Monday, November 29, 2010

Why Courts (and Litigants) Should be Concerned about the Meteoric Rise in Collection Lawsuits

In a recent post, I discussed the practice of lawsuit lending, where private lending institutions fund the lawsuits of litigants whose claims are unrelated to the interests of the lending institutions. An article in today's Wall Street Journal describes a similar development in the legal industry whereby investors are buying bad consumer debt obligations from creditors for pennies-on-the-dollar and then suing the debtor for the judgment, profiting from the difference in price between what the investor bought the debt obligation for and the amount of the judgment rendered. So instead of private investors lending to litigants, now private investors are effectively buying "standing" to sue by purchasing consumer debt obligations from creditors and thereby assuming the "harm" suffered by the creditor.

The effect is that "there [has been] a surge in lawsuits against people who aren't paying their bills, driven by the debt-buying industry that has boomed in the past three years as a sea of souring loans and credit-card obligations have become cheaper and cheaper to buy amid hard economic times," says the article. The escalating number of collection lawsuits is now clogging court dockets. According to the WSJ article, Cook County Associate Judge Thomas Donnelly said that he "has heard as many as 400 cases a day, filed by debt buyers, debt collectors and their attorneys who have often lugged their filings to his courtroom in crates." Furthermore, "A growing number of cases brought by debt buyers are plagued by sloppy, incomplete or even false documentation of debts." Sound familiar?

Last month, the New York Times reported that "A recent sample of foreclosure cases in the 12th Judicial Circuit of Florida showed that 20 percent of those set for summary judgment involved deficient documents." This, in Florida, where "in the second quarter, 20.13 percent of its mortgages were delinquent or in foreclosure" and where the 471,000 pending foreclosures cases in Florida forced the state to create foreclosure courts to prevent foreclosure cases from clogging the civil docket. The creation of foreclosure courts was necessary because Florida law requires financial institutions to prove to a judge that it owned the underlying note secured by the mortgage. Because the note had sometime been sold, divided, sub-divided, and pieced back together many times, this became difficult to do, and the resources of the court were drained in the meantime while litigation over the ownership of the notes continued.

Because consumer debt obligations are packaged and sold in much the same way as mortgage obligations, it appears that the same ownership issues of the underlying debt that brought foreclosures to a halt a few weeks ago might provide a similar stumbling block in collection cases. If these ownership issues, in fact, do present a legal problem, it is likely to drain the resources of the court in much the same way that the increase in foreclosure litigation has. This could have a catastrophic effect on accessibility to the courts at a time when state and federal budgets are actually eliminating judges instead of elevating more to the bench.


Mike said...

Very interesting post Nate; as my practice now consists mainly of various forms of debt collection, this concerns me as well. I don't want sloppy masses of debt collection actions to cast the whole area of the law in a bad light.

Michael W. Huseman said...

Interesting similarities in the two areas. I would be the first one to request documentation of the chain of title in either circumstance if I was defending, but what it all boils down to is whether the defendants had made their payments. I'm sure cases of mistaken identity exist, or other cases where the defendants are not actually in default, but those occur maybe once or twice per thousand. The vast majority of credit card cases involve people who splurged on credit and then quit making the payments.

If that results in clogged court calls, so be it. I don't see the rise in collection lawsuits as a problem. It just means that the courts will have to work past two o'clock in the afternoon!!!!

Nate Nieman said...

My concern about the clogged courts is that it will limit access to the court's time for matters that are unrelated to debt collection or foreclosure. Plaintiff's firms on the creditor side can churn through these debt or foreclosure files at a much faster rate than, say, personal injury cases. Because they can turn the files so quickly, these firms develop low-return, high-volume practices where they must burn through as many files as possible, despite the impact that this has on the court's resources. Because judge's resources are being spent on these hundreds of thousands of collection cases, judges have less time to carefully consider other more complex cases that might require more time and attention and that might have been given more consideration before the recent proliferation of foreclosure and collection cases.