§ 3.17.6 The “FTC Holder Rule.”

• Jurisdiction: Arizona

§ 3.17.6 The “FTC Holder Rule.” Under “regular” contract law, if the seller of goods sells goods and assigns the note to an assignee, the assignee is subject to all defenses the seller would be subject to. 4 Corbin, Corbin on Contracts §§ 892, 892A (1996 & Supp.); Restatement (Second) of Contracts § 336 (1981). UCC § 3-302 (A.R.S. § 47-3302 ) conferring “holder in due course” status upon a creditor (if certain conditions are met the creditor is not subject to any of the buyer’s defenses) is the exception to the rule, but that section has no effect in consumer cases.

The FTC Holder Rule, 16 C.F.R. § 433.2 (1975), requires that the following notice (in at least 10-point, boldface type) be placed on consumer contracts:

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.

Where the proceeds of a “straight loan” are used to purchase the goods or services, the words “pursuant hereto or” are deleted from the Notice placed on the purchase money loan. Placing the notice on the consumer credit contract (1) effectively defeats the assignee’s status under the UCC as a holder in due course (due to the required notice), and (2) subjects the assignee, as a matter of contract law, to the consumer’s claims and defenses. See Maberry v. Said, 911 F. Supp. 1393, 1397 (D. Kan. 1995); Hempstead Bank v. Babcock, 115 Misc. 2d 97, 453 N.Y.S.2d 557 (Sup. Ct. 1982 ); De La Fuente v. Home Savings Ass’n, 669 S.W.2d 137 (Tex. Ct. App. 1984 ). Even if the transaction is beyond the scope of the FTC Holder Rule, if the credit agreement contains the notice, the holder will be subject to seller-related claims and defenses. Gray v. Atlantic Permanent Savings & Loan Ass’n, 49 B.R. 540 (Bankr. E.D. Va. 1985); Music Acceptance Corp. v. Lofing, 32 Cal. App. 4th 610, 39 Cal. Rptr. 2d 159 (1995); Kish v. Van Note, 692 S.W. 2d 463 (Tex. 1985). Although the FTC Holder Rule’s required notice states that the “recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder,” that merely refers to the consumer’s affirmative recovery¾what the notice does not say is that the consumer can stop paying, too, but this is a defense the buyer would have against a nonperforming seller. Simply stated, the limit on recovery does not mean the debtor can only get back payments already made; it means the consumer can get back those payments plus cancel all remaining indebtedness under the note. FTC Staff Guidelines, 41 Fed. Reg. 20024 (May 14, 1976); Tinker v. De Maria Porsche Audi, Inc., 459 So. 2d 487 (Fla. Ct. App. 1984) (“It is clear that not only does the Notice clause entitle the buyer to withhold the balance of the purchase price owed to the creditor when the seller’s contractual duties are not fulfilled, but it gives the...