FTC Collection Litigation Roundtable Sees Lively Debate on Legal Issues

The Federal Trade Commission this week convened a roundtable on collection practices that sought to identify best practices for litigation and arbitration as well as better ways to handle lawsuit notification, judgments and garnishments.

The roundtable, held at Northwestern University in Chicago, follows up on the FTC’s February 2009 report Collecting Consumer Debts: The Challenges of Change – A Workshop Report, which recommended that the debt collection regulatory system in the U.S. should be reformed and modernized (“FTC Proposes Significant Changes to FDCPA in Workshop Report,” Feb. 27). The report also announced regional roundtables to further discuss issues surrounding litigation and arbitration practices in the accounts receivable management process, this week’s event in Chicago being the first.

The next roundtable will be held Sept. 29 and 30 in northern California. The exact location has yet to be determined. Written comments pertaining to the Chicago roundtable may be submitted to the FTC until Sept. 1, an extension from the original Aug. 1 deadline.

More than a dozen panelists packed a stage and engaged in a sometimes-lively conversation about legal processes used in debt collection. The discussion was broken up into distinct topical segments:

Initiating Suits: Default Judgments and Service of Process

Default judgments are issued in as many as 90 percent of cases that go to court, several panelists said. According to consumer advocates, one of the drivers behind so many default judgments is the failure to properly notify debtors of suits filed against them by creditors and collectors.

Part of the problem is that the rules are “based on fiction” of the U.S. Postal Service delivering a collection judgment notice to a debtor, or, returning the notice if the address is bad, said Dave Philipps, consumer attorney and partner with Philipps & Philipps in suburban Chicago

“The Boston Globe recently sent out 100 letters to known wrong address. Only 50 were returned,” Philipps said.

Though collection firms in several states use process servers to deliver these notices, several participants said that many process servers lie about whether notices were actually served.  

“There should be some audit of service,” said Thomas More Donnelly, associate judge in the first municipal district of the Circuit Court of Cook County.

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In the cases of process servers lying about servicing notice, the process servers should go to jail, said Robert Markoff, president of the National Association of Retail Attorneys (NARCA) and partner in the firm of Markoff & Krasny of Chicago. “We don’t need new regulations; we need to enforce those we have.”

Peter Barry, adjunct professor at the William Mitchell College of Law, recommended that collection firms use licensed process servers in all cases over a certain limit (he recommended $1,000), and that the process servers be required to fill out logs detailing all service. “My father worked for UPS. He delivered 400 packages a day and had to [make a log entry] for every one of them.”

Other panelists added that there are other instances in which the notifications are properly served, but the consumer lies in court about receipt of the notice.

The issue of proper service was laid bare in late July when New York Attorney General Andrew Cuomo named 37 law firms and collection agencies in a lawsuit that seeks to overturn some 100,000 judgments against debtors based on what he called “sewer service” of lawsuit notification.

The Statute of Limitations

Collection efforts after the expiration of the statute of limitations on a debt is somewhat common among debt buyers, according to Daniel Edelman, attorney with Edelman, Combs, Latturner & Goodwin, a Chicago law firm that represents consumers.

There is no good data on how often suits are filed after the statute of limitations has expired, panelists agreed. Rozanne Andersen, EVP and General Counsel for ACA International, noted that the practice was explicitly illegal.

There are multiple problems with the way the statute of limitations is applied, according to Jeffery Lipman, Polk County (Iowa) magistrate judge. Sometimes the consumer doesn’t know where the debt is from. Other times it is difficult to determine when the statute of limitations actually expired. Another problem is that consumers don’t understand that debts are bought, sold and traded. So they legitimately don’t know some debt buyers who bring suits, Barry said.

Edelman added that some collection firms send letters to consumers asking them to settle debts that are beyond the statute of limitations. Though the letters don’t threaten suits, many consumers read these letters as being legally binding. If the debtor makes a partial payment — which can extend the statute of limitations — the owner of the debt then sues for the remainder.

“We don’t look to sue on time-barred debt,” Markoff said. “We will follow the law. We bump up against the statute. I have an ethical obligation to get the suit on file because the client has authorized it.”

Part of the problem, according to Markoff, is that some debtors will file cease and desist motions to prevent communications from collectors. The only recourse then is to file suit.

One panelist openly questioned whether ARM companies should be allowed to engage in any collection actions on time barred debt. Barbara Sinsley, partner with law firm Barron, Newburger & Sinsley, PLLC in Austin, Texas and General Counsel for DBA International, noted that the practice of asking for payment on debts that are beyond the statute of limitations is perfectly legal.

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Prima Facie Collection Case and Evidentiary Burdens

Some of the litigation disputes between debt buyers and debtors arise because in many instances there is no notification to debtors of assignments of debts to subsequent parties, the panelists said.

“I don’t know that you can trust debt buyer records or debt buyer affidavits,” said Edelman, pointing to the debts that may have been sold multiple times.

One of the challenges in Illinois is that little information is required in lawsuits, according to Donnelly. A suit can simply say a person owes a creditor $10,000. This leads to a glut of cases. Donnelly recommended that there be some type of standardized complaint forms for debt buyers to use when suing debtors.

Such a standardized complaint is being discussed in Illinois, according to Michelle Weinberg, a supervisory attorney at the Chicago Legal Assistance Foundation and director of the Chicago Seniors/Consumer Law Project.

Among the other items that should be considered in a court considering a lawsuit is the suitability of the underlying asset, added Rozanne Anderson.

Garnishment

Among the complaints of debtors against collectors is the garnishment of exempt funds (e.g., Social Security payments). If these protected funds are garnished, then the consumer is likely to bounce other payments and pay significant overdraft fees. Panelists agreed that in many instances, banks don’t get involved in whether funds are legally exempt or not. There were no bankers on the panel.

“We don’t want to take exempt funds, but the onus is on the banks to communicate which funds are exempt before [debtors] run up a bunch of NSF fees,” said Michael Buckles, director of government affairs for the Michigan Creditors Bar Association and former NARCA president.

“There is no way we can know what funds are exempt,” said Ira Leibsker, founder and vice president of the Illinois Credit Bar Association and NARCA director. “The banks could solve this fairly quickly by letting us know which funds are exempt.”

Productive Change and Best Practices

“If you’re a consumer attorney and not happy with what is going on, or if you’re a collection attorney and not happy with what is going on, then network with others,” Buckles said, who has worked with consumer advocates to help develop rules for dealing with garnishment and co-mingling of exempt and non-exempt funds.

“There are opportunities for consumers’ [attorneys], creditors [attorneys] and the judiciary to work together on behalf of everyone,” Leibsker said. However, he and other participants said a lot of work still needs to be done on the garnishment issue.

While the idea is good, it doesn’t actually happen, according to Philipps. He added that there are too many cases filed in which the debt collection attorneys have no proof of the debt.

Markoff added that another large issue is consumer education, particularly in terms of financial literacy.