FTC "holder rule" protects purchaser even if defect is not immediately apparent

Law Reporter, Sep 2002

Jaramillo v. Gonzales, No. 21,180 (N.M. Ct. App. Apr. 9, 2002) (unpublished); cert. denied, May 28, 2002.

A New Mexico appellate court held that a mobile home purchaser could avoid payment to a bank on an installment contract after the home was ruined by flooding due to a defect, even though the product was not utterly without value when he first took delivery of it.

Here, Jaramillo bought a mobile home for his son on an installment plan. The home was later rendered uninhabitable by flooding, by which time the seller had gone out of business. The flooding was caused by leaks in the polybutylene used in the plumbing.

Through counsel, Jaramillo wrote to the bank to which the installment contract had been assigned, revoking the agreement to pay. The letter stated that the bank, as the assignee of the contract, was subject to all claims and defenses that could have been asserted against the seller. The bank refused to accept the revocation, and Jaramillo and his son filed suit. A trial court awarded damages.

Affirming, the court observed that the Federal Trade Commission (FTC) "holder rule," 16 C.F.R. sec 433.2, provides that consumer credit contracts must contain the statement that any holder of the contract is subject to all claims and defenses that could have been asserted against the seller. Defendant had argued that the holder rule applied only if the product had little or no value when initially delivered, citing a commentary on the rule published by the FTC. But the rule is unambiguous on its face, the court found, and nothing in its language limits the types of claims or defenses that may be brought against the assignee. Moreover, FTC guidelines for the rule state that the required notice protects a consumer's right to assert any legally sufficient claim against the seller. "The creditor stands in the shoes of the seller," the guidelines declare. Therefore, plaintiffs were not required to show that the mobile home had little or no value when it was delivered to them.

Plaintiffs Counsel

*James A. Burke, Santa Fe, N.M.

Documents in this case are available through the Court Document Sets section in the back of this issue, courtesy of Mr. Burke.