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Collection Actions: 5.5.1.1 Generally

An otherwise valid contract may be voidable because the consumer does not have the capacity to make the contract.233 Parties must be capable of intelligent assent in order to make a valid contract, and there can be no contract when there is no capacity to understand or agree.234 There are three conditions that give rise to questions about a person’s capacity to contract: minority, mental disability, and intoxication.

Collection Actions: 5.5.1.2 Minority

The legal age of minority or infancy is determined by the law of the state in which the contract is made. A minor may void a contract whether or not the other party knew of the minority and whether or not the minor understood the nature of the contract.236 Among other things, this rule protects the minor from being bound by contracts they may not understand, or may have entered into at the insistence of an overzealous or intimidating creditor.

Collection Actions: 5.5.1.3 Mental Incompetence

The general rule is that a mentally incompetent person may avoid a contract upon proof of mental incapacity at the time of contracting, provided the incompetent can fully restore the other party to its position before the contract.250 If the mentally incompetent person no longer has the consideration received, they cannot rescind the contract.251 However, the result would be different if the person was under guardianship when the contract was made, as such a contract is totally void.

Collection Actions: 5.5.1.4 Intoxication

A person who enters into a contract when they are so intoxicated that they cannot understand the nature and consequences of their actions may be treated in the same manner as a mentally incompetent person.259 Disaffirmance and ratification would occur in the manner described in § 5.5.1.3, supra.

Collection Actions: 5.5.2 Duress

A defense to a contractual obligation is that the consumer was under duress in agreeing to the contract. The creditor must have exercised coercion and the consumer must have lost volition because of the coercion, resulting in the execution of a contract or note.260 Duress as a defense is most common in the medical setting, when necessary medical treatment is conditioned upon agreement to a contract for payment.

Collection Actions: 5.6 No Deficiency When Insufficient Proof of Commercially Reasonable Sale

A common type of collection action seeks a “deficiency” on an auto loan or other secured debt after the creditor has sold the collateral. The amount due on the loan plus certain expenses to prepare and sell the collateral is offset by the collateral’s sale price, and the difference is called a deficiency. Collectors may then sue to collect on this deficiency even though they have already seized the collateral.

Collection Actions: 5.7.1.1 Counterclaims Related to Litigation Conduct

The consumer can bring a Fair Debt Collection Practices Act (FDCPA), tort, or state statutory counterclaim270 based upon a collector’s current litigation misconduct in the collection case itself, particularly when the collector’s unlawful action is egregious, such as when it knowingly filed the action outside the statute of limitations, knowingly sued on a debt discharged in bankruptcy, filed the action in an improper venue,271 or was not licensed to bring collection actions in the state.

Collection Actions: 5.7.1.2 Counterclaims Related to Collection Conduct Prior to the Initiation of a Collection Lawsuit

Debt buyers may contact the consumer before initiating litigation, and the federal Fair Debt Collection Practices Act (FDCPA) and Telephone Consumer Protection Act (TCPA) regulate those collection contacts. Debt buyers whose principal purpose is the collection of debt are defined as debt collectors and are therefore subject to FDCPA requirements. Debt buyers should also be liable in tort and under state debt collection and UDAP statutes for their collection misconduct.

Collection Actions: 5.7.1.4 Counterclaims Related to the Sales Transaction

When a seller of consumer goods is the originating creditor that assigns the debt to another, or when the seller arranges for a third party lender to extend credit so that the consumer can make the purchase, the credit agreement should contain the FTC Holder Notice. This notice requires that the holder of the credit agreement is subject to all claims and defenses that the consumer could have raised against the seller, up to the amount of the debt.296

Fair Credit Reporting: 16.11 Credit Scores and Insurance

A particularly controversial issue is the use of credit scores by automobile and homeowner’s insurers to determine whether to insure a consumer and at what price.463 The credit scores used by insurers, or “insurance scores,” are specially developed for insurance purposes and not the same as credit scores for credit-granting purposes, but they nonetheless are based solely on credit history.

Fair Credit Reporting: 16.2.1.1 The Basic Concept

A credit scoring system is one that numerically weighs or “scores” some or all of the factors considered in the underwriting process. Factors are developed based on data about past borrowers from their files at consumer reporting agencies and sometimes from other sources. Examples of factors used in a credit scoring system include payment history of past obligations, amounts owed, length of credit history, and types of credit already held. The number of points received often determines whether the consumer is offered credit, how much credit is granted, and at what price.

Fair Credit Reporting: 16.2.2.1 Generally

Exactly what is meant by a “credit score” can vary depending on the score’s creator and the specific industry involved. There are a number of types of credit scores, a fact which itself creates much confusion for consumers. The following are descriptions of different variations of credit scoring models.

In addition to credit scores for consumers, there are also credit scores that are used to evaluate businesses.17 This chapter is limited to a discussion of consumer credit scores.

Consumer Class Actions: 5.11 Review the Answer to the Complaint

Once the complaint is answered, make sure to go through the answers and cross-reference them to a copy of the complaint. What paragraphs have been admitted, what paragraphs have been denied, and what paragraphs have the defendants purported not to have sufficient information to provide an answer for? Does the defendant’s failure to admit uncontroverted facts give counsel the opportunity to serve a request to admit and then recover fees and costs for proving the denied admission?

Consumer Class Actions: 3.6 Removed Actions

When an action is removed to federal court, venue initially is determined by the removal statute. 28 U.S.C. § 1441(a) states that removal is to the district and division where the state action is pending. Thereafter, the action may be transferred under the venue transfer statutes as discussed in § 3.1, supra, and as discussed below.

Federal Practice Manual for Legal Aid Attorneys: 3.1.6 Non-economic Interests

Non-economic interests have proven more difficult for the Supreme Court to analyze. Most of the important cases have arisen in the environmental law context. The Court has recognized that environmental, recreational, and aesthetic injuries are legally cognizable for standing, but has had difficulty defining the circumstances in which such injuries are sufficiently concrete and imminent to confer standing. Sierra Club v. Morton, for example, arose from a challenge to a decision by the U.S.

Federal Practice Manual for Legal Aid Attorneys: 3.1.7 Injuries to Statutory Rights

Statutory rights can create the cognizable legal interest required for standing, but the Court limited this general principle in Defenders of Wildlife, where a majority of the Court found the “citizen suit” provision of the Endangered Species Act unconstitutional.662 The Act permitted “any person” to obtain judicial review of agency action that is alleged to violate the Act. The plurality opinion, authored by Justice Scalia, recognized that the Court had frequently held that “[t]he … injury required by Art.

Federal Practice Manual for Legal Aid Attorneys: 3.1.10 Concrete and Particularized Injury

In Spokeo, Inc. v. Robins,752 the Supreme Court considered the concrete and particularized injury facet of the injury-in-fact standing prong in a case claiming that inaccuracies in the results of a “people search engine” inquiry constituted a violation of the federal Fair Credit Reporting Act. The Court made very clear that “concrete” and “particularized” are two separate and distinct requirements.753

Federal Practice Manual for Legal Aid Attorneys: 3.1.11 Distinct and Palpable Injury

One of the goals of public interest litigation is to force the government to comply with the Constitution and federal statutes. In the absence of more specific injuries, plaintiffs have claimed that the Constitution confers upon all citizens the right to a lawful government and upon all federal taxpayers the right not to be taxed to support unlawful governmental activity. In a largely unbroken line of cases, the Supreme Court has refused to permit litigation of these so-called citizen or taxpayer suits.780

Federal Practice Manual for Legal Aid Attorneys: 3.1.12 Injury Fairly Traceable to the Challenged Conduct

In addition to alleging injury in fact, the plaintiff must demonstrate that the injury is fairly traceable to the defendant’s unlawful conduct. In cases in which the government acts against the plaintiff, causation generally is straightforward. When, however, governmental action or inaction relates to third parties or only indirectly affects the plaintiff, the question becomes whether the causal connection between action and injury is sufficient to confer standing. The Supreme Court has found standing in some cases notwithstanding an attenuated or uncertain chain of causation.