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Collection Actions: 3.2.3 When a Collection Action Is Brought Before an Arbitrator

Until 2009, hundreds of thousands of collection actions were brought before the National Arbitration Forum (NAF), instead of in court. The NAF is a private arbitration forum with no governmental connection. An arbitrator selected by the NAF, pursuant to NAF rules, would issue an award (invariably for the collector). When the collector confirmed that award in court, the award had the same effect as a court judgment, allowing the collector to garnish wages and seize bank accounts.

Collection Actions: 3.3.1 Introduction

This section considers a number of reasons why the collector may not be qualified to bring the collection action in a state’s courts. The entity bringing the action may not be entitled to bring any type of action in the state’s courts. Or the entity may be unqualified to bring consumer collection actions. Or the entity may not be qualified to bring an action without representation from an attorney.

Collection Actions: 3.3.2.2 When a Registered Collector Buys Debt from Unregistered Out-of-State Corporation

A state statute may provide that if an entity owning a debt fails to register, not only can it not sue in a state’s courts, but anyone taking assignment of that debt cannot sue upon that debt in the state’s courts either.46 Such a rule prevents a non-qualifying corporation from merely assigning the action to another. These rules have important implications for collection actions because what is at issue is not only whether the collector is qualified to bring an action but whether every owner up the chain of ownership is qualified.

Collection Actions: 3.3.3 Can a Collector Sue Under a Fictitious Name?

Some states have a statute pertaining to fictitious business names that requires filing of a business name before the entity is granted the capacity to sue under that name in the state’s courts. Until then, neither the business nor its assignee can bring suit. For example, California, Ohio, and Pennsylvania have such requirements.47

Collection Actions: 3.3.4 Partnership or Trust’s Capacity to Sue in Its Own Name

The common law aggregate theory of partnership holds that a general partnership has no legal existence separate from its members.48 Thus, in states adopting this theory, a general partnership has no authority to sue in the firm name alone.49 Significantly, debt buyers often are partnerships and thus cannot sue solely in their own name in these states.50

Collection Actions: 3.3.5.1 States Requiring Licensure As a Precondition to a Collection Action

The failure of a debt buyer or other collector to be properly licensed may prevent it from bringing suit.53 Many states have licensing requirements for debt collectors, and these are set out in another NCLC treatise.54 A number of these statutes require that only licensed debt collection agencies can bring suit55 or “engage in the business of debt collection in this state without first obtaining a license.”56

Collection Actions: 3.3.5.2 Must Debt Buyers Comply with Debt Collector Licensing Requirements?

An important question is whether the state debt collection agency licensing requirement applies to a debt buyer suing on a debt it owns itself. Is an entity in the business of buying and suing on defaulted loans a debt collection agency within the meaning of the state debt collection licensing statute? If the debt buyer is required to be licensed as a debt collector, but fails to do so, it may be prevented from suing in the state’s courts.66

Collection Actions: 3.3.6 Champerty and Other Limits on Suits on Assigned Debt

State law may prohibit certain suits on assigned debt. Connecticut prohibits a licensed collection agency from purchasing or receiving assignments of an obligation with the purpose of collection or instituting suit on the obligation.96 This provision in effect prevents licensed collection agencies from becoming debt buyers and bringing collection actions on the debts they purchase.

Collection Actions: 3.3.8 Requirement That a Collector Retain an Attorney to Bring Suit

A number of states require that a corporation only appear in court through counsel and not through a non-attorney employee.104 A corporate collector’s officer or employee cannot represent the collector in court unless that person is authorized to practice law in that jurisdiction.105 Other state law may limit the ability of “debt collectors” to pursue actions without an attorney,106 which raises the question of whether a debt buyer is a debt collec

Collection Actions: 3.4.1 Introduction

Consumer collection actions bear little resemblance to normal litigation. Some law firms have been known to file over one thousand collection complaints a week. Their focus is on volume, not precision. The collection attorney is relying on the fact that consumers are unlikely to contest a matter, so the form of the pleading is irrelevant. If the consumer does contest the action, the collection firm may drop the suit, so the form of the pleading is not even important to the collector if the consumer contests the action.

Collection Actions: 3.4.2.1 Generally

This subsection considers requirements that the plaintiff plead that it is licensed, owns the debt, or is authorized by the debt owner to bring the collection action.

Collection Actions: 3.4.3.1 Generally

There are significant variations between states’ requirements for legal pleadings. Most states have adopted notice pleading for civil litigation, often modeled after the Federal Rules of Civil Procedure. Other states, such as Florida, Illinois, Nebraska, and Pennsylvania, adopt “code” pleading that places more requirements on filing a complaint than is present in notice pleading states.

Collection Actions: 3.4.5 Signature and Verification of the Complaint

Federal Rule of Civil Procedure 11(a)—and similar state rules—require that a complaint be signed by the attorney of record in the attorney’s name or by a party personally if the party is unrepresented. In states following the federal rule, the pleading is improper if signed by someone other than the attorney of record, if the collector is represented by an attorney.

Collection Actions: 3.4.6 False or Vague Pleadings

Claims based upon obviously false statements in the pleadings are subject to dismissal. Collection law firms that file hundreds of cases a day may be producing pleadings by filling in the blanks within one standard form complaint without bothering to analyze how a particular case’s facts fit that form pleading. For example, the pleadings may allege that the contract was between the consumer and the debt buyer, instead of between the consumer and the original creditor.

Collection Actions: 3.5.1 Required Attachments to the Complaint

A number of states have a rule that, when a complaint is based upon a writing, the writing be attached to the complaint. This rule applies to collection actions as well. Section 3.4.2, supra, discusses one application of this requirement—that a debt buyer attach a document to the complaint indicating that it has ownership of the debt or the right to bring an action on the debt.

Collection Actions: 3.5.2 Is the Attachment Actually Attached?

When state rules require an attachment to the complaint, make sure an attachment referenced in the complaint is in fact attached. Debt buyers sometimes pretend to comply with rules as to the form of attachments without really doing so. If the complaint claims there is an attachment, make sure the attachment is actually attached.

Collection Actions: 3.5.3 Sufficiency of an Attached Document

When state rules require that a breach of contract claim attach a copy of the contract to the complaint, there must be more than just an unsigned, standard form contract attached to the complaint. Some connection between that form contract and the defendant and the defendant’s account number must be provided.227

Collection Actions: 3.5.4 Attachments for Account Stated Claims

Collectors often seek to recover based upon an account stated cause of action.242 The claim is that the consumer has been sent a statement of the account, and the consumer has implicitly agreed to pay that amount. Thus, the action is not upon the original contract or the individual charges making up the statement of account, but on the promise to pay the amount included in the statement.243