Debt Collectors, Debt Buyers, and Collection Agency Act
I recently attended Max Gardner's Debt Buyer Boot Camp. During the boot camp, the panel briefly discussed the Unifund CCR Partners v. Shah series of cases. These cases deal with a credit card debt that had been sold by the originating lender. They are also Illinois cases, so they are highly relevant for our clients.
Before I discuss the Shah line of cases, I'd like to provide some background on the debt buying industry. When a credit card is issued, the original lender is the bank that issued the card. In a perfect world, the credit card account remains open and current. In that scenario, the lender keeps the account on its books.
We don't live in a perfect world. People miss payments. Some people completely default on their credit card payments. Others file bankruptcy because their consumer debt has grown too large to manage. Some debts simply grow too old to be enforceable. For all of these situations, an original lender has three basic options: 1) hire a debt collector, 2) collect its own debt, or 3) sell the debt to a debt buyer.
Most credit card companies don't take option 2. After a while, the debt is either uncollectable (e.g. discharged in bankruptcy) or no longer profitable to keep on the books. Debt collectors tend to want to be paid a percentage of what they collect. If a debt has become uncollectable (e.g. too old, bankruptcy discharge), then it generally will not go to a debt collector.
In those situations, a debt buyer may purchase the debt. Credit card issuers will sell bundles of debt for pennies on the dollar. Debt buyers purchase this debt and either attempt to collect that debt or they assign the collection rights to a debt collector. Sometimes, these debts are purchased and immediately assigned to a new debt buyer and then to a collector via what are known as "forward flow agreements." In most cases, the debt buyers are purchasing data in a spreadsheet and receive very little (if any) documentation related to the actual credit card accounts.
And that brings us back to the Unifund CCR Partners v. Shah line of cases. The Shah cases provide a glimpse inside the debt buying industry. Even if you are an out-of-state practitioner, read Shah II (2013 WL 3053972). The opinion provides some visual aids to help explain the structure of the industry. The visual aids play havok with the page layout (the two-column layout doesn't work well in this context), but they are quite useful.
Shah I, addresses two main questions: 1) whether a collection agency can establish standing to sue via multiple documents that incorporate each other and 2) whether a collection agency has standing to sue under Section 2-403 of the Illinois Code of Civil Procedure if it has been assigned an account "for collection purposes only."
Section 2-403 outlines the pleading requirements for an action based on a "non-negotiable chose in action." Credit card accounts fall under this definition. Although the statute speaks to the "assignee and owner" of the chose in action, the Shah court held that, when read in conjunction with Section 8b of the Collection Agency Act, a collection agency had standing to sue under Section 2-403. Obviously, under this stautory schema, a debt buyer would have standing to sue on its own behalf under Section 2-403.
In addressing the question of how a Plaintiff might establish its standing via multiple documents, the Shah court held that a Plaintiff collection agency could use multiple contracts or assignments to establish its standing, so long as those documents incorporated each other by reference. The court also held that affidavits were insufficient to establish standing because they are not contracts or "instruments," but the subsitute for testimony at a court proceeding. Quite simply, the nature of an affidavit is separate and distinct from that of a contract or assignment.
Two years later, Shah II was decided. In Shah II, the court addressed whether a collection agency had to demonstrate a complete chain of title from the credit card issuer to the collection agency, or whether simply demonstrating how the collection agency obtained title was sufficient to establish standing to sue.
Yes, that's a long question without a question mark at the end.
In Shah, the Plaintiff was the fourth entity in the chain of title, not counting the credit card issuer. Mr. Shah's debt went from Citibank to a debt buyer. The debt was then sold to another debt buyer. That debt buyer assigned the collection rights to a collection agency, which, in turn, assigned its rights to yet another collection agency.
This chain of title creates multiple transactions with independent burdens of proof. The debt buyers in the chain would only need to prove their purchases via an affidavit that alleges the proper facts. I would also argue that such an affidavit must be supported by the business records reviewed by the affiant. I doubt that the Shah court would disagree with me.
On the other hand, the collection agencies bear a higher burden of proof. As noted above, affidavits are insufficient to prove their title to the debt. Collection agencies must provide assignments that list the date of the assignment and the amount of consideration paid for the assignment. In Shah, the Plaintiff argued that it only had to provide the assignment to the Plaintiff. The court disagreed. It noted that the purpose of the Collection Agency Act was to protect consumers from repetitive litigation and debt collection abuse. Therefore, it reasoned, the legislature would not impose such strict requirements for proving one assignment in a chain of title, but not subsequent assignments.
On the other hand, the Shah court indicated that a credit card issuer to debt buyer transaction only needed the proof required by Section 2-403. However, when a debt collector is attempting to prove its standing, and there are both debt collectors and debt buyers in the chain of title, then both Section 4-203 and Section 8b are triggered.
Ultimately, the Shah court ruled that the Plaintiff lacked the standing to sue because it had not complied with the requirements of the Collection Agency Act. The documents that it presented did not properly list the account being collected. As such, there was no proof that the Plaintiff had acquired the rights to collect on the debt.
So what can we take away from the Shah cases?
First, it is important to know whether your Plainitff is a debt buyer or a collection agency. The burden of proof is much higher for a collection agency. Collection agencies must also be licensed in Illinois, which can be another basis for fighting a credit card collections case. However, don't assume that when a debt buyer is suing in its own name that the game is over. Affidavits must be supported by facts pled from personal knowledge. The employee of a debt buyer must review records to testify to facts. Those records must be made available for review. If the records do not support the affiant's assertions, then the affidavit is worthless.
As I've written on multiple occasions, credit card cases are often undefended. I also see more people consenting to judgment in credit card cases than in any other kind of case. Consumers must fight these cases. If a debt buyer or collection agency cannot properly prove that a debt is owed, then it should not receive a judgment. Ignoring a lawsuit or consenting to judgment allows an industry that has slipshod quality control to continue its practices.
The only person who will stand up for your rights is you.