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Nice Try: Ninth Circuit Walks Back Debt Collector's Attempt to Purchase Lawsuit Against Itself

A debt collector cannot avoid claims under the Fair Debt Collection Practices Act (FDCPA) by purchasing the debtor's lawsuit, according to a recent opinion from the U.S. Court of Appeals for the Ninth Circuit. In Arellano v. Clark County Collection Service, defendant Clark County Collection Service (CCCS) sent plaintiff Patricia Arellano a debt-collection letter stating that she had 30 days to dispute the validity of the debt, along with a Nevada state court complaint and summons seeking collection of the debt. The letter, however, failed to mention that Ms. Arellano only had 20 days to file a formal response to the complaint.

When Ms. Arellano did not file a response, CCCS obtained a default judgment against her. Later, she filed a lawsuit against CCCS in federal court alleging that the letter was misleading— and in violation of the FDCPA—because it failed to disclose how much time she had to respond to the complaint, and also because CCCS's name impermissibly implied affiliation with the Clark County government.

CCCS countered by using its default judgment against Ms. Arellano to request that the state court issue a writ of execution against her claims in the FDCPA suit. The state court did so, and the sheriff then sold the claims to CCCS. The company then successfully moved for dismissal of Ms. Arellano's claims in federal court, arguing that she no longer possessed the claims and lacked standing to sue.

The Ninth Circuit reversed and remanded. According to the court, the FDCPA preempts a private party's use of state execution procedures to acquire and destroy a debtor's FDCPA claims against it. For this reason, the court held that debt collectors cannot force "a debtor's claims to be auctioned, acquiring the claims, and dismissing them." The Ninth Circuit stated that this "would thwart enforcement of the FDCPA and undermine its purpose."

As the approach taken by the debt collector here was novel, it seems unlikely that Arellano will have any immediate effects on the activities of debt collectors. Nevertheless, we caution members of the industry that similar attempts to evade claims under the FDCPA will likely be met with skepticism by the courts.

Copyright © by Ballard Spahr LLP


About this Author

Kaplinksy, partner, New York, finance

Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

Culhane, Ballard, Partner

John L. Culhane, Jr., is known for his work advising on interstate direct and indirect consumer and residential mortgage loan and leasing programs, through both traditional brick-and-mortar facilities and e-commerce. Before joining Ballard Spahr, Mr. Culhane was associate counsel with Mellon Bank, N.A.; associate counsel with Bank of America NT&SA; and senior attorney (section chief) with the National Credit Union Administration, the federal agency regulating federal credit unions.

Mr. Culhane addresses issues involving licensing, advertising and marketing, application processing, privacy, disclosure, pricing, substantive terms, servicing, collection, portfolio sales, and securitization. His regulatory practice includes preparing clients for banking agency and CFPB compliance examinations and assisting in the defense of attorney general investigations and banking agency and CFPB enforcement actions. His clients have ranged from a multibillion-dollar bank holding company, to one of the nation's largest residential mortgage lenders, to a leading provider of financial institution forms and documentation. Mr. Culhane is a member of the firm's Fair Lending Task Force.

Taylor Steinbacher Attorney Ballard Spahr

Taylor Steinbacher’s practice focuses on consumer financial services and commercial litigation, including individual actions and class action defense. He regularly represents businesses including banks, credit card issuers, and marketplace lenders in matters regarding consumer protection statutes, including the Telephone Consumer Protection Act (TCPA), the Fair Debt Collection Practices Act (FDCPA), as well as Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) statutes and state usury laws. He also assists clients in drafting consumer-facing agreements, such as...