Flores v. Westlake Services CA2/3 ( 2021 )

Filed 12/16/21 Flores v. Westlake Services CA2/3
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion
has not been certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
JOSE SANTOS HERNANDEZ B308288
FLORES,
(Los Angeles County
Plaintiff and Appellant, Super. Ct. No. BC723711)
v.
WESTLAKE SERVICES, LLC,
Defendant and
Respondent.
APPEAL from an order of the Superior Court of Los
Angeles County, Maureen Duffy-Lewis, Judge. Reversed and
remanded with directions.
Rosner, Barry & Babbitt, Hallen D. Rosner and Arlyn L.
Escalante, for Plaintiff and Appellant.
Madison Law, Jenos Firouznam-Heidari, James S. Sifers
and Brett K. Wiseman for Defendant and Respondent.
In this action arising out of a retail installment sales
contract, plaintiff and appellant Jose Santos Hernandez Flores
(Plaintiff) appeals an order that denied his motion for attorney
fees, costs and expenses against Westlake Services, LLC
(Westlake) and Southgate Auto, Inc. (Southgate), and for
prejudgment interest against Westlake.
Guided primarily by Pulliam v. HNL Automotive Inc.
(2021) 60 Cal.App.5th 396 (Pulliam),1 we conclude that title 16,
section 433.2 of the Code of Federal Regulations (CFR) (the
Holder Rule) does not cap the attorney fees, costs, expenses, or
prejudgment interest that Plaintiff may recover from Westlake,
the creditor-assignee, or from Southgate, the seller. Therefore,
we reverse and remand for the trial court to redetermine the
matter.
FACTUAL AND PROCEDURAL BACKGROUND
In 2017, Plaintiff purchased a used 2014 Toyota Corolla
from Southgate, doing business as Express Auto Lending,
pursuant to a retail installment sale contract, for a purchase
price of $14,300. The financing was for a term of 66 months, at
an annual percentage rate of 17.89 percent, for a total finance
charge of $8,452.22.
The contract included the following language from title 16,
section 433.2 of the CFR: “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
1 On April 28, 2021, the California Supreme Court granted
review in Pulliam. The order granting review specifies that the
Court of Appeal’s opinion in Pulliam remains citable for its
persuasive value. (No. S267576, order filed Apr. 28, 2021.)
2
OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS
HEREOF. RECOVERY HEREUNDER BY THE DEBTOR
SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR
HEREUNDER.” This language is commonly referred to as the
Holder Rule. (Pulliam, supra, 60 Cal.App.5th at p. 402.)
Following Plaintiff’s purchase of the vehicle, Westlake
accepted assignment of the retail installment sales contract and
became the holder thereof.
In October 2018, Plaintiff filed this action against Westlake
and Southgate. In the operative first amended complaint,
Plaintiff pled: he specifically told Southgate that he was looking
for a vehicle that had never been involved in an accident;
Southgate represented that the subject vehicle had not been in an
accident; after purchasing the vehicle Plaintiff discovered that
the vehicle had actually been involved in an accident and had
sustained structural damage. Plaintiff pled violations of the
Consumers Legal Remedies Act (CLRA) (Civil Code § 1750 et
seq.),2 the Song-Beverly Consumer Warranty Act (Song-Beverly)
(§ 1790 et seq.), and section 1632 (failure to provide Spanish
language translation of contract), as well as causes of action for
unfair competition (Bus. & Prof. Code, § 17200), and fraudulent
and negligent misrepresentation.
Westlake and Southgate unsuccessfully moved to compel
arbitration. Westlake and Southgate then filed a joint answer to
the complaint, denying all allegations and asserting numerous
affirmative defenses.
Westlake and Southgate’s counsel, Madison Law,
subsequently moved to be relieved as counsel for Southgate. The
motion was granted. In July 2019, because Southgate had failed
2 All unspecified statutory references are to the Civil Code.
3
to retain new counsel, the trial court struck Southgate’s answer
and entered its default.
In January 2020, the parties reached a partial settlement.
Under the settlement, Southgate, to whom Westlake had
reassigned the contract, waived the balance due; Westlake
acknowledged that Plaintiff owed nothing further on the contract;
Westlake would pay Plaintiff $5,712.42, reflecting the refund of
his down payment and monthly installment payments; and
Plaintiff would file a motion to recover attorney fees, costs, expert
expenses (Code Civ. Proc., § 998), and prejudgment interest,
within 30 days of receiving the payment from Westlake.
On March 11, 2020, Plaintiff filed the motion which is the
subject of this appeal, seeking recovery of attorney fees, costs and
expenses against Westlake and Southgate, as well as
prejudgment interest against Westlake.3 Plaintiff sought
$66,766.97 in attorney fees, costs, and expenses against Westlake
and Southgate, jointly and severally, and prejudgment interest of
$2,981.16 against Westlake. Plaintiff asserted that as the
prevailing party, he was entitled to recover attorney fees
pursuant to the CLRA (§ 1780, subd. (e)) and Song-Beverly (§
1794, subd. (d)), and pursuant to section 1459.5, which authorizes
recovery of attorney fees, costs and expenses against a holder,
i.e., Westlake.4 5 Plaintiff anticipated that Westlake would argue
3 We note the motion was only served on Westlake, as
Southgate was in default.
4 Section 1459.5 states: “A plaintiff who prevails on a cause
of action against a defendant named pursuant to Part 433 of Title
16 of the Code of Federal Regulations 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
4
that pursuant to Lafferty v. Wells Fargo Bank, N.A. (2018) 25
Cal.App.5th 398 (Lafferty), a holder of a retail installment sales
contract cannot be held liable for attorney fees, costs, or
expenses. Plaintiff asserted that Lafferty was superseded by
section 1459.5, which became effective January 1, 2020, and
which allows a prevailing plaintiff to recover attorney fees, costs,
and expenses from the holder to the fullest extent permissible
against the seller.
In opposition, Westlake argued that Plaintiff had no basis
to recover attorney fees, costs, or any amount in excess of the
Holder Rule cap from Westlake. Westlake relied on Spikener v.
Ally Financial, Inc. (2020) 50 Cal.App.5th 151 (Spikener), which
held that section 1459.5 conflicts with, and is therefore
preempted by, the federal Holder Rule, and thus, 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. (Id. at p. 155.)
On August 10, 2020, the matter came on for a hearing on
Plaintiff’s motion, as well as on an order to show cause re
dismissal due to the settlement. The trial court ruled that
Spikener is “on point. Both Defendants have paid the maximum
amount and [are] not obligated to pay more per Spikener.” The
expenses from that defendant to the fullest extent permissible if
the plaintiff had prevailed on that cause of action against the
seller.”
5 On March 26, 2021, Plaintiff filed an unopposed request for
judicial notice of the legislative history of section 1459.5. Ruling
on the motion previously having been deferred, the motion is now
granted. (Evid. Code, §§ 452, subd. (c), 459.)
5
court denied Plaintiff’s motion and ordered the action dismissed,
noting that no further proceedings were pending.
On October 6, 2020, Plaintiff filed a timely notice of appeal
from the August 10, 2020 order.
CONTENTIONS
Plaintiff contends: he is entitled to attorney fees, costs and
prejudgment interest for prevailing under the CLRA and Song-
Beverly; this court should follow Pulliam in finding that the
Holder Rule does not preclude statutory attorney fees, costs and
prejudgment interest, and that section 1459.5 is not preempted;
in the alternative, costs and attorney fees are recoverable from
the holder even if attorney fees were limited; and Plaintiff is also
entitled to attorney fees and costs under section 1717.6
DISCUSSION
1. Standard of appellate review.
The appeal requires this court to determine whether the
Holder Rule precludes Plaintiff from recovering attorney fees,
costs, expenses, and prejudgment interest in excess of the sums
paid on the contract. The issue presents a pure question of law
which we review de novo. (Mercury Ins. Co. v. Lara (2019) 35
Cal.App.5th 82, 97.)
6 Plaintiff’s motion did not request attorney fees pursuant to
section 1717. Therefore, that issue is not properly before this
court, as “theories not raised in the trial court cannot be asserted
for the first time on appeal.” (Hewlett Packard Co. v. Oracle
Group (2021) 65 Cal.App.5th 506, 548.) Plaintiff cannot assert
error based on the trial court’s failure to grant him relief that he
did not request.
6
2. Overview of the relevant law.
As indicated, 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.” (16 C.F.R. § 433.2)
In 2018, Lafferty held that a plaintiff is limited under the
plain meaning of the Holder Rule to recovering no more than the
sum that was paid under the terms of the installment contract.
(Lafferty, supra, 25 Cal.App.5th at p. 848.) Lafferty concluded
that “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. 855, italics omitted.)
In 2019, after Lafferty was decided, the FTC construed the
Holder Rule in the same manner as the Lafferty court. (Spikener,
supra, 50 Cal.App.5th at pp. 154, 158.) At that time, the FTC
rejected all proposed modifications to the Holder Rule, retained
the Holder Rule in its present form (Pulliam, supra, 60
Cal.App.5th at p. 418), and “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
7
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 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.)” (Spikener, supra, 50 Cal.App.5th
at p. 158.)
In 2019, in response to Lafferty, the California Legislature
adopted section 1459.5 (see fn. 4, ante; Stats. 2019, ch. 116, § 1),
which provides that the Holder Rule’s limitation on recovery does
not apply to attorney fees, costs and expenses. (Spikener, supra,
50 Cal.App.5th at pp. 154-155.)
In 2020, the Spikener court concluded the FTC’s
construction of the Holder Rule is entitled to deference.
(Spikener, supra, 50 Cal.App.5th at pp. 158-159.) It further
concluded 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
8
paid under the contract, section 1459.5 conflicts with, and is
therefore preempted by, the Holder Rule. (Spikener, at pp. 162-
163.) Accordingly, Spikener held that 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. (Id. at p. 162.)
In 2021, during the pendency of this appeal, Pulliam was
decided by Division Five of this court. Pulliam disagreed with
both Lafferty and Spikener. Pulliam rejected Lafferty’s
interpretation of the Holder Rule, and concluded that the Holder
Rule’s cap does not apply to attorney’s fees. (Pulliam, supra, 60
Cal.App.5th at p. 412.) Pulliam also disagreed with Spikener’s
conclusion regarding the binding nature of the FTC’s contrary
interpretation in its Rule Confirmation. (Pulliam, at p. 412.)
As discussed below, we find Pulliam persuasive, and
further conclude that the Holder Rule does not preclude Plaintiff
from recovering attorney fees, costs, expenses and prejudgment
interest in excess of the amount that Plaintiff paid under the
contract.
3. The Pulliam court’s rationale for construing the Holder
Rule as not capping the attorney fees that are recoverable, and for
declining to defer to the FTC’s Rule Confirmation.
Pulliam framed the issue as follows: “The statutory
interpretation question for us is: Does the word ‘recovery,’ as
used in the Holder Rule, include attorney’s fees. If ‘recovery’
includes attorney’s fees, then the Holder Rule’s limitation that
recovery ‘by the debtor shall not exceed amounts paid by the
debtor hereunder,’ means that the court would add the attorney's
fees to the compensatory award and limit the total recovery to
9
the amount the debtor paid under the purchase agreement.”
(Pulliam, supra, 60 Cal.App.5th at p. 413.)
Pulliam began with the dictionary definition of recovery,
and noted it “focuses on damages, i.e. restoring money that was
taken away from the plaintiff, and does not expressly address
attorney’s fees.” (Pulliam, supra, 60 Cal.App.5th at p. 413.)
Pulliam also examined the FTC’s earlier position on the
question, and noted that in the past, “the FTC’s position on the
limitation on recovery was that the rule limited consequential
damages, not attorney’s fees. To include attorney’s fees in the
Holder Rule’s limitation on recovery would be out of sync with its
objective of reallocating the costs of the seller’s misconduct from
the consumer back to the seller and creditor. Attorney’s fees ‘is a
form of compensation that, along with an award of actual
damages, permits the consumer to be made whole. . . . [O]ne of
the objectives of the Holder Rule is to internalize the costs of a
seller’s misconduct. Those costs include the expense of obtaining
compensation for injury caused by the seller’s misconduct.’
[Citation.]” (Pulliam, supra, 60 Cal.App.5th at pp. 415-416.)
Pulliam added, “One commentator suggested that if the
creditor is not responsible for attorney fees and costs, there would
be an incentive to intentionally prolong litigation and cause a
consumer to spend more prosecuting the case than the recovery
available under the sales contract. ‘Exposure to liability for fees
and costs . . . has a tendency to cut down on litigation and
encourage settlement because commercial parties have less
incentive to stall the litigation until the case goes away. This
ability to stall is especially implicated when the commercial
parties have the resources to continue the litigation while
wearing down the resources of the consumer.’ [Citation.] ‘The
10
statutory availability of attorney’s fees and costs to a prevailing
consumer is another way to level the playing field between the
consumer and commercial parties to the transaction.’ [Citation.]
Both consumer rights and the rule’s purpose would be frustrated
if attorney fees were not recoverable from both the seller and the
creditor-assignee.” (Pulliam, supra, 60 Cal.App.5th at p. 416.)7
Pulliam then concluded the FTC’s recent Rule
Confirmation was not entitled to dispositive deference. (Pulliam,
supra, 60 Cal.App.5th at p. 419.) It noted that in Kisor v. Wilkie
(2019) ––– U.S. ––––, 139 S.Ct. 2400, 2408, 204 L.Ed.2d 841(Kisor), the United States Supreme Court reaffirmed the doctrine
of deference to an agency’s reading of its own, genuinely
ambiguous regulations, while reaffirming “the limitations of that
doctrine. Particularly, in considering deference, ‘a court must
make an independent inquiry into whether the character and
context of the agency interpretation entitles it to controlling
weight. [Citations.]’ [Citation.] ‘The inquiry on this dimension
does not reduce to any exhaustive test.’ [Citation.] However, the
court has identified certain markers for identifying when
regulatory deference is and is not appropriate. [Citation.] [¶]
The . . . markers the court identified were: First, the ‘regulatory
interpretation must be one actually made by the agency. In other
words, it must be the agency’s “authoritative” or “official
position,” rather than any more ad hoc statement not reflecting
the agency’s views. [Citation.]’ [Citation.] ‘Next, the agency’s
7 We observe that if a transaction involves a relatively
inexpensive vehicle, a commercial party would have an even
greater incentive to prolong the litigation if the consumer’s total
recovery, including attorney fees, were capped by the amount the
consumer paid under the contract.
11
interpretation must in some way implicate its substantive
expertise.’ [Citation.] ‘Finally, an agency’s reading of a rule
must reflect “fair and considered judgment” to receive . . .
deference. [Citation.]’ [Citation.] A court should decline to defer
to a convenient litigation position or post hoc rationalization.
[Citation.]” (Pulliam, supra, 60 Cal.App.5th at p. 419.)
Upon considering these factors, Pulliam concluded the
FTC’s Rule Confirmation was not entitled to conclusive
deference. (Pulliam, supra, 60 Cal.App.5th at p. 420.) Among
other things, it found that resolution of the issue was not “easily
within the FTC's substantive expertise. This is so for two
reasons. (1) Resolution of the issue may turn on the particular
state statute providing for attorney's fee recovery at issue, and
whether that statute is intended to be punitive against the payor
or simply to make the payee whole. (2) As illustrated by the
FTC’s request for comments which led to the Rule Confirmation,
the FTC sought to exercise its judgment based on data regarding
the effect of the rule (or any proposed rule change) on consumers
and businesses. No commenter provided the FTC with data on
the costs and benefits to consumers or businesses in different
jurisdictions based on the availability of attorney’s fees or any
limitations placed on them. Thus, the FTC’s statement regarding
attorney’s fees in its Rule Confirmation was not an exercise of its
substantive expertise, but simply a position taken after limited
arguments were made on each side.” (Pulliam, supra, 60
Cal.App.5th at p. 420.)
Further, “given the informal nature of the FTC's
consideration of the issue– one that followed a request for
comments that did not mention attorneys’ fees – we are not
convinced that the confirmation truly represented the ‘ “fair and
12
considered judgment” [necessary] to receive . . . deference.’
(Kisor, supra, 139 S.Ct. at p. 2416.)” (Pulliam, supra, 60
Cal.App.5th at p. 420.)
Finally, “although we cannot say the position taken in the
Rule Confirmation was a change in interpretation – as the FTC
had not previously interpreted the rule at all – it did, in fact,
address an issue never previously addressed, and undermined
the existing practice in those jurisdictions in which attorney fees
in excess of the cap had been, and were being, imposed as a
matter of course.” (Pulliam, supra, 60 Cal.App.5th at p. 420.)
Based on the above rationale, we agree with Pulliam that
the Holder Rule does not limit a defendant’s liability for attorney
fees, and that the FTC’s recent Rule Confirmation is not entitled
to conclusive deference. We now turn to the discrete issues
raised by the instant appeal.
4. Trial court erred in denying Plaintiff’s motion for
attorney fees, costs, expenses and prejudgment interest on the
ground that both defendants’ liability for those items is capped by
the Holder Rule.
The inapplicability of the Holder Rule cap to attorney fees.
As indicated, the trial court ruled that Spikener is “on point.
Both Defendants have paid the maximum amount and [are] not
obligated to pay more per Spikener.” As discussed above, we in
turn agree with Pulliam that the Holder Rule cap does not
include attorney fees within its limit on recovery. (Pulliam,
supra, 60 Cal.App.5th at pp. 409-422.)
The inapplicability of the Holder Rule cap to costs and
expenses. The Lafferty court held the right to costs of suit under
Code of Civil Procedure section 1032, subdivision (b), is not
curtailed by the Holder Rule, which is silent about cost awards
13
under state law to a prevailing party in an action. (Lafferty,
supra, 25 Cal.App.5th at p. 415.) Further, although the Pulliam
decision did not discuss the impact of the Holder Rule cap on
costs or expenses, as those issues were not raised on appeal
(Pulliam, supra, 60 Cal.App.5th at p. 403, fn. 2), by parity of
reasoning, Pulliam’s rationale for concluding that the Holder
Rule cap does not include attorney fees within its limit on
recovery is equally applicable to the items of costs and expenses.
Those items, just like attorney fees, are incurred in the process of
recovering “damages, i.e., restoring money that was taken away
from the plaintiff.” (Pulliam, supra, 60 Cal.App.5th at p. 413.)
Additionally, if the Holder Rule cap were to extend to costs and
expenses, a commercial defendant would have greater “ ‘incentive
to stall the litigation until the case goes away.’ ” (Id. at p. 416.)
We conclude Pulliam’s determination that the Holder Rule cap
does not apply to attorney fees is equally applicable to the items
of costs and expenses.
The inapplicability of the Holder Rule cap to prejudgment
interest. In this regard, Lafferty, supra, 25 Cal.App.5th 398, is on
point. It states that section 3287, pertaining to prejudgment
interest, “applies to every person entitled to recover damages—
without reference to the underlying cause(s) of action for which
damages are awarded. Because prejudgment interest under Civil
Code section 3287 focuses on the person rather than the cause of
action, the limitation on recovery under the Holder Rule cause of
action does not affect entitlement to prejudgment interest.”
(Lafferty, supra, 25 Cal.App.5th at p. 416.)
The impact of section 1459.5. It is unnecessary to address
Westlake’s argument that section 1459.5, allowing a plaintiff to
recover attorney’s fees, costs and expenses, is preempted by
14
federal law. Again, Pulliam is on point. “Because we conclude
the Holder Rule cap does not include attorney’s fees [or costs or
expenses] within its limit on recovery and that the FTC’s
interpretation to the contrary is not entitled to deference, the
Holder Rule is consistent with section 1459.5, and we need not
address whether section 1459.5 independently applies.”
(Pulliam, supra, 60 Cal.App.5th at p. 422.)
The role of Southgate, the defaulted seller. In denying
Plaintiff’s motion, the trial court ruled that both defendants had
paid the maximum amount and were not obligated to pay more,
per Spikener. On appeal, Plaintiff seeks reversal and remand as
to both Southgate and Westlake. We agree that the Holder Rule
cap is inapplicable to the various items that Plaintiff sought in
his motion, and therefore the order must be reversed as to both
Westlake and Southgate. As we have noted, Southgate was in
default, and thus it is not a respondent in this appeal. In its
respondent’s brief, Westlake argues in a footnote that because
Southgate was not served with the notice of appeal and is not a
respondent in this appeal, “any relief requested as against
Southgate is inappropriate.” However, Westlake lacks standing
to assert any arguments on behalf of Southgate, its defaulted
codefendant. Moreover, after Southgate’s default was entered, it
was no longer an active party in the litigation and thus was not
entitled to any further notices. (Sporn v. Home Depot USA, Inc.
(2005) 126 Cal.App.4th 1294, 1301.) Therefore, reversal is proper
as to Southgate, irrespective of its absence as a respondent.
15
DISPOSITION
The August 10, 2020 order denying Plaintiff’s motion for
attorney fees, costs, expenses, and prejudgment interest against
Westlake and Southgate is reversed, and the matter is remanded
for the trial court to redetermine the issues without regard to the
Holder Rule cap on liability. Plaintiff shall recover his costs on
appeal as against Westlake.
NOT TO BE PUBLISHED
VIRAMONTES, J.*
We concur:
EDMON, P.J.
EGERTON, J.
______________________________________________________
* Judge of the Los Angeles County Superior Court, assigned
by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.
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