Arizona Court of Appeals Division One holds that a consumer may choose how to allocate partial judgment recovery among portions of judgment for purposes of bringing a claim against the holder of credit under 16 C.F.R. § 433.2.

A woman traded in her old car toward the purchase of another car.  The dealership agreed to pay off the loan on her old car but later refused after the dealer’s employee stole that car.  The woman sued the dealership and was award compensatory and punitive damages, as well as attorneys’ fees and costs.  The dealership went out of business and the woman was only able to recover part of the judgment. 

The Federal Trade Commission’s “Holder Rule,” 16 C.F.R. § 433.2, was incorporated into the sales contract.  The Holder Rule provides that the holder of a consumer credit contract is subject to “all claims . . . the debtor could assert against the seller,” but the recovery against a holder “shall not exceed amounts paid by the debtor.”  After failing to fully collect from the dealership, the woman sued the credit union that held the credit contract.  The trial court dismissed the claim because the woman had already collected from the dealership more than the amount of compensatory damages.  It held that the Holder Rule did not support a claim to collect punitive damages, fees or costs.  The woman appealed.

The Court of Appeals, after noting conflicting authorities, declined to address whether punitive damages, fees, or costs may be recovered under the Holder Rule.  It held that regardless, there is no requirement that the partial recovery from the dealership be allocated toward compensatory damages first.  Such a rule would make the viability of a Holder Rule claim dependent on the order in which a plaintiff pursues the seller and the holder.  Here the woman pursued the dealership first but the partial collection could be allocated towards punitive damages, fees, or costs (i.e., the portions of the judgment potentially not recoverable under the Holder Rule).  This left her with a valid and permissible compensatory damages claim under the Holder Rule for at least the compensatory damages.  Accordingly, it was improper to dismiss for failing to state a claim. 

Presiding Judge Johnsen authored the opinion; Judges Thompson and McMurdie concurred.