Court of Appeal (Ill.) Says FTC Holder Rule Allows Consumer to Cease Payments When It Becomes Apparent the Vehicle is a Lemon, but Says FTC Holder Rule Does Not Apply Where Holder Is Not the Assignee of the Seller

In Mercer v. Tumbleson Automotive Group, 2013 IL App (3d) 120400-U, 2013 WL 827716 (Ill.App. 3 Dist. 2013), Judge O’Brien found that a Holder of an automobile RISC was not subject to the Holder Rule for the misconduct of a seller. The facts were as follows:

In May 2009, plaintiff Terry Mercer executed a retail installment contract with Taylor & Son for the purchase of a 2006 Dodge Dakota. . . .The contract was immediately assigned to defendant Peoples National Bank of Kewanee. In April 2010, Mercer traded the Dakota for a 2005 Chrysler 300 Touring [that he purchased] from defendant Tumbleson Automotive Group. Peoples National Bank agreed to substitute the new vehicle as its security interest and entered into a substitution of collateral agreement with Mercer. The agreement referenced the original agreement dated May 20, 2009 and was signed by Mercer and Ryan McHenry for Peoples National Bank.

Initially, Judge O’Brien described what the FTC Holder Rule does, including allowing a consumer to stop paying:

The Holder Rule, which eliminated a creditor’s holder-in-due-course protection, was designed to preserve the claims and defenses of a consumer and to restore his or her right of nonpayment. Felde v. Chrysler Credit Corp., 219 Ill.App.3d 530, 536 (1991). The Holder Rule subjects the assignee to liability regarding the claims and defenses the debtor could assert against the seller. Jackson v. South Holland Dodge, Inc., 197 Ill.2d 39, 53 (2001). Under the Holder Rule, a vehicle buyer may withhold payment to the seller or assignee when it becomes apparent the vehicle is “a lemon.” Jackson, 197 Ill.2d at 54.

Judge O’Brien held, however, that the Holder of the contract was not subject the Holder Rule as to the subsequent seller’s conduct because the Holder was not an assignee of that seller – the Holder was only the assignee of the original seller.

Because there was no contract with Tumbleson and thus no assignment to the Bank of any Tumbleson contract, the Bank is not subject to derivative liability for any wrongdoing by Tumbleson. Similarly, the substitution of collateral agreement, which involved only Mercer and the Bank, did not create liability on the Bank’s’ behalf for Tumbleson’s actions. Accordingly, we find that the trial court properly granted summary judgment in favor of the Peoples National Bank.