The Claims and Defenses created under the CFA Lawyer Manual

Asserting CFA claims/defenses against assignees

Most car dealers assign the automobile installment contract to finance companies or other financing entities shortly after the purchase. The question then may arise: Can a claim or defense against the dealer--such as for a violation of the CFA--be asserted against the assignee who now holds the contract? Despite an FTC regulation designed to allow consumers to assert all claims and defenses against assignees, the Illinois Supreme Court has narrowly limited the ability of consumers to hold assignees liable for the misconduct of the seller.

The FTC, in 1975, enacted the Preservation of Claims and Defenses Rule, or the "Holder Rule", 16 C.F.R. § 433.2. The Holder Rule was designed to allow consumers to achieve redress from the entities that were collecting their debts-- the assignee/holder of the consumer credit contract. The regulation required all sellers to insert a clause in every consumer credit contract. That clause provides that the holder of the contract is "subject to all claims and defenses which the debtor could assert against the seller...." But the Illinois Supreme Court has turned the phrase "all claims and defenses" on its head. The Court now suggests that the Holder Rule protects consumers only in the "limited scenario" where "the car purchased is a lemon." Jarvis v. South Oak Dodge, 201 Ill. 2d 81, 92, n.2 (2002).

How did the Illinois Supreme Court go from holders who are subject to "all claims and defenses" to the point where holders are subject to one claim or defense? It began with the case of Lanier v. Associates Finance, Inc., 114 Ill. 2d 1 (1986). There the Court ruled that compliance with the federal Truth in Lending disclosure law precluded a consumer's claim under Illinois state law. A creditor who used the Rule of 78's to compute unearned interest in Lanier could not be liable for misrepresentation under the CFA where the creditor's actions did not violate the federal Truth in Lending Act. Then in Jarvis and another decision, Jackson v. South Holland Dodge, Inc., 197 Ill. 2d 39 (2001), the Court extended the Lanier ruling to assignees, relying on a provision in the Truth in Lending Act (TILA), 15 U.S.C. § 1641(a). That section states that assignees are only liable for Truth in Lending disclosure violations that are "apparent on the face of the disclosure statement." In Jarvis and Jackson, the Supreme Court held that misrepresentations by the seller were not apparent on the face of the contract, thus insulating the assignees from liability, because the section 1641(a) of TILA trumps the FTC Holder Rule. In Jarvis, the Court stated that "[w]e see no injustice in refusing to make the holder of a consumer lease responsible for the alleged fraudulent conduct of the lessor." The Court threw this bone to consumers:

"[W]e note that the FTC Holder Notice [Rule] has not been rendered completely meaningless by section 1641(a) of TILA. The notice ‘continues to fill a valuable role by confirming the right of buyers to withhold payment from sellers or assignees, if it becomes apparent that the car purchased is a lemon."

Jarvis, 201 Ill. 2d at 92, n. 2 (citations omitted).

Four ways around Jarvis and Jackson

1. Non-disclosure matters

Argue that in Jarvis and Jackson the consumer claims, which the Court did not permit to be asserted against the assignees, were misrepresentations that dealt with matters regulated by federal disclosure law. In Jarvis, the misrepresentation concerned the consumer's right to pay off the lease and purchase the vehicle; the Court explained that these disclosures were required by the federal Consumer Leasing Act, 15 U.S.C. §1667. 201 Ill.2d at 86-87. Similarly, in Jackson, where the consumer complained that the price for an extended warranty was disclosed in a deceptive manner, the Court viewed the disclosure of warranty price information as a required TILA disclosure. 197 Ill.2d at 48-49 and 55. 

Consequently, if the claim or defense of the consumer is unrelated to a disclosure requirement of federal law, the assignee limitation of liability provision in section 1641(a) of the federal Truth in Lending Act should not apply. The Court in Jarvis suggested as much by noting that a lemon law claim could be asserted against an assignee without running afoul of section 1641(a)'s grasp. Perhaps any significant non-disclosure-related claim may also circumvent section 1641. For example, if a consumer is defrauded by the classic "bait and switch" scam, the argument would be that the fraudulent act constituting "bait and switch" is not a credit disclosure governed by the federal Truth in Lending law. Therefore, section 1641(a)'s limitation on assignee liability does not come into play.

But note two things:

1. The language in Jackson suggests that the assignee will only be held liable under this theory where the misconduct of the seller "is so substantial that a court is persuaded that rescission and restitution are justified." 197 Ill. 2d at 55. See also Felde v. Chrysler Credit Corporation, 219 Ill. App. 3d 530, 536-537 (2d Dist. 1991); and
2. The rule may be different for "defenses" as opposed to affirmative claims; Jackson relies on language from an FTC official commentary which suggests that where a defense is raised as a setoff to a claim by a creditor/assignee, any defense can be asserted (it does not have to be "substantial"). 197 Ill. 2d at 55. But the Jackson rationale would still insulate holders from defenses that are disclosure-related and thus within the ambit of §1641(a). See also Ellis v. GMAC, 160 F.3d 703, 709 (11th Cir. 1998).

2. Assignee participates in the seller's misconduct

The Supreme Court in both Jarvis and Jackson held that if the assignee participates in the seller's misconduct the claims or defenses may be asserted against them. Assignees who engage in "active and direct" fraud would be subject to assignee liability. "Preassignment fraud would be independent of and separate from the TILA assignee exemption and would thus be actionable under Illinois law." Jackson, 197 Ill. 2d at 52. See Taylor v. Trans Acceptance Corp., 267 Ill App. 3d 562, 572 (1st Dist. 1994).

3. The claim or defense is apparent on the face of the contract

If the seller's misrepresentation or disclosure violation is apparent on the face of the contract, the assignee is subject to the claim or defense of the consumer. 15 U.S.C. § 1641 (a).

4. The seller is an agent of the holder

Where there is a close relationship between the seller and the holder, such as where there is common ownership of the two entities or the holder is the financing arm of the seller (e.g. Ford Motor Credit Company and Ford Company), it can be argued that the seller is the agent of the holder. Thus claims and defenses against the seller can be asserted against the holder. See Mercedes-Benz Credit Corp. v. Lotito, 703 A. 2d 288 (N.J. App. 1997); Connick v. Suzuki, 174 Ill. 2d 482 (1997).