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Credit Card Assignment Cases: Travelers Without Luggage

1/4/2008

James C. marked an “X” in the “I accept” block of one of the many credit card offers he received three years ago. After using the card for almost a year he exceeded both the original credit limit on the card and his ability to keep up his monthly payments. His card was ultimately cancelled but his account took on a life of its own when it, along with hundreds of other accounts, was sold by the original creditor to a California corporation that purchases such accounts in bulk at a price sharply discounted from their face values.

The same day, the first purchaser/assignee sold the bundled accounts to another corporation in New York. This purchaser used a collection agency to “work” the accounts, got payments on some, then months later, sold the bundle to yet another corporate clearing house, this time in New Mexico. Finally, today, this traveling account came to the end of its long journey as a collection action filed in your court.

Throughout the nation judges are facing a growing number of secondary consumer debt cases. This buying and selling of bulk consumer accounts is, in essence, a new type of commodity market. Unfortunately, some of the players on this new field are attempting to bypass the gatekeeper role of the courts in the race to convert their paper to cash.
As the Wall Street Journal reported on October 25, 2004, these companies "... use the relaxed rules of small claims and municipal courts to file suits that contain little documentation of the debts it seeks to collect. These courts typically allow for quick judgments when legally unsophisticated defendants failed to contest the suit." (Wall Street Journal, October 25, 2004, "Small Claims: Once Ignored Consumer Debts Are Focus of Booming Industry" by Suein Hwang.)

However, just because the same plaintiff files a hundred or more of these cases on the same day and submits each with substantially identical “boilerplate” offers of proof does not change the fact that the same principles of law apply to these cases as to an account from a local department store. The plaintiff must still prove that it is the owner of the account and establish a verifiable balance owed by the named defendant to the named plaintiff.

In multiple transfer/assignment cases, proof of ownership of the debt is often difficult since it requires an unbroken chain of valid assignments stretching from the original creditor to the plaintiff bringing suit. Often the only proof available is a brief statement of assignment of a generic group of accounts incorporating by reference a computer generated list of multiple account numbers which may or may not include reference to the full name of the consumer/defendant.

Also, as they travel, these accounts frequently lose most of their “luggage.” Often the first thing lost is the contract between the original creditor and the consumer/defendant. Obviously, without proof of the contract such things as attorney fee provisions, interest rates to be charged and miscellaneous late charges/penalties have no basis for enforcement by the plaintiff.

Even if the plaintiff abandons any contract claim and seeks recovery on an open account theory, there still may be problems. Proving a correct balance can be difficult when the account has passed through a number of owners and collection agencies, each relying on what their predecessor reported the balance to be rather than on a chain of documentation showing the original charges or balance and the subsequent credits and payments resulting in the balance claimed in the lawsuit.

Rather than relying on contract or open account some plaintiffs elect to claim an account stated. They submit proof to show that after the account was purchased the plaintiff took the necessary steps under the law of the jurisdiction to establish a new contract with the defendant/consumer. Often this proof is to the effect that the defendant/consumer was notified of the purchase of the account by the plaintiff and that the defendant either admitted the claimed balance or failed to timely object after proper demand. However, this does not remove the requirements that the Plaintiff show ownership of the account and the basis for balance demanded.

Whatever theory of recovery by the plaintiff, it is not unusual for issues regarding the running of the period of limitations to arise in these cases. With multiple transfers and assignments, collection efforts by various owners and the bulk packaging of accounts a period of years may go by from the time the account is created to the time a court action is brought.

These are just some of the issues which courts must recognize and deal with in handling credit card assignment cases. And, be assured, these “travelers without luggage” are coming soon to a courtroom near you.

This timely topic will be covered and examined in the upcoming offering of Handling Small Claims Cases Effectively: A Web-Based Course, April 14-May 29, 2008. Please call (800) 25-JUDGE for more information or to enroll.