Hayward v. Arizona Central Credit Union (Arizona Court of Appeals Case No. 1 CA-CV 15-0450, filed Jan. 10, 2017)

What do you do when you successfully sue the dealership that sold you a car, but the dealership goes out of business without paying the full amount of the judgment you obtained against it? In this case, you sue the credit union that bought the installment sales contract that was the basis for your successful suit against the dealership and seek to recover at least a portion of the remaining balance of the judgment from the credit union.

car-718781_1920Jamie Hayward bought a car from the now-defunct Steve Coury Buick, Pontiac & GMC Truck dealership. She satisfied the purchase in part by trading in a vehicle worth about $80 more than she still owed on it. After making a modest down payment, Hayward financed the remainder of the purchaser price through a retail installment sales contract. That agreement obligated the dealership to pay off what Hayward still owed on the car she traded in. When an employee of the dealership subsequently stole the trade-in car, the dealership refused to honor its agreement to pay off the remaining balance owed by Hayward on the trade-in. Hayward sued the dealership and obtained a judgment for nearly $17,000 in compensatory damages; $50,000 in punitive damages; and approximately $14,000 in attorneys’ fees and costs. The dealership went out of business without paying the judgment, but Hayward was able to recover just under $24,000 through garnishment proceedings.

With approximately $57,000 of her judgment against the dealership remaining uncollected, Hayward next sued Arizona Central Credit Union, the financial institution that purchased her installment sales contract from the dealership. Hayward’s suit against the credit union relied on the Federal Trade Commission’s “Holder Rule,” see 16 C.F.R. § 433.2, which the installment sales contract incorporated. Under the Holder Rule, a debtor may sue the purchaser of an installment sales contract on all claims the debtor could assert against the seller. But the debtor’s recovery against the holder of the debt cannot exceed the amount paid by the debtor under the installment sales contract.

The credit union moved to dismiss Hayward’ complaint against it under Rule 12(b)(6), Ariz. R. Civ. P., for failure to state a claim. The credit union argued that, as a matter of law, it could not be liable under the Holder Rule for the punitive damages, attorneys’ fees, and costs awarded to Hayward in her judgment against the dealership. Because Hayward had successfully recovered from the dealership an amount that exceeded her approximately $17,000 compensatory damage award, the credit union argued she could not recover the non-compensatory-damages portion of the judgment from the credit union. The superior court agreed with the credit union’s argument and dismissed Hayward’s complaint.

The Arizona Court of Appeals reversed the superior court’s decision. Declining to decide the question of whether liability under the Holder Rule is limited to compensatory damages–an issue on which courts in other jurisdictions have reached different conclusions–the court of appeals found the credit union’s entire argument untenable because it was based on a false premise. The credit union’s argument incorrectly assumed the nearly $24,000 Hayward garnished from the dealership must be allocated first to the satisfaction of the approximately $17,000 compensatory damages award before being applied against the separately awarded amounts in the judgment for punitive damages, attorneys’ fees, and costs. But neither the installment sales contract nor Hayward’s judgment against the dealership specified the order in which any partial recovery should be applied against the separate awards contained in the judgment for compensatory damages, punitive damages, attorneys’ fees, and costs. And the credit union failed to identify any authority “to support its contention that monies a judgment creditor recovers through garnishment must be allocated first to satisfy the compensatory damages portion of a judgment, or otherwise must be allocated in a manner so as to reduce the potential exposure of the holder of the installment sales contract under the Holder Rule.”

The court of appeals noted the inequity that adoption of the credit union’s argument would create. Under that argument, “if Hayward had sued the Credit Union before she sued the dealership (or before she pursued garnishment to execute on her judgment against the dealership), she could have collected from the Credit Union the full amount she paid on the contract. She then could have sought to recover from the dealership any additional amounts due her.” But if, as here, she instead chose to pursue her claim against the dealership first, she would have no remedy against the credit union. The court of appeals stated that result “makes no sense.”

The court of appeals concluded:

Under both the contract and the federal regulation, it is undisputed that the holder of installment debt is subject to a claim for compensatory damages the debtor could bring against the seller. Under these circumstances, a holder may not avoid that obligation simply because a debtor who has obtained a judgment against the seller for both compensatory damages and punitive damages manages to partially satisfy that judgment. Absent any legal constraint on how Hayward’s recovery should be allocated, we cannot say that as a matter of law, the partial recovery she received from the dealership satisfied her compensatory damage award.

To read the full opinion of the court of appeals, click here.