Collection agencies’ creative use of tools authorized under state law may be struck under a federal consumer-protection statute.
A Nevada collection agency used a state-law mechanism to buy, and extinguish, a lawsuit brought against the firm— “a bold gambit” that violated federal law, according to a ruling by the 9th Circuit Court of Appeals on Friday. The case arose from Clark County Collection Service suing Patricia Arellano in state court over a $371.89 medical bill and receiving a $793.39 default judgment that included costs, interest and legal fees.
Arellano responded by suing in federal court under the Fair Debt Collection Practices Act, alleging the collection agency engaged in deceptive practices, including by using a business name that could be readily confused with a government agency and providing misleading information about court deadlines. The collection agency then obtained a “writ of execution,” pursuant to state law, entitling it to take possession of Arellano’s personal property to satisfy the judgment.
The action gave Clark County Collective Service the ability to buy the rights to Arellano’s lawsuit against itself in an auction — which it did for $250. Taking ownership of the lawsuit provided the collection agency the apparent authority to end the case, except that doing so contravened the FDCPA, the 9th Circuit held.
Chief Judge Sidney R. Thomas’ opinion Friday for a unanimous three-judge panel, quoting previous federal-court opinions, noted: “The Act’s purpose is ‘to protect vulnerable and unsophisticated debtors from abuse, harassment, and deceptive debt collection practices.’” The opinion further stated that “a debt collector cannot be allowed to use state law strategically to execute on a debtor’s FDCPA claims against it under the guise of legitimate debt collection.”
On behalf of himself and Judges Stephen Reinhardt and Edward R. Korman, Thomas wrote:
Debt collectors cannot evade the restrictions of the Act by forcing a debtor’s claims to be auctioned, acquiring the claims, and dismissing them. To allow otherwise would thwart enforcement of the FDCPA and undermine its purpose.
Appellate specialist Deepak Gupta, formerly of the Consumer Financial Protection Bureau, represented Arellano before the 9th Circuit. He persuaded the court the Nevada laws authorizing the collection agency’s action conflicted with the FDCPA and, therefore, were preempted under the U.S. Constitution’s Supremacy Clause.
Oral arguments in the case were heard on June 5 in Pasadena, California, and can viewed online. Arellano will now be able to pursue her in case in federal court in Las Vegas, Nevada.