Debt buyers continue to face increased scrutiny of their practices, as illustrated by the recent judicial and legislative developments described below.
Commonwealth Financial Systems, Inc. v. Smith. This Pennsylvania appellate court decision, issued on February 14, 2011, will require buyers of credit card accounts to develop procedures to obtain documents or other evidence from card issuers that will be admissible in Pennsylvania collection actions. In this breach of contract action, filed by a debt buyer to collect on a credit card account, the Superior Court found that the trial court had properly refused to admit into evidence the card issuer’s computerized files and documents consisting of a cardholder agreement, two monthly statements, and bills of sale covering the account in question.
The Superior Court agreed that such evidence did not qualify for the business record exception to the hearsay rule. Noting that “the question of whether computerized files of an original creditor are admissible as the business records of a successor debt buyer appears to be an issue of first impression in [Pennsylvania],” the Superior Court declined to adopt the “rule of incorporation” advocated by the debt buyer. Under that rule, a third party’s records integrated into the business records of an acquiring business are deemed “made” by the acquirer.
In particular, the Superior Court held that it was not an abuse of discretion for the trial court to rule the card issuer’s records inadmissible for lack of a witness who participated in their creation or maintenance or who could personally attest to their accuracy. The Superior Court also ruled that the record supported the trial court’s finding that the debt buyer had not established the trustworthiness of its documentary evidence; the form of cardholder agreement was drafted nearly seven years after the debtor’s card was issued and did not provide for the interest rate or attorneys fees charged to her account. Finally, because the documentary evidence was properly excluded, the Superior Court agreed with the trial court that the debt buyer had failed to prove the existence of a contract establishing its right to a judgment.
Chulsky v. Hudson Law Offices. This decision, issued by the U.S. District Court for the District of New Jersey on February 10, 2011, may require law firms that purchase debts to do so through a separate business corporation. The Court ruled that a law firm cannot use New Jersey courts to collect a debt it purchased if the law firm engages in the business of purchasing and collecting debts. It found that a provision in New Jersey’s Professional Service Corporation Act (PSCA) prohibiting such a corporation from engaging “in any business other than the rendering of the professional services for which it was specifically incorporated” makes it unlawful for a New Jersey law firm to operate a debt collection business under the auspices of its professional practice. As a result, the Court held that the plaintiff had properly stated a claim that the law firm’s filing of the collection complaint violated the Fair Debt Collection Practices Act (FDCPA) prohibition on a debt collector using “any false misrepresentation or deceptive means” to collect a debt. According to the District Court, if the law firm’s collection attempt was unlawful under the PSCA, it misrepresented its ability to collect the debt by filing the complaint. Debt collection law firms operating in other states that limit the business activities of professional services corporations could face similar challenges when bringing collection actions.
Bradshaw v. Hilco Receivables, LLC. This decision by the U.S. District Court for the District of Maryland, issued on February 23, 2011, demonstrates that a debt buyer risks liability if it fails to identify and comply with applicable state licensing requirements. The Court found that a debt buyer that sued in state court to collect consumer debts it had purchased must be licensed as a “collection agency” under the Maryland Collection Agency Licensing Act. Therefore, the Court held, the debt buyer violated the FDCPA prohibition on a debt collector using “any false misrepresentation or deceptive means,” which includes threatening “to take any action that cannot legally be taken.” Following the majority view, the Court declined to apply the prohibition only to threatened actions, holding that it also reached actions that are actually taken, such as the debt buyer’s filing of lawsuits. (The Court found that the debt buyer could not rely on the FDCPA’s bona fide error defense because the violation resulted from a mistake of law.) Further, the Court ruled that the plaintiff was entitled to summary judgment on his claims that the Maryland Consumer Debt Collection Act and Maryland Consumer Protection Act were violated. However, it found that the declaratory and injunctive relief requested was not available under the FDCPA or Maryland statutes; the plaintiff’s remedy was limited to damages.
Florida Legislation. State legislators appear to have debt buyers in their crosshairs. For example, a bill has been introduced in Florida (Senate Bill 1116) that would amend the State’s debt collection statute to impose burdensome new requirements on debt buyers, including that advance notice be made to the debtor before any legal action is filed, extensive documentation be attached to complaints, and authenticated business records be filed with the court before a default or summary judgment is entered.