Consumer Debt:

Helping Your Clients Vacate or Avoid Judgments

Tuesday, November 28, 2017

Moderator:

Kelly L. Gotham, Esq. Tonawanda City Court

Speakers: Paulette C. Campbell, Esq.

WNY Law Center

Matthew A. Parham, Esq. WNY Law Center

WBASNY

ERIE INSTITUTE OF LAW

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Syllabus

Consumer Debt: Helping Your Clients Vacate or Avoid Judgments

Matthew Parham and Paulette Campbell

ECBA, November 28, 2017

I. Welcome and Introductions - 12-12:05 (Kelly Gotham)

II. Overview – 12:05-12:15 (Matthew Parham)

III. Dealing with Default Judgments –12:15-12:35 (Paulette Campbell)

IV. Answering and Overview of Defenses – 12:35-55 (Matthew Parham)

III. Questions - 12:55-??

Paulette Campbell is a Staff Attorney at Western New York Law Center and the Managing

Attorney of the WNY CLARO Program where she focuses her practice on consumer debt defense,

mortgage and tax foreclosure defense, and consumer bankruptcy. She is a graduate of the

University of Rochester where she earned her Bachelor of Arts in African and African-American

studies. She also graduated from the University at Buffalo School of Law where she earned her

Juris Doctor degree.

Matthew Parham is an attorney with the Western New York Law Center in Buffalo, handling

consumer rights litigation matters and serving as the consumer law expert at CLARO-Buffalo

consumer law clinics. After graduating from NYU Law School in 2004, Mr. Parham clerked for

the Honorable Rosemary S. Pooler of the United States Court of Appeals for the Second Circuit,

and then spent five years at the Manhattan headquarters of the global law firm Sullivan &

Cromwell, LLP, at which he represented large financial institutions and other corporations in

high-stakes commercial litigation and handled pro bono immigration matters. Between October

2010 and September 2012, Mr. Parham operated a solo law practice in Buffalo practicing consumer

and civil rights litigation, including debt collection defense and prosecuting debt collector

harassment, wrongful automobile repossession, and other consumer rights matters, and police

and correction officer misconduct cases. Mr. Parham has also served as an adjunct clinical

professor at the SUNY-Buffalo Law School teaching consumer finance law and litigation.

Helping Your Clients Vacate or Avoid Judgments

Bar Association of Erie County

November 28, 2017

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Consumer Debt

Presented by:Matthew A. ParhamPaulette C. Campbell

Tuesdays 5-7pm Fridays 10am-12pm

45 Jewett, Ste 250A Buffalo City Court

(Corner of Leroy & Halbert) 50 Delaware, 7th Floor

Also regular sessions in Lackawanna, Jamestown

Attorney of the Morning program Wednesdays and Fridays at 9:30am in Buffalo City Court

Contact us:

mparham@wnylc.com pcampbell@wnylc.com

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Consumer Credit Lawsuits:Some Statistics from OCA Data

• ~80% of lawsuits in Buffalo are consumer debt collection lawsuits

• ~55% of these lawsuits end in a “default” judgment

• About half of these are brought by “debt buyers” that had no direct relationship with the defendant and claim to have bought their account

• ~96% of all Buffalo defaults are in consumer credit cases (so the other 20% of cases account for 4% of defaults)

• Only 1-2% of defendants in these lawsuits have attorneys –but all Plaintiffs have attorneys

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Interlude - Debt Buyers - Overview

• Purchase accounts original creditors have given up on collecting– Banks required to “charge off” debt as

accounting matter 180 days after default

• Typically pay up to $0.05 per $1 face value of debt – receiving a spreadsheet but little to no documentation

• Highly profitable to then collect this debt through judicial and nonjudicial means– Many of companies are publicly traded, highly

profitable– Also many small players – minimal start-up

cost

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How a Judgment Can Affect the Consumer

• FORCIBLE COLLECTION– Creditor with judgment may be able to garnish defendant’s pay or

freeze and levy on his or her bank account to collect the money

• CREDIT SCORE– Defaulted accounts and judgments may stay on one’s credit and

negatively affect it for 5-7 years depending whether, when, and how resolved

• LIENS– Judgments act as liens on property the defendant owns (in the county)

and can prevent or at least impact any sale or refinancing

• INTRUSIVE DISCLOSURE– Judgment holder can make defendant testify or provide

documentation about his or her finances – and have the defendant hauled into court and even sent to jail if the questions are not answered

• INTEREST– A civil judgment usually grows at 9% a year automatically

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Little Known Fact About Consumer Debt Collection Lawsuits:

THE CONSUMER CAN OFTEN WIN!

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Attorney Assistance Can Make All the Difference for Consumers

• Judgments Obtained Through Improper or Sewer Service – Make the appropriate motion with the appropriate proof, judgment is

automatically vacated and action dismissed; often time barred and so gone forever; but consumers have trouble knowing what to prove or how

• “No Evidence” Lawsuits by Debt Buyers– Demanding the missing proof in discovery or pointing out its absence on summary

judgment may win the case for the consumer, but few non-attorney consumers are sophisticated enough to do this on their own

• Money That is Genuinely Not Owed to Putative Original Creditors– Creditors often blow statutes of limitations because they don’t realize which ones

apply, but this is even harder for consumers to figure out by themselves– Car lenders often sue despite usury or fraud that renders contracts unenforceable,

or UCC violations that entitle the consumer herself to affirmative damages– Consumer defendants may be victims of identity theft or mistaken identity, but

need help proving this• Even the Most Sophisticated Plaintiffs Tend to Rely on Conclusory, Robosigned Affidavits

That are Arguably Inadmissible– Difficult for nonattorneys to point this out

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As an Attorney You Can Make a Huge Difference With Relatively Little Effort

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• If there’s a default judgment, there’s a good chance you can successfully vacate it and have the entire case thrown out by making one relatively simple motion

• If there’s a lawsuit, you can at the very least prevent a default judgment with a basic answer

• With a little more effort, it is often possible to litigate strong defenses or even counterclaims that position the defendant for an acceptable settlement, a “walk-away,” or even an affirmative recovery, sometimes with attorney fee shifting available

Plaintiffs Rarely Give Individualized Attention to a Consumer Debt Case

• Number of Suits filed in 2011 by three Long Island collection firms (according to WebCivil Local):

• This does not include Supreme Court. Each firm has about 8 lawyers.

Buffalo City Court All NYS Justice Courts

Forster & Garbus 1,935 46,914

Rubin & Rothman 1,552 34,385

Cohen & Slamowitz 1,589 40,587

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Dealing with Default

Judgments10

Vacating a Default Judgment

• Makes it as though the judgment never existed– Any liens, garnishments, bank account freezes will be

released and judgment will come off your credit

• Two ways to do it:– If something was wrong with the service of the

summons, no time limit for motion and case should be dismissed – CPLR 5015(a)(4)

– If service was OK but you have a defense to the lawsuit and either did not know about it or have an excuse for not answering, must make motion within a year of finding out about it; then case may be “restored” so you can defend it – CPLR 5015(a)(1) / 317

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Motions to Vacate under CPLR 5015(a)(4)

• If jurisdiction to render judgment was lacking, the judgment must be vacated. There is no time limit for the motion. No condition may be imposed. The court has no discretion. The judgment was from its inception a nullity that the defendant was within his or her rights to ignore. It is reversible error to even consider issues of timeliness or the existence of any other defense or excuse for the default.– Taylor v. Jones, 172 A.D.2d 745, 746, 569 N.Y.S.2d 131, 133 (2d Dep’t 1991); Hitchcock v.

Pyramid Cents. of Empire State Co., 151 A.D.2d 837, 839, 542 N.Y.S.2d 813, 815 (3d Dep’t 1989); Citibank, N.A. v. Keller, 133 A.D.2d 63, 64-65, 518 N.Y.S.2d 409, 410-11 (2d Dep’t 1987); Shaw v. Shaw, 97 A.D.2d 403, 404, 467 N.Y.S.2d 231, 233 (2d Dep’t 1983); 2837 Bailey Corp. v. Gould, 143 A.D.2d 523, 523-24, 533 N.Y.S.2d 34, 35 (4th Dep’t 1988); Ariowitsch v. Johnson, 114 A.D.2d 184, 185-86, 498 N.Y.S.2d 891, 893 (3d Dep’t 1986); Mayers v. Cadman Towers, Inc., 89 A.D.2d 844, 845, 453 N.Y.S.2d 25, 26 (2d Dep’t 1985); Chase Manhattan Bank, N.A. v. Carlson, 113 A.D.2d 734, 735, 493 N.Y.S.2d 339, 340 (2d Dep’t 1985); Ross v. Eveready Ins. Co., 156 A.D.2d 657, 657, 549 N.Y.S.2d 151, 152 (2d Dep’t 1989) (quoting McMullen v. Armone, 79 A.D.2d 496, 499, 437 N.Y.S.2d 373, 375 (2d Dep’t 1981)); State of N.Y. Higher Educ. Servs. Corp. v. Sparozic, 35 A.D.3d 1069, 1070, 826 N.Y.S.2d 493, 494 (3d Dep’t 2006); Onondaga County Dep’t of Soc. Servs. ex rel. Patricia L. v. Junior L.C., 296 A.D.2d 845, 744 N.Y.S.2d 788 (4th Dep’t 2002); Gager v. White, 53 N.Y.2d 475, 487, 442 N.Y.S.2d 463, 468, 425 N.E.2d 851, 856 (1981); see also Berlin v. Sordillo, 179 A.D.2d 717, 720, 578 N.Y.S.2d 617, 619 (2d Dep’t 1992) (laches is no defense to vacatur of default judgment void for lack of jurisdiction); Federal Nat’l Mortgage Ass’n v. Rick Mar Constr. Corp., 138 Misc. 2d 316, 317-20, 523 N.Y.S.2d 963, 964-66 (Sup. Ct. Kings County 1988) (same); 10-5015 OSCAR G. CHASE, NEW YORK CIVIL PRACTICE: CPLR¶ 5015.10; 10-5015 OSCAR G. CHASE, NEW YORK CIVIL PRACTICE: CPLR ¶ 5015.16.

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Motions to Vacate and Dismiss under CPLR 5015(a)(4) and 3211(a)(8)

• Personal jurisdiction– Is lacking if service was not properly made in accord

with the CPLR.– Regardless whether Plaintiff made reasonable efforts

to comply with the CPLR or came close to complying and regardless whether the defendant received actual notice from the defective service.• E.g., Saxon Mortgage Servs., Inc. v. Bell, 63 A.D.3d 1029,

1029, 880 N.Y.S.2d 573, 573 (2d Dep’t 2009); Hartloff v. Hartloff, 296 A.D.2d 849, 850, 745 N.Y.S.2d 363, 364 (4th Dep’t 2002); see also Parker v. Mack, 61 N.Y.2d 114, 118-19, 472 N.Y.S.2d 882, 884, 460 N.E.2d 1316, 1318 (1984); Burkhardt v. Cuccuzza, 81 A.D.2d 821, 823, 438 N.Y.S.2d 594, 595 (2d Dep’t 1981)

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Permissible Methods for Serving Most Humans

• CPLR 308(1) – hand it to the person• CPLR 308(2) – substitute service + mail– At “actual dwelling place or usual place of abode” or

“place of business”– On a person of “suitable age and discretion”– Mail to “last known address”

• CPLR 308(4) – nail and mail– At “actual dwelling place or usual place of abode” or

“place of business”– After attempting personal or substitute service with

“due diligence”– Mail to “last known address”

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CPLR 5015(a)(4)

• The Plaintiff bears the burden to prove service was proper and jurisdiction obtained– See Joseph v. Siebtechnik, G.M.B.H., 172 A.D.2d 1056,

571 N.Y.S.2d 410 (4th Dep’t 1991) (“plaintiff has the burden of establishing the fact of jurisdiction”); Cato Show Printing Co. v. Lee, 84 A.D.2d 947, 949, 446 N.Y.S.2d 710, 712 (4th Dep’t 1981) (“the burden of establishing jurisdiction rests on the party asserting it”).

• The affidavit of service prima facie sustains this burden, but if rebutted by non-conclusory evidence, an issue of fact is raised that requires at least a hearing.– U.S. Bank, N.A. v. VanVliet, 24 A.D.3d 906, 907-08, 805 N.Y.S.2d

459, 461 (3d Dep’t 2005).– Called a “traverse hearing”

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Service Defects Are Pretty Common in Consumer Credit Cases

• “A review of a random sample of 91 court cases raised serious questions about the propriety of service by process servers hired by plaintiff debt collectors and the accuracy of their records.”

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Common Service Issues

• CPLR 308(1) service that didn’t happen as described

– Witnesses or documentary evidence show the facts asserted are impossible because, e.g., defendant was somewhere else; or, more commonly

– The description of the defendant is badly wrong, so whoever was served, assuming someone was, was not the defendant.

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Common Service Issues• Defective CPLR 308(2) service

– Improper location• Must be “actual dwelling place or usual place of abode or place of business” of

the defendant

– Fake substitute• Witness statements and/or documentary evidence show, e.g., no co-tenant

exists, description and name not recognized, no such relative

– Improper substitute• Must be of “suitable age and discretion”• Suitable discretion requires sufficient relationship of trust with defendant that

defendant would trust the person to transmit important legal papers– Not someone you don’t know (even if someone else in the household knows them)– Not a small child – age 11 and under pretty much insufficient, otherwise case by case– Not someone mentally incompetent or disabled who couldn’t understand what court

papers were– Not someone with whom a trusting relationship was lacking, e.g. abusive spouse that

you had fled

– Procedural errors• Mail to wrong address – must be “last known address”• Mailing and substitute service not within 20 days of each other or affidavit of

service not filed within 20 days of later.18

Common Service Issues• Defective CPLR 308(4) service

– Improper location• Must be “actual dwelling place or usual place of abode or place of business” of

the defendant

– Insufficient due diligence• Process server cannot resort to “nail and mail” unless he or she has first

attempted to make 308(1) or 308(2) service with “due diligence”• Generally require (a) multiple attempts on different days of the week at

different times of day, to maximize probability that, without knowing defendant’s schedule, defendant will be found at home; plus (b) efforts, by talking to neighbors or otherwise, to discover defendant’s schedule or place of business or other location where defendant can be found– No hard and fast rules on what’s sufficient, and (a) and (b) above can compensate

somewhat for each other– But typically, require at a minimum to have 3 attempts at different times of day, with at

least two during times that working people aren’t usually at work i.e. a Saturday or very early or late on a weekday; with some variation in the days (i.e., all three on the same calendar day even sufficiently spread over time should probably never be upheld)

– Procedural errors• Mail to wrong address – must be “last known address”• Mailing and nailing not within 20 days of each other or affidavit of service not

filed within 20 days of later (service isn’t complete until 10 days after filing).19

You May Be Dealing with “Sewer Service” or with Simple Error

• Common: Fabricated substitute – “John Doe Co-Tenant,” nonexistent relative, etc.; or fabricated attempts before affixing– Server actually went to location but did not want to come

back for more attempts before affixing

• Also ubiquitous: Fabricated address verification efforts – leads to service at address where person didn’t actually live– E.g., address supposedly verified with “John Doe” who

lives at a vacant lot or nonexistent address

• We also know from AG investigations that it is standard with some servers for the mailing after substitute or affixed service to not be done at all – but impossible to prove this in most individual cases

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This One is Sewer Service

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Pfau v. Forster & Garbus / People v. American Legal Process

• Criminal Prosecution, and Lawsuit under CPLR 5015(c) seeking to mass vacate default judgments

• Company policy was to attempt service once, then affix and fabricate the other attempts, and mail the unnotarized signature to another location for notarizing

• Investigation found American Legal Process systematically falsified affidavits of service– Servers swore to have made or attempted service at disparate locations at the

same time, often three or more locations at the same time. Some servers submitted dozens of such false affidavits

– Servers swore to impossible numbers of attempts in one day, e.g. 61 attempts requiring 10,700 miles of travel, or attempts in Brooklyn and Jamestown within one minute of each other

– Some supposed attempts at service before the index number was purchased or before the server had the documents.

– Servers swore to confirming conversations that could not have happened because e.g. the location didn’t exist.

– Servers swore they mailed papers they didn’t mail.– False notarizations where notary was not present for signature – over 70,000

times. 22

Relief in ALP Cases

• As a result of the ALP investigation and consent decrees entered by the largest debt collection law firms, most process servers are now required to collect and save time- and GPS-stamped cellphone photos showing each service or attempted service to verify that they were actually at the location

• This does nothing to prevent fabricated substitute service that is actually an affixing without prior service attempts

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AG Continues to Act on Sewer Service

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• Collecting accounts after original creditor tried and gave up, so accounts are older, and more likely to have stale address information

• May not have, or have access to, original documentation to verify the identity of the consumer, and information may have been repeatedly transferred and become garbled, leading to faulty address tracing or to mistaken identification of the wrong defendant

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Debt Buyers Are Especially Likely to Have Service Errors (“Honest” or Not)

Remedy for Improper Service Is Dismissal

• Lack of personal jurisdiction is grounds for dismissal under CPLR 3211(a)(8)

• Normally plaintiff will be outside 120 days to serve process under CPLR 306-b, so dismissal is appropriate rather than reservice, and this can only be extended upon motion by the plaintiff, based on good cause or the interest of justice

• If action is time barred, therefore, it is important to push for dismissal rather than restoration of the action

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Motions to Vacate under CPLR 5015(a)(1)

• Time limit: within 1 year after service of notice of entry of judgment

• Need a reasonable excuse and a meritorious defense• Court has broad discretion, but there is a presumption

in favor of adjudications on the merits rather than by default.– Home Ins. Co. v. Meyers Parking Sys., Inc., 186 A.D.2d 497,

498, 589 N.Y.S.2d 322, 323 (1st Dep’t 1992); 10-5015 OSCARG. CHASE, NEW YORK CIVIL PRACTICE: CPLR ¶ 5015.02 .

• Kinds of excuse– Clear ones: misled by plaintiff, its attorney, or court

personnel; literally physically incapacitated (coma)– Lots of grey areas, but can be creative

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Motions to Vacate under CPLR 317

• Time limit: within 5 years after entry of judgment and 1 year after learning of judgment

• Potentially applies any time service was not under 308(1), so where it was affixed or served on a substitute and mailed

• Must show that defendant did not receive personal notice of the action in time to defend, e.g., despite service being proper, defendant didn’t timely receive the served pleadings

• Need a meritorious defense

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Rarer Grounds to Vacate• CPLR 5015(a)(3) – fraud, misrepresentation, or other misconduct

– Even if other grounds don’t apply, if you can show the plaintiff knew the debt was fraudulent or not owed, or there was an affirmative misrepresentation in the default judgment application• E.g., defendant answered timely but plaintiff got default judgment anyway• E.g., Plaintiff had been provided definitive evidence the account was created

by identity theft, before the default was obtained. Oppenheimer v. Westcott, 47 N.Y.2d 595, 604, 419 N.Y.S.2d 908, 912, 393 N.E.2d 982, 986 (1979).

– No time limit. Judgment was a nullity. Shaw v. Shaw, 97 A.D.2d 403, 403, 467 N.Y.S.2d 231, 233 (2d Dep’t 1983)

• Catch-all: good cause/interest of justice– Courts have inherent authority to vacate, not resting on statute.– Somewhat rare to see this actually applied without other grounds. We

generally will not make a motion solely grounded on this.– But as an additional ground this allows one to raise general equitable

arguments, otherwise time-precluded meritorious defenses, defects in the proof submitted with the default judgment application, etc.

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Procedural Issues• Motion by Order to Show Cause– CPLR 5015(a) provides that the Court will direct the

form of notice of that shall be provided to the Plaintiff

• Stay of Enforcement– Routinely granted in OTSC bringing on motion to

vacate – included in our form

• Restitution – CPLR 5015(d)– If moneys already taken and judgment vacated for

lack of jurisdiction, moneys should be returned –should include request in OTSC.

– If vacatur for some other reason, common to have moneys held in escrow pending disposition of case

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Answering

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The Most Important Lesson of Today’s Session:

IF YOU ARE DEFENDING A DEBT BUYER CASE,

PLEAD LACK OF STANDING AS A DEFENSE

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This may be the only thing that determines whether the defendant wins or loses the case

Debt Buyer Documentation• Typically receive a spreadsheet with limited information• May have bought this information from another debt buyer • Seller typically expressly disclaims any warranty that information is accurate,

that documentation exists or can be obtained, or that debts are enforceable• Only little or no original documentation available

• Accounts with more documentation cost more

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“Junk Debt” Sold “As Is”

• “B of A was not making ‘any representations, warranties, promises, covenants, agreements, or guaranties of any kind or character whatsoever’ about the accuracy or completeness of the debts' records, according to a 2010 credit card sales agreement submitted to a California state court in a civil suit involving debt that B of A had sold to CACH.”

• “At Bank of America, records declared unreliable yet sold to CACH were used to file thousands of lawsuits against consumers, according to a review of hundreds of cases in the state courts where collection suits are typically filed. The overwhelming majority of cases end in default judgments . . . .”

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Debt Collection Lawsuit Papers

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Answering – Basics• Time to Respond

– Personal Service: see CPLR 320(a), UCCA 402• 10 days if City Court and served in County• 30 days if City Court and served outside County• 20 days if Supreme Court

– Substitute Service – CPLR 308(2), (4), see 320(a), UCCA 402• Service is complete 10 days after affidavit of service filed• Answer due 30 days after service is complete

• Manner of Responding– Serve a copy of the answer– By mailing it to opposing counsel– Best practice is to file it as well with proof of service– Technically a nonparty must serve

• Answer must be verified if complaint is• Respond to the allegations

– Pro se forms include a “general denial”; otherwise, go line by line

• Raise any defenses and counterclaims36

Evaluating Defenses

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Evaluating Defenses

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Common Defenses • We Are Going to Talk About the Most Common and Useful Defenses

– Failure to state a claim– City Court Jurisdiction– Limitations– Lack of Capacity– Standing– Installment Sale Defenses – Broad Overview– Usury– Limitations on Right to Collect Attorneys’ Fees

• Be aware that there are other defenses that are common but less useful or useful but less common. We had to draw the line somewhere or we’d be here all day.– For example, there are specific defenses that may apply to:

• Debt buyer suing right after acquiring debt without first trying to collect out of court• Hospital suing person who earns less than 300% of federal poverty guidelines• Medical provider suing for balance left after insurance disallowed portion of bill• Nursing home suing relative guarantor for cost of care• Debt defendant failed to list in prior no-asset Chapter 7 bankruptcy

– You also may be able to articulate general contract defenses, such as unconscionability

• Also be aware that different issues come up on summary judgment when creditors try to actually prove what they were able to plead, and either do not or cannot do so. Dealing with summary judgment is for a more advanced class.

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Failure to State a Claim

• Does “you owe me money” state a cause of action? Because you’ll see complaints that say nothing more than that.

• Account stated by a debt buyer– Account stated requires a pre-existing contractual

relationship between the parties, proffer of a statement of account, and acceptance and mutual assent thereto, possibly constructive assent through silence

– If the debt buyer claims account stated based on an account statement it itself sent, I would move to dismiss under CPLR 3211(a)(7)

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City Court Jurisdiction

• Under Uniform City Court Act 213, action subject to dismissal if no plaintiff or defendant lives, works, or has an office in the City or a Town contiguous by land

– E.g. person who lives and works in Grand Island, sued in any City Court, can move to dismiss and also sue the plaintiff’s law firm under the FDCPA, 15 USC 1692i

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Statute of Limitations

• Accrual generally based on when last payment was –and probably not apparent from pleadings

• General New York statute for contracts is 6 years: CPLR 213

• Shorter Statutes Often Apply– Sale of Goods, e.g. retail installment contract, like most car

loans: 4 years under UCC 2-725(1)– Borrowing Statute, CPLR 202

• Applies if cause of action accrued outside NY and jurisdiction of accrual has a shorter statute– Accrual in debt case occurs in jurisdiction where company that suffered

the harm resided, i.e., was incorporated

• Often will apply with credit cards, e.g. 3-year statute for Delaware banks - Portfolio Recovery Assocs. v. King, 14 N.Y.3d 410, 416, 901 N.Y.S.2d 575, 577, 927 N.E.2d 1059, 1061 (2010) (Discover Bank)

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Common Shorter Statutes

• Delaware – 3 years for debt collection generally (but longer for “promissory note” or “instrument under seal”)– Discover Bank– Chase– Bank of America / FIA Card Services– TD Bank (now issues Target REDCard)

• Virginia – probably 3 years for credit cards (under VA AG opinion)– Capital One

• Nevada – probably 4 years for credit cards– HSBC Bank Nevada

• Use FDIC Institution Lookup to see where bank is chartered

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Lack of Capacity

• Plaintiff doing business in NYS must be licensed – check Department of State website

– National Banks don’t need to be licensed, but FDIC-insured banks do. For a while American Express wasn’t licensed and this was a good defense for their cases. There is a relatively recent case finding that a Sallie Mae student loan trust couldn’t maintain suit because it lacked capacity. So it pays to check this.

44

Debt Buyer Issues• Defense of Lack of Standing / Proof of Assignment– To recover for an assigned debt, the debt buyer must

both prove that it owns the account, and prove up the elements of the underlying cause of action

– Under Palisades v. Kedik, 67 A.D.3d 1329 (4th Dep’t 2009), and Unifund v. Youngman, 89 A.D.3d 1377 (4th Dep’t 2011), the debt buyer will have to present an affidavit from the original creditor’s employee, evidencing that person’s knowledge of the creditor’s record systems, authenticating both (a) the account transfer records and (b) the underlying account records

– Debt buyers virtually never have this or the ability to get it

45

Debt Buyers• Defense of Lack of Standing / Proof of Assignment

– Palisades v. Kedik, 67 A.D.3d 1329 (4th Dep’t 2009): • To establish standing to sue, plaintiff was required to submit admissible

evidence that Discover assigned its interest in defendant's debt to plaintiff. Here, plaintiff submitted an affidavit from its agent with exhibits, including a printed copy of several pages from an electronic spreadsheet listing defendant's Discover account as one of the accounts sold to plaintiff. Contrary to the contention of plaintiff, the court properly determined that it failed to establish a proper foundation for the admission of the spreadsheet under the business record exception to the hearsay rule. (Citations omitted.)

• Although plaintiff's agent averred that the spreadsheet was kept in the regular course of business and that the entries therein were made in the regular course of business, the agent did not establish that he was familiar with plaintiff's business practices or procedures, and he further failed to establish when, how, or by whom the electronic spreadsheet submitted in paper form was made. Furthermore, although an electronic record "shall be admissible in a tangible exhibit that is a true and accurate representation of such electronic record”, plaintiff's agent failed to establish that the printed electronic spreadsheet submitted to the court was a true and accurate representation of the electronic record kept by plaintiff. (Citations omitted.)

46

Debt Buyers

• Unlikely to Have Admissible Evidence of Account Particulars• Unifund v. Youngman, 89 A.D.3d 1377 (4th Dep’t 2011): A business

record is admissible if "it was made in the regular course of any business and . . . it was the regular course of such business to make it, at the time of the act, transaction, occurrence or event, or within a reasonable time thereafter" (CPLR 4518 [a]). "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.“ Although plaintiff's agent averred that the credit card statements and account balance documents were made and kept in the regular course of business, the agent did not establish that he had personal knowledge of Chase's business practices or procedures, nor did he establish when, how, or by whom the credit card statements and account balance documents were made and kept. (Citations omitted.)

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Debt Buyers – Look Closely at the Alleged Chain of Title

• From a recent case:

48

Debt Buyer – Typical “Proof” of Assignment

Says it sells rights to accounts “identified in the Account Schedule attached hereto as Exhibit A”

49

This page is Exhibit B to something

Any conveyance is subject to “the terms, conditions and provisions” in the “Purchase and Sale Agreement” of 12/20/11

Never in the history of the universe has any debt buyer plaintiff ever submitted:• The thing this is

Exhibit B to• The Account

Schedule attached hereto as Exhibit A; or

• The “Purchase and Sale Agreement” that defines all the terms and conditions of this alleged transaction.

Without those things, nobody knows what, if anything, was sold.

Debt Buyers – Typical “Proof” of Assignment Proves Nothing

• Typical “proof of assignment” consists of a bill of sale that references nonexistent documents for all transaction terms and the definition and description of the accounts being transferred. This is clearly insufficient to prove standing.– See, e.g., Bank of N.Y. Mellon v. Deane, 31 Misc. 3d 494, 506, 970 N.Y.S.2d 427, 437 (Sup. Ct.

Kings County 2013) (incomplete copy of pooling agreement insufficient to establish assignment of note); RAB Performance Recoveries, LLC v. Scorsonelli, Index No. 3442/2008, 2009 N.Y. Misc. LEXIS 2512, at *4 (N.Y.C. Civ. Ct. June 25, 2009) (besides incomplete "schedule" "[t]he other documents plaintiff produced as proof of assignment are ambiguous and refer to terms and accounts in other documents" and so were insufficient to prove assignment); Midland Funding LLC v. Loreto, Index No. 8963/11, 2012 N.Y. Misc. LEXIS 803, at *3-4 (N.Y.C. Civ. Ct. Feb. 23, 2012) ("[T]he Bill of Sale and Assignment refers to 'the terms and conditions of a Purchase and Sale Agreement' which is not included as an exhibit in this litigation and may set forth rights and defenses available to defendant herein. The court must question why it has been omitted. . . . Neither the Bill of Sale and Assignment nor the Asset Schedule specifically refer to the defendant's account. . . . The documentation is legally insufficient to establish the proper assignment of the account . . . ."); CACH LLC v. Fatima, Index No. 4381/11, 2011 N.Y. Misc. LEXIS 3974, at *6-7 (Dist. Ct. Aug. 3, 2011) (affidavit stating that pool of loans sold, with no reference to specific account, accompanied by "excerpt" of spreadsheet allegedly listing transferred loans, with no explanation how "excerpt" or spreadsheet itself were created, not sufficient to prove assignment); Midland Funding LLC v. Goldberg, Index No. 16677/2010, 2010 N.Y. Misc. LEXIS 5142, at *5 (Dist. Ct. Oct. 19, 2010) (to prove assignment, debt buyer must provide "a complete copy of the alleged assignment [which] must include any referenced attachments and related agreements, with all referenced assigned accounts").

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Installment Contracts• Car Loan or other Retail Installment Sale

– RISA, MVRISA, FTC Holder Rule provide defenses and counterclaims good against the seller are also good against the financer/assignee

– Interview client about any complaints they have about the underlying transaction, as these may form the basis for defenses or counterclaims. For example:• Improper credit disclosures under Truth in Lending Act

– E.g. fishy stuff about being presented with new contracts to sign after receiving the car, being told after signing the documents that the loan wasn’t approved and they needed e.g. more down payment, etc.

• Fraud / fraudulent inducement / consumer deception or false advertising under General Business Law 349-350– E.g. if car was in undisclosed wreck or had other undisclosed defect or damage (discovered by a

mechanic after the fact, or otherwise consider checking CarFax)– E.g. bait and switch where car changed to less desirable one after agreed to buy based on test

drive or floor model– E.g. price massively increased from what was on windshield or other ad

• Breach of Warranty / Magnusson-Moss Warranty Act / Lemon Law– May apply where defects apparent shortly after transaction and dealer refused or unable to fix

them.– Important to know that Mag-Moss provides implied warranties can’t be disclaimed if a written

warranty is extended, and Lemon Law requires a written warranty when it applies at all

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Uniform Commercial Code• Article 9 (Secured Transactions)

– Upon default (missed payments), secured party may enforce the security interest – 9-601(a)

– Repossession must be accomplished either judicially or, if nonjudicially, without “breach of the peace” – 9-609

– After repossession, creditor may sell the collateral, but every aspect of the disposition, including method, manner, time, place, etc., must be “commercially reasonable” – 9-610

– If 60% paid off, must dispose of collateral within 90 days unless debtor consent – 9-620(e)-(f)

– Creditor may accept collateral instead of selling it, but this must be in full satisfaction of the debt, and on notice, and the consumer may object and require sale – 9-620

– Must give debtor reasonable advanced notice of disposition, including regarding intended manner (public or private sale), how to redeem the collateral pre-disposition, and whether the consumer will be liable for any deficiency – 9-611, 612, 613, 614

– Debtor has right to redeem collateral any time before disposition, by paying in full the balance and collection costs and attorneys’ fees (to the extent collectible) – 9-623

– After repossession and disposition, debtor has the right to receive any surplus – 9-608(a)(4), 9-615(d)

– If sold to a party related to the creditor, surplus or deficiency is to be calculated based not on actual price but on what would have been recovered in an arm’s length transaction – 9-615(f)

– Must send debtor accounting of surplus or deficiency claimed – 9-619

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Uniform Commercial Code

• Common Defenses or Counterclaims– Breach of Peace during repossession causes creditor to

lose present right to possession of car• Creditor has nondelegable duty to ensure peace isn’t breached

– Not commercially reasonable disposition of repossessed collateral• If no proper notice, or otherwise not reasonable, cannot recover a

deficiency. Rather, presume that the fair value of the car equaled the loan balance. Secured party bears burden to prove otherwise. Sec. Trust Co. v. Thomas, 59 A.D.2d 242 (4th Dep’t 1977)

• Price disparity alone supports an inference of lack of commercial reasonableness. Leasing Serv. Corp. v. Broetje, 545 F. Supp. 362 (1982)

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Example: Pre-Disposition Notice

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Uniform Commercial Code

• Article 9 Remedies– Can’t get collateral back from a good faith purchaser – 9-

617(b)– Consumer entitled to – 9-625

• Actual damages, including the added cost of replacement financing, or

• Minimum damages = 10% of principal + total finance charge

– Plus statutory damages of $500, per case, if there are specified violations• E.g. failure to provide accounting after request under 9-210,

noncompliant post-disposition notice

– In deficiency suit, creditor not entitled to deficiency based on sale price, but only based on fair market value (which may mean no deficiency or a surplus), which it is creditor’s burden to prove

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Usury• Generally, under General Obligation Law § 5-501

and Banking Law § 14-a, the maximum rate of interest that may be charged for a “loan or forbearance of any money, goods, or things in action” in New York is 16% annually.

• Under General Obligation Law § 5-511, usurious contracts are void, and under 5-513 there’s a counterclaim for the excess interest paid – Lender forfeits right to collect any principal or

interest, and may collect nothing. Seidel v. 18 E. 17th St. Owners, Inc., 79 N.Y.2d 735, 740, 586 N.Y.S.2d 240, 242, 598 N.E.2d 7, 9 (1992); Szerdahelyi v. Harris, 67 N.Y.2d 42, 48, 499 N.Y.S.2d 650, 654, 490 N.E.2d 517, 521 (1986).

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Usury - Exceptions• Licensed Lenders

– Have a license to make consumer loans at any interest rate, up to $25,000 – check licensure on DFS website

• “Time-Price Doctrine”– Holds that a retail installment sale is not a “loan or forbearance of money” etc.– Also (probably) applies to retail installment credit, e.g., a store credit card (as opposed to a

store-branded credit card)– Still worth raising as a defense because of “substance over form” doctrine – if transaction is

economically a loan and not a sale, courts may treat it as such for usury purposes, See, e.g., Schneider v. Phelps, 41 N.Y.2d 238, 391 N.Y.S.2d 568, 359 N.E.2d 1361 (1977); Nassau Trust Co. v. Midland Manor Home for Adults, 57 A.D.2d 609, 393 N.Y.S.2d 778 (2d Dep’t 1977).

– Thus, cases hold that the (typical) car loan situation where the sale agreement is assigned to the finance company at execution is subject to usury because it is substantively a secured loan, not a sale. Ford Motor Credit Co. LLC v. Black, Index No. 9078/08, 2010 N.Y. Misc. LEXIS 784 (N.Y.C. Civ. Ct. Apr. 14, 2010) (holding usurious and declining to enforce 24% annual rate of interest in car loan)

• Federal Preemption for National Banks and FDIC-Insured Banks– Must comply with interest-rate laws of home state only.– Still worth raising the defense for these entities, where over 16% charged, because they don’t

always prove entitlement to preemption or compliance with applicable state laws• Have to establish where home state is; OCC and FDIC hold that home state is NY if the bank’s actual

lending operations happen there, so bank does have to make a showing of where its lending operations happen;

• Most state laws require a written agreement setting forth the authorized interest rate

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Defenses to Demands for Attorneys’ Fees

• Attorneys’ Fees– Only if the contract expressly provides for it

– Must be reasonable, cannot get based on a pure percentage of recovery

– Limited to 15% of balance in car installment sales, and prohibited completely for other kinds of installment sale

• Requesting them when they are not available will support an FDCPA lawsuit against the collection law firm

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You Are Not Alone• This is a basic overview. There are many

complications and advanced topics. Please feel free to ask questions. We are happy to talk.

• If you are not going to help someone, our CLARO clinics provide free assistance, with no limitations as to income or anything else, with all of these issues, so feel free to refer people to the clinics.

• The clinics are walk-in, first come, first served, so people do not need to call in advance or make an appointment (and in fact, it is not possible to do those things).

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Tuesdays 5-7pm Fridays 10am-12pm

Tri-Main Building Buffalo City Court

2495 Main Street 50 Delaware, 7th Floor

Attorney of the Morning program Wednesdays and Fridays at 9:30am in Buffalo City Court

Contact us:

mparham@wnylc.com pcampbell@wnylc.com

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