Spikener v. Ally Financial, Inc.

Filed 6/9/20
CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FIVE

DAMON SPIKENER,
Plaintiff and Appellant,
A157301
v.
ALLY FINANCIAL, INC., (Alameda County
Super. Ct. No. HG18893481)
Defendant and Respondent.

Title 16, section 433.2 of the Code of Federal Regulations (the Holder
Rule), promulgated by the Federal Trade Commission (FTC), requires
consumer credit contracts 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.”
Lafferty v. Wells Fargo Bank, N.A. (2018) 25 Cal.App.5th 398, 410–414
(Lafferty) held that the limitation on recovery contained in the second
sentence of the Holder Rule notice applies to attorney fees a debtor seeks to
recover pursuant to a claim asserted under the Holder Rule. In other words,
Lafferty held a debtor cannot recover damages and attorney fees for a Holder
Rule claim that collectively exceed the amount paid by the debtor under the

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contract. After Lafferty issued, the FTC construed the Holder Rule in the
same manner. In response to Lafferty, the California Legislature enacted
Civil Code section 1459.5,1 effectively providing, in part, that the Holder
Rule’s limitation on recovery does not apply to attorney fees.
We conclude the FTC’s construction of the Holder Rule is entitled to
deference. We further conclude that, to the extent section 1459.5 authorizes
a plaintiff to recover attorney fees on a Holder Rule claim even if that results
in a total recovery greater than the amount the plaintiff paid under the
contract, section 1459.5 conflicts with, and is therefore preempted by, the
Holder Rule. Accordingly, when a debtor asserts a claim against a holder
pursuant to the Holder Rule, the debtor’s recovery—including any attorney
fees based on the Holder Rule claim—cannot exceed the amount the debtor
paid under the contract.
BACKGROUND
In February 2018, Damon Spikener (Plaintiff) filed a complaint alleging
that in 2016, he purchased a car from Premier Automotive of Oakland, LLC
(Seller) by means of a credit sales contract (the Contract). At the time of the
purchase, Seller did not inform Plaintiff that the car had been in a major
collision resulting in a severe reduction in its value. After the purchase, but
before Plaintiff learned about the collision, the Contract was assigned to Ally
Financial, Inc. (Ally). The Contract included the notice required by the
Holder Rule.
Plaintiff sued Ally under the Consumers Legal Remedies Act
(§§ 1750–1784; hereafter CLRA), based on Seller’s misrepresentations about
the car’s condition. In August 2018, the parties entered into a settlement

1 All undesignated section references are to the Civil Code.

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agreement in which Ally agreed to rescind the Contract and pay Plaintiff a
sum equal to the amount he had paid under the Contract, approximately
$3,500. The settlement agreement preserved Plaintiff’s claim for attorney
fees and declared Plaintiff the prevailing party for purposes of such a claim,
but otherwise preserved Ally’s right to oppose a fee motion.
Plaintiff filed a fee motion, seeking more than $13,000 in attorney fees
pursuant to CLRA’s fee shifting provision (§ 1780, subd. (e)).2 The trial court
denied the motion, finding Plaintiff was not entitled to fees under Lafferty,
supra, 25 Cal.App.5th 398. This appeal followed.
DISCUSSION
I. The Holder Rule
The parties first dispute whether Lafferty correctly construed the
Holder Rule’s limitation on recovery.
A. Background
“The FTC promulgated the Holder Rule in 1975 as a consumer
protection measure to abrogate the holder in due course rule for consumer
installment sale contracts that are funded by a commercial lender.
[Citations.] ‘Under the holder in due course principle, the creditor could
“assert his right to be paid by the consumer despite misrepresentation,
breach of warranty or contract, or even fraud on the part of the seller, and
despite the fact that the consumer’s debt was generated by the sale.” ’
[Citation.] ‘Before the FTC rule, if a seller sold goods on credit and
transferred the credit contract to a lender, the lender could enforce the
buyer’s promise to pay even if the seller failed to perform its obligations

2 Section 1780, subdivision (e) provides: “The court shall award court
costs and attorney’s fees to a prevailing plaintiff in litigation filed pursuant to
this section.”

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under the sales contract. Similarly, despite a seller’s breach, the buyer was
obligated to pay the lender under a consumer loan contract that directly
financed the purchase of goods or services from the seller.’ ” (Lafferty, supra,
25 Cal.App.5th at pp. 410–411.)
“ ‘ “ ‘In abrogating the holder in due course rule in consumer credit
transactions, the FTC preserved the consumer’s claims and defenses against
the creditor-assignee. The FTC rule was therefore designed to reallocate the
cost of seller misconduct to the creditor. The commission felt the creditor was
in a better position to absorb the loss or recover the cost from the guilty
party—the seller.’ [Citation.]” ’ [¶] In addition to preventing the creditor
from continuing to collect on a debt for a defective product or deficient
service, the FTC also provided consumers with a new cause of action against
their creditors. This new cause of action allows consumers to assert against
the creditors ‘all claims and defenses which the debtor could assert against
the seller of goods or services’ to which the Holder Rule applies. [¶] This new
cause of action, however, was expressly constrained. The Holder Rule
language delineates the new cause of action by declaring: ‘RECOVERY
HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID
BY THE DEBTOR HEREUNDER.’ (40 Fed. Reg. 53506 (Nov. 18, 1975); 16
C.F.R. § 433.2(2018).)” (Lafferty, supra, 25 Cal.App.5th at pp. 411–412.)
B. Lafferty
In Lafferty, the plaintiffs bought a vehicle under an installment
contract that was subsequently assigned to a holder. (Lafferty, supra, 25
Cal.App.5th at p. 405.) The plaintiffs sued the holder pursuant to the Holder
Rule, asserting claims for negligence and under the CLRA (additional claims
were dismissed by the court). (Id. at pp. 406–407.) The plaintiffs and the
holder entered into a settlement agreement pursuant to which the holder

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paid the plaintiffs the amount the plaintiffs had paid under the installment
contract. (Id. at p. 407.) The plaintiffs moved for attorney fees, and the trial
court denied fees as barred by the Holder Rule’s limitation on recovery in
excess of the amount paid by the debtor under the assigned contract. (Id. at
p. 408.)
Lafferty analyzed the Holder Rule’s limitation on recovery by looking at
its three component parts: “recovery,” “shall not exceed amounts paid by the
debtor,” and “hereunder.” (Lafferty, supra, 25 Cal.App.5th at pp. 412–413.)
It found “[t]he term ‘recovery’ is broad and regularly used to include
compensatory damages, punitive damages, attorney fees, and costs.” (Id. at
p. 412.) Lafferty considered the FTC’s statements about the phrase “shall not
exceed amounts paid by the debtor,” made at the time it promulgated the
Holder Rule and shortly thereafter. (Id. at pp. 412–413.) Based on these
comments, Lafferty reasoned, “ ‘the purpose of this language is clearly to “not
permit a consumer to recover more than he [or she] has paid. . . .” [Citations.]
A rule of unlimited liability would place the creditor in the position of an
insurer or guarantor of the seller’s performance.’ ” (Id. at p. 413.) With the
word “hereunder,” the Lafferty court found, based in part on statements made
by the FTC shortly after promulgating the Holder Rule, “the FTC indicated
the Holder Rule constraint does not apply to independent causes of action
accruing under state and local law. . . . However, recovery under the Holder
Rule is capped to amounts paid regardless of additional recovery that may be
independently available under state or local law.” (Id. at p. 413.) Lafferty
concluded: “To sum up, the language of the Holder Rule plainly defines the
amount subject to the rule broadly by using the word ‘recovery’ to include
more than just compensatory damages but narrows the amount that may be
recovered to those monies actually paid by the consumer under the contract.

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And the Holder Rule constraint on recovery does not apply to separate causes
of action that might exist independently under state or local law. However, a
consumer cannot recover more under the Holder Rule cause of action than
what has been paid on the debt regardless of what kind of a component of the
recovery it might be—whether compensatory damages, punitive damages, or
attorney fees.” (Id. at p. 414.)3
C. The FTC’s Confirmation of the Holder Rule
In 2015, the FTC requested public comments on “the overall costs and
benefits, and regulatory and economic impact, of” the Holder Rule. (80
Fed.Reg. 75018 (Dec. 1, 2015).) In 2019—after Lafferty issued—the FTC
issued a confirmation of the Holder Rule (the Rule Confirmation). (84
Fed.Reg. 18711 (May 2, 2019).)
As relevant here, the Rule Confirmation noted that several of the
comments received “addressed whether the Rule’s limitation on recovery to
‘amounts paid by the debtor’ allows or should allow consumers to recover
attorneys’ fees above that cap . . . .” (84 Fed.Reg., supra, at p. 18713.) After
discussing the substance of the comments, the Rule Confirmation provided as
follows: “We conclude that if a federal or state law separately provides for
recovery of attorneys’ fees independent of claims or defenses arising from the

3 In what appears to be an alternative basis for affirming the trial
court’s denial of attorney fees, Lafferty held the CLRA’s fee provision, which
applies “in litigation filed pursuant to this section” (§ 1780, subd. (e)), did not
apply to a Holder Rule claim. (Lafferty, supra, 25 Cal.App.5th at pp. 418–
419.) The court reasoned that the plaintiffs “ ‘borrowed’ the CLRA action for
purposes of asserting a claim for relief against [the holder]” pursuant to the
Holder Rule, and “borrowing a cause of action under the CLRA is not the
same as a cause of action ‘filed pursuant to’ ” section 1780. (Lafferty, at
p. 419.) We express no opinion on this analysis, which was not necessary to
the court’s decision.

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seller’s misconduct, nothing in the Rule limits such recovery. Conversely, if
the holder’s liability for fees is based on claims against the seller that are
preserved by the Holder Rule Notice, the payment that the consumer may
recover from the holder—including any recovery based on attorneys’ fees—
cannot exceed the amount the consumer paid under the contract. Claims
against the seller for attorneys’ fees or other recovery may also provide a
basis for set off against the holder that reduces or eliminates the consumer’s
obligation. The Commission does not believe that the record supports
modifying the Rule to authorize recovery of attorneys’ fees from the holder,
based on the seller’s conduct, if that recovery exceeds the amount paid by the
consumer.” (Ibid.)
D. Analysis
Plaintiff attacks Lafferty’s reasoning and urges us to disagree with it.
We need not address Plaintiff’s challenges to Lafferty because we conclude
the Rule Confirmation is dispositive on the Holder Rule’s application to
attorney fees.
“Because we are applying a federal [regulation], we follow rules of . . .
construction enunciated by the United States Supreme Court.” (Kilroy v.
Superior Court (1997) 54 Cal.App.4th 793, 801.) The United States Supreme
Court recently reaffirmed, and discussed the limitations of, the doctrine by
which federal courts “defer[] to agencies’ reasonable readings of genuinely
ambiguous regulations,” known as “Auer deference.” (Kisor v. Wilkie (2019)
139 S.Ct. 2400, 2408 (Kisor).) The Court explained, “a court should not afford
Auer deference unless the regulation is genuinely ambiguous” and “the
agency’s reading . . . [is] ‘reasonable.’ ” (Kisor, at p. 2415.) In addition, “the
regulatory interpretation must be . . . the agency’s ‘authoritative’ or ‘official
position,’ rather than any more ad hoc statement not reflecting the agency’s

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views”; “must in some way implicate its substantive expertise”; and “must
reflect ‘fair and considered judgment.’ ” (Id. at pp. 2416–2417.)
The FTC’s construction of the Holder Rule is a reasonable one, for the
reasons set forth in Lafferty, supra, 25 Cal.App.5th at pages 410–414. We
will assume, without deciding, that Plaintiff’s construction is also reasonable,
rendering the regulation ambiguous. The Rule Confirmation was issued by
the FTC and published in the Federal Register, and was indisputably the
FTC’s official position. Interpretation of the Holder Rule, which provides that
taking a consumer credit contract without the prescribed language is an
unfair or deceptive act or practice, falls within the substantive expertise of
the FTC. (See 15 U.S.C. § 45 [empowering the FTC to prevent the use of
“unfair or deceptive acts or practices in or affecting commerce”].) The Rule
Confirmation issued after the FTC solicited and reviewed public comments
and reflects the agency’s considered judgment. The FTC’s interpretation is
entitled to deference. (Cf. Kisor, supra, 139 S.Ct. at p. 2414 [“Auer deference
. . . is ‘unwarranted’ . . . when a court concludes that an interpretation does
not reflect an agency’s authoritative, expertise-based, ‘fair[, or] considered
judgment.’ ”].)
Plaintiff argues a claim for CLRA attorney fees against a holder is
“independent of claims or defenses arising from the seller’s misconduct” (the
Rule Confirmation, 84 Fed.Reg., supra, at p. 18713), and therefore not limited
by the Holder Rule’s limitation on recovery, because it is based on the
holder’s litigation conduct rather than any conduct by the seller. We
disagree. The CLRA’s fee-shifting provision authorizes a fee award “to a
prevailing plaintiff in litigation filed pursuant to this section.” (§ 1780,
subd. (e).) Where a CLRA claim is filed against a holder based on misconduct
by a seller of goods or services, it is filed pursuant to the Holder Rule; in the

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absence of the Holder Rule, the claim would be barred. If the plaintiff
prevails, his or her claim for CLRA fees is not “independent of claims . . .
arising from the seller’s misconduct” (84 Fed.Reg., supra, at p. 18713), but
rather is wholly dependent on such claims. Thus, the CLRA’s fee-shifting
provision falls squarely within the second category identified by the Rule
Confirmation: when “the holder’s liability for fees is based on claims against
the seller that are preserved by the Holder Rule Notice . . . .” (84 Fed.Reg.,
supra, at p. 18713.) In such cases, the Rule Confirmation clearly provides
that “the payment that the consumer may recover from the holder—including
any recovery based on attorneys’ fees—cannot exceed the amount the
consumer paid under the contract.” (Ibid.)
Plaintiff also raises various policy arguments to support his
construction of the Holder Rule. Courts afford deference to administrative
agencies (when warranted) because of the understanding that “interpretive
decisions . . . about how best to construe an ambiguous term in light of
competing policy interests” should not be shifted from “the agencies that
administer the statutes to federal courts.” (City of Arlington, Tex. v. F.C.C.
(2013) 569 U.S. 290, 304; see id. at pp. 304–305 [“We have cautioned that
‘judges ought to refrain from substituting their own interstitial lawmaking’
for that of an agency.”].) The policy implications of the FTC’s construction do
not impact our analysis.
Accordingly, the Holder Rule’s limitation on recovery applies to
attorney fees based on a claim asserted pursuant to the Holder Rule, such
that a plaintiff’s total recovery on a Holder Rule claim—including attorney
fees—cannot exceed the amount paid by the plaintiff under the contract.

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II. Section 1459.5
Plaintiff next relies on section 1459.5, which was enacted after Lafferty
and provides: “A plaintiff who prevails on a cause of action against a
defendant named pursuant to Title 16, Part 433 of the Code of Federal
Regulations [the Holder Rule] or any successor thereto, or pursuant to the
contractual language required by that part or any successor thereto, may
claim attorney’s fees, costs, and expenses from that defendant to the fullest
extent permissible if the plaintiff had prevailed on that cause of action
against the seller.” The legislative history makes clear that the Legislature’s
intent was to “reverse[] the decision in Lafferty” and “restor[e] California’s
original interpretation of the ‘Holder Rule’ . . . .” (Sen. Rules Com., Off. of
Sen. Floor Analyses, Rep. on Assem. Bill No. 1821 (2019–2020 Reg. Sess.)
Jun. 11, 2019, pp. 4–5; see also Assem. Com. on Judiciary, Analysis of Assem.
Bill No. 1821 (2019–2020 Reg. Sess.) Apr. 9, 2019, p. 6 [“Before Lafferty,
attorneys were willing to handle consumer fraud cases on a contingency
basis, knowing that if [the] client’s claims were meritorious, the financing
company would pay their attorney fees. . . . Since Lafferty, many defrauded
customers are unable to find attorneys to take these cases . . . .”].)4
Ally argues section 1459.5’s authorization of attorney fees for Holder
Rule claims regardless of the Holder Rule’s limitation on recovery conflicts
with, and is therefore preempted by, the Holder Rule. We agree.5

4 We grant Plaintiff’s unopposed request for judicial notice of four
legislative analyses of the bill enacting section 1459.5.
5 We therefore need not decide Ally’s alternative argument that section
1459.5 violates the constitutional separation of powers, or the parties’ dispute
as to whether section 1459.5 (enacted and effective after judgment issued in
this case) applies prospectively only.

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 “ ‘The supremacy clause of the United States Constitution establishes a
constitutional choice-of-law rule, makes federal law paramount, and vests
Congress with the power to preempt state law.’ [Citations.] . . . Preemption is
foremost a question of congressional intent: did Congress, expressly or
implicitly, seek to displace state law? [Citations.] [¶] . . . The burden is on
. . . the party asserting preemption[] to demonstrate [preemption] applies.”
(Quesada v. Herb Thyme Farms, Inc. (2015) 62 Cal.4th 298, 307–308
(Quesada).) “[B]oth federal statutes and regulations may have preemptive
effect.” (Olszewski v. Scripps Health (2003) 30 Cal.4th 798, 814 (Olszewski).)
“[C]onflict preemption will be found when simultaneous compliance
with both state and federal directives is impossible.” (Viva! Internat. Voice
for Animals v. Adidas Promotional Retail Operations, Inc. (2007) 41 Cal.4th
929, 936; see also Olszewski, supra, 30 Cal.4th at p. 815 [“state law actually
conflicts with federal law ‘where it is impossible for a private party to comply
with both state and federal requirements’ ”].) For example, in Olszewski, our
Supreme Court considered whether state laws “authorizing a health care
provider to assert and collect on a lien for the full cost of its services against
‘any judgment, award, or settlement obtained by’ a Medicaid beneficiary”
were preempted by federal law. (Olszewski, at p. 804.) The Supreme Court
concluded that federal Medicaid statutes and regulations “limit provider
collections from a Medicaid beneficiary to, at most, the cost-sharing charges
allowed under the state plan, even when a third party tortfeasor is later
found liable for the injuries suffered by that beneficiary.” (Id. at p. 820.)
Because the state laws “allow the provider to recover more than these cost-
sharing charges from the beneficiary, they cannot coexist with federal law”
and therefore are preempted. (Id. at pp. 820–821.)

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 In contrast, in People v. Guiamelon (2012) 205 Cal.App.4th 383
(Guiamelon), the Court of Appeal considered whether a state statute making
it unlawful for physicians to offer kickbacks for patient referrals, which had
no specific intent requirement, conflicted with the federal Medicaid
antikickback statute, which required such violations be committed knowingly
or willfully. (Id. at pp. 390, 396, 398–399.) The Court of Appeal reasoned
that the different scienter requirement “is not dispositive. Conflict
preemption is not demonstrated simply because a state statute prohibits
what is allowed under a federal statute.” (Id. at p. 399.) Instead, the Court
of Appeal found significant the enforcing federal agency’s position that
“ ‘conduct that is lawful under the federal anti-kickback statute or this
regulation may still be illegal under State law.’ ” (Id. at p. 406, added italics
omitted.) Under this interpretation, the state statute did not conflict with,
and was not preempted by, the federal law. (Id. at pp. 407–408.)
“Where Congress has legislated in a field traditionally occupied by the
states, ‘we start with the assumption that the historic police powers of the
States were not to be superseded by the Federal Act unless that was the clear
and manifest purpose of Congress,’ ” known as “[t]he presumption against
preemption.” (Olszewski, supra, 30 Cal.4th at pp. 815–816.) “ ‘ “[C]onsumer
protection laws such as . . . CLRA, are within the states’ historic police
powers and therefore are subject to the presumption against preemption.” ’ ”
(Paduano v. American Honda Motor Co., Inc. (2009) 169 Cal.App.4th 1453,
1474.) We therefore “conduct our analysis from the starting point of a
presumption that displacement of state regulation in areas of traditional
state concern was not intended absent clear and manifest evidence of a
contrary congressional intent.” (Quesada, supra, 62 Cal.4th at p. 315.)

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 The FTC’s interpretation of the Holder Rule informs our preemption
analysis. (See Olszewski, supra, 30 Cal.4th at p. 821 [if federal law is
ambiguous, an agency’s interpretation, if entitled to deference, can clarify
whether the state law “conflict[s] with federal law”]; Guiamelon, supra, 205
Cal.App.4th at p. 405 [“In determining whether we may infer a Congressional
intent to preempt state law, we may rely on a federal agency’s interpretation
of the relevant statute: ‘ “In general, an agency’s interpretation of statutes
within its administrative jurisdiction is given presumptive value as a
consequence of the agency’s special familiarity and presumed expertise with
. . . legal and regulatory issues.” ’ ”].) As discussed above, the FTC has
construed the Holder Rule’s limitation on recovery to limit a plaintiff’s total
recovery, including attorney fees, on a claim asserted pursuant to the Holder
Rule to the amount the plaintiff paid under the contract, regardless of
whether the state claim being asserted pursuant to the Holder Rule contains
fee-shifting provisions. This demonstrates a clear intent to prohibit states
from authorizing a recovery that exceeds this amount on a Holder Rule claim.
Of course, the Rule Confirmation expressly preserves a state’s ability to
authorize attorney fees against holders independent of Holder Rule claims,
and clarifies that such fee claims are not constrained by the Holder Rule’s
limitation on recovery. (84 Fed.Reg., supra, at p. 18713 [“[I]f a . . . state law
separately provides for recovery of attorneys’ fees independent of claims or
defenses arising from the seller’s misconduct, nothing in the Rule limits such
recovery.”].) But where “the holder’s liability for fees is based on claims
against the seller that are preserved by the Holder Rule Notice, the payment
that the consumer may recover from the holder—including any recovery
based on attorneys’ fees—cannot exceed the amount the consumer paid under
the contract.” (Ibid.)

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 Accordingly, we conclude that, to the extent section 1459.5 authorizes a
plaintiff’s total recovery—including attorney fees—for a Holder Rule claim to
exceed the amount the plaintiff paid under the contract, it directly conflicts
with the Holder Rule and is therefore preempted.6
DISPOSITION
The judgment is affirmed. Ally is awarded its costs on appeal.

6 Plaintiff’s appeal involves only his claim for attorney fees, and does
not involve any claims for costs, expenses, or prejudgment interest. We
therefore express no opinion on the Holder Rule’s application to these items,
or on any preemption of section 1459.5 as to them. (See Lafferty, supra, 25
Cal.App.5th at p. 405 [because “[t]he California statutes providing for costs
and prejudgment interest apply to actions as a whole rather than to
individual causes of action such as that provided by the Holder Rule,” the
Holder Rule’s limitation on recovery does not apply to costs or prejudgment
interest]; § 1459.5 [authorizing recovery of a plaintiff’s costs and expenses on
a Holder Rule claim without consideration of the Holder Rule’s limitation on
recovery].)

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 SIMONS, J.

We concur.

JONES, P.J.

NEEDHAM, J.

(Spikener v. Ally Financial, Inc. / A157301)

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A157301 / Spikener v. Ally Financial, Inc.

Trial Court: Superior Court of Alameda County

Trial Judge: Honorable Stephen Pulido

Counsel: Law Office of Kevin Faulk and Kevin M. Faulk; Rosner, Barry &
Babbitt, Hallen D. Rosner, Arlyn L. Escalante, and Tsolik Kazandjian, for
Plaintiff and Appellant.

Severson & Werson, John B. Sullivan, Andrew S. Elliott, and Jan T.
Chilton, for Defendant and Respondent.

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