Creative Avoidance of Potential FDCPA Liability

     On May 19, 2015, Clark County Collection Services, LLC ("CCCS"), a Nevada debt collector, obtained a default judgment in Nevada Justice Court against Patricia Arellano on an assigned medical claim of $371.89. Two months later, on July 27, 2015, Arellano filed a class action in federal district court in Nevada, against CCCS and its lawyers, alleging FDCPA violations associated with the state debt collection action.

     A week later, on August 4, 2015, CCCS and its lawyers responded with some creative lawyering. CCCS obtained a writ of execution from the Nevada Justice Court. The writ, stating an amount owing of about $825 (including fees, costs, and interest added to the principal amount of the judgment), commanded the sheriff to levy on the Arellano FDCPA cause of action pending in federal district court. Because Nevada law permits execution on a judgment debtor's pending cause of action against another, the sheriff levied the writ, posted notice of sale once each week, for three consecutive weeks, in the Nevada Legal News, and thereafter held a sale of the cause of action on November 19, 2015. CCCS, likely the only bidder at the sale, purchased the cause of action with a credit bid $250.

     On January 21, 2016, CCCS filed a motion to dismiss the federal district court action (or in the alternative for summary judgment) arguing, among other things, that by virtue of the execution sale it now owned the FDCPA claim against itself and that Arellano therefore lacked standing. The district court agreed and entered an order dismissing the action. Ms. Arellano has appealed to the Ninth Circuit and the case is pending. Her opening brief (Plaintiff-Appellant's Opening Brief, Arellano v. Clark County Collection Services, LLC, No. 16-15467 (9th Cir. July 29, 2016), ECF No. 9), argues that federal law preempts and therefore precludes this use of the Nevada enforcement procedure by a debt collector because, so used, the procedure undermines the deterrent and remedial purposes of the FDCPA. The brief also argues that an FDCPA claim is akin to a tort claim and that use of the Nevada enforcement procedure to purchase the claim amounts to the assignment of a tort claim that is prohibited by common law.

     I shared news of this litigation with the CFPB. A representative of its amicus group studied the issue but indicated that it would not be filing an amicus brief, both because the preemption argument, which it found "novel and interesting," had not been raised in the district court and because, in any event, the time for filing an amicus brief had expired.

     At common law, execution could not reach a cause of action. But statutes in at least a few states, including Nevada, Alaska, Washington, Utah, Iowa, and Mississippi, permit execution on a cause of action. In contrast, California, for example, forbids execution on a cause of action that is subject of a pending action, although it permits the fixing of a judicial lien on a pending cause of action. Cal. Code Civ. Pro. §§ 699.720(a)(3), 708.410. The Nevada and the California rules are contrasted in Denham v. Farmer's Insurance Co. (Cal. Ct. App. 1989). California's prohibition, enacted in 1941, reflected concern that a sale of a cause of action might realize far less than its worth. Id. at 1071. This is precisely the result, Ms. Arellano's brief argues, of the CCCS execution sale. Her brief also refers to inconsistent state law governing enforcement of judgment in arguing that deterrence of FDCPA violations would depend upon the state of the debtor's residence, "a 'patchwork scheme of regulation' that Congress clearly did not intend."

     In those states permitting execution on a pending cause of action, only a few courts have confronted the question of whether a judgment creditor may execute on a pending cause of action against itself. In Snow, Nuffer, Engstrom & Drake v. Tanasse (Utah 1999), a law firm holding a judgment against a former client for unpaid attorney's fees executed on the former client's malpractice claim against the law firm and then purchased the cause of action at an execution sale. The former client (Tanasse) moved for an order setting aside the execution sale. The Utah Supreme Court acknowledged a judgment creditor's general right to execute on a judgment debtor's pending cause of action, even one pending against the judgment creditor itself, but held that public policy forbade this practice in the context of the lawyer-client relationship. Id. at 211-212. In a subsequent decision, the Utah Supreme Court declined to expand the public policy exception beyond the lawyer-client relationship. Applied Med. Techs v. Eames (Utah 2002). A federal district court magistrate in Utah later seemed sympathetic to the expansion of the public policy exception to a situation involving a debt collector's execution sale purchase of an FDCPA claim against it, but declined to so rule, in part because the judgment debtor seemingly had abandoned its federal district court FDCPA action. Ewell v. Law Offices of Cullimore (D. Utah 2013). 

     Washington courts have taken a different approach, holding that a trial court has an inherent supervisory power to prevent an execution sale of the type described above, but only if necessary to prevent an inequitable result. See Paglia v. Breskovich (Ct. App. Wash. 1974) and Washington cases citing it. A Texas Court of Appeals has taken yet a third approach: extinguishing a claim against oneself by obtaining a turnover order to enforce a judgment in another action ("turn over the claim you have against me") is unconstitutional because it violates the state constitutional "open court" guarantee. Criswell v. Ginsberg & Foreman (Ct. App. Tex. 1992).      

     Earlier this year, the American Bankruptcy Institute publicized the district court's holding in the Arellano case. It would therefore not be surprising that news of the tactic employed by CCCS in that case has or will spread among debt collectors and that debt collectors may start employing the tactic with increasing frequency in those states where it would be permissible and in those states where the law on the subject is not yet settled.

     Use of the tactic in the relevant states strikes me as fundamentally antithetical to the purposes of the FDCPA. Permitting debt collectors to extinguish possibly meritorious FDCPA claims against themselves for a nominal credit bid (assuming no higher third party bidders) undermines the deterrent value of the FDCPA by reducing a debt collector's fear of FDCPA liability.

     A Ninth Circuit holding prohibiting a debt collector from the practice described above would not end a "patchwork scheme of regulation" absent the same holding from the Supreme Court of the United States, or legislation appropriately amending the FDCPA, or rulemaking by the CFPB or FTC, or appropriate amendment of state law by every state that permits execution on a pending cause of action.

     Section 1089 of Dodd-Frank (codifed at 15 U.S.C. § 1692l(d)) conferred on the CFPB authority to prescribe rules "with respect to collection of debts by debt collectors, as defined in [the FDCPA]." Unless narrowly construed, that language would authorize the CFPB to prohibit the practice described above, because execution of a judgment is part of the process of collection of debts. The Bureau's recently outlined proposals for regulation of debt collectors do not address the practice described above, but time remains for it to do so. Moreover, the CFPB could address the same practice, lest it spread beyond debt collectors to creditors collecting on their own behalf, under its more general power to regulate unfair practices by entities "engaging in offering or providing a consumer financial product or service to consumers for personal, family, or household purposes," (Dodd-Frank § 1031, codified at 12 U.S.C. § 5531). Indeed, the CFPB has already exercised its enforcement powers in that way, such as against Citibank in connection with sale of debt to a debt buyer or against a small dollar lender for its debt collection practices. (In his recent Credit Slips post, Adam Levitin concluded that CFPB rulemaking and enforcement actions remain valid and unaffected after the decision in PHH Corp. v. CFPB, the DC Circuit case challenging the structure of the CFPB. But the recent federal election results pose a significant threat to the aggressiveness if not the existence of the CFPB.) Were the CFPB to exercise the full range of its powers to address the practice described above, there would remain a relatively small group of entities — those who are neither debt collectors nor providers of financial products or services — uncovered by regulation. 

     The FTC could fill that gap, such as by amending its long standing Credit Practices Rule. The FTC never had FDCPA rulemaking power (former 15 U.S.C. § 1692l(d)), but section 1061 of Dodd-Frank (codified at 12 U.S.C. § 5581) preserved the FTC's longstanding general authority under the FTC Act to promulgate other rules prohibiting unfair acts or practices in or affecting commerce other than with respect to an "enumerated consumer law" for which authority has been transferred to the CFPB.  

     In the meantime, of course, the judgment debtor faced with an execution sale of its pending FDCPA cause of action could preserve its cause of action by paying the judgment or outbidding the debt collector at an execution sale. (Tongue planted firmly in cheek.)

Comments

[Mason]

This is nefarious and genius. I'm a lawyer with only non-professional interest in consumer debt law and litigation financing.

I wonder if the firm who found themselves on both sides of the "V" in this case was concerned about conflict of interest and duties to their client in the matter. I would think that even after purchasing the cause of action, the Plaintiff did not change.

Thanks for the great coverage!

[Knute Rife]

I really have trouble with Warner's ruling. The Tanasse court held, "We hold that Snow Nuffer's actions — in forcing an execution sale of defendant's assets to satisfy a default judgment, purchasing Tanasse's pending legal malpractice claim against it, and extinguishing that claim through a motion to dismiss — violate public policy." The only difference in Ewell is that it was FDCPA instead of malpractice, which by the Utah Supreme Court's ruling should make no difference. Welcome to consumer protection in Utah.

[Knute Rife]

I meant "by the Utah Supreme Court's 'reasoning'".

[Knute Rife]

And the quotes around "reasoning" are just to show that's the word being changed, not air quotes of disagreement.

[David Yen]

In some states the consumer would be able to claim an exemption in a cause of action. There appears to be a $1,000 wild card exemption in Nevada that would apply even if there is no other exemption.

There is a line of cases that held that a debtor who filed bankruptcy could discharge the debt and still prosecute a Truth-in-Lending cause of action. Newton v. BENEFICIAL FINANCE CO., NEW ORLEANS, 558 F. 2d 731 (5th Cir 1977); Riggs v. Government Emp. Financial Corp., 623 F. 2d 68 (9th Cir 1980). The policy reasons that led to those rulings seem to apply to this situation.