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Appeals Court Overturns Case Allowing Agency To Purchase Lawsuit Against Itself

The Court of Appeals for the Ninth Circuit has overturned a District Court ruling that allowed a collection agency to purchase a lawsuit filed against it by a plaintiff as liquidation of a judgment. The case has been remanded back to the District Court.

A copy of the ruling, in the case of Arellano v. Clark County Collection Service (CCCS) can be downloaded here.

The defendant had sent a collection letter and summons to the defendant over an unpaid debt of $371.89. In the letter, Patricia Arellano was notified that if she did not dispute the validity of the debt within 30 days, the debt would be presumed to be valid. But in fine print at the bottom of the letter was a notice that she had only 20 days to respond to file a formal written response to the summons. She did not file a summons and a default judgment was entered against her for the amount of $793.39.

She subsequently filed a lawsuit against the collection agency, claiming the collection letter was misleading. At this point, the collection agency took the very somewhat usual step of obtaining a writ of execution against Arellano, seeking a levy on her property to satisfy the judgment. In this case, the collection agency asked the sheriff to execute the writ on the lawsuit she had filed against it. The lawsuit was then auctioned off and CCCS purchased the lawsuit for $250, following which it moved to have the suit against itself dismissed.

The appeals court ruled that using a state remedy – the writ of execution in this case – can not “be used for the purpose of avoiding the impact of federal law.”

In remanding the case back to the District Court level, the Appeals Court ruled that federal law preempts use of state execution procedures to “acquire and destroy” an FDCPA claim against a private party.

In addition to evading liability and preventing Arellano from pursuing her potential federal claims, the collection agency has literally used the execution mechanism to collect debt from Arellano, and argues that she “has received the benefit of [the $250] reduction in her judgment.” But 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. Though the FDCPA does preserve debt collectors’ rights to collect what they are owed, the Act does not “authorize the bringing of legal actions by debt collectors.”

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