The New York State Court of Appeals has finalized rules requiring buyers of credit card debt to prove they own the accounts, and has added additional notice requirements for consumer credit lawsuits. The court clerk will be mailing a notice of a consumer credit lawsuit, in addition to the notices the creditor must serve or mail.
However, the new rules do not include two provisions that were included in the proposed rule back in April: an option for defendants in consumer credit lawsuits to go to the court clerk's office and respond to a lawsuit by filing out a 'check the box' written answer, and a simplified form to have a judgment vacated or reopened by filing out a couple of 'check the box' forms at the court clerk's office.
This blog will focus on what is included in the new rules. I will post a second blog that will review what was not included in the final version of the rules, and how the provisions and forms that were omitted from the final rule might yet help out consumer credit lawsuit defendants who do not have, or cannot afford, a lawyer.
The new rules were announced by a Attorney General's press release dated September 16, 2014, and the rules are available online.
NEW RULE #1: Debt buyers must prove they own the debt they are suing on. In 2009, the City Civil Court of New York City implemented a rule requiring proof that debt buyers prove that they are the legal owner of a debt before they can obtain a judgment by default (that is, when the defendant fails to respond to the lawsuit). The court explained the reasoning of the rule this way:
"Consumer credit actions may be commenced by a creditor who contracted directly withvthe debtor or by a third party who subsequently purchased the debt/account. In the past, lendersvsuch as American Express did their own collections, now most lenders sell the debt to a debtvpurchaser who may collect on the debt or sell the debt to a subsequent debt purchaser. Since our procedures were based on debt collection by the original lender, we are adjusting our procedures to include current practices of third party-debt collection."
That rule only applied to New York City Civil Court. The Court of Appeals has now created a similar rule for all courts in New York State.
WHAT DEBTS ARE AFFECTED? The new rule deals with "consumer credit" transactions, which are defined as "revolving or open end credit transaction wherein credit is extended by a financial institution, which is in the business of extending credit, to an individual primarily for personal, family or household purposes" (new rule (a)(1)). Consumer credit card accounts are the main target of the rules. The rules do NOT apply to "medical services, student loans, auto loans or retail installment contracts".
WHAT IS A 'DEFAULT JUDGMENT'? If someone is sued, and they are properly served payers and fail to respond, the plaintiff (the party that filed the lawsuit) can obtain a judgment by default. The plaintiff files a default judgment application with the court clerk. If the documents are all in order, the court clerk will issue a default judgment, which can be enforced by things like wage garnishments and asset seizures. A default judgment is a very powerful legal tool. These new rules are intended to make sure that the plaintiff in a consumer credit lawsuit actually is owed the money they are suing over.
WHAT CREDITORS ARE AFFECTED? The new rules require that, in order to obtain a judgment by default, affidavits must be filed by the original creditor, intermediate debt owners, and the debt owner filing the lawsuit. For example, if a credit account was owned by 'Acme National Bank, then sold to 'ABC Debtbuyers, LLC', then sold again to '123 Portfolios, LLC', affidavits in a default judgment application would have to be filed by Acme (the "original creditor", ABC (the "debt seller") and by 123 (the "debt buyer").
WHAT DOES THE ORIGINAL CREDITOR HAVE TO PROVIDE? If the collections lawsuit is filed by the bank that originally provided the credit card account ("Acme National Bank", in our example), an officer of that bank must sign an affidavit listing the date of default, the amount owed, the amount charged off, interest since the account was charged off, and any payments received after the account was charged off.
WHAT DOES A DEBT BUYER HAVE TO PROVIDE? A debt buyer is defined by the new rules as a person or an entity (a corporation or an LLC) "that is regularly engaged in the business of purchasing charged-off consumer debt for collection purposes, whether it collects the debt itself, hires a third party for collection, or hires an attorney for collection litigation." If a debt buyer files the lawsuit, two or more affidavits will be required, in order to obtain a default judgment:
Affidavit #1: The 'Original Creditor' must sign an affidavit stating that they sold the account to a debt buyer, the date and amount of the last payment made to the original bank by the debtor, the amount owed when the account was sold, the amount charged off, interest since the account was charged off, and any payments received after the account was charged off.
Affidavit #2: If the account is sold to a debt buyer (like 'ABC Debtbuyers, LLC' in our example above) which then resells the account to another debt buyer (like '123 Portfolios LLC' in our example), the first buyer (ABC) must sign an affidavit listing the name of the original creditor and date the account was bought, the name of the subsequent debt buyer the account was sold to and the date of the sale, and the amount owed as of the sale date.
The debt buyer that files the collection lawsuit (123), as the owner of the account, must submit an affidavit that lists all the previous owners of the account and the date of the sale to the next owner (call the 'chain of title'), as well as the amount owed when the lawsuit is filed, including any interest or fees incurred after the account was charged off minus any payments after the charge off.
WHAT IS 'CHARGED OFF'? Many consumer debtors do not know what it means for an account to be charged off. The new rules define 'charge off' as "a consumer debt that has been removed from an original creditor's books as an asset and treated as a loss or expense" (new rule (a)(2)). Charge off is an accounting term, which means the creditor considers the account to be uncollectible. FDIC policy states that a revolving credit account should be charged off 180 days after it becomes delinquent.
What it does NOT mean is the debtor no longer owes the money. The creditor, or a debt buyer, can still attempt to collect the debt, including filing a collection lawsuit.
What else is required to obtain a default judgment? In all default judgment applications, either by the original creditor or a debt buyer, two other items will be required: an affidavit that the statute of limitations has not expired and a copy of the original credit agreement or statement of account.
STATUTE OF LIMITATIONS: First, the lawyer filing the default application must execute an affidavit stating that the statute of limitation has not expired. The statute of limitations is a state law that sets a deadline for filing a lawsuit. In New York State, a lawsuit for money owed under a contract, such as a credit card agreement, must be filed within six years of default under the contract.
The attorney who signs the affidavit that the statute of limitations has not expired does not have to provide an analysis as to why he or she has come to that conclusion; the statute of limitations is a complicated legal analysis and can be extended (or 'tolled') by various things, like the filing of a bankruptcy or the debtor leaving the country.
The text of the statute of limitation affidavit changed from the time the new rules were proposed in April to the final version published in September.
But the other affidavits filed with the default judgment package will provide important information about when the account went into default. The original creditor will state the date of the last payment; presumably the account went into default shortly after that. The charge off date will also be provided; the account certainly went into default before it was charged off. This will show basic information that may suggest the statute of limitations has expired.
OUT-OF-STATE STATUTE OF LIMITATIONS MAY APPLY TO DEBT BUYERS: A recent lawsuit by the New York State Attorney General shows how important this information is. Attorney General Eric T. Schneiderman recently settled with two big debt buyers a challenge that they were filing lawsuits past the expiration of the statute of limitations. As the Attorney General's press release states, the applicable statute of limitation is governed by BOTH the New York State statute (six years) AND the applicable statute in the state where the original creditor was located. For example, if an original creditor was incorporated in Delaware, the debt would be subject to that state's shorter three year statute of limitations.
The ORIGINAL VERSION (April 2014) of the required statute of limitation affidavit read as follows:
The cause(s) of action asserted herein accrued in New York and ________ [other jurisdiction where cause of action accrued, if applicable], where __________ [original creditor] resides. The cause(s) of action accrued on ___________ [date of default]. The statute(s) of limitations for the cause(s) of action asserted herein is _____________ years for New York and ____________ years for [other jurisdiction where cause of action accrued, if applicable]. Based on my reasonable inquiry, I have reason to believe that the applicable statute(s) of limitations for the cause(s) of action asserted herein has/have not expired.
This was modified and shortened in the final version. The text of the FINAL VERSION (September 2014) is as follows:
The cause(s) of action asserted herein accrued on ________ [date of default] in the state of ________ . The statute(s) of limitations for the cause(s) of action asserted herein is/are _______ years. Based on my reasonable inquiry, I believe the applicable statute(s) of limitations for the cause(s) of action asserted herein has/have not expired.
The new rule does not require the plaintiff to report where the original creditor was located (in-state or out-of-state). However, I could imagine a defendant answering a lawsuit, arguing that the statute of limitations had lapsed and stating that the plaintiff failed to provide this information.
ORIGINAL AGREEMENT MUST BE PROVIDED: The new rules require that a default judgment application include a copy of the "credit agreement". This is defined as the "contract or other document governing the account provided to the defendant evidencing the defendant's agreement to the debt, the amount
due on the account, the name of the original creditor, the account number, and the name and address of the defendant. The charge-off statement or the monthly statement recording the most recent purchase transaction, payment or balance transfer shall be deemed sufficient evidence of a credit agreement."
WHAT IF THE CREDITOR DOES NOT HAVE ALL THESE AFFIDAVITS AND DOCUMENTS? The new rules state that the court clerk shall "refuse to accept for filing a default judgment application that does not comply with the requirements of this section". However, the new rules are court procedure rules and do not supplement the requirements of New York law on obtaining a default judgment. As stated in the new rules, "Nothing in this section is intended to impair a plaintiff's ability to make a default judgment application to the court as authorized under CPLR 3215(b)." In other words, if a creditor or debt buyer believe they are entitled to a default judgment under New York law, but cannot satisfy these new documentation requirements, they can tell it to a Judge. I would assume that a judge would want to know why the creditor cannot provide this information, before granting a request for a default order.
NEW RULE #2: THE COURT CLERK WILL MAIL OUT AN ADDITIONAL LAWSUIT NOTICE: The second part of the new rules is intended to avoid so-called 'sewer service' and to give debtors additional information about the importance of the lawsuit being filed against them. Under the new rules, when a consumer credit lawsuit is filed the creditor shall give the court clerk an envelope, stamped, addressed to the defendant (the debtor) with the court clerk's address listed as the return address. The clerk then will mail a new, specially worded, notice of the lawsuit directly to the defendant, and a default judgment cannot be filed until 20 days has passed after that mailing.
The new notice will include the following language (in both English and Spanish):
ATTENTION: A lawsuit has been filed against you claiming that you owe money for an unpaid consumer debt. You should respond to the lawsuit as soon as possible by filing an "answer." You may wish to contact an attorney. If you do not respond to the lawsuit, the court may enter a money judgment against you. Once entered, a judgment is good and can be used against you for twenty years, and your personal property and money, including a portion of your paycheck and/or bank account, may be taken from you. Also, a judgment will affect your credit score and can affect your ability to rent a home, find a job, or take out a loan. You cannot be arrested or sent to jail for owing a debt. Additional information can be found on the court system's website at: www.nycourts.gov
Besides warning the defendant of the importance of responding to the lawsuit, the new notice is intended to verify that the defendant knows a lawsuit has been filed against him or her. There has been problems in the past where process servers have filed affidavits with courts stating that they property served out the lawsuit papers, but, in fact, the papers were never served. This is known as 'sewer service', as if the lawsuit papers were just thrown down a sewer.
However, the mailing does not appear to require that a copy of the lawsuit papers (the summons and complaint) be mailed along with the court clerk's notice. So if someone receives this notice but, for some reason has not received the actual lawsuit papers, they would have to go to the court clerk's office to see what the lawsuit is all about. That seems unlikely.
WHAT IF THE NEW NOTICE IS UNDELIVERABLE? This new notice requirement provides another major protection against a default judgment being taken against a defendant without him or her knowing anything about it: if the envelope is returned to the court clerk by the post office as undeliverable, no default judgment can be entered UNLESS the address of the defendant on the envelope matches "the address of the defendant on a Certified Abstract of Driving Record issued from the New York State Department of Motor Vehicles."
BANKRUPTCY IMPLICATIONS: Although these new rules only apply to applications for a default judgment in state court, I can imagine that trustees and debtors may use the requirements in objecytions to proof of claims filed in bankruptcy, especially claims by debt buyers.
I will be posting another blog soon that will examine some provisions that were proposed as part of the new rules last April, but were not included in the final version. Although not included in the requirements of the final rules, they may point a way for defendants without attorneys to respond to consumer credit lawsuits and, perhaps, reopen an old lawsuit judgment, without an attorney, if the defandant knew nothing about it when it was originally filed.
If you live in the Greater Rochester NY are and have been served with a lawsuit, and wish to know what your options are, please feel free to contact me at my website for a phone consultation, at no charge, of your situation.