Consumer Law & Policy Blog

Mary Spector Study of Debt Collection Litigation

Mary Spector of SMU has written Debts, Defaults and Details: Exploring the Impact of Debt Collection Litigation on Consumers and Courts, 6 Virginia law and Business Review 257 (2011).  Here's the abstract:

This Article explores consumer collection litigation through original research from more than five hundred cases filed in the Dallas County courts. It analyzes the data within the context of the modern debt collection industry, paying special attention to the role of debt buyers and to the peculiar legal issues their involvement raises. After explaining the methodology and mechanics used to gather and analyze the data, the Article discusses the data collected, identifying and analyzing the most significant findings and placing them within a larger legal landscape. While the research confirms anecdotal reports of litigation abuse in consumer collection cases, it also reveals some surprising patterns. For example, the research indicates that consumer default was not the most common outcome and that minimal effort by consumers often considerably helped to protect their rights and favorably to conclude the litigation. The Article concludes by discussing some of the implications for the judicial system and by suggesting additional areas of research that would increase understanding of the challenges the litigation presents for parties, their lawyers, and the courts.

Debt Collection Scenarios and Rules Dramatized

Here.  HT to Dee Pridgen.

CreditCards.Com Article on New Maryland Debt Collection Rules

Here.  The article also reports on the industry's self-regulation efforts, apparently an attempt to forestall tougher rules from the Consumer Financial Protection Bureau.

Some Recent Scholarship

Raymond H. Brescia 

of Yale and Albany has written The Iqbal Effect: The Impact of New Pleadings Standards in Employment and Housing Discrimination Litigation, forthcoming in the Kentucky Law Journal.  Though it's not a study of Iqbal's impact on consumer law cases, the study sheds some light on how Iqbal might affect consumer law cases.  Here's the abstract:

In May 2009, the Supreme Court issued its decision in Ashcroft v. Iqbal, a case brought by an immigrant of Pakistani descent caught up in the worldwide investigation that followed the horrific attacks of September 11, 2001. In that decision, the Court extended the “plausibility test” first introduced two years earlier, in Bell Atlantic v. Twombly, to all civil pleadings in federal court. That test requires that, in order to satisfy federal pleading requirements, a complaint must allege a plausible set of facts. But what is plausible in a given case may be in the eye of the beholder.

In the two years since the Court reached its decision in Iqbal, that opinion has been cited roughly 25,000 times. The empirical analysis contained in this study attempts to gauge the impact of Iqbal on civil rights cases, specifically cases involving allegations of employment and/or housing discrimination. While several other studies have attempted to answer similar questions, to date, no study has analyzed this impact with reference solely to motions based on the specificity of the pleadings: which is, of course, the central issue in Twombly and Iqbal. In addition, other studies looked exclusively at quantitative results, with no assessment of the manner in which the plausibility standard was being applied by the lower courts. This empirical study attempts to fill that gap in the empirical research.

This study identified over 1850 reported decisions on motions to dismiss in employment and housing discrimination cases filed in federal district court covering the years prior to and after the Court’s decision in Twombly. From this group of cases, a smaller sub-set, totaling 634 cases, was identified by excluding those decisions — included in previous studies — that bore no relation to the issue of the specificity of the pleadings. Furthermore, despite this winnowing process, the sample size for this study was still considerably larger than those analyzed in previous studies.

This detailed study yielded the following results. Surprisingly, the dismissal rate in this class of cases during a set time-period immediately prior to the Twombly decision was actually slightly higher than the dismissal rate of decisions issued in the time period between issuance of the Twombly and Iqbal decisions, but then the rate increases considerably after Iqbal. The dismissal rates for all cases pre-Twombly was 61%; between Twombly and Iqbal, it was 56%; but then after Iqbal, it was 72%, an 18% increase from the pre-Twombly period analyzed.

In addition, even more troubling, plaintiffs were far more likely after Iqbal than either before Twombly or immediately thereafter to face a motion to dismiss challenging the sufficiency of the pleadings in the cases analyzed. Indeed, decisions on such motions were generated only 12 times in the first quarter of 2004 (the first quarter analyzed in this study), but then 61 times in the third quarter of 2010 (the last full quarter analyzed): a greater than 500% increase.

Moreover, when it comes to the substance of these decisions, something else appears to be happening. Despite the increased dismissal rate following Iqbal, oddly, in a class of cases analyzed for this study, courts rarely invoked the plausibility standard in the same manner it was utilized by the Court in Twombly and Iqbal; that is, courts rarely found that dismissal was warranted if there was an arguably more plausible, and entirely legal, basis for the challenged conduct. Finally, and similarly, judges rarely, if ever, appear to invoke their own “experience and common sense,” as urged to by the Court, when ruling on motions to dismiss in these cases.

These outcomes yield three conclusions. First, district courts are using the Iqbal precedent, though not necessarily Twombly, to dismiss employment and housing discrimination cases at an accelerated rate. Second, although courts may be invoking the Twombly/Iqbal plausibility standard in assessing the sufficiency of the pleadings in employment and housing discrimination cases, they are certainly not relying on or utilizing the plausibility standard as articulated in these two precedents. This suggests that the subjective elements of the plausibility standard may be infecting these outcomes. That is, if district court judges are dismissing cases at a higher rate post-Iqbal, yet are not relying on the guidance the Court has given such lower courts in how to deploy the plausibility standard, it would seem that such courts may feel emboldened to dismiss cases that might have survived such a motion had that motion been decided pre-Iqbal. Finally, regardless of whether there is a dramatic Twombly or Iqbal effect on outcomes, motions to dismiss challenging the sufficiency of the pleadings are much more common since Iqbal, which means that even if some plaintiffs are defeating such motions, it still comes at a price: it increases transactions costs in these cases, and may, as a result, have a chilling effect on lawyers contemplating bringing them in the first place.

Meanwhle, Jim Hawkins of Houston has been busy writing Credit on Wheels: The Law and Business of Auto Title Lending, forthcoming in Washington and Lee.  That abstract reads:

Despite the fact they are used by millions of Americans, auto title loans have received little attention in the legal literature about consumer credit. Friends and foes of title lending make confident statements about their net welfare effects, but we still lack empirical data on many of the central policy questions that title lending raises.

This Article offers new evidence about the title lending transaction, paying special attention to the risks borrowers face when they use their vehicles as collateral for the loan. I gathered this evidence by obtaining new reports from state regulators about the title lending industry, examining public disclosure statements by title lenders, interviewing title lenders, and surveying a small group of title lending customers.

Additionally, this Article organizes the different legal responses to title lending, creating a taxonomy of regulatory approaches. Based on the new data uncovered by my research, I offer tentative evaluations of these diverse regulatory strategies.

 Finally Lea Krivinskas Shepard of Loyola University Chicago has penned Creditors' Contempt, which will appear in Brigham Young.  Here's that abstract:

This Article takes a fresh look at the power of courts and creditors to force debtors to repay their obligations through in personam collection techniques. Variously known as “debtors’ examinations,” “turnover orders,” “citations to discover assets,” “supplementary proceedings,” “proceedings supplementary,” and “proceedings in aid of execution,” in personam remedies force the debtor, under threat of the court’s contempt authority, to turn over money or property directly to a creditor. Because the exercise of the court’s contempt authority can result in a debtor’s imprisonment, in personam techniques have long been regarded as a critical but potentially very coercive arrow in a debt collector’s quiver.

Recently, the Federal Trade Commission and others have endorsed major changes to a debt collection system labeled as “broken.” These reform proposals, however, have overlooked key problems in in personam proceedings, where excessive creditor leverage and insufficient protection of debtors’ procedural rights risk validating a view that the judicial system is functioning as creditors’ private collection arm.

Following the transfer of power to a newly established Bureau of Consumer Financial Protection, this Article resurrects a subject that has received virtually no attention in the scholarly literature for over a decade. It analyzes the particular features of in personam proceedings and debtor behavior that contribute to a longstanding imbalance in the leverage asserted by creditors over debtors. The Article recommends specific changes to the way courts conduct in personam proceedings to ensure that the in terrorem effects of these remedies do not upend important social policies, including the protection of exempt property and the adjudicative fairness of the collection process.

Debt collection is a fundamental component of the consumer credit system. The strength and legitimacy of its procedures, however, depend on maintaining a difficult balance between the state’s and creditors’ interest in rigorous judgment enforcement and debtors’ interest in imposing reasonable limitations on the coerciveness of debt collection.

 

 

No Preemption for U.S. Bank

On August 1 the Ninth Circuit Court of Appeals held that a consumer's California law claims against a national bank for improper repossession were not preempted by the National Bank Act and OCC regulations.  In a case argued for the consumers by fellow blogger Paul Bland, U.S. Bank's innovative proposal to be bound only by the uniform provisions of the state's Uniform Commercial Code was soundly rejected.  The Court of Appeals relied on the savings clause of the OCC preemption rule, which exempts state laws regarding the "right to collect debts," a category in which it had no trouble placing California's Rees-Levering repossession notice law. The Fourth Circuit will be hearing arguments later this year in the Epps v. JPMorgan Chase case, which raises similar issues.

Baltimore Sun Article: Maryland Law School Debt Collection Clinic and Debt Collection Reform

Here.  The article melds coverage of the clinic with discussion of reform of debt buyers' debt collection efforts.  An excerpt on the latter topic:

Maryland's highest court is about to consider a change in the rules that would make it clear that debt buyers cannot expect a judgment against a no-show defendant without presenting sufficient evidence to back up their claims.

A court committee recommended the move in June at the urging of the Maryland Attorney General's Office and the Department of Labor, Licensing and Regulation.

The chief judge of Maryland's District Court, where almost all these cases are filed, believes reform is urgently needed. Judge Ben C. Clyburn said small-claims courts sign off on more than 200,000 judgments in contract cases each year. Probably two-thirds, he said, are debt-collection matters.

Grand Theft Auto, or Preemption Run Amok

In a case now before the 4^th Circuit Court of Appeals, Chase Bank asserts that it may repossess an auto loan borrower’s car without complying with consumer protections in state commercial law.   The Maryland District Court found for Chase Bank, concluding that 1) the National Bank Act preempts state repossession notice law and 2) Chase was not bound by the mandatory loan contract term specifically incorporating Maryland repossession law, because as an assignee of the contract, Chase had not voluntarily agreed (!) to the choice of law provision. 

The opening brief of the appellants is here and the lower court opinion is here.  The logic of the lower court opinion is remarkable.  It seems to suggest that even the repossession rules of Article 9 of the Uniform Commercial Code could be preempted by the National Bank Act and OCC regulations.  What is truly extraordinary, however, is the idea that a national bank could on the one hand invoke the privilege, created by the UCC and other state law, to repossess collateral without judicial process, while on the other hand disregarding the restrictions and consumer protections that accompany that privilege.  If the entirety of state commercial and debt collection law conflicts with the National Bank Act, then there was no state law basis for Chase to seize Ms. Epps' car, and the purported repossession was nothing more than grand theft.

Peter Holland on Debt Buyers and Robo-Signing

Peter A. Holland

 of Maryland has written The One Hundred Billion Dollar Problem in Small Claims Court: Robo-Signing and Lack of Proof in Debt Buyer Cases, 6 Journal of Business & Technology Law  101 (2011). Here's the abstract:

Recent years have seen the rise of a new industry which has clogged the dockets of small claims courts throughout the country. It is known as the "debt buyer" industry. Members of this $100 billion per year industry exist for no reason other than to purchase consumer debt which others have already deemed uncollectable, and then try to succeed in collecting where others have failed. Debt buyers pay pennies on the dollar for this charged off debt, and then seek to collect, through hundreds of thousands of lawsuits, the full face value of the debt. The emergence and vitality of this industry presents several legal, ethical and economic issues which merit exploration, study and scholarly debate.

This article focuses on the problem of robo-signing and the lack of proof in debt buyer cases. Although this problem has received limited attention from the media and from regulators, there is a paucity of legal scholarship about debt buyers in general, and this problem in particular. This article demonstrates that robo-signing and fraud are rampant in this industry, and that the debt buyers who pursue these claims often lack proof necessary to show that they own the debt, and often lack proof even that a debt was ever owed in the first place. The fact that this lack of proof has led to consumers being sued twice on the same debt demonstrates the due process concerns which are implicated when courts enter judgments against consumers based on robo-signing and insufficient proof.

This article calls on courts to hold plaintiffs in debt buyer cases to the same standards required of other litigants. Courts must require a demonstration of personal knowledge of the matter at issue before any affidavit is accepted, before any person testifies, and before any documents are admitted into evidence.

Update on Debtor's Prisons

A bill has been passed in Washington state to curb the practice of issuing arrest warrants for debtors in civil collection cases.  In several states it appears that collectors use this tactic to threaten consumers owing ordinary civil debts with prison.  The consumer is issued court process to appear at a civil hearing, and on failing to appear, is then served with a bench warrant.  Ordinarily the bench warrant is a means to enforce the order to appear, and should be resolved once the debtor is brought before the court.  However some judges seem willing to impose bail once the debtor is arrested and to threaten him or her with jail unless payment is forthcoming.  Conveniently, the bail amount is set to coincide with the civil debt.  The dubious process concludes with the bail money being paid over to the collection attorney.

This is only one of many ways in which debtors are threatened with imprisonment every day in the United States, despite the notion that debtor's prison was abolished before the Civil War.  I wrote previously about an Indiana variant here. Bad check prosecutions and the accompanying "diversion" programs arranged between District Attorneys and collection agencies are another example. These programs have been the subject of some class action litigation.  Nonpayment of two special categories of debt, income taxes and child support payments, is explicitly criminalized.

Beyond these examples, one could cite a variety of contexts in which criminal restitution sentences are imposed in what ought to be civil contract or tort disputes, or more broadly, the phenomenon termed the criminalization of poverty (articles here and here.)  The new debtors' prisons:  a good law review article topic, perhaps . . .

More on Debt Collector Use of Pseudonyms

by Jeff Sovern

We posted last week on a piece in the Times that mentioned a debt collector using a pseudonym; here is my letter in the Times on that issue.