of the need for attorneys’ fees when it wrote the rule. The Commission recognized at the time that cases of this kind will not be brought unless attorneys’ fees are available, since the damages are often too small to attract an attorney and consumers cannot afford to pay an attorney out of pocket. Given these realities, the only reasonable reading of the Rule would allow consumers to be awarded attorneys’ fees.

The brief also highlights the difficulty that Californians have had in finding counsel willing to take their cases in the wake of the recent appellate decisions holding attorneys’ fees are unavailable. In an ironic twist, those decisions threaten to create a regime in which consumers are unable to obtain fee awards while prevailing holders face no such obstacle to utilizing the state’s fee-shifting statutes against consumers.

If affirmed – as the Center’s brief argues it should be – the court of appeal’s decision in Pulliam would reestablish the rights that California consumers held for more than four decades. 

The Center was joined on the brief by the Centers for Public Interest Law at the University of San Diego, Consumers for Auto Reliability and Safety, Consumer Federation of California, East Bay Community Law Center, Housing & Economic Rights Advocates, National Consumer Law Center, and Public Law Center.