Subject: Questions re FTC regulation
Date: March 8, 2009
To: Joe Panetti <firstname.lastname@example.org>
I wanted to ask you a few questions in connection with a case involving one of my mom’s friends, Gloria Tavares, who has been defrauded. She paid a jeweler $10 000 to reset a valuable emerald ring, and he absconded with the ring, sold it to a collector, and disappeared. She had signed a $10 000 note to pay for the re-setting and now the bank is suing her to collect on the note. She hired a lawyer, and he informed her about an FTC regulation mandating that consumer credit contracts include a certain notice. This notice supposedly states that the holder of a note is subject to the consumers’ claims and defenses. I’m not familiar with this regulation, but I’m sure you are. Do you know whether the courts have enforced it?
I’m so sorry to hear about your mom’s friend. What a terrible story!
First, I just wanted to mention a few ideas. If the jeweler stole the ring, she would have a claim against him, because he unlawfully deprived her of her property. I guess that’s no help if the guy has left the jurisdiction. But what about the collector? Wasn’t he complicit in this crime? He was involved to some extent, because he accepted a stolen ring. I wonder if there’s a claim against him predicated on the theory that he received stolen property?
As for your question—yes, I’m familiar with this regulation. It’s called the FTC Holder Rule. The courts have definitely enforced it. The courts generally agree that it insulates consumers from collection actions by providing them with the ability to raise claims and defenses arising out of the seller’s misconduct. Some courts have disagreed about the circumstances under which consumers may obtain affirmative recovery, that is, some disagree about when consumers may bring their own independent claims seeking refunds for amounts paid to financers. They generally agree, however, that if consumers were entitled to rescission, that is, cancellation of the original consumer contract, they would be entitled to a refund of money paid on a note. Here, it sounds like your mom’s friend would be entitled to rescind the contract because she received nothing of value and was the victim of fraud. These are usually good grounds for rescission and a claim for a refund of money paid on the note.
Let me know what happens.