When banks and payday lenders write off their bad debts, a busy industry steps in to try to generate revenue from the old unpaid accounts.
The consumer debt – once declared “dead” by the bank or other creditor – rises from its grave to haunt the debtor. The zombie debt buyers purchase the right to pursue payment, and debtors suddenly get payment demands from unfamiliar companies.
Any amount recovered is revenue for the debt buyer.
Many of those companies go beyond mailed collection notices. They also ask courts to order payment for the “zombie” debt accounts, and those collections lawsuits present troubling issues for lawyers and judges.
One issue is whether a lawyer ethically can bring suit when the file might lack critical details about the original loan agreement, including dates, interest rates and attorney fee agreements. Some consumer lawyers say it’s a violation of federal law to file unsupportable claims in the expectation that most will result in uncontested default judgments.
One company targeted by Virginia lawsuits, however, says it is following the rules.
Meanwhile, judges debate whether they should act as gatekeepers, scrutinizing purchased debt lawsuits for legal flaws even when debtors fail to raise any defense. Lawyers for the purchased debt companies argue judges should not be raising defenses for people who don’t even show up at court.
Default judgment is the rule
Courts are rarely asked to decide whether a particular “zombie debt” has any life left.
A few defendants bring lawyers and ask to set cases for trial, but the debt buyers quickly drop those cases by taking nonsuits – Virginia’s automatic right to a voluntary dismissal – consumer advocates say.
The nonsuited cases are rarely refiled, so the debt buyers apparently have decided litigation is not cost-effective, according to consumer lawyers.
“I started to get frustrated,” said Simon Sandoval-Moshenberg, a legal aid lawyer in Falls Church who has handled about 20 such cases. “As a lawyer, I’d like to try one of these things. I have some defenses I’d like to try out,” he said.
Consumer advocates suggested the debt buyers’ lawyers know most of their cases will not withstand examination in court, so they abandon contested cases and collect default judgments in the far more numerous cases where no one shows up.
“How can that possibly be a legitimate litigation practice, to file suit knowing you cannot and will not try it?” Sandoval-Moshenberg said.
Sandoval-Moshenberg filed suit March 27 against Midland Funding LLC, a subsidiary of Encore Capital Group Inc.
Suit targets national debt buyer company
Encore invested $1.2 billion in 2013 to acquire debt portfolios with a face value of $84.9 billion, an average purchase price of 1.4 cents on the dollar, according to the company’s filing with the Securities and Exchange Commission. The portfolios were primarily charged-off credit card accounts, the company said.
“We generate a significant portion of our revenue by collecting on judgments that are granted by courts in lawsuits filed against consumers,” Encore said in its report.
“Zombie debt buyers – they buy these debts for pennies on the dollar and their objective is to turn as many as possible into judgments, which makes them much more valuable,” said Thomas D. Domonoske, a consumer lawyer in Harrisonburg.
Judgments have a 10-year lifespan, extending the deadline for collection efforts, Sandoval-Moshenberg explained in his lawsuit. A judgment creditor can garnish bank accounts and wages for the entire 10-year period, and interest runs at 6 percent even if interest would not be otherwise available.
Hoping for default judgments, Midland files hundreds of collection suits annually in Fairfax General District Court, the suit contends. The practice is not limited to that court, according to Sandoval-Moshenberg.
“This is definitely happening all across the state and, to a different extent, all across the country,” he said.
Dispute focuses on affidavits
Consumer advocates say the weak links in the mass-filed lawsuits are the attached affidavits, purporting to verify that the debts are genuine, the numbers are accurate and the plaintiff has the right to collect.
Encore says its representatives will “read, understand, and fully verify document contents as appropriate to ensure accuracy” in affidavits.
The affidavits are suspect, consumer lawyers say. They are based only on data from computer files, representing information from the company that sold the debt, the advocates say. The information sometimes fails to track details of the original credit agreement, the advocates say.
That’s what happened in the case of Leoncio Paz, according to the suit filed by Sandoval-Moshenberg.
Paz owed money on his J.C. Penney credit card, but when he was sued by Midland, the numbers on his credit card account statement, even with added interest, did not add up to the $5,216.58 claimed by the affidavit filed by Midland.
The affidavit is “false, deceptive and/or misleading,” according to Paz’ lawsuit, because Midland had no original account documents and the math was flawed.
When Paz’ lawyer challenged the validity of the suit against him, Midland nonsuited its case in January.
Use of such “direct falsehoods and false implications” violates the federal Fair Debt Collections Practices Act, according to Paz’ lawsuit in Alexandria federal court.
“These false affidavits should not be allowed to exist,” said Domonoske, adding, “Something needs to be done to stop this.”
Litigation practice questioned
Sandoval-Moshenberg said he hopes to uncover the instructions given by Midland to its lawyers, Virginia Beach-based Dominion Law Associates PLLC. He suspects Midland expressly tells the lawyers to nonsuit cases if any challenge is raised.
“If that turns out to be the case, I think it’s shocking and scandalous, quite frankly,” Sandoval-Moshenberg said.
“There’s a part of me that wants to actually shame them into trying some of these cases,” he said.
Beginning with Fairfax County, some Virginia general district courts have imposed heightened scrutiny for purchased debt lawsuits, but no one contacted said the new guidelines have quelled the tide of filings.
“Special court rules have, in my opinion, not done a thing to slow debt buyers down,” said consumer lawyer Robert S. Brandt of Alexandria. He said 95 percent of defendants fail to show and “judges just rubber stamp the plaintiff’s request.”
After “winning” about 25 such cases with plaintiffs’ nonsuits, Brandt said he finally faces a possible trial in Alexandria on a re-filed suit from a different debt buyer.
Sandoval-Moshenberg’s lawsuit is not the first aimed at zombie debt buyers and their Virginia litigation practice.
A 2011 lawsuit filed by Petersburg’s Dale W. Pittman and other consumer lawyers laid out detailed allegations of Encore employees “robo-signing” batches of 400 affidavits at a time, without access to the underlying account information.
The lawsuit was vigorously defended by Encore through attorneys at the Virginia offices of Troutman Sanders. In a motion for summary judgment, Encore contended that the affidavit at issue was truthful and that such business records affidavits are fair game in collections lawsuits.
The suit was “one hell of a fight,” according to Pittman, and resulted in a quiet dismissal in 2012.
It was not clear what relief was obtained.
A spokesperson for Encore acknowledged a request for comment, but no one from the company had responded as of press time.
No response had yet been filed to the Paz lawsuit.
Concerns about the integrity of collections actions have slowed the business “dramatically” since 2008, according to a statement from the Virginia Creditors Bar Association.
As a result of heavier federal regulation and continued scrutiny from Virginia courts, collections filings declined by 119,000 over a six-year period, said P. Matthew Roberts, vice-president of the VCBA.
The VCBA says it promotes strict adherence to both the rules of civil procedure and the rules of professional conduct in the collections industry.