California court ruling opens auto lenders to larger lawsuit payments
Consumer groups are applauding a California Supreme Court ruling that found auto lenders liable for the legal costs of car buyers in lawsuits involving fraudulent vehicle sales.
One of the immediate impacts of last week’s decision concerns Tania Pulliam, who is now eligible for at least $169,602 in attorneys’ fees, in addition to nearly $22,000 in damages. Pulliam had sued both her car dealership and the lender, TD Auto Finance, over the sale of a car that allegedly lacked certain advertised features she needed due to a disability.
But the decision will also have wider ramifications, exposing lenders to more legal risk in California, as the ability to recoup attorney fees makes litigation more economically feasible for consumers.
The hope of consumer advocacy groups is that the increased legal risk will prompt lenders to stop doing business with car dealerships that engage in questionable practices.
“It’s going to encourage lenders who take advantage of their warm relationship with them to be a little more diligent,” said Rosemary Shahan, president of the Sacramento, Calif.-based group Consumers for Auto Reliability and Safety.
The American Financial Services Association, a trade group that represents auto lenders, said it was disappointed with the decision.
“Allowing unlimited attorneys’ fees helps one group of people in California – attorneys,” spokesman Ed McFadden said. “It will likely lead to an increase in litigation that does not help the consumer or the auto industry.”
The ruling revolved around a decades-old Federal Trade Commission rule — and if the rule says lenders are only liable for reimbursing the price of a defrauded consumer’s car purchase, instead of also be responsible for their lawyers’ fees.
Consumer groups and auto lenders disagree on this point, and the courts are divided on the issue. California has a law in place that makes it clear that consumers can recover attorney’s fees from lenders, but lenders have argued that the federal rule supersedes state law.
In a unanimous decision, California’s highest court rejected the lenders’ arguments. “It is clear that the FTC contemplated that state law might provide greater protections for consumers and that those protections might come with greater recovery than the amounts paid on the contract,” Judge Goodwin wrote. Liu in his opinion.
A TD Bank spokesperson said the company does not comment on the disputes.
Lawyers for the bank had argued that the California Supreme Court should overturn an earlier ruling by an appeals court, which found that Pulliam was entitled to nearly $170,000 in attorney fees. In a filing last year, TD attorneys wrote that the FTC’s rule is “unambiguous” in limiting lenders’ liability to the purchase price of a car under the contract — which, in the Pulliam’s case, was around $12,500.
According to the appeals court ruling, an “innocent creditor is liable for $170,000 or more based on a contract under which a consumer spent only $12,500 on a used car,” wrote TD’s attorneys in the filing. They warned that making lenders liable for consumer legal costs could cause the industry to back off from offering credit.
“If creditors risked uncapped attorney fees when funding consumer contracts, they would be less likely to take that risk and fund those contracts,” TD lawyers wrote last year.
But lawyers for Pulliam argued that TD’s aim was to make it “impossible for consumers to sue the holders of their consumer credit agreements when they have been deceived by fraudulent sellers”.
The court ruling may “really help put some teeth” into the FTC’s rule and spur auto lenders in California to refuse to work with dealerships “engaging in shady practices,” wrote Bernard Brown, an attorney for leading auto fraud specialist, in an email to consumer attorneys.
“The result would be to do much to clean up the rotten used car sales industry we have today,” Brown wrote, encouraging lawyers to scour their own national laws and take on similar cases. .
The FTC, whose rule has been in place since 1975, indirectly weighed in on California’s legal battle in January. The agency issued an advisory notice stressing that its “rule does not eliminate any rights a consumer may have” to recover attorney’s fees under state law.
The California ruling is important because it clarifies the issue in the nation’s most populous state, but attorneys pointed to the FTC’s advisory opinion as another source of increased legal risk for auto lenders.
Combined with California’s decision, the FTC’s opinion could encourage similar lawsuits elsewhere, said Alan Wingfield, a Troutman Pepper partner who represents auto lenders. Another potential outcome is that lawmakers in other states will pass attorney fee laws that resemble California law, he said.
“We’ll see this unfold state by state, nationwide,” Wingfield said, adding that the California Supreme Court could “set the tone” for court rulings elsewhere.