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Empire Justice Comments on Proposed Reforms Relating to Consumer Credit Collection Cases

May 30, 2014

 

John W. McConnell, Esq.
Counsel
Office of Court Administration
25 Beaver Street, 11th Floor
New York, New York 10004

Re: Proposed Court Rules  Relating to Consumer Credit Collection Cases

Dear Mr. McConnell:

We are writing in support of the Unified Court System proposed rules governing consumer credit collection cases and suggesting minor improvements to make them more effective.  The Empire Justice Center has extensive experience in successfully representing low income consumers in upstate New York.  In addition to assisting victims of predatory mortgage lending, we have successfully brought multiple suits against rent-to-own companies, exposing their rapacious pricing schemes; worked with the New York Attorney General to alert consumers about the dangers of debt settlement companies; and played an instrumental role in the enactment of the New York Exempt Income Protection Act. This state law protects thousands of low-income New Yorkers by exempting government benefits and their wages held in bank accounts from abusive debt-collection practices.

We also have considerable experience in defending low income consumers in litigation brought by major debt buyers such as Portfolio Recovery Associates, LLC (PRA), Cohen & Slamowitz LLP,  Midland Funding, LLC in Rochester City Court and Monroe County Supreme Court.  As you know, funding for consumer legal services in New York State has been extremely limited, leaving low income consumers woefully under-served.  This is particularly true in Upstate New York.   While that is beginning to change with the additional support of the Office of Court Administration (OCA) and the Chief Judge in providing unprecedented funding for civil legal services, the need for this type of legal assistance remains. Nevertheless, even with limited resources, our representation of dozens of poor consumers against debt buyers has been remarkably successful: No debt buyer has ever prevailed in any suit we have defended.

Based on our experience, the vast majority of consumers in Western New York have multiple meritorious defenses to debt collection actions filed against them.  These defenses include expiration of the statute of limitations; previous payment of all or part of the debt; prior purchase of credit card payment insurance; suits for more than the amount of debt owed; and,
 most frequently, the inability of a debt buyer to prove actual ownership of the alleged debt sought to be collected.  Without a defense attorney, however, debt buyer-plaintiffs are virtually assured a default judgement.  In fact, the successful business model used by PRA, Midland Funding and other large debt buyers is based on obtaining a default judgment against unrepresented consumers.

The Epidemic of Abusive Creditor Litigation

The epidemic of abusive ligation brought by creditors against New York consumers has resulted in tens of thousands of frivolous lawsuits, creating an enormous strain on our court system.  These suits have a devastating long term economic effect on unrepresented New Yorkers, who have lost their case to debt buyers by default. Over the past decade, the number of debt collection lawsuits filed in New York courts has exploded, with upward of 200,000 cases filed in 2011 alone.  Regrettably, only two percent of all New Yorkers sued have legal representation, and debt collection lawsuits account for eight out of ten default judgments entered.  In that year, debt buyers obtained an estimated $230 million in judgments against New Yorkers.

The proposed consumer debt collection court rules are analogous to the predatory lending state court rules.  These mortgage foreclosure rules help protect the rights of  consumers who are victims of the bad acts of predatory mortgage lenders, and guide mortgage consumers through the complex foreclosure crisis.  Providing similar court rules in debt collection lawsuits will result in much needed relief for unrepresented consumers in these cases, just as the foreclosure court  rules addressed the unfair practices of predatory mortgage lenders.

Once again, Chief Judge Lippman has identified and addressed a  major access to justice issue.  These proposed court rules will provide a necessary counterbalance to achieve fairness and justice for all summoned before the courts, while permitting debt collectors to proceed with legitimate cases.  Specifically, the consumer credit court rules will help achieve fairness and justice by requiring debt collector plaintiffs to prove the statute of limitation has not expired; proffer evidence of ownership through the chain of assignment; and properly demonstrate the amount owed on the debt.  Additionally, these rules propose the use of certain forms for pro-se consumers to vacate default judgments or file a pro-se answer in a debt collection case.

The Proposed Court Rules Come Closer to Eliminating the Disparity of Judicial Fairness

By applying uniform debt collection court rules to most  New York courts, the proposed court rules limit the disparity of fairness between upstate and down-state residents.    Court rules similar to those proposed have already provided protection to consumers in New York City,  and have proven successful.  In response to the Rochester City Court’s recent promulgation of stricter default judgment rules, debt buyers have attempted to avoid these due process procedures by filing their actions in Monroe County Supreme Court. [1]  As a result, a disparity of judicial fairness based on the debt buyer’s choice of forum remains. The proposed debt collection court rules will help, but not completely level the playing field for all New Yorkers regardless of where they live.

Achieving Fairness through Affirmation of Statute of Limitations

When bringing their cases, debt buyer-plaintiffs frequently rely on a pro-se defendant’s lack of legal education to assert a statute of limitations defense.  As a group, indigent defendants are more severely harmed by suits intentionally brought after the expiration of the statute of limitations because these defendants are less likely to afford and retain counsel to defend a debt collection lawsuit.  The proposed court rule requiring a debt buyer to affirm that the statute of limitations has not expired is critical to achieving access to justice for all New Yorkers, and is especially significant to low income citizens of this state.  

The Importance of Demonstrating the Chain of Assignment

Halecki v. Empire Portfolios, et al, 09 CV 6615 (W.D.N.Y.),  provides an important window into common and abusive debt buyer litigation practices.   In this matter, we  represented Eugene Halecki, an elderly gentleman who used a Providian credit card with a $1500 credit limit.  In 2004, he owed Providian $700.  Around that time, he was hospitalized and was unable to make any more payments.  Soon after, he defaulted on the debt, and owed $2282.62, including $1400 in fees and interest. 

Four years later, Mr. Halecki’s Providian debt was purchased by a debt buyer called “Empire Portfolios” for  $79.89, as part of a larger portfolio.  Empire Portfolios then referred Halecki’s debt to its debt collection law firm, Cohen & Slamowitz LLP,  which later sued Mr. Halecki for $2282.62 (plus interest) in Buffalo City Court.  In the course of litigation, we learned that  Empire Portfolios is actually a corporation with no employees and is equally owned by its two shareholders: Mitchell Slamowitz and David Cohen.  The two partners of Cohen & Slamowitz LLP, Mitchell Slamowitz and David Cohen, are the same co-owners of Empire Portfolios, Inc.  Cohen & Slamowitz pays Empire Portfolios a confidential amount in “management fees” from the firm’s debt collection work, but there is no written contract between these two business entities.

Before or after filing suit, neither Empire Portfolios nor Cohen & Slamowitz ever bothered determining whether they could actually prove their debt collection case.  Even without the recently proposed debt collection rules, state law requires a plaintiff who attempts to collect on an assigned debt to prove the chain of assignment.  In Mr. Halecki’s case, Empire Portfolios was required to prove the complete chain of assignment back to the original creditor, Providian, to lawfully collect their purported debt.  In fact, neither Empire Portfolios nor Cohen & Slamowitz had any idea of what happened to Mr. Halecki’s debt after it was sold by Providian in 2004.  The chain of assignment was of no importance to them; all they knew is that on August 25, 2008, the debt was bought and sold several times, with Empire Portfolios as the final purchaser. Without these basic documents, Empire Portfolios never had standing to bring this suit. Unifund CCR Partners v. Youngman, 89 A.D.3d 1377, 1377-1378 (4th Dept. 2011).

Both Empire Portfolios and Cohen & Slamowitz had no idea about any prior collection efforts, or the whereabouts of the credit card contract between Providian and Mr. Halecki.   In fact, the Halecki litigation revealed that only review or investigation conducted by Empire Portfolios or Cohen & Slamowitz prior to filing its debt collection suits is whether the purported debtor is dead or has filed bankruptcy. 

We strongly believe that the proposed debt collection court rules requiring debt buyers to  prove the chain of assignment will eliminate these types of cases, and put an end to this rampant abuse of the judiciary system.  At the time of the Halecki suit, Cohen & Slamowitz employed approximately 14 lawyers who filed approximately 60,000 cases on behalf of Empire Portfolios and other clients in New York courts. In addition, Cohen & Slamowitz employed approximately 130 debt collectors and 100 other support staff.  Last year, Cohen & Slamowitz filed 430 debt collection cases on behalf of debt buyers in Rochester City Court alone.  In 423 of these cases, there was no attorney defending against them.   Without these new court rules, however, Cohen & Slamowitz is virtually guaranteed a default judgment against another 423 unrepresented Rochester consumers.

The Proposed Affidavit of Facts and Purchase by Debt Buyer Plaintiff Will Eliminate Frivolous Suits

In Colorado Capital Investments, Inc.  v. Burgess, Index No. 16094/04 (Rochester City Ct.), we again represented an elderly and disabled debtor, Solomon Burgess, against a large debt buyer.  Colorado Capital was the sixth purported purchaser of Mr. Burgess’ defaulted credit card debt, and in support of its motion for summary judgment, the debt buyer submitted an affidavit from one Jim Scoroposki, an “agent of the Recovery Division of Colorado Capital Management Corp.”  Affiant Scoroposki claimed to have “personally reviewed Plaintiff’s business records,” but he had no personal knowledge of the underlying facts.  These details did not prevent Mr. Scoroposki from claiming that Mr. Burgess owed plaintiff $2022.55 “plus interest at a rate of 9% from September 23, 2003".   Affiant Scoroposki calculated that Mr. Burgess owed $1010.53 when this sum was “charged off on or about May 30, 2001" by the credit card company, and “the account accrued contractual charge off interest at the rate of 23.99% through September 29, 2003". This resulted in “an amount due and owing of $2022.55, the amount claimed herein.” 

In fact, Colorado Capital’s credit card debt claim for $2055.55, is mathematically impossible.   Using the exact same variables as purportedly applied by Affiant Scoroposki, Mr. Burgess owes a maximum of  $1768.76.  When confronted with this $250 math error, neither Colorado Capital nor its counsel could explain the $250 discrepancy or how the debt buyer actually determined “the amount claimed herein”.   Faced with this evidence, the debt buyer quickly dismissed the action with prejudice.

It is apparent that Colorado Capital had no idea of the underlying facts or an accurate amount of credit debt purportedly owed by Mr. Burgess.  These types of debt buyer mistakes are all too common. But they require competent representation to uncover, which in turn is all too often unavailable. The proposed court rules directly address these issues by requiring an “Affidavit of Facts and Purchase of Account By Debt Buyer Plaintiff”, paragraph 4, and will provide both the court and consumer defendants with the evidence necessary to demonstrate the validity of any debt buyer’s monetary claim. [2]  We believe that this proposed rule will help consumers defend themselves against these types of frivolous suits, and ultimately lead to their elimination from the docket.

Pro-Se Forms will Assist in Eliminating Frivolous Creditor Suits

The Empire Justice Center supports the proposal for assisting pro se defendants by making simple legal forms available to defend a creditor lawsuit.  For example, the proposed forms allow a defendant to file an answer by simply checking some boxes on a form.  Pro-se debt collection programs will help facilitated access to justice for debtor defendants, assist the courts in handling frivolous creditor lawsuits, and help assure that creditors  provide the requisite evidence to proof claims.  In this respect, the Office of Court Administration should also consider adopting a rule similar to Alberta Legal Profession Act Rule 2.23 , applied by the Provincial courts in Alberta, Canada.  This Rule gives individual judges discretion as to whether to allow non-lawyers to provide  assistance to unrepresented parties in the courtroom. [3]

Conclusion

Requiring substantial proof of chain of assignment, the itemized amounts owed at the time the debt was purchased, and the amount owed post-purchase, (including an itemization of fees and interest) are vitally important to protect consumers and help eliminate frivolous creditor-driven law suits.  These rules will allow judges much needed time and resources to focus on valid lawsuits and protect consumers from unjust lawsuits.  We appreciate OCA’s attention to this matter, and look forward to working with the new court rules when promulgated. 

Respectfully Submitted,

Maggie Robb,  Esq.
Peter O’Brian Dellinger, Esq.
                                                           

End Notes:
 [1] To avoid exploitation of New York's multilayered court system, the proposed rules should cover all courts with civil jurisdiction, not just the Civil, CIty and District Courts.
 [2] The proposed rule should be amended to require that paragraph 3 of the affidavits with regard to cases involving “account stated causes of action” by both original creditors and debt buyers be amended to require the affiant to insert the dates of mailing and the address to which account statements were mailed, so that an alleged debtor can bring to the Court’s attention that they were sent to an address where the alleged debtor did not reside at the time of the alleged mailing.
 [3] The Alberta Legal Profession Act Rule 2.23 provides:
Assistance before the Court:
(1) The Court may permit a person to assist a party before the Court in any manner and on any terms and conditions the Court considers appropriate.
(2) Without limiting subrule (1), assistance may take the form of (a) quiet suggestions, (b) note-taking, (c) support, or (d) addressing the particular needs of a party.
(3) Despite subrule (1), no assistance may be permitted (a) that would contravene section 106(1) of the Legal Profession Act [i.e. practicing law without a license], (b) if the assistance would outright be disruptive, or (c) if the assistance would not meet the purpose and intention of these rules.




For more information, please contact:


Peter Dellinger

Empire Justice Center
Telesca Center for Justice
One West Main Street, Suite 200
Rochester, NY  14614 


(585) 454-4060
(585) 454-2518
pdellinger@empirejustice.org