Holder Rule Allows Motor Home Buyer To Assert All Claims Against Assignee Of Loan That He Otherwise Had Against Motor Home Dealer

A motor home buyer who entered into an installment sale contract with a motor home dealer alleged the motor home was defective from the time of purchase and brought a lawsuit against the dealer and the lender to which the dealer assigned the contract.  The trial court held that the Holder Rule did not allow the buyer to assert claims against the lender that pertain only to the responsibility of the dealer.  The court of appeal held that the Holder Rule allows the buyer to assert all claims against the lender that he or she might otherwise have against the dealer.  (Lafferty v. Wells Fargo Bank, (213 Cal.App.4th 545, Cal.App. 3 Dist., February 4, 2013).


Patrick and Mary Lafferty (“Laffertys”) purchased a motor home manufactured by Fleetwood Motor Homes (“Fleetwood”) from Geweke Auto & RV Group (“Geweke”).  Pursuant to the terms of the installment sale contract the Laffertys entered into with Geweke, they would make payments of $389,929 over the course of 239 months.  Geweke assigned the installment sale contract to Wells Fargo Bank (“Wells Fargo”) in accordance with the terms of a dealer agreement.  The motor home began experiencing problems right after the Laffertys took possession of it.  After they took possession of the home, they immediately took it on a seven-day trip.  Upon return from the trip, they took the motor home to Geweke complaining of electrical failures and cosmetic issues.  Geweke did not perform any repairs in the over two weeks it had the motor home.  Because the Laffertys had another trip planned, they picked up the unrepaired motor home and took it for a little over one week and then returned it to Geweke for completion of the original repairs and additional mechanical and electrical failures that occurred during their second trip. 

Weeks later, Geweke called the Laffertys and told them they had to authorize a payment of $1,300 for a “failure analysis” so that Geweke could determine if some of the problems were caused by operator error.  The Laffertys refused to authorize the payment.  They wrote to Fleetwood to describe the problems with the motor home and stated the motor home had been at the dealership for 42 days.  On February 7, 2006, the Laffertys informed Wells Fargo that they would not make payments on the motor home until it was repaired. 

Although Geweke told the Laffertys the motor home was repaired in June 2006, it was not actually repaired.  The Laffertys declined to pick up the motor home from Geweke and stopped making payments.  Wells Fargo took possession of the motor home pursuant to the terms of the installment contract.  Although Wells Fargo did not take action to collect any money from the Laffertys, it did report to consumer credit reporting agencies that they had defaulted on their agreement to pay for the motor home. 

The Laffertys sued Geweke, Fleetwood, Wells Fargo, and the company that issued an extended service contract alleging “causes of action for breach of warranty, breach of contract, breach of the covenant of good faith and fair dealing, violation of the [Consumer Legal Remedies Act (“CLRA”)], violation of the Song-Beverly Act, violation of the Tanner Consumer Protection Act, and negligence.”  A “second amended complaint added five causes of action for insurance bad faith, unfair business practices, fraud, negligent credit defamation, and declaratory and injunctive relief.”  The Laffertys named Wells Fargo as a defendant in all of the causes of action except the insurance bad faith and fraud causes of action.  The causes of action against Wells Fargo for breach of contract, warranty, and the covenant of good faith and fair dealing, for violation of the CLRA, the Song-Beverly Act, and the Tanner Consumer Protection Act, and unfair business practices were based on the fact that the contract entered into between the Laffertys and Geweke was assigned to Wells Fargo.  The Laffertys alleged “the FTC ‘Holder Rule‘ and California state law mak[e] such a holder and/or assignee financer subject to any claims or defenses that might be asserted against the seller and/or manufacturer of the motor home.”

The trial court sustained Wells Fargo’s demurrer to the Laffertys’ causes of action for violation of the CLRA, negligence, negligent credit defamation, and declaratory and injunctive relief.  Wells Fargo filed a motion for summary adjudication for the breach of warranty, contract, and implied covenant of good faith and fair dealing causes of action, the violation of the Song-Beverly Act and Tanner Consumer Protection Act causes of action, and the cause of action for unfair business practices.  The trial court entered summary judgment in favor of Wells Fargo finding “that the Holder Rule limits claims by buyers against lenders that would otherwise lie only against the seller to cases in which little or no value was received by the buyer.”


At issue in this case is what is commonly referred to as the Holder Rule, which was promulgated by the Federal Trade Commission and requires specific language to be included in every consumer installment contract that is assigned to a lender.  Such instruments must contain the following language in 10 point or larger bold typeface:  “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.”

The Laffertys asserted that “the Holder Rule allows them to assert any claims against Wells Fargo that they might otherwise have against Geweke.”  The court of appeal agreed, but held that the Holder Rule limits them “to recovering no more than what they have paid under the installment contract.”

The court noted that the Holder Rule explicitly “allows the buyer to assert against the holder of a consumer credit contract ―all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds of the financing.”  This provision not only encompasses defensive claims but causes of action the buyer might assert against the seller.  The language mandated by the Holder Rule notifies all potential holders who accept an assignment of a contract that “they will be stepping into the seller‘s shoes.”  However, the rule “does not create any new claims or defenses for the consumer; it simply protects the consumer‘s existing claims and defenses.”

The court concluded that to the extent that the Laffertys have causes of action against Geweke that by operation of the Holder Rule are also valid against Wells Fargo, the Laffertys’ recovery is limited to what they have already paid under the installment contract.  The court of appeal concluded that the trial court erred in sustaining the demurrer as to the causes of action for violation of the CLRA and for negligence.  The appellate court found that the Laffertys’ letters to Fleetwood and Wells Fargo satisfied the notice requirements of the CLRA.  However, the court found federal law preempts the Laffertys’ claim of negligent defamation of credit.  The court also found that the Laffertys lack standing to assert their cause of action for declaratory and injunctive relief because the dealer agreement was not made for the benefit of the Laffertys.

The court found the Laffertys forfeited on appeal their causes of action for breach of contract, breach of warranty, breach of the covenant of good faith and fair dealing, violation of the Tanner Consumer Protection Act, violation of the Song-Beverly Act, and unfair business practices because they failed to present arguments on these issues.  Because the court reversed the judgment in favor of Wells Fargo, it also reversed the award of attorney fees because Wells Fargo is no longer necessarily the prevailing party in this action.


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