O'LEARY, P. J.
Stephanie M. Duran prevailed in her lawsuit against car dealership Quantum Auto Sales, Inc. (Quantum) and financing company Veros Credit (Veros). A jury concluded Quantum violated the Consumer Legal Remedies Act (CLRA; Civ. Code, § 1750 et seq., all further statutory references are to the Civil Code), and the California Automobile Sales Finance Act (ASFA; § 2981 et seq.). It awarded Duran $41,800 in punitive damages, rescission, and restitution. The trial court issued an injunction against Quantum, prohibiting it from misrepresenting a vehicle's history of accidents and collision damage. In our concurrently filed opinion Duran v. Quantum (Dec. 12, 2017, G052968) [nonpub. opn.] (Duran I), we rejected Quantum's and Veros's contentions the court abused its discretion in determining Quantum did not qualify for CLRA's affirmative defenses, and Veros was liable under the Federal Trade Commission (FTC) Holder in Due Course Rule (Holder Rule, 16 C.F.R. § 433.2). (See Duran I, supra, G052968.)
The court's initial judgment awarded but did not include an amount for attorney fees and costs. After considering the parties briefing and argument, the court determined Quantum and Veros were jointly and severally liable for $23,264.91 in costs and $203,287 in attorney fees.
Quantum and Veros separately appealed from this order raising the following arguments: (1) Veros cannot be liable because it assigned the finance documents to Quantum; (2) Veros cannot be liable for attorney fees and costs under the Holder Rule; (3) the court abused its discretion by refusing to give Quantum the benefit of CLRA's affirmative defenses, which would have barred Duran from recovering attorney fees and costs; (4) the same affirmative defense would preclude Duran's action for rescission, restitution, and injunctive relief; (5) Duran cannot recover attorney fees and costs under the ASFA; and (6) Duran cannot recover costs under any non-CLRA causes of action. All but two of these arguments were resolved by our holding in Duran I, supra, G052968.
Thus, in this appeal we must decide whether the FTC's Holder Rule permits the consumer to recover attorney fees and costs from the creditor-assignee. We conclude Duran may recover attorney fees and costs from Veros in excess of the amounts paid on the contract, but the amount is limited to those fees/costs that resulted from litigation of claims against it. Second, we consider the argument Duran cannot recover under the ASFA. We conclude this contention lacks merit, however, because the attorney fees and costs must be apportioned between Quantum and Veros. The trial court's order must be reversed and remanded for further proceedings in a manner consistent with this opinion.
We incorporate by reference the detailed summary of facts contained in Duran I, supra, G052968. The only additional fact necessary for this appeal is that the trial court ordered Quantum and Veros jointly and severally liable for $23,264.91 in costs and $203,287 in attorney fees.
As described in Duran I, the FTC's Holder Rule is a remedial measure designed to protect consumers. The rule requires every consumer contract to contain the following notice in 10 point bold type: "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." (16 C.F.R. § 433.2.)
"In 1975 the [FTC] concluded that unethical merchants and their financers were using the venerable Holder in Due Course doctrine from the law of negotiable instruments to victimize thousands of innocent consumers. Inner-city stores were selling shoddy furniture, fly-by-night contractors were promising to install aluminum siding that never appeared, the proverbial used car dealers were hawking lemons, and countless other shady characters were operating in similar fashion in scores of different fields. In each of these cases, the defrauded consumer was saddled with the bill when a holder in due course demanded payment." (Sturley, The Legal Impact of the Federal Trade Commission's Holder in Due Course Notice on a Negotiable Instrument: How Clever are the Rascals at the FTC? (1990) 68 N.C. L.Rev. 953, fns. omitted (hereafter Sturley); see also Music Acceptance Corp. v. Lofing (1995) 32 Cal.App.4th 610, 626-627 (Music Acceptance).) The Holder Rule takes away the financers' traditional status as a holder in due course and subjects it to any potential claims and defenses the purchaser has against the seller.
We determined in Duran I that Veros could not avoid all liability by assigning the note before the judgment was entered. The notice provided "any holder" was subject to all claims and defenses the consumer had against the original seller. We determined a holder who acquires a finance agreement from the seller may be liable to the consumer for the return of all money it received under the contract. "The FTC Holder Rule seeks to place the burden on the seller and its assignee." (Szwak, The FTC "Holder" Rule (2006) 60 Consumer Fin. L.Q. Rep. 361 (hereafter Szwak).)
In Duran I, we reversed the judgment because Duran's recovery against Veros exceeded what was permitted under the Holder Rule. The matter was remanded to permit the trial court to limit Duran's recovery from Veros to what it collected from Duran under the terms of the finance agreement. (Duran I., supra, G052968.)
We therefore turn to Veros's alternative argument the Holder Rule does not include liability for statutory attorney fees. Duran asserts Veros stepped into Quantum's shoes and became liable for all claims that could be raised against Quantum, which would include statutory attorney fees. As discussed in Duran I, the Holder Rule unambiguously places no limitation on the types of claims or defenses a consumer may assert against a creditor-assignee. Thus, consumers can raise any affirmative claims (tort or contractual) related to the transaction. The only express limitation concerns the maximum recovery available to the consumer: "Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder." (16 C.F.R. § 433.2, italics added, capitalization omitted.)
Thus, the Holder Rule authorizes a consumer to assert a CLRA claim against both the dealership and the creditor-assignee. In all CLRA actions, there are mandatory attorney fees awarded to the prevailing party, whether it be the plaintiff or defendant. We found no legal authority in California discussing CLRA's attorney fees (or any other statutory attorney fees) when the consumer has borrowed the CLRA cause of action under the Holder Rule. We found a split of opinion in out-of-state authority.
Some cases cited by Veros have held the Holder Rule was not designed to impose derivative liability for a statutory attorney fee award. For example, in Hardeman v. Wheels, Inc. (1988) 56 Ohio App.3d 142, 565 N.E.2d 849, 852 (Hardeman), the court held that neither the treble damages nor the attorney fees provisions of the Ohio Consumer Sales Practices Act (CSPA) (Oh. Rev. Stat. section 1345.09, subds. (B) & (F) [remedies available to consumers]), extend to a third-party assignee holder of a credit contract containing the FTC notice. The court reasoned that while a culpable seller should be punished, "[t]he onerous burden of paying a potentially extensive statutory and common-law punitive award rendered against a culpable merchant should not be imputed to an innocent assignee of the contract." (Hardeman, supra, 56 Ohio App.3d at p. 145, 565 N.E.2d at p. 852.)
The Hardeman court explained, "Treble damages awarded under the CSPA are punitive and designed to prevent or discourage certain activities or misconduct. [Citation.] In addition, since punitive damages are assessed as punishment and not compensation, a positive element of conscious wrongdoing is always required. [Citation.]" (Hardeman, supra, 56 Ohio App.3d at p. 145, 565 N.E.2d at p. 852.) The assignee was not guilty of any "conscious wrongdoing or misconduct." (Ibid.) "It is enough that these holders . . . are denied the advantage of being a holder in due course and are subject to any actual and compensatory damages suffered by the innocent purchaser. This is penalty enough for accepting business from dishonest merchants." (Ibid.)
The Hardeman court further reasoned that because the attorney fees provision of Ohio Revised Code section 1345.09, subdivision (F), specifically applied to a seller who "knowingly committed an act or practice" violating the CSPA it qualified as a penalty. It reasoned the assignee "is clearly subject to [the consumer's] claims for actual and statutory damages designed to compensate the injured party" but "should not be subject to claims or defenses which encompass penalties specifically designed to be assessed against the supplier, rather than the assignee, for the supplier's statutory or common-law infractions." (Hardeman, supra, 56 Ohio App.3d at p. 146, 565 N.E.2d at p. 853.)
This rational reflects the policy and logic of the holder in due course doctrine. It is out of sync with the Holder Rule's purpose of providing an exception to that rule in consumer credit agreements. The FTC's notice was designed to "reallocate the costs of the seller's misconduct in the consumer market, `compel[ling] creditors to either absorb seller misconduct costs or return them to sellers. . . .' [Citation.])" (Lozada v. Dale Baker Oldsmobile (W.D.Mich. 2000) 91 F.Supp.2d 1087, 1095.) In California, claims for such costs include attorney fees to the consumer prevailing on CLRA Claims. Unlike Ohio's CSPA, the CLRA does not condition an award of fees on evidence there was a knowing violation. Attorney fees and costs are not a punishment, but rather a statutory remedy available to the prevailing plaintiff or the prevailing defendant (if the plaintiff's prosecution was not in good faith). (§ 1780, subd. (e).)
Veros cites another case from Ohio, Reagans v. MountainHigh Coachworks, Inc. (2008) 117 Ohio St.3d 22, 31-32, 881 N.E.2d 245, 254 (Reagans), reaching the same conclusion as the Hardeman case. It highlights the punitive nature of attorney fees awarded under Ohio's CSPA. "The [CSPA] allows consumers to recover treble damages and attorney fees from sellers for deceptive or unconscionable acts. [Citation.] Under the Act, treble damages are punitive in nature, intended to deter a seller's wrongful conduct. [Citations.] [The CSPA also] permits a trial court in its discretion to award reasonable attorney fees against sellers who intentionally commit unfair or deceptive sales practices. [Citations.] [¶] [T]he FTC rule `was not designed to act as a weapon to exact statutory and punitive damages against otherwise innocent creditors.' A creditor whose only connection to a sales transaction is as a lender does not deserve to have an additional penalty — treble damages — imposed for the seller's misconduct. . . . [Citation.] [¶] Nor does the FTC rule impose derivative liability on a bank for an attorney-fees award against a seller." (Ibid.) The court reasoned the FTC rules shift to the creditor the actual, compensatory damages incurred by the consumer due to the seller's misconduct, but penalties (treble damages and attorney fees) are "not designed to compensate the consumer but to punish and deter the seller who engages in prohibited conduct." (Ibid.)
Finally, the Reagans court noted attorney fees in the CSPA would not be imposed in every case because the decision whether to punish the seller is in the discretion of the trial court. (Reagans, supra, 117 Ohio St. 3d at p. 32, 881 N.E.2d at p. 254.) The court determines if "the seller intentionally commits an act or practice that is deceptive, unfair, or unconscionable." It concluded, "A creditor's potential derivative liability for compensatory damages under the FTC rule already provides creditors with an incentive to discourage sellers' misconduct. Neither the FTC rule nor the purpose behind it requires that innocent creditors also be held derivatively liable for additional awards intended as penalties against sellers." (Ibid.)
This last comment offers another reason why penalties should not be assessed against an innocent creditor. It also emphasizes why the holding should not apply to California CLRA cases. Under the CLRA, a creditor's potential derivative liability will always include attorney fees. Section 1780, subdivision (e), mandates the court "shall award court costs and attorney's fees to a prevailing plaintiff. . . ." California creditors have advance notice of this potential cost of doing business with its merchants.
"The FTC Guidelines for the FTC Holder Rule state that the required notice under the rule `protect[s] the consumer's right to assert against the creditor any legally sufficient claim or defense against the seller. The creditor and assignees stand in the shoes of the seller.' . . . Using rather stern language, some courts have stated that: `The FTC Holder Rule is designed to require the assignee of a consumer contract to step into the shoes of the seller with respect to the claims and defenses of the consumer. If the seller's shoes are too tight a fit, then the assignee need not purchase the consumer contract.' Contract purchasers that buy consumer paper from merchants should have little trouble demanding protection when they receive the assignment. The creditor faced with the loss of the holder in due course defense against the victimized consumer has a variety of acceptable options, for example, buying the commercial paper with some type of recourse, protecting against losses by negotiating with the merchant for a larger discount to face value in the purchase price of the contract, and/or purchasing insurance." (Szwak, 60 Consumer Fin. L.Q. Rep. at p. 364.)
Moreover, the Legislature's inclusion of a mandatory attorney fee provision into the CLRA was not intended to be punitive. The statutory provision provides attorney fees may be awarded to the prevailing plaintiff or defendant. (§ 1780, subd. (e).) As aptly noted by one legal commentator, "The purpose of attorney fees is to encourage settlement, make it economically feasible for consumers to bring small claims, and discourage sellers and creditors from using their superior legal resources to wear down the consumer." (Szwak, 60 Consumer Fin. L.Q. Rep. at p. 364.) Because courts uniformly agree the Holder Rule is premised on the fact creditors are in a better position than consumers to protect themselves against unscrupulous sellers and to bear the cost of seller misconduct, the rule's purpose would be frustrated if attorney fees were not recoverable from the seller and the creditor-assignee. Unlike creditors in other states, California creditors can decide in advance if the assignment is worth the risk of CLRA damages and attorney fees.
Several Texas state court opinions support the consumer's recovery of attorney fees from the lender. For example, in Oxford Finance Cos. v. Velez (Tex.App. 1991) 807 S.W.2d 460, 465 (Oxford Finance), the court allowed the plaintiff to recover attorney fees from the lender in excess of the amounts paid on the contract, but limited the recovery to only those attorney fees that resulted from her own attorney's pursuit of claims against the lender. (See also Kish v. Van Note (Tex. 1985) 692 S.W.2d 463; Home Savings Association v. Guerra (Tex. 1987) 733 S.W.2d 134.)
Other courts have allowed attorney fees but capped the recovery to the amount paid on the contract. For example, the federal court in Louisiana held plaintiff could recover a share of attorney fees, "provided that the maximum recovery by any plaintiff may not exceed the amount paid [the holder] by that plaintiff." (Simpson v. Anthony Auto Sales, Inc. (W.D.La. 1998) 32 F.Supp.2d 405, 410 (Simpson).) The Simpson court reasoned the seven consumer plaintiffs would not be permitted to recover more than what each one paid because "[a] rule of unlimited liability would place the creditor in the position of an insurer or guarantor of the seller's performance." (Ibid.) It ruled, "Accordingly, this court holds that a creditor's derivative liability for seller misconduct under the FTC rule is limited to the amount paid by the consumer under the credit contract. Therefore, with respect to each plaintiff, [the creditor's] liability is limited to the amount paid to it by that plaintiff. In other words, each plaintiff may recover from [the creditor] their actual damages times three or $1,500, whichever is greater, the costs of the action, and [the creditor's] pro rata share of reasonable attorney's fees, provided that the maximum recovery by any plaintiff may not exceed the amount paid [to the creditor] by that plaintiff. [Citation.]" (Ibid.)
We believe the better rule is the one adopted by the Texas courts. The court should not artificially cap the consumer's recovery of attorney fees. Such a rule effectively insulate holders from paying fees and costs, even if they refused to refund payment made or reach reasonable settlements of CLRA claims. And as noted by Duran, if the holder is not responsible for attorney fees and costs, there may be incentive to intentionally prolong litigation and cause a consumer to spend more prosecuting the case than what is available under the contract. Such an interpretation would frustrate the Holder Rule's purpose to protect consumers and preserve their rights. Moreover, artificially capping the prevailing plaintiff's fees and costs would create an impermissible inequity because there is no monetary limitation on the fees and costs a prevailing defendant can recover in a CLRA action. (§ 1780, subd. (e).)
We conclude the attorney fees and costs award must be reversed and remanded for a new hearing. Duran may recover attorney fees and costs from Veros in excess of the amounts paid on the contract, but limited to those fees/costs that resulted from litigation of claims against it. (Oxford Finance, supra, 807 S.W.2d at p. 465.)
Section 2983.4 provides: "Reasonable attorney[] fees and costs shall be awarded to the prevailing party in any action on a contract or purchase order subject to the provisions of this chapter regardless of whether the action is instituted by the seller, holder or buyer. Where the defendant alleges in his answer that he tendered to the plaintiff the full amount to which he was entitled, and thereupon deposits in court, for the plaintiff, the amount so tendered, and the allegation is found to be true, then the defendant is deemed to be a prevailing party within the meaning of this section."
"[The] statute only addresses the issue of who is the prevailing party `in any action on a contract or purchase order' subject to the ASFA. . . . Unlike Code of Civil Procedure section 998, a tender under . . . section 2983.4 is not a statutory offer to compromise. . . ." (Tun v. Wells Fargo Dealer Services Inc. (2016) 5 Cal.App.5th 309, 325 (Tun).) The Tun case analyzed the attorney fee provision and determined a prevailing defendant need not tender and deposit money as a prerequisite for an attorney fee award. (Id. at p. 326.) "`Rather, the second sentence of the statute merely describes one way in which a defendant will be declared a "prevailing party," i.e., where a defendant who concedes owing money but disputes the amount, tenders and deposits the amount to which the plaintiff is entitled, and the allegation (that this is the full amount to which the plaintiff is entitled) is found to be true by the court. It would be nonsensical to require a defendant who has done nothing wrong to tender, deposit, and prove an amount to which plaintiff is "entitled" in order to recover attorney[] fees. (Ibid., italics added.)
As described in Duran I, supra, G052968, Quantum and Western Surety filed an "Application for Deposit of Funds" with the court and deposited $4,156.15, which they claimed constituted tender to the CLRA claim. This tender was made after Veros assigned the contract back to Quantum. Quantum alleged the $4,156.15 represented Duran's $1,000 down payment, $2,656.15 in payments to Veros, and $500 for incidental expenses. The deposit did not allocate any funds to pay off the loan or for attorney fees and costs.
We conclude section 2983.4 does not apply in this case for several reasons. First, when Quantum deposited the money it represented before trial that the tender related to the CLRA claim, not the ASFA allegations. Second, Veros did not make the tender because it had assigned the contract to Quantum.
Third, if the tender could be construed as relating to the ASFA claims, it was not "the full amount to which the plaintiff [was] entitled." (Tun, supra, 5 Cal.App.5th at p. 326; § 2983.4.) The court's rescission and restitution remedy required Quantum to refund $1,856.30 in payments, refund a $1,000 down payment, refund $172 in incidental costs, and pay the outstanding loan amount for the car (approximately $11,467.70). Quantum's tender of $4,156.15 fell significantly short of the "full amount to which [Duran] was entitled." (§ 2983.4.)
In this opinion, we do not disturb the total amount of attorney fees and costs awarded to Duran. The order is reversed because the trial court's order stated Quantum and Veros would be jointly and severally liable for the entire sum. On remand, the trial court need not reconsider the total amount of attorney fees and costs owed but rather endeavor to fairly apportion the amount Duran expended litigating claims against Quantum apart from those incurred with respect to Veros. The court shall order each defendant to pay their portion of attorney fees and costs owed (they will not be jointly liable). To be clear, Duran may recover the apportioned attorney fees and costs from Veros in excess of the amounts paid on the contract. Duran shall also recover her costs on appeal from Appellants.
ARONSON, J. and IKOLA, J., concurs.
