Throughout last year, William A. Moore fielded debt-collection phone calls that flummoxed him. The retired schoolteacher said his mobile home was paid for, he had been late on a car payment only once and he hadn’t had a credit card for 38 years.
So when he received a notice on April 30 that he was being sued by a debt-collection firm seeking more than $1,700, it all became clear. The debtor that the firm named in the suit was a William T. Moore.
“How greedy do you have to be to overlook something as obvious as that?” said William A. Moore. “They just didn’t do due diligence, or maybe they just didn’t care.”
Misunderstandings like that one are at the heart of a lawsuit that the three-year-old Consumer Financial Protection Bureau is bringing against Frederick J. Hanna & Associates P.C., the law firm that sued Moore. It marks the bureau’s first enforcement attempt against debt-collection law firms, which make money by suing debtors in court, often on behalf of firms that bought the debts from banks for pennies on the dollar.
The bureau’s suit, filed July 14, alleges that Hanna churns out hundreds of lawsuits each day -- many against consumers who don’t owe money or owe a different amount. Hanna’s lawyers violated the law by filing suits throughout Georgia without verifying facts, the bureau alleges, relying instead on an automated system and hundreds of non-lawyer staff.
The firm also submitted affidavits signed by individuals who said they had “personal knowledge” of the amount and ownership of the debts, even when they didn’t, according to the CFPB complaint in federal court in Atlanta. Hanna disputes the allegations.
The suit opens a new front in the fight to protect people from what consumer advocates call predatory collection tactics. Hanna’s methods, as the bureau describes them, represent the latest twist on robo-signing, the speed-processing behind many subprime loans and subsequent mass foreclosures. The bureau believes there are other firms that engage in similar, allegedly illegal practices and it will monitor them and take future action as necessary, said a CFPB spokeswoman, Moira Vahey.
The bureau’s action is also unique in that it tees up a legal clash between the federal agency and lawyers -- who have traditionally been regulated at the state level, such as by judiciaries or state bars. According to the CFPB’s federal mandate, the bureau can’t regulate attorneys as they engage in practicing law. But the agency says its authority extends to those who behave like debt collectors, whether they are lawyers or not.
“It’s groundbreaking for consumers because if allegations at this level of generality are vindicated by the court, then the business model has to change,” said Dalie Jimenez, a law professor at the University of Connecticut who was a policy adviser at the CFPB during its first year. “They must think this particular law firm and what it’s doing are a particularly good test case.”
From 2009 to 2013, Hanna’s lawyers signed off on about 350,000 lawsuits filed in Georgia on behalf of credit-card issuers, including JPMorgan Chase & Co. and Bank of America Corp., and debt buyers like Portfolio Recovery Associates LLC, according to the complaint. JPMorgan, Bank of America and Portfolio Recovery Associates declined to comment.
That rate averages out to some 270 suits a day, five days a week, for five years. Hanna’s lawyers -- who also operate out of Florida, Missouri and South Carolina -- are expected to spend a minute at most reviewing each suit, the CFPB alleges in the complaint.
The CFPB seeks to prevent the Hanna firm from continuing its “high-volume litigation tactics” and to force it to pay back those hurt by its conduct, it says in the complaint.
Hanna’s office denies the allegations and invests “an enormous amount of effort and time” to make sure its actions are “legally proper,” Joseph Cooling, a managing partner at the firm, said in an e-mailed statement. The firm reviews each lawsuit to verify that it seeks the right amount from the right person, that the debt hasn’t expired and that the debtor isn’t on active military duty, protected by bankruptcy or experiencing medical hardship, disability, identity theft or fraud, Cooling said.
Congress established the CFPB through the 2010 Dodd-Frank Act, in the aftermath of the financial crisis, to rein in unfair, deceptive and abusive practices in consumer finance. Over the past year, the agency has received about 80,000 consumer complaints related to debt collection, it says.
The collection process starts after consumers miss payments, such as on credit cards. Once the issuing bank gives up on recovering the money, it might hire an external collection agency to keep trying.
If that fails, the bank may sell off the debt -- often as part of a portfolio of thousands of other debts -- to a large debt buyer, charging an average of four cents on the dollar, according to a 2013 report by the Federal Trade Commission. Those companies can resell parts of the portfolio to smaller debt buyers that operate in particular states or focus on specific kinds of debt, or they can try to collect the debts themselves.
Litigation can be effective: If a court enters a default judgment against a debtor, the collector can garnish wages or tap into bank accounts. Default judgments result when consumers don’t answer complaints or show up in court to defend themselves, leaving the judge to decide using only the collector’s documents.
Over the past decade, debt buyers have increasingly turned to lawsuits to get debtors to pay, said Judy Fox, a law professor at the University of Notre Dame. For four publicly traded debt-buying firms, income earned from debt lawsuits nearly doubled over three years, to $1.1 billion in 2012, according to an April report by the Center for Responsible Lending.
Those suits are stacking up in courts across the country. In Decatur, Georgia, the DeKalb County small-claims court processed about 500 debt collection cases in June and about 670 in May, Melanie Wilson, the court clerk, said in an e-mail. Each of Georgia’s 159 counties has its own magistrate court that handles small-claims collection lawsuits.
Magistrate Judge Albert Sacks, who works in Decatur, said he oversees about 85 debt cases during a typical court session and can’t be attuned to every suit’s potential deficiencies. “I need a starting point -- I need someone telling me there’s a problem,” Sacks said.
Law firms “are essentially placing bets on the fact that most people won’t respond,” said Larry Silverman, a lawyer in Marietta, Georgia, who represents debtors in collection suits. “Very few will fight, and an infinitesimal percentage of those who will fight will hire an attorney. So the incentive to file these unsubstantiated lawsuits is very great.”
In Maryland, 85 percent of consumers didn’t respond to lawsuits filed against them, and of those, debt buyers secured money judgments 73 percent of the time, according to a University of Maryland study that looked at several thousand debt collection cases filed in 2009 and 2010. In Indiana, 61 percent of debt collection cases ended in default judgments in 2009, based on a Notre Dame review of statewide data. In New York, collectors won by default in 42 percent of about 200,000 lawsuits filed in 2011 that were analyzed by the New Economy Project, an economic justice advocacy group.
Far From Truth
“There is this misperception that it’s so wonderful for us to get default judgments. Nothing could be farther from the truth,” said Joann Needleman, an attorney in Wayne, Pennsylvania, and president of the National Association of Retail Collection Attorneys, a trade group for debt collection lawyers. Following through with a garnishment can be expensive, she said. “We would love for consumers to come to court and resolve debt.”
Some accused debtors say they never got the chance. In February, Wilberto Melendez, 50, said he found out that a debt-collection law firm in Parsippany, New Jersey, had taken more than $1,500 out of his paychecks while he worked as a bellman at the Muse Hotel near Times Square, over an alleged AT&T debt. Melendez has never had an AT&T phone account in his life, he said, and didn’t receive notice that the firm, Pressler & Pressler LLP, had filed a collection suit against him, he said.
According to an affidavit, Pressler used a process server who said that Melendez was notified of the suit at a Bronx, New York, apartment on Sept. 24, 2005, at 7:51 a.m.
The affidavit described Melendez as a 5-foot-9-inch black man. Melendez describes himself as a 6-foot-2-inch light-skinned Puerto Rican.
Melendez didn’t have enough money to hire a lawyer, he said. In March, he filed a motion in Bronx County civil court to overturn the default judgment against him, with help from a clerk. At the courthouse in April, he says, he met a consumer lawyer working with the nonprofit New York Legal Assistance Group, who advised him for free. In June, he received a court ruling in his favor.
In New York federal court, a proposed class-action lawsuit is pending against Pressler and one of its debt buyer-clients over allegations that they fraudulently collected millions of dollars by suing thousands of low-income New Yorkers, like Melendez, over unpaid bills from AT&T Wireless.
The suit claims that this was part of a scheme of “mass litigation” to win default judgments “without having, being able to obtain, or intending to obtain, the evidence necessary to prove their claims.”
The firm denies the allegations, said Lawrence McDermott, Jr., a partner at Pressler. Many of the alleged violations occurred several years ago and fall outside the allowed timeframe for bringing legal action, according to a July court filing by Pressler.
The suit isn’t the first action against Pressler. In June, U.S. District Judge Kevin McNulty in Newark, New Jersey, ruled in favor of a debtor who accused the firm of filing a complaint against him that hadn’t been meaningfully evaluated by an attorney.
By signing off on the collection suit in 2011, Pressler lawyer Ralph Gulko was representing that he had “arrived at a good faith belief in the truth of this allegation,” the judge wrote in his opinion. The firm’s computer records revealed that Gulko spent four seconds reviewing the complaint before signing it electronically. Gulko reviewed 672 other complaints that same day, approving all but ten, according to the judge.
“Whatever reasonable attorney review may be, a four-second scan is not it,” the judge wrote.
The firm plans to appeal the decision because it believes the “court-created doctrine” of meaningful attorney involvement applies to instances in which consumers receive collection notices threatening legal action, not ones in which they have already been sued by a lawyer, said McDermott. The firm declined to make Gulko available for comment.
In Resaca, Georgia, William A. Moore said the identity mix-up added to what was already a hard time in his life. When he found out about the suit, he was coping with his brother’s suicide six weeks earlier and started losing sleep, he said.
He found a lawyer willing to take on his case, pro bono, in May. They filed counterclaims against the Hanna collection lawsuit that same month, seeking damages for emotional distress and intrusion of privacy. Hanna’s firm voluntarily dismissed the case a few weeks later, admitting in its own court filings that William A. Moore was the wrong guy.
William T. Moore couldn’t be reached for comment.