On January 18, 2022, the Federal Trade Commission (FTC) issued an advisory opinion (the FTC Opinion) to clarify that the FTC’s Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses (the Holder Rule), 16 C.F.R. § 433.2, does not preclude the recovery of attorneys’ fees and costs when state law authorizes such awards against a holder of a consumer credit contract. The FTC Opinion represents a potentially seismic shift in how the FTC, courts, and litigants have treated monetary recoveries against holders of consumer credit contracts for nearly fifty years.
The Holder Rule, promulgated by the FTC in 1975[1], provides that “[i]n connection with any sale or lease of goods or services to consumers, in or affecting commerce,” it is an unfair practice in violation of section 5 of the Federal Trade Commission Act[2] to “[t]ake or receive a consumer credit contract” which does not include the following notice:
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.[3]
Historically, the FTC has encouraged courts and litigants to apply the Holder Rule’s plain language.[4] As recently as 2012, the FTC affirmed the ‘plain language’ approach when it opined that “no additional limitations on a consumer’s right to an affirmative recovery should be read by and into the Rule, especially since a consumer would not have notice of those limitations because they are not included in the credit contract.”[5]
This plain language interpretation makes sense and comports with the balance the Holder Rule seeks to achieve between permitting a consumer to assert claims and defenses against an otherwise innocent holder but capping its liability as a result. And, in fact, the majority of courts have applied the plain language interpretation and expressly precluded recovery of attorney’s fees and costs against a holder, or capped the recovery of such fees to the amounts paid by the consumer under the contract.[6]
Creditor Considerations
The Advisory Opinion threatens to undermine the majority position on the recovery of attorney’s fees under the Holder Rule. Here are three primary considerations for creditors and holders of consumer credit contracts.
The Advisory Opinion incentivizes additional litigation against holders of consumer credit contracts.
Usually, but not always, claims brought under the Holder Rule do not involve significant dollar amounts because, as the plain language makes clear, such recovery is capped as to the amounts actually paid under the contract.[7]
Consider the following scenario: Carlos Consumer financed the purchase of a used motor vehicle from Debbie Dealer. The purchase was financed by Harry Holder who, in exchange for financing the purchase, was assigned the retail installment contract memorializing the terms. The contract contains the Holder Rule language. After making two payments on the contract totaling $1,000.00, Carlos Consumer discovers a mechanical issue with the vehicle that he believes Debbie Dealer lied to him about. Carlos Consumer files suit against Debbie Dealer and asserts a claim or defense under the Holder Rule against Harry Holder. Carlos Consumer, understanding the recovery cap in the Holder Rule, has little incentive to litigate his claims to trial against Harry Holder. Rather, a quick resolution (whether it be by stipulation or by interpleading the funds with the clerk of court) makes sense for all parties because, after all, Carlos Consumer’s best recovery against Harry Holder is $1,000.00.
Now, however, the Advisory Opinion could provide consumers and enterprising counsel with an incentive to seek maximum recovery against the holder of a consumer credit contract. Most jurisdictions follow the “American Rule” regarding payment of attorney’s fees and costs. The “American Rule” refers to the general policy that all litigants—even the party that prevails at trial—must bear their own attorney’s fees. As one commentator has noted:
“the Supreme Court of the United States has routinely held that individuals should pay their own attorney’s fees, with few exceptions, for three major policy reasons: (1) to keep courts accessible to all persons, including low-income individuals; (2) to reduce the burden on courts in having to determine awards of attorney’s fees; and (3) to prevent penalization of individuals for asserting claims or defenses in court, because the outcome of litigation cannot be known in advance.”[8]
There are, of course, exceptions to the rule, and the Advisory Opinion provides consumers and their counsel sufficient incentive to litigate these exceptions in the hopes of shifting attorney’s fees incurred during litigation to the holder.[9] This is especially true since the Advisory Opinion indicates that the Holder Rule does not even cap the amount of these fees and costs: “if the applicable law requires or allows costs or attorneys’ fee awards against a holder, the Holder Rule does not impose a cap on such an award.” (Emphasis added.)
This interpretation contradicts the express language of the Holder Rule which, by its plain language, caps damages against a holder to amounts paid under the contract. Many consumers’ counsel are well-versed in the Holder Rule’s cap on damages and are usually willing to entertain relatively quick, cost-effective resolutions against a holder of a consumer credit contract because of this. If, however, the Holder Rule cap does not prohibit the recovery of attorney’s fees and costs under applicable state law, there is little incentive for a consumer to engage in such cooperative behavior with an innocent holder. Rather, there would be an incentive to go after the proverbial “deep pockets” of the assignee/holder for the recovery of all of the consumer’s attorney’s fees and costs.
Indemnification language in dealer/seller agreements should be confirmed.
A standard element of a dealer or seller agreement is an obligation for the assignor to indemnify the assignee finance company for any costs, damages, liabilities, or expenses related to the assignor’s conduct. Most often, this clause is drafted to expressly include attorney’s fees and other expenses for the proceeding, whether in mediation, arbitration, or litigation. In a traditional forward flow dealer relationship, it is uncommon for there to be any limitations on the dealer’s obligation to indemnify the assignee finance company. The Advisory Opinion provides a good reason to review the dealer agreement and ensure that a dealer/seller is obligated to indemnify and hold the assignee harmless in the event it is sued because of dealer/seller misconduct.
Further, even if the contractual language is adequate and does not include any financial limitations, finance companies should consider the financial strength of the seller to fulfill its contractual obligations, as their potential liability has significantly increased. What a dealer agreement states and what a dealer can do may not always align. Finance companies may find that the selling company is not adequately capitalized or insured in light of the potential increase in its financial liability.
Programs that utilize a bank partnership model or that involve secondary market portfolio acquisitions may face a unique challenge. The purchasing company will look to the prior holder to indemnify them for the originating credit seller’s conduct. Both the contract purchaser and seller should carefully review their respective contractual obligations to determine who bears the financial risk of the credit seller’s conduct.
It also makes sense to review any indemnification language in the dealer or asset sale agreements to determine if it mirrors the potential range of attorney’s fees and costs contemplated against a holder under the Advisory Opinion.
Holders should continue to rely upon the plain language of the holder rule when defending lawsuits.
An advisory opinion is just that: advisory and not binding on courts or litigants[10]. However, courts will often defer to an agency’s reasonable reading of an ambiguous regulation. This deference, however, is not unlimited. The Supreme Court has reigned in the scope of this deference when it is unwarranted.[11]
This is especially true when an agency opinion has no basis in the legislative history of the statute and “falls outside the range of reasonable interpretations of the Act’s express language.”[12] For decades, courts and litigants have construed the Holder Rule as written to find that it caps liability against a holder. Indeed, the second sentence of the rule makes this clear: “[r]ecovery hereunder by the debtor shall be limited to amounts paid by the debtor hereunder[.]” There is only one reasonable interpretation of this provision; it limits the consumer to a refund of monies paid under the contract in the event that an affirmative money recovery is sought.[13]
It is reasonable for an agency like the FTC to be afforded the authority to interpret its own regulations, but this is not a situation where such interpretation is necessary. The Holder Rule is not ambiguous. Rather, the plain language of the regulation limits the holder’s liability using straightforward language. Because of this, and because the majority of courts have followed the plain language interpretation of the Holder Rule, holders and creditors should continue to argue for a plain language interpretation of the rule when they find themselves facing lawsuits predicated upon the Holder Rule.
Simply stated, the Advisory Opinion contradicts not only the plain meaning of the Holder Rule but also decades of jurisprudence interpreting the scope of liability against a holder. As such, unless and until courts begin to accept this new-found proposition permitting liability against a holder above and beyond the cap contained in the Holder Rule, holders and creditors should continue to rely upon and argue for a plain language interpretation of the rule when it comes to finding liability.
[1] 40 Fed. Reg. 53506 (Nov. 18, 1975).
[2] 15 U.S.C. § 45 (2006).
[3] 16 C.F.R. § 433.2(a) (2012).
[4] See, e.g., U.S. Fed. Trade Comm’n, Opinion Letter on The Holder Rule (May 3, 2012) (“The Commission affirms that the Rule is unambiguous, and its plain language should be applied.”).
[5] American Financial Services Association, Comment Letter on Holder Rule Review, https://www.ftc.gov/system/files/documents/public_comments/2016/02/00025-100572.pdf.
[6] See, e.g., Houser v. Diamond Corp., 2005 WL 94452, at *6 (Wash. Ct. App. 2005); Alduridi v. Cmty. Tr. Bank, 1999 WL 969644, at *12 (Tenn. Ct. App. 1999); Riggs v. Anthony Auto Sales, Inc., 32 F. Supp. 2d 411, 417 (W.D. La. 1998); Simpson v. Anthony Auto Sales, Inc., 32 F. Supp. 2d 405, 410-11 (W.D. La. 1998); Patton v. McHone, 1993 WL 82405, at *4-5 (Tenn. App. 1993); Reagans v. MountainHigh Coach Works, Inc., 881 N.E.2d 245, 253-54 (Ohio 2008).
[7] 16 C.F.R. § 433.2(a).
[8] Contract and Property Law – Fee Shifting Statutes and Landlord-Tenant Law – A call for the Repeal of the English Rule “Loser Pays” System Regarding Contract Disputes and its Effect on Low-Income Arkansas Tenants, Stephanie Mantell, 36 U. Ark. Little Rock L. Rev. 105 (Fall 2016).
[9] Note, some states have passed laws that permit recovery of attorney’s fees and costs for the prevailing party. ALASKA R. CIV. P. 82(a) (2021) (“Except as otherwise agreed to by the parties, the prevailing party in a civil case shall be awarded attorney’s fees calculated under this rule”); WASH. REV. CODE § 4.84.330 (2021) (if a contract provides for fees to one party, the prevailing party is entitled to fees); KY. REV. STAT. Ann. § 367.220(1) (West 2015) (court may award attorneys’ fees and costs to prevailing party in any action under Kentucky Consumer Protection Act).
[10] See Heintz v. Jenkins, 514 U.S. 291, 296 (1995); Safeco Ins. Co. v. Burr, 551 U.S. 47, 70 (2007).
[11] Kisor v. Wilkie, 139 U.S. 240 (2019).
[12] Heintz, 514 U.S. at 298.
[13] See Simpson v. Anthony Auto Sales, 32 F. Supp. 2d 405, 409 (W.D. La. 1998) (“the consumer will not be entitled to receive from the creditor an affirmative recovery which exceeds the amounts of money the consumer has paid in.”)
