• Debt Buyers & North Carolina’s Consumer Economic Protection Act

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    Last month John Oliver made headlines across the country when his TV show, Last Week Tonight, did an episode focusing on common practices by debt buyers.  To illustrate how easy it is to buy consumer debt, Oliver formed a debt-buying company (“CARP”) after complying with legal requirements in Mississippi: paying $50 to the State and appointing himself Chairman of the Board. The new company set up a very basic website and was quickly offered an opportunity to buy $3 million of consumer medical debt for $60,000, along with the names, addresses, and social security numbers of almost 9,000 alleged debtors.  At the end of the episode Oliver— in his role as CARP Chairman– forgave the debt by pushing a giant red button. You can watch the excitement, and perhaps learn something about debt-buying, by going to https://www.youtube.com/watch?v=hxUAntt1z2c .

    Court systems across the country are currently struggling with large numbers of lawsuits filed by debt buyers. These cases present exactly the sort of challenging problems one would anticipate when third-party companies purchase  thousands of delinquent accounts deemed uncollectable by the original creditors. Actions on many accounts are barred by applicable statutes of limitation. Detailed documentation of the original debt is frequently incomplete, sometimes consisting of no more than a single line notation in a list of accounts sold. Because debts are sold and re-sold, even the identity of the original creditor may be unclear, and plaintiffs may struggle to trace the chain of transactions necessary to demonstrate their ownership of the debt.  Defendants in these lawsuits often vigorously challenge the existence and amount of the debt as well as their identification as the individual originally liable on the contract. In short, these are contract actions in which evidence establishing the existence of a contract, the terms of the contract, breach of the contract, and even the parties to the contract may be in short supply.

    Notably, North Carolina has largely avoided the avalanche of issues experienced by other states thanks to the 2009 enactment of the Consumer Economic Protection Act (CEPA) (amending GS Ch. 58, Art. 70, which regulates collection agencies).  Today’s blog post is offered simply to remind judicial officials of the most significant provisions of this law.  Frequently these lawsuits are brought against defendants who appear pro se or fail to appear altogether and who thus fail to raise violation of the CEPA as a defense.  Nevertheless, the statutes impose a substantial affirmative burden which must be satisfied by the plaintiff/debt buyer as a prerequisite to judgment in its favor.

    What’s a debt buyer?

    GS 58-70-15 defines a debt buyer as a person or company engaged in the business of buying “delinquent or charged-off consumer loans or consumer credit accounts, or other delinquent consumer debt for collection purposes.” A debt buyer is deemed a “collection agency” and is thus required to comply with the statutory requirements set out in Art. 70.

    At the pleading stage. . .

    GS 58-70-150 requires that a complaint filed by a debt buyer against a consumer must be accompanied by the following additional materials:

    • A copy of the contract “or other writing evidencing the original debt” signed by the defendant. If the action is for credit card debt and no such signed writing ever existed, a copy of a document “generated when the credit card was actually used” must be attached.
    • Written documentation establishing the plaintiff’s ownership of the debt. If the plaintiff did not purchase the debt from the original creditor, each assignment of the debt must be documented, showing “an unbroken chain.” Each transfer of ownership must contain (1) the original account number, and (2) “clearly show the debtor’s name associated with that account number.”

    No default or summary judgment for plaintiff/debt buyer unless . . .

    A debt-buyer who satisfies the pleading requirements set out above has merely cleared the first hurdle imposed by the CEPA.  GS 58-70-155 requires the plaintiff to produce specific additional evidence establishing the “amount and nature of the debt” as a prerequisite to entry of default or summary judgment for plaintiff. The statute specifies that “the only evidence sufficient” to do so are “properly authenticated business records” complying with GS 8C-1, Rule 803(6).  The statute also identifies the required content of these records:

    • The original account number
    • The original creditor
    • The amount of the original debt
    • An itemization of charges and fees claimed to be owed
    • The original charge-off balance (or if not charged-off, an explanation of how the balance was calculated
    • Date of last payment
    • Amount of interest claimed and basis for such charge

    Common problems

    As explained above, debt buyers may encounter difficulty in producing the evidence required by the North Carolina statute. One common deficit is documentation of the original debt; the original contract signed by the debtor or signed credit card receipts are often not included in the “package” of delinquent accounts purchased by the debt buyer. (Such missing documents may well explain why the accounts were available for purchase at such a steep discount, of course.)  Even if the debt buyer possesses copies of these vital documents, Rule 803(6) authentication requirements must be met, and the plaintiff is unlikely to have personal knowledge of the original creditor’s usual business and record-keeping practices.  Plaintiffs also frequently struggle to supply the court with the required itemized evidence of charges and fees over the life of the account. A solitary credit card statement showing a balance owed as of a particular date falls woefully short of meeting the statutory requirements. Such evidence would not be sufficient in an action brought on the debt by the original creditor, and the evidentiary burden on a debt buyer is certainly no less.

    Also note:

    The pleading and evidentiary requirements I’ve focused on in this post are a relatively small part of CEPA’s protections.  GS Ch. 58 Art. 70 contains numerous detailed provisions related to required operating procedures and prohibited practices by debt collectors, including debt buyers. GS 58-70-115 specifically identifies several practices by debt buyers as unfair trade practices, including filing an action on the debt without “valid documentation” that the plaintiff owns the debt and “reasonable verification” of the amount of the debt. GS 58-70-115(5). In fact, the statute states that failure to comply with the pleading requirements discussed above is itself an unfair trade practice!  GS 58-70-115(7). Even when a defendant fails to assert violation of the statute as a basis for affirmative relief, however, judicial officials should be aware that the statute specifically seeks to protect these consumer/defendants from judgments based on uncontested but insufficient evidence of liability.

    Dona Lewandowski joined the faculty of the Institute of Government in 1985 and spent the next five years writing, teaching, and consulting with district court judges in the area of family law. In 1990, following the birth of her son, she left the Institute to devote full time to her family. She rejoined the School of Government in 2006. Lewandowski holds a BS and an MA from Middle Tennessee State University and a JD with honors, Order of the Coif, from the University of North Carolina at Chapel Hill. After law school, she worked as a research assistant to Chief Judge R.A. Hedrick of the NC Court of Appeals.

    One thought on “Debt Buyers & North Carolina’s Consumer Economic Protection Act”

    • Brian C. Bernhardt says:

      Few thoughts, from a collection lawyer…

      1. You left out the Notice of Intent to Sue Requirement that must be met at least 30 days prior to suit.

      2. You write: “Even if the debt buyer possesses copies of these vital documents, Rule 803(6) authentication requirements must be met, and the plaintiff is unlikely to have personal knowledge of the original creditor’s usual business and record-keeping practices.” There’s a case on point – don’t have it on my fingertips as I’m not at the office – that allows for a way around that requirement. Not that Judge Tin in Charlotte or Judge Sasser in Raleigh think it applies, and it hasn’t been litigated since the 2009 enactment of the Debt Buyer statute, but eventually the issue will go up on appeal, and the Court of Appeals has already ruled in a manner favorable to the debt buyer.

      3. Your write: “A solitary credit card statement showing a balance owed as of a particular date falls woefully short of meeting the statutory requirements. Such evidence would not be sufficient in an action brought on the debt by the original creditor.” You are definitely correct in the context of debt buyers (as the lawyers who represented Portfolio Recovery are finding out every week all over the state). But with respect to an original creditor, there is definitely case law directly on point – again, I don’t have it on my fingertips as I’m not at the office – that does state that the charge off statement, alone, is sufficient for an original creditor to prevail on summary judgment.

      4. Also, it is important to note that banks are explicitly exempted from the definition of debt buyer – so if the buyer of the debt is a bank, the entire statutory regime simply does not apply.

      5. Also, credit card companies are not the “big” debt sellers anymore (unlike the past few years). Finance companies (think of the folks who finance your auto loan) are now the big sellers; John Oliver did a segment on this last weekend, too. Those debts are much easier to get through the debt buyer statute regime because there is an easily obtainable contract (the purchase contract), a payment history (an itemization), the original assignment is typically on the face of the contract, and subsequent assignments are usually evidenced by a bill of sale or, if a tranche is sold, a detailed list.

      6. Generally the sales of the debt are not due to lack of documentation, but so that the original creditor (or even subsequent debt buyers who sell) want to get paid now for the debt, even at a discount, rather than get more money, possibly, at some unknown date in the future.

      Long and short – debt buyer suits have dramatically decreased since 2009 because of the law. But if the plaintiff has the documentation and the plaintiff’s lawyer spends the time necessary to do things the right way, the debt is still a lucrative recovery for the plaintiff and the representative; and, let’s not forget – when done properly, the suit is actually being brought against someone who got something and has not paid for it; so the alleged debtor is not always the one on the side of the angels.

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