North Carolina Judgment Enforcement and Collection Attorney Thomas Kerner

NC Judgment and Debt Purchasers Beware: Attorneys' Fees Assessed Against Assignees Unaware that Debt Arose From Identity Theft

The NC Court of Appeals recently upheld an award of attorney's fees against a debt buyer who purchased a default judgment, then sought to enforce the judgment, only to discover later that the debtor had been the victim of identity theft and didn't actually owe the debt.

In Credigy Receivables, Inc. v. Whittington (COA 09-465, March 2, 2010) an identify thief had stolen the identity of Ms. Whittington, and opened a credit card account with Fleet Bank.  That account went into default, and the debt was sold to First Select Corp. which then filed suit - in 1999 - and obtained a default judgment in 2001.  Of note:  First Select made six attempts at personal service using the Sheriff's office, and each time the summons and complaint were returned because the sheriff's office indicated it was unable to locate Ms. Whittington at the address on the account.  This in itself, is not unusual.  Unlike corporations, which are required by law to maintain an agent for service of process, individuals can be very difficult to locate and serve, especially ones who know they owe somebody money and don't want to pay them.  Some of them even lie to Sheriff's deputies and claim they are not the person being sought.  However, an attempt at service by Certified Mail was successful in July, 2001 ,  -- or so they thought, when the mail card was returned with a signature bearing the name Blanche Whittington -- a signature which, as it turns out, was a forgery. 

Based on this apparent service, default judgment was entered a month later. First Select then attempted to serve a Notice of Rights on Ms. Whittington in October, 2001, but again the Sheriff indicated that no one by that name could be found at the address given.  First Select then sold the judgment to Credigy, in March 2003, which tried to serve the Notice of Rights the following month.  When that was returned unserved (because the Sheriff again could find no one by that name at that address), Credigy ran a skip-trace using only the social security number from the credit application, and found "the real" Ms. Whittington at a different address (different from the one at which she was served with the original complaint, albeit many years earlier), and served her there, in 2008.  She then retained counsel, who quickly filed a motion to relieve Ms. Whittington from the judgment.  Two weeks after the motion was filed, in April 2008 in apparent agreement that the judgment had been entered against a victim of fraud, Credigy's counsel stipulated that the Rule 60 motion to set aside the judgment should be allowed.  However, Credigy disputed Ms. Whittington's claim for attorneys fees.

Credigy's counsel agreed at the initial hearing, also in April 2008, to suspend collection efforts until it could conduct its own research into Ms. Whittington's claim regarding identity theft and, but for reasons not discussed in the opinion, refused to withdraw the Notice of Rights.  Two months later, her attorneys filed a motion seeking attorneys' fees under NCGS 6-21.5.  They claimed that Credigy had pursued a non-justificiable claim, since she had never actually been served, and was not the true Defendant.  By this point-- two months after the initial motion for relief from judgment was filed, her attorneys had managed to run up more than $26,000.00 in legal fees, and spent, according to their sworn affidavits, a total of 89.4 hours on her case. (Unfortunately, the opinion does not contain an itemized breakdown of how these fees were calculated.)

Credigy then argued, at the hearing on the attorneys' fees claim, that it should not be liable for her attorneys' fees since it had no notice of the identity theft claim until two weeks prior to her Rule 60 motion being filed, that it had stopped collection efforts once it became aware of the dispute, and that Ms. Whittington had refused to fill out a standard Fraud/Identity Theft Affidavit (the opinion does not state why she refused to do this).    Credigy also attempted to argue that it was a bona fide purchased for value, not subject to the defenses to which the original Plaintiff was subject.  They also argued that she knew or should have known that the judgment was on her credit report (it had been there for more than six years, before Credigy located her) and that through the exercise of even a tiny modicum of diligence, could have been discovered and the matter resolved without further litigation.  The Superior Court disagreed, and entered an award of attorney's fees in Ms. Whittington's favor.  Credigy appealed.

In upholding of the award of attorneys fees, the Court of Appeals cited NCGS 6-21.5, which can apply when "the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue."  After a lengthy discussion of how assignees inherit the rights -and problems- of their assignors, the Court, despite initially stating that First Select had obtained a "valid judgment" against  the identity thief despite not naming her in the Complaint or identifying her on the summons or the order of judgment (she had been, of course, erroneously designated in the Complaint as Ms. Whittington), concluded that none of the Plaintiff/assignees ever held a valid claim against her, because she was never the actual account holder to begin with.  What the Court perhaps did not spend quite as much time on was detailing exactly how Credigy or its predecessors continued to litigate the case "after a point" where it "should have known" better. 

In explaining that portion of the ruling, the Court mentioned that Fleet Bank, the original creditor in all of this, "should have been aware that it would have standing against no one other than the signing party" to the credit account, and that it transferred its claim "at the first signs of collection trouble."  And of course, Fleet Bank does know that, but so far as can be gleaned from the opinion, Fleet was under the impression that Ms. Whittington was the signing party.  Credigy inherited no other problems or defenses from Fleet Bank, other than the fact that the account was bogus, though at the time of the first assignment, it does not appear Fleet or First Select was aware of this..   

The Court then went on to assail the First Select complaint for not including Ms. Whittington's social security number and home address on the complaint -- a practice which I believe would now be outlawed by the NC Identity Theft Protection Act, NCGS 132-1.10(d) which prohibits any document being "recorded with the courts" from containing a social security number, as well as NCGS 75-62, which among other things prohibits any business from mailing documents to a person that contain that person's SSN (and of course, pleadings and motions have to be served, and are often mailed) unless it has been redacted.  But there would not have been any law against doing so at the time the First Select complaint was filed.

While Credigy argued at the hearing that it traced the social security number from the creation of the account all the way to the service of the notice of rights, the Court of Appeals remained unimpressed because the social security number "was [n]ever made part of the pleadings or judgment."  In addition, Credigy "should have been aware" that the only person identified in the judgment, "Blanche Whittington of [address redacted]" was the party against whom the judgment could be enforced.  It should be noted that the real Blanche Whittington - in 2008 - lived at an address different from the one listed on the bogus credit application from 1999.

At the last, the court again states that "[t]he circumstances that the judgment was fatally flawed by ...fraud does not make the judgment justificable... and does not change the context in which Credigy and its predecessors in interest should have known that no cause of action has ever existed against Ms. Whittington." (Emphasis added). 

This case certainly has implications for creditors, debt purchasers, and their attorneys.  While the law addressed in this decision is not new, the routine practices of skip-tracing, filing complaints, service, and using account verification affidavits to establish damages, are all called into question.  The court appears to be taking creditors and their attorneys to task for the sometimes-casual practices involved in debt-mill-style litigation, the results of which can be observed first hand on District Court calendars every month in every county in the state.  Debt buyers and judgment purchasers need to understand that if there are problems with the judgments they purchase, they will inherit those problems, and that being a "bona fide" purchaser is not a defense -- even in cases of identify fraud. And it certainly presents a quandary to any litigant worried about disclosing the defendant's personally identifiable information in a pleading, motion, affidavit or memorandum -- the Court appears to be requiring that creditors take greater efforts to properly and unambiguously identify defendants in pleadings and on judgment orders -- a laudable goal, to be sure, to prevent innocent persons from the threat of judgments being executed against their property. Moreover, better identification procedures will reduce the likelihood of abusive debt collection practices that can arise from collecting against anyone who happens to have a name similar to the person on the account.  How this can be balanced with the requirements of the Identity Fraud Act is less clear, and what a creditor can do to protect itself in cases of identity fraud is even less clear.

Judgment Enforcement Businesses: Legal in North Carolina?

A lot of people starting judgment enforcement businesses ask me if they are legal in North Carolina.  Unfortunately, I can't necessarily tell them that they are.  On one hand, I have yet to find a statute or case that specifically prohibits it.  But then again, I haven't researched the question in great depth.

What I have found is that other states are quite clear in their opposition to judgment collection businesses.  These businesses are often started as "home-based" businesses, and they sound like a great idea.  The owner starts the business and gets people who hold court judgments to "assign" the judgment to them on a "future pay" basis -- that is, the collector becomes the legal holder of the judgment, then executes a side agreement with the original judgment holder to pay them a percentage of whatever they ultimately collect. 

Courts have found this practice to either be a disguised way of "practicing law without a license" or operating an unregistered debt collection business (typically a debt collection company needs a special license and must be bonded). 

For example, our neighbor to the south -- South Carolina -– expressly forbids these arrangements. See Roberts v Laconey (2007). Iowa holds similarly.  In  Iowa Supreme Court Comm’n on Unauthorized Practice of Law v. A-1 Assocs, Ltd., 623 N.W.2d 803 (2001) the Supreme Court of Iowa concluded that an instrument similar to the “Notice of Assignment and Assignment of Judgment” used by the Respondent (a judgment collection company) was not in fact an assignment of a judgment, but was an agreement for collection services such as a lawyer would perform.  The court noted that if the instrument truly had been an assignment, then the assignee could have attempted to collect the judgment without engaging in the practice of law.  The court went on to state “A-1’s claimed status as a bona fide assignee is defeated under this record, however, because the assignment – though absolute in form – is, in fact, a transfer intended primarily to secure payment for services rendered.  (citation omitted).  This is demonstrated by the fact that A-1 pays nothing for the purported ‘assignment.’ . . .  Courts throughout the country have condemned this practice as an attempt by collection agencies to accomplish indirectly what the law otherwise prohibits.”  (citation omitted).  623 N.W.2d at 808.  The court concluded that A-1 Associated, Ltd. had engaged in the unauthorized practice of law.  “So long as A-1 is not representing its own legal interests . . ., but the legal interests of others, it is engaging – without license or other authorization – in the practice of law.”  623 N.W.2d at 808-09.

In State ex rel. State Bar of Wisconsin v. Bonded Collections, Inc., 36 Wis.2d 643, 154 N.W.2d 250 (1967), the Supreme Court of Wisconsin considered the following issue: “Does a course of conduct whereby a collection agency takes assignments of accounts for collection, . . ., brings suit in its own name, and then pursuant to a prior agreement deducts from the proceeds, costs, and a fixed percentage as its fee and remits the balance to the creditor, constitute the unauthorized practice of law?” 154 N.W.2d at 253-54. In concluding that it does, the court stated “[i]t is sheer hypocrisy to conclude that the percentage retained by the collection agency represents its equity or ownership share of the claim. It is its fee or charge for professional services rendered.” 154 N.W.2d at 256. The Wisconsin court also noted that “[t]he collection agency by going into court representing itself as the client perpetrates a fraud on the court.” Id.

Another state where I found a case on this was New Mexico.  In State ex rel. Norvell v. Credit Bureau of Albuquerque, Inc., 85 N.M. 521, 514 P.2d 40, 49 (1973)  it was held that assignments procured by a credit bureau were not truly taken to acquire title and ownership, but to facilitate delivery of legal services for consideration constitute unauthorized practice of law.  In West Virginia State ex rel. Frieson v. Isner, 168 W.Va.758, 285 S.E.2d 641, 651-52 (1981) cites numerous cases to support the conclusion that an assignment taken solely to maintain suit on a creditor’s claim is a "sham" perpetrated on the court to enable the unauthorized practice of law.

So if you are tempted to start one of these businesses, wherever you are, please take heed of this information and consult with an attorney first to find out whether or not this practice is legal in your state.  For those in North Carolina who contact me on a regular basis, unfortunately I do not have an answer for you.  I suspect that North Carolina would probably go along with the other states, but you never know. Again, as far as I know, the Court of Appeals has not addressed the issue, but I must emphasize that my research on this question is far from complete.