Greene County Clerk’s Index No. 323/05 Appellate Case No. 503411

COURT OF APPEALS

STATE OF NEW YORK

PORTFOLIO RECOVERY ASSOCIATES, LLC,

Plaintiffs-Respondents

—against—

JARED KING,

Defendant-Appellant.

PROPOSED BRIEF AMICI CURIAE OF AARP, CENTER FOR RESPONSIBLE LENDING, AND NATIONAL CONSUMER LAW CENTER

________________________________________________________________________

Susan Ann Silverstein Of Counsel: Julie Nepveu AARP Foundation Litigation Michael Schuster AARP 601 E Street, NW Washington, DC 20049 (202) 434-2060

January 8, 2009 ________________________________________________________________________

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TABLE OF CONTENTS

STATEMENT OF INTEREST....................................................................... 1 SUMMARY OF ARGUMENT...................................................................... 3 ARGUMENT.................................................................................................. 4 I. Relaxation of Strict Legal Standards Invites Collection Abuses .................................................................................................. 4

A. Industry Focus Is On Debts Previously Considered To Be

Uncollectible ............................................................................. 6 B. Debt Buyers Seek Collection-Friendly States.......................... 11

II. Collection of Stale Debt is Fraught With Problems........................... 15

A. Inadequate Information Begets Abusive Collection Practices ................................................................................... 17

B. Skepticism Is Warranted In Collection of Stale Debt ............. 21

III. Courts Reject Collection Practices Which Violate Basic

Principles Of Fairness and Reliability................................................ 24

A. Sufficient And Reliable Evidence of Alleged Debt Is Required ...................................................................... 24

B. Collector’s Personal Knowledge Of Alleged Debts Vital ....... 29

C. Statutes Of Limitations Must Be Strictly Enforced ................. 33

CONCLUSION................................................................................................................. 36

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TABLE OF AUTHORITIES

Federal Cases Basile v Blatt, Hasenmiller, Leibker & Moore, LLC 632 F. Supp 2d 842 [2009] ................................................................ 34 Bd. of Regents v Tomanio,

446 U.S. 478 [1980] .......................................................................... 33 Chaudhry v Gallerizzo, 174 F.3d 394 [4th Cir. 1999] ............................................................. 21 Garr v U.S. Healthcare, Inc., 22 F.3d 1274 [3d Cir. 1994] .............................................................. 30 Herkert v MRC Receivables Corp., -- F. Supp. 2d --, 1:08-cv-00760, 2009 WL 2998557 [N.D. Ill. 2009] ......................... 35 Kimber v Fed. Fin. Corp., 668 F. Supp. 1480 [M.D.Ala. 1987] ............................................ 33, 34 Marquette Nat'l. Bank of Minneapolis v First of Omaha Serv. Corp., 439 U.S. 299 [1978] ............................................................................. 7 McCollough v Johnson, Rodenberg & Lauinger 610 F. Supp. 2d 1247 [D. Mont. 2009] ....................................... 25, 26 Midland Funding LLC v Brent,

3:08-cv-1434, 2009 WL 2437243 [N.D. Ohio 2009]................... 21, 30 R.R. Telegraphers v Ry. Express Agency,

321 U.S. 342 [1944] .......................................................................... 33 SEC v Merch. Capital, LLC

483 F.3d 747 [11th Cir. 2007] ............................................................. 9 Semper v JBC Legal Group,

No. C04-2240L, 2005 WL 2172377 [W.D.Wash. Sept. 6, 2005] ............................................................... 22

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Smiley v Citibank (SD), N.A., 517 U.S. 735 [1996] ............................................................................. 9

United States v Kubrick, 444 U.S. 111 [1979]...................................................................................... 33

State Cases Asset Acceptance Corp., v Proctor, 804 N.E.2d 975 [Ohio Ct. App. 2004] .............................................. 19 Alt. Credit and Fin., Inc., v Giuliana, 829 A.2d 340 [Pa. Super. 2003] ........................................................ 19 Citibank (SD), N.A., v Whiteley, 149 S.W.3d 599 [Mo. Ct. App. 2004] ............................................... 19 Citibank (SD), N.A., v Martin, NY Slip Op 25536, 11 Misc. 3d 219, 807 N.Y.S.2d 284 [N.Y. Civ Ct. 2005] .......................................................... 18, 19, 25, 28 DeVivo v Sparago, 287 A.D.2d 535 [2d Dep’t 2001] ................................................. 19, 31 Discover Bank v Owens, 822 N.E.2d 869,

[Ohio Mun. Ct. Clev. 2004] ................................................................. 9 First Selection Corp., v Grimes, No. 2-01-257-cv, 2003 WL 151940 [Tex. App. Jan. 23, 2003] ..................................................................................... 19 Foreman v PRA III, LLC, 05 C 3372, 2007 U.S. Dist. LEXIS 15640, 2007 WL 704478, [N.D .Ill. March 5, 2007] .................................................................. 17 Joosten v Gale,

129 A.D.2d 531, 514 N.Y.S.2d 729 [1st Dep’t 1987]........................ 27

iii

Levi v Oberlander, 144 A.D.2d 546, 547, 535 N.Y.S.2d [2d Dep’t 1988] ....................... 29

LVNV Funding, LLC v Moehrlin,

No. 2006-10917-CODL [Order Denying Plaintiff Final Judgment and Closing the Court’s File, 7th Judicial Cir. Ct., Volusia Co., FL Aug. __, 2006] .................................................. 18

MBNA America Bank, N.A., v Nelson,

15 Misc. 3d 1148A, 841 N.Y.S.2d 826 [N.Y. Civ Ct. 2007] .................................................................................. 5, 11, 22

Miller v Upton, Cohen & Slamowitz -- F. Supp. 2d --,

1:01-cv-01126-RRM-RML, 2009 WL 3212556, [E.D.N.Y. 2009] ..................................................................... 26, 27, 31

MRC Receivables Corp., v Zion,

No. 60926-2-I, 2009 WL 3418132 [Wash.App. Div 1 2009]......................................................................................... 25

Nelson v First Nat’l. Bank Omaha, A04-579, 2004 WL 2711032 [Minn. Ct. App. Nov 30, 2004] ..................................................................................... 18 Nielson v Dickerson,

307 F.3d 623 [7th Cir. 2002] .............................................................. 31 Norton v Wilshire Credit Corp., Civ No. 95-3223, 1997 U.S. Dist. LEXIS 23360,

[D.N.J. Jul. 14, 1997] ........................................................................ 22 Palisades Collection, LLC v Gonzalez, No. 58564 CV 2004,

2005 N.Y. Misc. LEXIS 2774 [Civ. Ct. N.Y. County, Dec. 12, 2005], available at http://www.courts.state.ny.us/ reporter/3dseries/2005/2005_52015.htm [accessed Nov. 18, 2009].. 32

Palisades Collection, LLC v Kedik, -- N.Y.S.2d--, 67 A.D.3d 1329,

2009 WL 3790408, 2009 N.Y. Slip Op. 08259 [N.Y.A.D. 4 Dept. 2009] ............................................................. 32, 33

iv

People v Kennedy, 68 N.Y.2d 569 [2002]......................................................................... 35 Portfolio Acquisitions, LLC v Feltman, 391 Ill.App.3d 642, 909 N.E.2d 876 [2009] ............................... 34, 35 Portfolio Recovery Associates, LLC v Ginn No. 2008-941 QC, 2009 WL 2170564 [N.Y.Sup.App.Term 2009] ................................................................ 25 PRS Assets, a/o Jack LaLanne v Rodriguez, 12 Misc. 3d 1172A; 820 N.Y.S.2d 845 2006 NY Slip Op 51148[U] [Dist. Ct. of N.Y., 3d Dist. Nassau County, June 21, 2006]) ........................................... 28 Resurgence Financial, LLC v Taylor, 05-07-01492-cv, 2009 WL 2712387, [Tex.App.--Dallas 2009] .................................................................... 25 West Val. Fire Dist. No. 1 v Village of Springville, 294 A.D.2d 949 [2002]....................................................................... 31 Worldwide Asset Purchasing v Stern, Civ Div No. AR04-4429 [Pa. Ct. Common Pleas Dec. 29, 2004], reprinted in 153 Pittsburgh Legal J. 111 [2005] ............................... 19 Wirth v Cach, LLC, -- S.E.2d --, A09A1270, 2009 WL 3417915 [Ga.App. 2009]).................................................................................. 28 Legislative History Consumer Credit Protection Act, S. Rep. No. 95-382 [1977] ....................... 7

Federal Regulations 49 Fed. Reg. 7740 [Mar. 1, 1984] .................................................................. 7

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Rules CPLR § 202............................................................................................... 4, 14 CPLR § 3215(a) ............................................................................................ 27

Other Authorities Eileen Ambrose, Debt That Won’t Die, Baltimore Sun [May 6, 2007],

available at http://www.baltimoresun.com/business /investing/balbz.ambrose06 may06,0,5473187.column [accessed Nov. 18, 2009].................................................................... 23

Asset Acceptance Capital Corp., 2008 Annual Report to SEC

Form 10-K, [Mar. 5, 2009], available at http://www.sec.gov/Archives/edgar/ data/1264707/ 000119312509046364/d10k.htm [accessed Nov. 18, 2009]........ 12, 13

Center For Responsible Lending, The Plastic Safety Net:

The Reality Behind Debt In America: Findings From A National Household Survey Of Credit Card Debt AmongLow- And Middle-Income Households [2005], available at http://www.responsiblelending. org/credit-cards/research-analysis/DEMOS-101205. pdf [accessed Nov. 18, 2009] ............................................................... 8

Comment of Nat'l. Consumer Law Cntr. Submitted to FTC

[June 6, 2007] available at http://www.ftc.gov/os/comments/ debtcollectionworkshop/529233-00018.pdf [accessed Nov. 18, 2009]........................................................ 18, 22, 23

Comment of New York City Department of Consumer Affairs

Submitted to FTC, available at http://www.ftc.gov/os/ comments/debtcollectionworkshop/529233-00055. pdf [accessed Nov. 18, 2009] ............................................................... 5

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Comment of Portfolio Recovery Associates, LLC Submitted to FTC, [June 5, 2007], available at http://www.ftc.gov/os/comments/ debt collectionworkshop/529233-00022.pdf [accessed Nov. 18, 2009]........................................................ 14, 20, 21

Council of Better Business Bureaus and Javelin Strategy & Research,

2006 Identity Fraud Survey Report, [Jan. 31, 2006], available in part at http://www.bbb.org/alerts/article. asp?ID=651 [accessed Nov. 18, 2009]............................................... 23

Tamara Draut & Heather McGhee, Demos, Retiring in the Red: The Growth of Debt Among Older Americans [Feb. 2004], available at http://www.demos.org/pubs/ Retiring_ 2ed.pdf [accessed Nov. 18, 2009] ........................................................ 3 Charles Duhigg, Bilking the Elderly with a Corporate Assist,

New York Times, A1 [May 20, 2007] ............................................... 12 Employee Benefit Research Institute, Notes, Debt of the Elderly and Near Elderly, 1992–2007, Vol. 30, No. 10., [Oct. 2009] available at http://www.ebri.org/pdf/notespdf/ EBRI_Notes_10-Oct09.DebtEldly.pdf [accessed Nov. 18, 2009] ...................................................................................... 2 Fair Debt Collection [6th ed. 2008 & 2009 Supp.]........................................ 3 Federal Reserve Board, Statistical Release - Consumer Credit Historical

Data [Revolving], available at www.federalreserve.gov/releases/ g19/hist/cc_hist_mt.txt [accessed Nov. 18, 2009]............................ 7, 8

Federal Trade Commission Annual Report 2009: Fair Debt Collection

Practices Act, available at http://www.ftc.gov/ os/2009/02/P094804fdcpareport.pdf [accessed Nov. 18, 2009] .. 15, 16

Federal Trade Commission, Collecting Consumer Debts: The Challenges of Change, A Workshop Report [Feb. 2009], available at http://www.ftc.gov/bcp/ workshops/debtcollection/dcwr.pdf [accessed Nov. 18, 2009].......................................... 4, 9, 10, 16, 17, 23

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Government Accountability Office, Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers, GAO-06-929, at 20-21 [Sept. 2006], available at www.gao.gov/new.items/d06929. pdf [accessed Nov. 18, 2009] ............................................................... 9

Donna S. Harkness, When Over-The-Limit is Over The Top:

Addressing The Adverse Impact of Unconscionable Consumer-Credit Practices on the Elderly, 16 Elder L.J. 1 [2008].......................................................................................... 1

Suein Hwang, Small Claims: Once-Ignored Consumer Debts

Are Focus of Booming Industry, Wall St. J., A4, [Oct. 25, 2004].................................................................................... 10

Matthew W. Ludwig, Abuse, Harassment, and Deception: How

the FDCPA is Failing America’s Elderly Debtors, 1 Elder L.J. 135 [2008]......................................................................... 1

Caroline Mayer, New Breed Of Collectors Has Debtors

Seeing Red, Washington Post [May 28, 2005]................................... 24 News Release, Historic Lawsuit Settlement for New Mexico...AG's

Pursuit Means Good News for Consumers [August 28, 2008], available at http://www.nmag.gov/Articles/newsArticle.aspx? ArticleID=484 .................................................................................... 16

News Release: ID Analytics Research Shows Highest Rates of

U.S. Identity Fraud in New York and the Western States, ID Analytics, [February 14, 2007], available at http://www. idanalytics.com/news_and_events/20070214a.html [accessed Nov. 18, 2009].................................................................... 23

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News Release, Top 10 List of Consumer Complaints for 2008, [Aug 31, 2009], http://www.naag.org/top-10-list-of- consumer-complaints-for-2008-aug.-31-2009.php [accessed Nov. 18,

2009]................................................................................................... 15 News Release, Top Debt Buyers,

http://www.creditcollectionsworld.com/pagedisplay.html? pagename=topdebtbuyers [accessed Nov. 18, 2009] ......................... 10

Corinna C. Petry, Do Your Homework; Dangers often lay hidden in secondary market debt portfolio offerings. Here are lessons from the market pros that novices can use to avoid nasty surprises, Collections & Credit Risk, March 2007, pg. 24, Vol. 12, No. 3) .................................................................................... 29 Portfolio Recovery Associates LLC, 2008 Annual Report to

SEC Form 10-K [Feb. 27, 2009], available at http://www. sec.gov/Archives/edgar/data/1185348/000095013309000517/ w72980e10vk.htm [accessed Nov. 18, 2009] ............................. passim

Press Release, Attorney General Cuomo Launches Inquiry Into Debt Collectors Across New York State, Cuomo Shuts Down NY Collection Agencies That Threatened and Intimidated Consumers Into Paying Debts They Didn't Owe, Sends Subpoenas to Nearly 20 Debt Collectors Statewide [May 27, 2009], http://www.oag.state.ny.us/media_ center/ 2009/may/may27a_09.html [accessed Nov. 18, 2009] .......... 16

Press Release, Attorney General Cuomo Sues To Throw Out Over 100,000 Faulty Judgments Entered Against New York Consumers In Next Stage Of Debt Collection Investigation, 37 Law Firms and Collectors Named in Lawsuit for Failing to Properly Notify New Yorkers Being Sued for Owing Debt, Cuomo Seeks to Vacate Over 100,000 Faulty Judgments Statewide and Provide Restitution to Victims, [July 22, 2009], http://www. nydebthelp.com/ [accessed Nov. 18, 2009]........................................ 16 Press Release, Illinois Attorney General Madigan Files Suit

Against Deceptive Debt Collection Agency Illinoisans

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Allegedly Harassed For Payment On Uncollectible Debt, May 18, 2006], http://www.illinoisattorneygeneral.gov/pressroom/ 2006_05/ 20060518.html [accessed Nov. 18, 2009]......................... 16

Press Release, Federal Trade Commission, Subprime Credit Card Marketer to Provide At Least $114 Million in Consumer Redress to Settle FTC Charges of Deceptive Conduct [Dec. 19, 2008], http://www.ftc.gov/ opa/

2008/12/compucredit.shtm [accessed Nov. 18, 2009] ....................... 16 Press Release, Federal Trade Commission, Nationwide Debt Collector Will Pay $2.25 Million to Settle FTC Charges [Nov 21, 2008], http://www.ftc.gov/opa/ 2008/11/academy. shtm [accessed Nov. 18, 2009]........................................................... 16 Press Release, Federal Trade Commission, Bear Stearns and EMC Mortgage to Pay $28 Million to Settle FTC Charges of Unlawful Mortgage Servicing and Debt Collection Practices [Sept. 9, 2008], http://www2. ftc.gov/opa/2008/09/emc.shtm [accessed Nov. 18, 2009] ................. 16 Press Release, Federal Trade Commission, Nationwide Debt Collector Will Pay $1.3 Million to Settle FTC Charges [Nov. 6, 2007], http://www2.ftc.gov/opa/2007/11/ debtcol.shtm [accessed Nov. 18, 2009].............................................. 16 Michael Rezendes, Beth Healy, Francie Latour, Heather Allen,

and Walter V. Robinson (ed.), Debtor’s Hell, IV Part Series, the Boston Globe, [July 30, 2006], available at http://www. boston.com/news /specials/debt [accessed Nov. 18, 2009]................ 23

Report of the Civil Court of the City of New York, January 1, 1997 –

December 31, 2006, A Decade of Change and Challenge in “The People’s Court” 1997 – 2006 ................................................. 5, 6

Statement of Professor Elizabeth Warren, Senate Comm. On Banking, Housing & Urban Affairs, Examining The Billing, Marketing, And Disclosure Practices Of The Credit Card Industry And Their Impact On Consumers 3 [Jan. 25, 2007], http://www.banking.senate. gov/_files/warren.pdf [accessed Nov. 18, 2009].................................. 8

x

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Truth in Lending [6th ed. 2007 & 2008].......................................................... 3

Urban Justice Center, Debt Weight: The Consumer Credit Crisis

in New York City and its Impact on the Working Poor, [Oct. 2007], available at http://www.urbanjustice. org/pdf/publications/CDP_Debt_Weight.pdf [accessed Nov. 18, 2009].................................................. 13, 14, 29, 32

Liz Pulliam Weston, The Basics: ‘Zombie Debt’ is Hard to Kill, MSN Money [c. May 18, 2006], available at http://articles.moneycentral. msn.com/SavingandDebt/ManageDebt/ZombieDebtIsHardTo Kill.aspx.............................................................................................. 24

STATEMENT OF INTEREST

Despite the convenience credit cards provide, problems occur for too

many people when they cannot pay off the full amount due, carry forward a

balance, and get caught in a downward spiral of exorbitant interest rates,

fees and penalties, and other billing practices that quickly drive them

hopelessly further into debt. With increasing debt has come a corresponding

increase in the number of debt collectors attempting to collect from and

garnish even the exempt income of seniors and low-income people.

AARP is a non-partisan, non-profit membership organization

approximately 2.5 million of whom live in New York. As the leading

organization representing the interests of people aged 50 and older, AARP is

greatly concerned about the growing level of debt, including credit card debt,

being incurred by older people. Many older people are especially vulnerable

to debt collection abuses.1

Not only do older people carry more credit card debt than before, but

more are being buried in what may be considered unaffordable debt. An

increasing number of older people -- from 7.3% in 2004 to 9.9% in 2007 --

1 Many older people believe they will have to go to jail if they are summonsed to court (see Donna S. Harkness, When Over-The-Limit is Over The Top: Addressing The Adverse Impact of Unconscionable Consumer-Credit Practices on the Elderly, 16 Elder L.J. 1, 3-4 [2008]; Matthew W. Ludwig, Abuse, Harassment, and Deception: How the FDCPA is Failing America’s Elderly Debtors, 1 Elder L.J. 135, 135-37, 151-56 [2008]).

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have debt payments that exceed 40% of their income, and this increase is

especially acute for older age groups (Employee Benefit Research Institute

Notes, Debt of the Elderly and Near Elderly, 1992–2007, Vol. 30, No. 10.

p.9 [Oct. 2009], available at http://www.ebri.org/pdf/notes

pdf/EBRI_Notes_10-Oct09.DebtEldly.pdf [accessed Nov. 18, 2009]).

The Center for Responsible Lending (hereinafter “CRL”) is a non-

profit policy, advocacy, and research organization dedicated to exposing and

eliminating abusive consumer lending practices. CRL is an affiliate of Self-

Help, a non-profit lender that has provided more than $5 billion in financing

to help more than 50,000 low-wealth borrowers buy homes, build businesses,

and strengthen community resources. CRL research has documented

numerous unfair practices by credit card lenders that increase outstanding

credit card balances by millions of dollars, which then can become the

subject of questionable debt collection efforts. These research reports are

available at http://www.responsiblelending.org/credit-cards/research-

analysis/ [accessed Jan. 7, 2010].

The National Consumer Law Center, Inc., (hereinafter “NCLC”) is a

non-profit corporation. NCLC was organized in 1969 to conduct research,

education and litigation to promote consumer justice. One of the NCLC's

primary objectives is to provide assistance to attorneys advancing the

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interests of their low-income and elderly clients in the area of consumer law.

Accordingly NCLC has focused considerable attention on laws to prevent

abusive debt collection and unreliable disclosure of the terms of consumer

credit transactions.

The Fair Debt Collection Practices Act and the Truth in Lending Act

have been a major focus of the work of NCLC. NCLC publishes Fair Debt

Collection [6th ed. 2008 & 2009 Supp.] and Truth in Lending [6th ed. 2007

& 2008], comprehensive treatises, each over 1000 pages, to assist attorneys,

creditors and debt collectors in complying with the law.

SUMMARY OF ARGUMENT

Relaxation of strict legal standards invites abuses by debt collectors,

which aggressively pursue judicial collection of debts previously considered

to be uncollectible. The evolution of the debt buying industry, primarily

involving credit card debt, presents significant challenges for consumers and

courts. Debt buyers seek to collect stale debts in the most collection-friendly

jurisdictions. Thus, the judicial environment is a key factor debt buyers

evaluate to decide whether to purchase particular debt and how to collect it.

Abuses in the debt collection industry abound, despite efforts by

legislatures, state Attorneys General, and the Federal Trade Commission

(hereinafter “FTC”) to protect consumers. Common abuses include seeking

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to collect time-barred debt and their refusal to purchase the evidence

necessary to verify the validity of the debt. The collection of stale claims

also increases the likelihood that errors in collection will occur because

alleged debtors may lose important evidence over time.

Strong policy reasons militate in favor of strict adherence to pleading

and evidentiary standards and the requirements applicable to statutes of

limitations. The court should apply New York law’s three year statute of

limitations pursuant to § 202 of the Civil Practice Law and Rules

(hereinafter “CPLR”) to bar Portfolio’s lawsuit; but in any case it should

require Portfolio to establish the validity of the debt with competent

evidence.

ARGUMENT

I. Relaxation of Strict Legal Standards Invites Collection Abuses Courts across the country face significant challenges in administering

the burgeoning dockets of collections in a just and fair manner. “Judges

have expressed concern that the burden of handling the number of debt

collection lawsuits on their dockets is making it difficult for them to handle

other cases in an expeditious manner.” (Federal Trade Commission,

Collecting Consumer Debts: The Challenges of Change, A Workshop Report,

56, [Feb. 2009], available at http://www.ftc.gov/bcp/workshops/

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debtcollection/dcwr.pdf [accessed Nov. 18, 2009] (hereinafter “Challenges

of Change”); Report of the Civil Court of the City of New York, January 1,

1997 – December 31, 2006, A Decade of Change and Challenge in “The

People’s Court” 1997 – 2006 at 11-12 (hereinafter “NYC Civil Court

Report”)).

Courts must guard against relaxation of legal standards due to the

sheer volume of cases choking the court system, for relaxation will only

increase the number of unverifiable claims. The New York City Department

of Consumer Affairs has expressed concern that complaints and testimony

received by the Department “reflect that debt collection efforts are initiated

and proceed through the court process despite insufficient proof

demonstrating that a debt is actually due and owing.” (Comment of New

York City Department of Consumer Affairs Submitted to FTC, at 2 [Nov. 9,

2007], available at http://www.ftc.gov/os/comments/debtcollection

workshop/529233-00055.pdf [accessed Nov. 18, 2009]). “The judiciary

continues to provide an important role in safeguarding consumer rights and

in overseeing the fairness of the debt collection process.” (MBNA America

Bank, N.A., v Nelson, 15 Misc. 3d 1148[A], *1, 841 N.Y.S.2d 826 [Table

N.Y. Civ Ct. 2007]). Considering the courts’ role as gatekeeper, both

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debtors and the integrity of the legal system risk significant harm if vigilance

and high standards are not maintained.

In 2008, approximately 319,500 consumer debt cases were filed in the

five counties of the New York City Civil Court, most of which involve

consumer credit transactions (NYC Civil Court Report). Courts should

anticipate that the total number of collections will continue to increase,

particularly as unemployment and debt load rises and debt portfolios

becomes more stale and difficult to collect by means other than judicial

proceedings. According to Portfolio, “[a]s our portfolio matures, a larger

number of accounts will be directed to our outsourced collections

department for judicial collection; consequently, we anticipate that legal

collections will grow commensurately and comprise a larger percentage of

our total cash collections.” (Portfolio Recovery Associates LLC, 2008

Annual Report to SEC Form 10-K, 8 [Feb. 27, 2009], available at

http://www.sec.gov/Archives/edgar/data/1185348/

000095013309000517/w72980e10vk.htm [accessed Nov. 18, 2009])

(hereinafter “Portfolio 10-K”).

A. Industry Focus Is On Debts Previously Considered To Be Uncollectible

Congress enacted the Fair Debt Collections Practices Act (hereinafter

“FDCPA”) in 1977 to combat the “widespread and serious national

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problem” of debt collection abuse (Consumer Credit Protection Act, S. Rep.

No. 95-382, at 2 [1977]). The FDCPA was designed to “prohibit in general

terms any harassing, unfair, or deceptive collection practice,” as well as to

place restrictions on the manner in which debt collectors could contact

debtors (id. at 4). A third abusive practice that the authors of the Act sought

to curb in 1977 was “forum abuse,” in which “collectors would file suit

against consumers in courts which are so distant or inconvenient that

consumers are unable to appear. As a result, the debt collector obtains a

default judgment and the consumer is denied his day in court.” (Id. at 5).

In 1977, when the FDCPA was passed, there was no interstate

banking, and credit card companies had to obey the laws of the borrower’s

home state (Federal Trade Commission, Statement of Basis and Purpose for

the Credit Practices Rule, 49 Fed. Reg. 7740, 7747 [Mar. 1, 1984]). Credit

card deregulation, and the concomitant spiraling credit card debt began in

1978 with a Supreme Court decision allowing banks to locate in states with

lax or no usury caps and to take the lax states’ interest limits across state

lines (Marquette Nat’l. Bank of Minneapolis v First of Omaha Service Corp,

439 U.S. 299 [1978]). At the beginning of 1977, consumers carried

revolving debt worth approximately $32 billion; by 2007 it had increased

more than 27 times to $880 billion (Federal Reserve Board, Statistical

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Release - Consumer Credit Historical Data (Revolving), available at

www.federalreserve.gov/releases/g19/hist/cc_hist_mt.txt [accessed Nov. 18.

2009]).

A significant amount of debt load is increasingly exacerbated by

punitive tactics of the credit card industry which keep consumers on a

treadmill of spiraling debt, fees, and charges for as long as possible (Center

For Responsible Lending, The Plastic Safety Net: The Reality Behind Debt

In America: Findings From A National Household Survey Of Credit Card

Debt Among Low- And Middle-Income Households 20-21 [2005], available

at http://www.responsiblelending.org/credit-cards/research-analysis/

DEMOS-101205.pdf [accessed Nov. 18, 2009]) (hereinafter “Plastic Safety

Net”). “A debtor could pay nearly 100% of what she owed every year for

the rest of her life, and thanks to the traps built in to her credit card, she

would keep paying until she died—and still not pay off her card.” (Statement

of Professor Elizabeth Warren, Senate Comm. On Banking, Housing &

Urban Affairs, Examining The Billing, Marketing, And Disclosure Practices

Of The Credit Card Industry And Their Impact On Consumers 3 [Jan. 25,

2007], http://www.banking.senate.gov/_files/warren.pdf [accessed Jan 4,

2010]).

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The litany of abusive credit card fees and charges seen today did not

exist in 1977. But in 1996, a Supreme Court ruling permitted credit card

companies to avoid laws of the borrower’s home state governing a wide

variety of fees (Smiley v Citibank (SD), N.A., 517 U.S. 735 [1996]). Credit

card lenders no longer impose high penalties in order to curb undesirable

behavior by consumers. Industry tactics now intentionally trap consumers

into incurring added fees, practices which have been have been described as

“widespread financial exploitation of the urban poor by overbearing credit

card companies” (Discover Bank v Owens, 822 N.E.2d 869, 875 [Ohio Mun.

Ct. Clev. 2004]; see Government Accountability Office, Credit Cards:

Increased Complexity in Rates and Fees Heightens Need for More Effective

Disclosures to Consumers, GAO-06-929, at 20-21 [September 2006],

available at www.gao.gov/new.items/d06929.pdf [accessed Nov. 18, 2009]);

The debt collection industry has also evolved substantially in the

decades since the FDCPA was passed. “The most significant change in the

debt collection business in the past decade, however, has been the advent

and growth of debt buying (i.e., the purchasing, collecting, and reselling of

debts in default).” (Challenges of Change at iv). Formerly considered a

liability, stale debt is now a commodity that is sold at auction to the highest

bidder (SEC v Merchant Capital, LLC, 483 F.3d 747, 750-51 [11th Cir.

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2007]; Suein Hwang, Small Claims: Once-Ignored Consumer Debts Are

Focus of Booming Industry, Wall St. J., A4 [Oct. 25, 2004]). Greater

efficiencies in the collection of debts, fed by technological and

communications advances, have spawned the debt buying industry,

anticipated to have annual revenues worth $11.6 billion by 2011 (Challenges

of Change at 13). Purchasing consumer debt at rock-bottom prices with

little of the information about the debt, collectors are no longer hampered by

traditional transaction costs (id. at 17 n.121).

Portfolio Recovery Associates, LLC, was the nation’s sixth largest

debt buyer by revenue in 2008, out of approximately 6,000 (News Release,

Top Debt Buyers, http://www.creditcollectionsworld.com/pagedisplay.html?

pagename=topdebtbuyers [accessed Nov. 18, 2009]). It has purchased

defaulted consumer receivables with a face value of $39,921,078 for only

$1,071,963 (Portfolio 10-K at 8). Because debt is increasingly more

difficult to collect as it ages, most stale debt is purchased for minimal cost,

between 4 and 6 cents on the dollar (id.), and eventually for less than a

penny on the dollar. As Portfolio explains

“[t]he age of a defaulted consumer receivables portfolio (the time since an account has been charged-off) is an important factor in determining the price at which we will purchase a receivables portfolio. Generally, there is an inverse relationship between the age of a portfolio and the price at which we will purchase the portfolio.

10

This relationship is due to the fact that older receivables typically are more difficult to collect.”

(Id.). As one New York court aptly observed, debt is sold at such a cheap

price for “the simple fact that the proof required to obtain a judgment in the

creditor’s favor is lacking, usually as a result of poor record keeping on the

part of the creditor.” (MBNA at *2 (emphasis added)).

Accordingly, increased vigilance over judicial debt collections is

necessary to ensure that judicial collections do not undermine the protections

guaranteed by the FDCPA.

B. Debt Buyers Seek Collection-Friendly States

Judicial collection is a key tool used by the collection industry

(Portfolio 10-K at 11). Portfolio’s in-house and contingency-fee attorneys

review for legal action “[a]ccounts for which the consumer has the likely

ability, but not the willingness, to resolve their obligations. . . Depending on

the balance of the defaulted consumer receivable and the applicable state

collection laws, we determine whether to commence legal action to

judicially collect on the receivable.” (Id.). Further, Portfolio uses judicial

collection for “[a]ccounts for which the consumer is not cooperative and for

which we can establish a garnishable job or attachable asset . . . Additionally,

we review accounts using a proprietary scoring model and select those

11

accounts reflecting a high propensity to pay in a legal environment.” (Id. at

15).2

Logically, the judicial environment is critical to debt buyers’ ability to

collect stale debts. When considering purchase price for debt, they look

beyond the attributes of the debts and debtors to determine the distribution in

states with collection-friendly laws and procedures. Portfolio “review[s] the

geographic distribution of accounts within a portfolio because [they] have

found that certain states have more debtor-friendly laws than others and,

therefore, are less desirable from a collectibility perspective.” (Id. at 8).

Moreover, changes in the collection law may prompt debt buyers to “pursue

selective expansion into different geographic regions if analysis indicates it

is favorable to do so.” (Asset Acceptance Capital Corp., 2008 Annual

Report to SEC Form 10-K, 10 [Mar. 5, 2009], available at

http://www.sec.gov/Archives/edgar/data/1264707/000119312509046364/d1

0k.htm [accessed Nov. 18, 2009]) (hereinafter “Asset Acceptance 10-K”).

2 Older people tend to have attachable assets, such as their homes, and are typically very vulnerable to collection through the legal process, potentially making them an easy target for debt collectors. As distressing as abusive debt collection practices are for everyone, they are particularly problematic for seniors. A frail elderly person is more easily upset by an abusive telephone call; indeed, the stress from harassing tactics can actually threaten their health. Older consumers living alone are more often targets of abusive tactics because they may be socially isolated; in addition, because they are at home during daytime hours, they are more accessible to collectors (see, e.g., Charles Duhigg, “Bilking the Elderly with a Corporate Assist,” N.Y. Times, A1 [May 20, 2007]).

12

Debt buyers readily acknowledge that “[a] decrease in the willingness of

courts to grant such judgments, a change in the requirements for filing such

cases or obtaining such judgments, or a decrease in our ability to collect on

such judgments could have a material and adverse effect on our results of

operations.” (Id. at 17-18).

The evidence suggests that New York is an attractive state in which to

purchase and collect stale debt. Portfolio has purchased $2,686,008 of New

York debt as of 2008, paying only $69,125 for all the accounts (Portfolio 10-

K at 8). This represents 19.3% of the total number of Portfolio’s files and

11.65% of the total volume of debts it has purchased (id.). Similarly, the

$2,067,673 worth of New York debts purchased by Asset Acceptance

Capital Corp., another publicly traded debt buyer, represents 5.8% of its

acquisitions by volume (Asset Acceptance 10-K at 8). For each, the fourth

largest percentage of their portfolios is comprised of New York debts. Even

so, neither are the most prominent collectors in New York (see Urban Justice

Center, Debt Weight: The Consumer Credit Crisis in New York City and its

Impact on the Working Poor 1, [Oct. 2007], available at

13

http://www.urbanjustice.org/pdf/publications/CDP_Debt_Weight.pdf

[accessed Nov. 18, 2009])3 (hereinafter “Debt Weight”).

Of particular relevance to this case, New York appears to be a more

collector-friendly state compared to Delaware. While Delaware law

arguably governs the original credit card agreement, New York offers

Portfolio at least the possibility of collecting debts which are clearly time-

barred under the Delaware three year statute of limitations, and arguably

time-barred under New York’s borrowing statute (CPLR §202). Thus, while

the debt is clearly uncollectible in a Delaware judicial forum, it is not

entirely legally uncollectible if Portfolio can persuade the New York courts

to relax the applicable statute of limitations or the standards of pleading and

proof. According to Portfolio, “with a couple of exceptions, a statute of

limitations is only a limitation on the time period in which a legal action

may be brought to enforce a debt.” (Comment of Portfolio Recovery

Associates, LLC Submitted To FTC, at 2, [June 5, 2007], available at

http://www.ftc.gov/os/comments/debtcollectionworkshop/529233-00022.pdf

[accessed Nov. 18, 2009]) (hereinafter “Portfolio Comment”). Moreover, if

successful in obtaining the relaxation of applicable legal standards, Portfolio 3 In a representative sample of collection cases filed in New York City Civil Court in February 2006, Palisades Collection, LLC, (accounting for 39% of all cases) and wholly owned subsidiaries of Encore Capital Group, Inc., (accounting for 12% of all cases) were the largest collectors (Debt Weight at 14) .

14

holds open the courthouse doors to the collection of hundreds of thousands

of debts – potentially worth billions of dollars – which would otherwise be

considered time-barred.

Thus, judicial debt collections are more likely in a less stringent

judicial environment. Quite simply, failure of a state legal systems to

enforce applicable legal standards is likely to attract claims that arguably are

time-barred, subject to valid defenses, or would otherwise be considered

uncollectible.

II. Collection Of Stale Debt Is Fraught With Problems Despite legal protection from abusive debt collections, consumer

complaints to state Attorneys General and the Federal Trade Commission

about debt collection practices have exceeded those for any other specific

industry for over 10 years (News Release, Top 10 List of Consumer

Complaints for 2008, [Aug. 31, 2009], http://www.naag.org/top-10-list-of-

consumer-complaints-for-2008-aug.-31-2009.php [accessed Nov. 18, 2009];

Federal Trade Commission, Annual Report 2009: Fair Debt Collection

Practices Act 4, available at http://www.ftc.gov/os/2009/02/P094804fd

cpareport.pdf [accessed Nov. 18, 2009]). Complaints about third-party debt

collectors and in-house collectors in 2008 totaled 104,661 complaints and

accounted for 25.2% of all complaints the FTC received (id. at 5). State

15

Attorneys General4 and the FTC5 have launched targeted enforcement

actions to combat widespread abuses by relatively large debt collectors.

Courts operate at ground zero of the debt collection explosion. While

the FTC acknowledges the persistence and increasing incidence of abusive

debt collection complaints, it notes that “[v]irtually all collection

proceedings are decided in state court through the application of state

substantive and procedural law.” (Challenges of Change at 65).

Accordingly, the FTC believes that “states should take primary

responsibility to address abuses in the debt collection process.” (Id.).

4 See Press Release, Attorney General Cuomo Launches Inquiry Into Debt Collectors Across New York State, Cuomo Shuts Down NY Collection Agencies That Threatened and Intimidated Consumers Into Paying Debts They Didn't Owe, Sends Subpoenas to Nearly 20 Debt Collectors Statewide [May 27, 2009], http://www.oag.state.ny.us/media_center/ 2009/may/may27a_09.html [accessed Nov. 18, 2009]; Press Release, Attorney General Cuomo Sues To Throw Out Over 100,000 Faulty Judgments Entered Against New York Consumers In Next Stage Of Debt Collection Investigation, 37 Law Firms and Collectors Named in Lawsuit for Failing to Properly Notify New Yorkers Being Sued for Owing Debt, Cuomo Seeks to Vacate Over 100,000 Faulty Judgments Statewide and Provide Restitution to Victims, [July 22, 2009], http://www.nydebthelp.com/ [accessed Nov. 18, 2009]; Press Release, Illinois Attorney General Madigan Files Suit Against Deceptive Debt Collection Agency Illinoisans Allegedly Harassed For Payment On Uncollectible Debt, [May 18, 2006], http://www.illinoisattorneygeneral.gov/pressroom/ 2006_05/ 20060518.html [accessed Nov. 18, 2009]; News Release, Historic Lawsuit Settlement for New Mexico...AG's Pursuit Means Good News for Consumers [August 28, 2008], available at http://www.nmag.gov/Articles/newsArticle.aspx?ArticleID=484 [accessed Nov. 18, 2009].

5 For a list of cases, see Federal Trade Commission, Annual Report 2009: Fair Debt Collection Practices Act 4, available at http://www.ftc.gov/os/2009/02/P094804fd cpareport.pdf [accessed Nov. 18, 2009]).

16

A. Inadequate Information Begets Abusive Collection Practices

The integrity of the legal system is on the line if debt collectors are

able to manipulate the power of the courts to perpetrate abusive practices.

Lack of information makes both consumers and the courts vulnerable to

manipulation. According to the FTC,

“The first major problem is that debt collectors have inadequate information when they seek to collect from consumers. This increases the likelihood that collectors will reach the incorrect consumer, try to collect the wrong amount, or both. . . A related information problem is that the limited information debt collectors obtain in verifying debts is unlikely to dissuade them from continuing their attempts to collect from the wrong consumer or the wrong amount.”

(Id. at iv-v).

In most debt buyer transactions, they are not provided with – and do

not have access to – documentation which would constitute admissible

evidence to prove the debtor in fact opened the account, used the credit card,

or agreed to the terms and interest rates imposed and added to the purported

principal amount. Typically, only basic electronic information regarding the

alleged account is provided or available to the debt buyer (Foreman v PRA

III, LLC, 05 C 3372, 2007 U.S. Dist. LEXIS 15640, 2007 WL 704478, *9

[N.D. Ill., March 5, 2007]). According to Portfolio,

“[i]n a typical sale transaction, a debt owner distributes a computer data file containing ten to fifteen basic data fields on each receivables account in the portfolio offered for sale. Such fields typically include

17

the consumer’s name, address, outstanding balance, date of charge-off, date of last payment and the date the account was opened.”

(Portfolio 10-K at 19).

Critical information necessary to validate debts that is typically

omitted from the sales process includes:

• consumer complaints about billing errors • payments not credited • settlement agreements not honored • identity theft • mistaken listing of an account user as an account holder

responsible for the whole account balance • the consumer’s representation by an attorney • the contract, or • payment history.

(Comment of Nat’l. Consumer Law Cntr. Submitted to FTC, 12-13, [June 6,

2007], available at http://www.ftc.gov/os/comments/debtcollection

workshop/529233-00018.pdf [accessed Nov. 18, 2009]) (hereinafter “NCLC

Comments”). In light of the unavailability of such information in the

industry generally, it is not surprising that debt collectors regularly cannot

produce evidence of a contract or its terms sufficient to meet the legal

standards for entitlement to judgment.6

6 Many courts have criticized the lack of such evidence (see, e.g., LVNV Funding, LLC v Moehrlin, No. 2006-10917-CODL [Order Denying Plaintiff Final Judgment and Closing the Court’s File, 7th Judicial Cir. Ct., Volusia Co., FL, Aug. 2006] (finding “Not only did the Plaintiff fail to attach a bill, statement or contract to the complaint, the Plaintiff has not attached ANYTHING to its affidavit or the complaint that has the Defendant’s name or signature on it”); Nelson v First Nat’l. Bank Omaha, A04-579, 2004 WL 2711032 [Minn. Ct. App. Nov 30, 2004] (no signed credit card application provided); Citibank

18

Lacking such proof, debt buyers nevertheless pursue purported

debtors by simply offering up an affidavit from an employee in their loss

recovery department and/or suing on an account-stated theory (see, e.g.,

Citibank (SD) N.A., v Whiteley, 149 S.W.3d 599 [Mo. Ct. App. 2004]; Asset

Acceptance Corp. v Proctor, 804 N.E.2d 975 [Ohio Ct. App. 2004]).

Portfolio fully understands that some courts reject such shortcuts. “When we

collect accounts judicially, courts in certain jurisdictions require that a copy

of the account statements or applications be attached to the pleadings in

order to obtain a judgment against the account debtors. If we are unable to

produce account documents, these courts will deny our claims.” (Portfolio

10-K at 19).

Debt buyers do not deny that lack of information provided to the

assignee about the debt they have purchased is a significant problem

inherent to the industry as a whole. Portfolio concedes that “[t]he lack of

(SD), N.A., v Martin, 11 Misc. 3d 219, 807 N.Y.S.2d 284 [N.Y. Civ. Ct. 2005] (enumerating documents necessary for summary judgment in credit card case, including account agreement, billing statements, and proof of assignment); DeVivo v. Sparago, 287 A.D.2d 535, 536 [2d Dep’t 2001] (affirming denial of motion for default judgment); Asset Acceptance Corp. v Proctor, 804 N.E.2d 975 [Ohio Ct. App. 2004] (debt buyer failed to provide documentation of the charges, debits, and credits to permit court to calculate the balance claimed to be due); Worldwide Asset Purchasing v Stern, Civ Div No. AR04-4429 [Pa. Ct. Common Pleas Dec. 29, 2004], reprinted in 153 Pittsburgh Legal J. 111 [2005]; Atlantic Credit and Fin., Inc., v Giuliana, 829 A.2d 340 [Pa. Super. 2003]; First Selection Corp. v Grimes, 2003 WL 151940 [Tex. App. Jan. 23, 2003] (no written agreement submitted)).

19

such records fail to serve the interests of consumers in obtaining

documentation of disputed accounts or the legitimate interests of credit

grantors and debt collectors in collecting debts that are genuinely owed.”

(Portfolio Comment at 2). Portfolio also concedes that lack of information

masks valid defenses: “[i]f the credit originator fails to comply with

applicable statutes, rules and regulations, it could create claims and rights for

consumers that could reduce or eliminate their obligations to repay the

account and have a possible material adverse effect on us.” (Portfolio 10-K

at 18).

To hedge against such risk, Portfolio “contractually require[s] credit

originators to indemnify us against any losses caused by their failure to

comply with applicable statutes, rules and regulations relating to the

receivables before they are sold to us.” (Id. at 18). Thus, Portfolio bears no

financial or legal risk for defenses that may be asserted against the assignor.

Portfolio nevertheless excuses its own role in and responsibility for ignoring

such defenses, attributing an “unwillingness to pay” to debtors’ lack of

recognition of the debt. Portfolio suggests that “for many reasons (including

mergers and acquisitions in the banking and credit card industries) a much

more common occurrence is that consumers simply do not recognize or

remember obligations, particularly when a consumer has many accounts and

20

the names of various creditors may have changed for some reason.”

(Portfolio Comment at 2).

Of course, such reasoning begs the question, because alleged debtors

are entitled to obtain verification, including adequate information about the

original debt and chain of assignment. The FDCPA imposes two specific

verification requirements on debt collectors: obtaining verification from the

creditor and mailing that verification to the debtor (15 U.S.C. § 1692g(b)).

These requirements are designed to prevent debt collectors from “dunning

the wrong person or attempting to collect debts which the consumer has

already paid.” (Chaudhry v Gallerizzo, 174 F.3d 394, 406 [4th Cir. 1999]).

Providing alleged debtors such information would completely eliminate lack

of recognition as a reason for “unwillingness to pay a debt.”

B. Skepticism Is Warranted In Collection Of Stale Debt

“It is unsurprising when a consumer/debtor contacted by a collection

agency about a seven-year-old debt would question whether it was a valid

obligation.” (Midland Funding LLC v Brent, 3:08-cv-1434, 2009 WL

2437243, *8 [N.D. Ohio 2009]). It is reasonable to conclude that some

percentage of people who are “unwilling to pay” have a defense or dispute

about the validity of the debt being collected. One New York court aptly

warned that

21

“The entire [debt buying] industry is a game of odds, and in the end as long as enough awards are confirmed to make up for the initial sale and costs of operation the purchase is deemed a successful business venture. However, during this process mistakes are made, mistakes that may seriously impact consumers and their credit.”

(MBNA at *1). Common defenses include: disputes with the original

creditor; wrong person/id theft; prior satisfaction; inadequate documentation

to establish the debt is owed; and collection of inaccurate or impermissible

interest, fees, and penalties (NCLC Comments at 27-28).

When a debtor disputes the validity of a debt, the debt collector must

provide the debtor with meaningful information to inform him of the source

of his debt. Otherwise, a debtor has no way of knowing what the

outstanding debt is from and if it is in fact still owed. “The verification

requirement demands more than that the debt collector merely repeat its

assertion that a debt is due.” (Norton v Wilshire Credit Corp., Civ No. 95-

3223, 1997 U.S. Dist. LEXIS 23360, *22 [D.N.J. Jul. 14, 1997]; Semper v

JBC Legal Group, No. C04-2240L, 2005 WL 2172377, *14 [W.D.Wash.

Sept. 6, 2005] (finding “[s]imply repeating second-or third-hand information

in the debt collector’s file ... is insufficient under the statute.”)). Debtors

with disputes face significant frustration as a result of the inadequate

information provided to the debt buyer. “Many collectors currently do little

more to verify debts than confirm that their information accurately reflects

22

what they received from the creditor. This is not likely to reveal whether

collectors are trying to collect from the wrong consumer or collect the wrong

amount.” (Challenges of Change, at v).

Even if the debt buyer agrees to cease collection, it may nevertheless

sell the debt to another debt buyer, who will in turn have inadequate

information about the dispute. Debt buyers are also known to sell debt

which is ostensibly the result of identity theft,7 settled, discharged in

bankruptcy, or which has been paid in full (NCLC Comments at 27-28). It is

not uncommon for debt to be sold three or four times (Portfolio 10-K at 8).

With each incarnation, a debtor must re-engage in the same frustrating and

often futile process to dispute the debt. Such debt has been dubbed “zombie

debt” for apt reasons; it is hard to defend against and it seemingly never

dies.8

7 Almost nine million people, or four percent of the United States population, were victims of identity fraud in 2006 (Council of Better Business Bureaus and Javelin Strategy & Research, 2006 Identity Fraud Survey Report, [January 31, 2006], available in part at http://www.bbb.org/alerts/article.asp?ID=651 [accessed Nov. 18, 2009]). In fact, a recent study found that New York State has the highest rate of identity fraud among the fifty states (News Release: ID Analytics Research Shows Highest Rates of U.S. Identity Fraud in New York and the Western States, ID Analytics, [February 14, 2007], available at http://www.idanalytics.com/news_and_events/20070214a.html [accessed Nov. 18, 2009]).

8 There are numerous accounts of such collections (see, e.g., Eileen Ambrose, “Debt That Won’t Die,” Baltimore Sun [May 6, 2007], available at http://www.baltimoresun.com /business/investing/balbz.ambrose06may06,0,5473187.column [accessed Nov. 18, 2009]; Michael Rezendes, Beth Healy, Francie Latour, Heather Allen, and Walter V. Robinson (ed.), Debtor’s Hell, IV Part Series, Boston Globe [July 30, 2006], available at

23

III. Courts Reject Collection Practices Which Violate Basic Principles of Fairness and Reliability The issues involved in this appeal are similar to those being addressed

by courts across the country. Faced with an explosion of debt collection

cases, courts regularly rebuke dubious collection efforts which do not satisfy

the applicable minimum legal standards. Such efforts, as in this case,

include attempts to skirt the standards of proof and evidence and to extend

the statute of limitations. In light of the aging of debt portfolios being

collected, combined with the significant documentation and information

problems inherent in the debt buying industry, courts must enforce strict

adherence to applicable standards. Dubious collections will increase unless

courts enforce high legal standards.

A. Sufficient And Reliable Evidence Of Alleged Debt Required

Courts are justifiably frustrated by the lack of compliance with court

requirements by credit card debt collectors. One New York court lamented,

“With great frequency, courts are presented with summary judgment

motions by credit card issuers seeking a balance due from credit card holders

which motions fail to meet essential standards of proof and form in one or

http://www.boston.com/news /specials/debt/ [accessed Nov. 18, 2009]; Liz Pulliam Weston, The Basics: ‘Zombie Debt’ is Hard to Kill, MSN Money [c. May 18, 2006], available at http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/Zombie DebtIsHardTo Kill.aspx [accessed Nov. 18, 2009]; Caroline Mayer, New Breed Of Collectors Has Debtors Seeing Red,” Washington Post [May 28, 2005]).

24

more particulars.” (Citibank (SD), N.A., v Martin, 2005 NY Slip Op 25536,

11 Misc. 3d 219, 807 N.Y.S.2d 284 [Civ Ct., New York Co. Dec. 16, 2005];

see Portfolio Recovery Associates, LLC v Ginn, No. 2008-941 QC, 2009

WL 2170564, *1 [N.Y.Sup.App.Term 2009] (finding collector failed to

provide proof necessary to establish its prima facie entitlement to summary

judgment); MRC Receivables Corp. v Zion, No. 60926-2-I, 2009 WL

3418132, *3 [Wash. App. Div 1 2009] (finding even if collector established

delinquent account beyond question, it provided “no direct or even indirect

proof of any written assignment” and “failed to meet its burden of

establishing that it was entitled to judgment as a matter of law”); Resurgence

Financial, LLC v Taylor, 05-07-01492-cv, 2009 WL 2712387, *4

[Tex.App.Dallas 2009] (affirming dismissal where evidence reflected a

variety of conflicting rates and requirements and was insufficient to support

the default judgment requested)).

Collector conduct designed to manipulate the judicial process,

including asserting facts known to be untrue, which “appears to be designed

to conclusively establish each element of [the] case and to use the power of

the judicial process against a pro se defendant to collect a time-barred

debt . . . is abusive, unfair and unconscionable.” (see McCollough v Johnson,

Rodenberg & Lauinger, 610 F. Supp. 2d 1247, 1256 [D. Mont. 2009]).

25

Where, as here, the vast majority of cases involve unrepresented debtors –

who are unlikely to be able to raise complex defenses – and end in default,

such conduct is especially abhorrent. Notably, McCullough found its

“conclusion in this regard is strengthened when one considers that

[collector’s] behavior is measured by the objective “least sophisticated

debtor” standard.” (Id.).

Courts justifiably require of attorneys a basic level of professionalism

and independent judgment when they file litigation. Failure to evaluate core

issues of the case, even if it may not go to the validity of the alleged debt,

implicates basic concerns of attorney competence and speaks directly to an

appreciable lack of professional care in preparing the matter for debt-

collection and/or legal action (see Miller v Upton, Cohen & Slamowitz -- F.

Supp. 2d --, 1:01-cv-01126-RRM-RML, 2009 WL 3212556, *10 [E.D.N.Y.

2009]). The Miller court concluded:

“in cases such as here, where an attorney commences suit in so uninformed a manner that he is ignorant even as to what law governs his suit, it cannot be said that he has undertaken a level of review sufficient to satisfy even the most general requirements applicable to attorney conduct, let alone the more focused review requirements established by the FDCPA.”

(Id. at *13).

Moreover, courts do not tolerate excuses for failure to exercise

professional care (id.). In Miller, the court criticized attorney reliance on the

26

evaluation of governing law made by previous collectors and the failure to

undertake any independent review as being “a naked attempt to substitute

their judgment for his own in derogation of his professional duties and his

obligations under the FDCPA.” (Id.). Thus, to the extent contingency-fee

collectors rely on Portfolio to “determine whether to commence legal

action” including determining the applicable statute of limitations,

calculating filing deadlines, and advising them of other legal issues, such

conduct is a derogation of the professional obligation of attorneys which

New York courts should not tolerate (Portfolio 10-K at 11).

Courts, too, have an obligation to exercise judgment before entering

default judgments. CPLR § 3215, governing the entry of default judgments,

provides: “The clerk, upon submission of the requisite proof, shall enter

judgment for the amount demanded in the complaint . . . plus costs and

interest.” (CPLR § 3215(a) (emphasis added)). The CPLR does “not

contemplate that default judgments are to be rubber-stamped once

jurisdiction and a failure to appear have been shown. Some proof of liability

is also required to satisfy the court as to the prima facie validity of the

uncontested cause of action.” (Joosten v. Gale, 129 A.D.2d 531, 535, 514

N.Y.S.2d 729, 732 [1st Dep’t 1987]). “The defendant’s default does not

automatically create a mandatory ministerial duty by the clerk to enter a

27

default judgment against that defendant since the plaintiff is required to

demonstrate that he or she has a viable cause of action.” (PRS Assets, a/o

Jack LaLanne v. Rodriguez, 2006 NY Slip Op 51148[U]; 12 Misc. 3d

1172A; 820 N.Y.S.2d 845 [Dist. Ct. of N.Y., 3d Dist. Nassau County, June

21, 2006]). The court’s obligation is not excused simply because of the

sheer number of cases filed or industry-wide failure to retain requisite proof.

In fact, such circumstances are cause for greater scrutiny.

Support for a motion for summary judgment where a defendant has

defaulted requires

“an affidavit sufficient to tender to the court the original agreement, as well as any revision thereto . . . The same affidavit typically advances copies of the credit card statements which serve to evidence a buyer’s subsequent use of the credit card and acceptance of the original or revised terms of credit.”

(Martin at *11).

Evidence of chain of title is also critical. In Wirth v Cach, LLC, --

S.E.2d --, A09A1270, 2009 WL 3417915, *2 [Ga.App. 2009]), the court

found evidence submitted by a debt buyer to be insufficient because the

affidavit “fails to refer to or attach any written agreements which could

complete the chain of assignment,” account invoices do not reflect a

relationship with the debtor, and no competent evidence exists to establish

the relationship between the original creditor and subsequent debt owners

28

(id.). Indeed, there are numerous instances on record where debt buyers

filed suit without even owning the debts they claim to purchase. According

to an officer of an Illinois debt buyer who had purchased, or ostensibly

purchased, bad paper, “[t]he same portfolio is sold to multiple buyers; the

seller doesn't actually own the portfolio put up for sale; half the accounts are

out of statute; accounts are rife with erroneous information; access to

documentation is limited or nonexistent. . . . .” (Corinna C. Petry, Do Your

Homework; Dangers often lay hidden in secondary market debt portfolio

offerings. Here are lessons from the market pros that novices can use to

avoid nasty surprises, Collections & Credit Risk, [March 2007], pg. 24, Vol.

12, No. 3).

B. Collector’s Personal Knowledge Of Alleged Debts Vital Because of the high rate of default judgments entered in debt

collection cases,9 courts are forced to rely primarily on affidavits and

representations of collectors. It is imperative that courts enforce

requirements for reliability of the affidavits before entering a default

judgment. Affiants must “possesses personal knowledge of the facts” (PRS

Assets (emphasis added); Levi v. Oberlander, 144 A.D.2d 546, 547, 535

9 A study in New York City Civil Court found that 80% of the final judgments entered in collection cases filed in February 2006 resulted in default judgments (see Debt Weight at 17). These rates are consistent with rates for courts in other states (id. at 21).

29

N.Y.S.2d [2d Dep’t 1988]). Affidavits that establish the affiant “has

personal knowledge of this particular account … are material to the issue of

whether the debt is valid at all, and if relied on, help to make the proposition

that it is more likely valid than it was without the statements.” (Midland, at

*8-9). Midland explained,

“Considering public policy, it is also worth noting many debt collection cases of these types place courts in the position of evaluating the validity of the plaintiff's claim without any response from the defendant. Thus, in general terms, courts rely on the assertions in an affidavit to determine, among other things, whether the debt is valid and judgment, usually default judgment, should be granted. . . The contents of the affidavit itself, and in particular the fact that the affiant allegedly had personal knowledge that the debt was valid, would effectively serve to validate the debt to the reader, whether that was [a debtor] or a court.”

(Id.). Of particular relevance to the collection practices of debt buyers, no

personal knowledge is possessed where “it appear[s] to be an entirely

random act that affiant signed the affidavit based entirely on when it came

off a printer.” (Id.).

Courts should be able to, but currently cannot, rely on the collector to

supply adequate documentation of the defendant’s obligation in each case.

“As in the analogous Rule 11 context, an attorney responsible for issuing

and executing a legal document ‘must make a reasonable inquiry

personally.’” (Id. (quoting Garr v U.S. Healthcare, Inc., 22 F.3d 1274, 1280

[3d Cir.1994])). “The affidavit must demonstrate personal knowledge of

30

essential facts or the judgment will be assailable, even if the defendant

defaults.” (DeVivo v. Sparago, 287 A.D.2d 535, 536 [2d Dep’t 2001]).

Based on the volume of cases and significant problems inherent in

collecting stale debt, it is reasonable for courts to find that “[r]eviewing

basic debtor information – the informational equivalent of ‘name, rank and

serial number’ – without more, is insufficient data on which to form a

reasoned professional judgment as to the appropriateness of a collection

action.” (Miller at *12; Nielson v Dickerson, 307 F.3d 623, 636 [7th Cir.

2002] (finding attorney could not have rendered the necessary judgment on

client’s limited information, which included only debtor’s account number,

name, address, account balance and amount past due)). Requiring strict

adherence to legal standards makes it more difficult for collectors to merely

“review[ ] the collection files with such speed that no independent judgment

could be found to have been exercised, and then issue[ ] form collection

letters with the push of a button.” (Miller at *8).

Personal knowledge is also critical in order to establish a proper

foundation for admission into evidence of the documents proffered to collect

debts. “A proper foundation for the admission of a business record must be

provided by someone with personal knowledge of the maker’s business

practices and procedures.” (West Val. Fire Dist. No. 1 v Village of

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Springville, 294 A.D.2d 949, 950 [2002] (emphasis added); Palisades

Collection, LLC v Kedik, -- N.Y.S.2d--, 67 A.D.3d 1329, 2009 WL 3790408,

2009 N.Y. Slip Op. 08259 [N.Y.A.D. 4 Dept. 2009]). Unless an affiant has

familiarity with the underlying debt, and can personally attest to the

legitimacy of the business records purporting to prove that a debt liability

exists, he cannot adequately confirm the existence or amount of the debt

(Debt Weight at 20). Without personal knowledge, affidavits are

“irrelevant,” “insufficient,” and “of no probative value.” (Palisades

Collection, LLC v. Gonzalez, No. 58564 CV 2004, 2005 N.Y. Misc. LEXIS

2774 [Civ. Ct. N.Y. Co., Dec. 12, 2005], available at http://www.courts.state.

ny.us/reporter/3dseries/2005/2005_52015.htm) [accessed Nov. 18, 2009].

In Kedik, the court affirmed the exclusion from evidence under the

business record exception to the hearsay rule a “printed copy of several

pages from an electronic spreadsheet listing defendant’s Discover account as

one of the accounts sold to plaintiff.” (Kedik at *1). The debt buyer failed

to establish a proper foundation because he did not establish he was familiar

with plaintiff’s business practices or procedures, failed to establish when,

how, or by whom the electronic spreadsheet submitted in paper form was

made, and failed to establish that the printed electronic spreadsheet

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submitted to the court was a true and accurate representation of the

electronic record kept by plaintiff (id.).

C. Statutes Of Limitations Strictly Enforced

The United States Supreme Court repeatedly has pointed out that

“[s]tatutes of limitations are not simply technicalities. On the contrary, they

have been long respected as fundamental to a well-ordered judicial system.”

(Bd. of Regents v Tomanio, 446 U.S. 478, 487 [1980]). Indeed, “it is unjust

to fail to put the adversary on notice to defend within a specified period of

time and that the right to be free of stale claims in time comes to prevail over

the right to prosecute them.” (United States v Kubrick, 444 U.S. 111, 117

[1979] (quoting R.R. Telegraphers v Ry. Express Agency, 321 U.S. 342, 349

[1944])).

When a collector pursues a stale claim, “the search for truth may be

seriously impaired by the loss of evidence, whether by death or

disappearance of witnesses, fading memories, disappearance of documents,

or otherwise.” (Kubrick, 444 U.S. at 117; Kimber v Federal Fin. Corp., 668

F. Supp. 1480, 1487 [M.D.Ala. 1987]). This is especially critical in cases

involving primarily pro se debtors. Kimber explained that

“[T]he unfairness of [filing suit on a time-barred debt] is particularly clear in the consumer context where courts have imposed a heightened standard of care — that sufficient to protect the least sophisticated consumer. Because few unsophisticated consumers

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would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts, such consumers would unwittingly acquiesce to such lawsuits.”

(Id.).

Portfolio has sought to extend the statute of limitations in courts

throughout the country. Courts have generally refused to grant a relaxation

of the requirements relating to the statute of limitations. Illinois courts, for

example, consistently have reaffirmed that they follow a strict interpretation

of the meaning of a written agreement for purposes of the statute of

limitations (see Portfolio Acquisitions, LLC v Feltman, 391 Ill. App. 3d 642,

647, 909 N.E.2d 876, 858 [2009]) (holding evidence insufficient to establish

written contract to which ten year statute of limitations applies, and finding

collection barred by five year statute applicable to oral contracts); Basile v

Blatt, Hasenmiller, Leibker & Moore, LLC, 632 F. Supp. 2d 842 [N.D. Ill.

2009] (rejecting argument in FDCPA case asserted against Portfolio

Acquisitions, LLC and its collection attorneys that an affidavit of

indebtedness is sufficient evidence of a written contract subject to longer

statute of limitations)).

Notably, the Feltman court was not persuaded by Portfolio, with the

support of collection industry amici, to lower the standards in order to

accommodate the changing nature of the credit card and debt buying

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industry. Feltman found that although “the nature of credit card transactions

and the relationships between the parties is complex and only made more

difficult to analyze under modern realities,” courts “cannot escape the

requirement” of the law (909 N.E.2d at 880). “Any departure from this

finding to account for modern business practices is a matter for the

legislature, not this court.” (Id.; see, People v Kennedy, 68 N.Y.2d 569, 579-

580 [1986]). Portfolio’s “wishful thinking” to extend the statute of

limitations does not justify ignoring the requirements of the law (see Herkert

v MRC Receivables Corp. -- F.Supp. 2d --, 1:08-cv-00760, 2009 WL

2998557, *7 [N.D.Ill. 2009] (rejecting “broad reading” of statute of

limitations requirements)).

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CONCLUSION

The Court should reverse the judgment entered against the pro se

debtor, require debt collectors to adequately prove their cases with

competent evidence, and apply the statute of limitations requirements strictly.

Respectfully Submitted, ____________________________ Susan Ann Silverstein Of Counsel: Julie Nepveu AARP Foundation Litigation Michael Schuster AARP 601 E Street, NW Washington, DC 20049 (202) 434-2060

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37

CERTIFICATE OF SERVICE

This is to certify that a true and correct copy of the within Proposed

Brief Amici Curiae of AARP, Center for Responsible Lending, and National

Consumer Law Center was duly served upon all parties herein by overnight

delivery this ________ day of January, 2010 to:

Timothy Murtha 123 Frost St. Westbury, NY 11590 Jared King 156 S. River St. Coxsackie, NY 12051

___________________________________ Susan Ann Silverstein