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.

Attorneys in Ballard Spahr's Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.

Copyright © 2017 by Ballard Spahr LLP.
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