Debt Collector Gets Out Of Lawsuit… By Buying The Lawsuit Out From Under The Plaintiff

Image courtesy of Kieron Beard

When you sue a debt collector for allegedly violating federal law, that collector can’t just go behind your back, buy the debt on the cheap at auction and get the whole case dismissed, can it? That tactic worked for one collection agency and, depending on how a federal appeals court rules, it could lead to many other debt collectors buying their way out of legal trouble.

In early 2015, Nevada resident Patricia Arellano received a collections notice from a company called Clark County Collection Service seeking payment of a medical debt. The notice was confusing, giving her 30 days to respond regarding the validity of the debt but only 20 days to respond in court to the debt-collection legal action.

She did not respond in time and CCCS ultimately received a default judgment against Arellano for the $370 in alleged debt plus $430 in costs and fees.

However, Arellano responded by filing a lawsuit of her own against CCCS, alleging violations of the Fair Debt Collection Practices Act, arguing that it was misleading for CCCS to list a 30-day response window in the notice while the included summons only provided for 20 days. In 1988, the Ninth Circuit Court of Appeals ruled that a debt collector violated the FDCPA by using similarly confusing timeframes in a notice sent to an alleged debtor.

Arellano also said that the “Clark County Collection Service” name violated the law by falsely implying that the private company was actually a government entity.

A week after being sued, CCCS sought a Notice of Execution to be issued, directing the Clark County Sheriff’s office to enforce the default judgment against Arellano by seizing her property for sale at auction. Here’s the kicker: Included in that notice was Arellano rights of action in “any lawsuit pending in Nevada,” meaning the sheriff would be auctioning off Arellano’s legal claim in the CCCS lawsuit to the highest bidder.

Then the legal snake ate its own tail: At a courthouse steps auction in Nov. 15, CCCS — the only bidder — paid $250 to purchase the very lawsuit in which it was the only defendant.

Arguing that Arellano no longer had any standing to sue because her rights of action had been sold (to the very company she was suing), CCCS asked the court to dismiss the complaint. Arellano countered that FDCPA lawsuits are effectively claims of personal injury that can not be assigned to others.

After what appears to have been a very brief discussion of the issue, the District Court judge labeled the case an “interesting situation,” but agreed with CCCS and dismissed the lawsuit.

Arellano’s case attracted the attention of high-profile D.C.-based attorney Deepak Gupta, who recently appealed the lower court’s ruling, arguing that the FDCPA preempts any state laws that might have allowed Arellano’s legal claim to be transferred like it was property.

“State laws governing property transfers, like other state laws, are preempted when they ‘undermine the purpose’ of a federal law,” writes Gupta in his appeals brief [PDF].

The appeal contends that allowing an FDCPA claim to be sold off to the highest bidder would “frustrate the essential purpose” of a federal law aimed at protecting consumers. Knowing that the collector being sued could use the sheriff’s sale option to make an end-run around the lawsuit would discourage consumers from bringing these lawsuits in the first place.

“The FDCPA is meant to accomplish its goals through a nationwide scheme of private enforcement; victims of debt-collection abuses may bring suit, and win statutory damages, to deter future violations,” explains the brief. “But if CCCS gets its way, that system would crumble.”

Additionally, since the CCCS auction maneuver wouldn’t work in all states, the brief argues that the FDCPA would become a “state-by-state patchwork.”

Additionally, only the debt collector being sued would have any reason to bid on the rights to this sort of lawsuit, notes Gupta: “because no serious bidder would compete against the debt collector in the auction, the debt collector could name its own price to evade liability.”

Perhaps more importantly, according to the appeal, the notion of being able to seize and sell off a person’s rights of action in an FDCPA lawsuit runs counter to the common law understanding of such claims.

“Claims under the FDCPA are properly understood as analogous to traditional personal-injury tort claims and are thus unassignable under this common-law rule,” argues the brief. “That rule applies with special force here, where the unique relationship between the parties — a debt collector seeking to destroy a consumer’s collection-abuse claim — is so stark. And enforcing this specific prohibition is consistent with the common law’s traditional anti-assignment rule, which grew out of a suspicion that the rich and powerful would ‘pervert[] the process of law into an engine of oppression.'”

If the Ninth Circuit ultimately upholds the lower court’s ruling in this case, Gupta says it could open the floodgates to debt collectors buying their way out of alleged FDCPA violations.

“Thus, under both federal law and the common law, CCCS’s purchase-and-dismiss maneuver must fail,” he concludes in the brief. “Instead, CCSS should be required to defend itself the old-fashioned way: with legal arguments on the merits.”

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[via Bloomberg]