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.”

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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

2

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.

3

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.”

4

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

5

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.

6

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.

7

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

8

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

9

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.

10

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.

11

“ ‘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 costsharing charges from the beneficiary, they cannot coexist with federal law”

and therefore are preempted. (Id. at pp. 820–821.)

12

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.)

13

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.)

14

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.

The judgment is affirmed. Ally is awarded its costs on appeal. 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, 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].)