The following is the result of one lady following our information and winning on appeal:
Kentucky Collections
By William R. Mapaother, Thomas L. Canary, Jr.
§ 2:6 Pre-demand considerations – Documentation
There is certain minimal documentation that a debt collector must possess before proceeding forward. The type and extent of that documentation depends on the type of matter being sued upon. To proceed forward without minimal documentation exposes debt collector to suit under the judicially created “meaningful involvement” standard of FDCPA. The following reviews some of the more common documentation issues that you can face in your collection practice.
♦ Practice Tip: Deficiency balances on secured transactions – KRS 355.9-616 requires that a debtor receive an explanation of the calculation of any surplus or deficiency to which the debtor may be entitled after the repossession and resale of the underlying collateral. You must have a copy of that document in your file before you send your first demand letter. Subsection (2)(a)(1) of that statute mandates that explanation be sent: “before or when the secured party accounts to the debtor and pays any surplus or first makes written demand on the consumer obligor after the disposition for payment of the deficiency” (Emphasis added). You must insure that your client has sent this Explanation and that it is in a proper form. If not, then you may not make your first written demand for payment, i.e. your initial demand and validation letter to the debtor.
Your author also thinks it prudent to have a copy of the Notice of Sale in your file. If that notice has not been sent, then there is a presumption that the damages that arise from that failure are equal to the deficiency balance and the deficiency balance cannot be collected. Again, if your client has failed to send notice and you proceed to collection on the debt, then you are putting both your client and yourself at risk.
♦ Practice Tip: Assigned or Purchased Debt – if the debt you are suing on has been assigned from one creditor to another, you probably will need documents showing the chain of title to the ownership of the account. Debt buying and selling has become a standard practice by which lenders raise capital to finance new loans or operations. The practice has grown so large that there are companies not that do nothing but purchase, collect and sell debt. There is even a trade organization represents the interest of such entities.
The vast majority of the debt that is being traded is credit card debt. Many times, the only thing that a debt collector will receive from his credit purchasing client is a spreadsheet or affidavit giving the name of the original lender, pertinent information on the debtor. Is this enough to get the case started?
Perhaps not. In an unpublished decision, the Kentucky Court of Appeals opined on the quantum of documentation a debt purchaser must produce before a judgment is entered. The case of Bullock v. Worldwide Asset Purchasing, LLC, 2006-CA-001757 (August 8, 2008) reviewed the grant of a summary judgment in favor of the creditor. Worldwide is a debt purchaser. It had acquired the appellant’s account from NextCard, Inc. The appellant had originally filed a motion to dismiss which was denied. Worldwide then served Request for Admissions to which appellant responded by letter stating the request was “inappropriate.” Worldwide moved for summary judgment based in part on the failure to answer the discovery. Appellant responded stating that Worldwide had never responded to her request for debt validation nor presented sufficient evidence that Worldwide owed the NextCard, Inc. account. Worldwide’s motion for summary judgment was granted and this appeal followed.
The Court of Appeals found that Worldwide did have standing to sue. The Creditor had produced some billing statements from business records furnished by NextCard. The Court found this was sufficient to show Worldwide had a “judicially recognizable interest in the subject matter of the suit” and this had standing.
Next, the appellant challenged the sufficiency of the bill of sale to show she owed the NextCard debt to Worldwide. The bill of sale produced did not list her name, account number nor the amount of the debt at issue. The Court of Appeals agreed with appellant on this assignment of error. Apparently, there was an Account Schedule that listed individual accounts purchased by Worldwide. This was not introduced into the record when the summary judgment was considered. The Court of Appeals used this lack of evidence as a springboard to opine what it believed were the three elements a debt purchaser needed to prove before judgment can be entered against a defendant.
First, a bill of sale must be produced listing the name and account number of the defendant. Many times the bills of sale will not mention each account by name. There could be a series of account numbers showing which debts were sold. Your author would submit that if you have an account number reflected in the bill of sale that can be linked to a billing statement that bears the debtor’s name, that should suffice. The purpose behind this element is to show that the defendant has been properly identified and the plaintiff has standing to sue.
Second, the creditor must produce a document specifically detailing how it reached the principal and interest amounts stated in the complaint and judgment. This could be done in several different manners. First, there could be a last statement that details this information. Arguably, this could also be done by affidavit. Third, a creditor could prepare a “document” that details this information from the business records provided to it upon the purchase of the account from its predecessor. The Court’s use of the word “document” in its decision demonstrates flexibility in this element.
Third, the creditor must “produce documentary evidence that the defendant is in fact the person responsible for the debt.” This could be done in several fashions. First, the creditor could produce a statement sent to the debtor that went unchallenged. Secondly, it could produce a check showing payment on the account. Many times the check will include the account number on the memo line. If you are going to introduce this into evidence, remember to black out or otherwise redact all but the last several digits of the account number to protect what some consider is personal identification information. Third, the creditor could produce an application, although those records need only be kept for two years.
Another way to prove this last element may be by use of discovery. Note that in Bullock the motion for summary judgment filed by Worldwide cited Civil Rule 33 versus Civil Rule 36.01(2) – the civil rule which states unanswered admissions are deemed admitted. Given the appellant was acting pro se and the fact that Worldwide cited to the Ohio Rules of Civil Procedure versus the Kentucky rules, the Court felt there was enough confusion to decide this issue in appellant’s favor. Query if the decision would have been different if the correct Kentucky rule had been cited? Note, however that Judge Caperton’s concurring, separate opinion indicates that the failure to include the Account Schedule [the schedules showing this particular account was sold to the plaintiff] was fatal to the summary judgment motion, despite the appellant’s failure to respond to the request for admissions.
Although an unpublished case, it appears this will be the blueprint used by many courts to rule on even default judgments. Let the (debt) Buyer Beware!
Given the holding in Bullock, if you are going to sue on an account stated theory, you should have a reasonable basis to believe your client will be able to provide a statement of account on request. It is preferable to have the statement of account attached to the complaint, but that may not always be possible. If you have a record from your client evidencing the amount due, then you have a good faith basis for proceeding forward.
When a debt purchaser buys accounts, it has transmitted to it the records from the previous owner. This includes records relating to the balance due on the account. Such business records are an exception to the hearsay rule and in most instances self authenticating. If the current owner of the debt sends out its own statement of account to the debtor, that should qualify as an “account stated” under Kentucky law. The burden then falls to the defendant to overcome that statement with something more than a general denial.
♦ Practice Tip: Assigned or Purchased Debt – If you are suing on a promissory note make sure you have a copy of the assignment of not only the account but of the promissory note to the debt buyer.
When your client is a debt purchaser, and the debt is based on a promissory note, versus a credit card account, a recent case from the Kentucky Court of Appeals requires the debt purchaser to show it is the assignee of that note. In Harrington v. Asset Acceptance, LLC, the appellant questioned the entry of a summary judgment in favor of Asset Acceptance, and the denial of his motion for summary judgment. In setting aside the judgment on behalf of Asset Acceptance, and ordering a judgment in favor of Harrington, the Court found that Asset Acceptance had no present right to sue since it failed to produce evidence that it was the assignee of the promissory note.
The debtor took the position that all Asset Acceptance had proven was that it had purchased an “account” from Fifth Third Bank. The present right to sue was embodied in the promissory note. The debtor argued, and the Court agreed that instruments are specifically excluded from the definition of “account” under both Kentucky and Ohio’s Uniform Commercial Code. “Instruments” include negotiable instruments or any other writing that evidences a right to the payment of a monetary obligation. “Promissory Notes” are subsets of instruments that evidence a promise to pay a monetary obligation, do not evidence an order to pay, and do not contain an acknowledgment by a bank that the bank has received for deposit a sum of money or funds. The Court held that Asset Acceptance had not proven that it was the assignee of the Promissory Note or security agreement (most likely one and the same instrument) and thus did not have the right to seek collection of the amounts due on the note.
This argument appears to have merit where the promissory note is a negotiable instrument. KRS-355.3- 203 governs the transfer of an instrument. Recall that a promissory note is a type of instrument. KRS 355.3-203(1) states: “An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.” (Emphasis added). Subsection two continues this there: “(2) Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument,…”
Official Comment 1 to the Uniform Commercial Code explains this even further:
Ownership rights in instruments may be determined by the principles of the law of property, independent of Article 3, which do not depend upon whether the instrument was transferred under Section 3-203. More-over, a person who has an ownership right in an instrument might not be a person entitled to enforce the instrument. For example, suppose X is the owner and holder of an instrument payable to X. X sells the instrument to Y but is unable to deliver immediate possession to Y. Instead, X signs a document conveying all of X’s right, title, and interest in the instrument to Y. Although the document may be effective to give Y a claim to ownership of the instrument, Y is not a person entitled to enforce the instrument until Y obtains possession of the instrument. No transfer of the instrument occurs under Section 3-203(a) until it is delivered to Y.
An instrument is a reified right to payment. The right is represented by the instrument itself. The right to payment is transferred by delivery of possession of the instrument “by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.”
(Bold and underline added).
Coupling this decision with the Bullock case noted above could lead a court to require a fourth element before a judgment can be entered against a defendant on a promissory note purchased by a debt buyer – proof of assignment of the promissory note. The quantum of evidence necessary to prove this element remains to be seen.
♦ Practice Tip: Chain of title/Assignment – If you are suing on a purchased debt, or if you are foreclosing on an assigned mortgage instrument, you will need to prove that your client is either the proper party in interest to file suit or that the lien being foreclosed upon is owned by the plaintiff.
Every action must be brought in the name of the real party in interest. If during the course of litigating the action there is a transfer of an interest in the matter, then the suit can continue in name of the original plaintiff unless the court orders the substitution. If capacity is not raised as a defense, then it is deemed waived. In the area of purchased debt, more and more courts are requiring the plaintiff to produce a chain of title evidencing its is the owner of the account. (See, discussion of Bullock v. Worldwide Asset Purchasing above). Capacity can be waived by a non-responding defendant, but the court can always, and frequently does ask for proof in this regard.
The same is true if you are foreclosing on an assigned security instrument. In an unusual twist, Judge Christoper A. Boyko of the Northern District of Ohio required several lenders in foreclosure cases pending before him to file a copy of an executed Assignment demonstrating those Plaintiffs were the holders and owners of the Notes and Mortgages as of the date the foreclosure complaints were filed. (Similar to the observations made by the Kentucky Court of Appeals in Harrington). Several of those creditors were unable to show that they were the owners of the mortgages on the date the foreclosure actions were filed, and Judge Boyko promptly dismissed those causes of action, without prejudice. As the Court succinctly stated: “before an entity assigned an interest in that property would be entitled to receive a distribution from the sale of the property, their interest therein must have been recorded in accordance with Ohio law. (Citations omitted).
So where does that leave the debt collector? Make sure your clients understand that they will need to be able to provide you with a chain of title of ownership to the account. This is usually done by bills of sale and an affidavit from the current owner of the account. Without this proof, you may never get a judgment on an otherwise lawfully owned debt.
♦ Practice Tip: Are you suing the proper party? In days gone by, the writer’s firm included in the Complaint the social security number of the defendant. While no longer on the face of the Complaint, the writer’s firm still mandates its clients give it the social security number of the putative defendant. While you may think you are serving the correct John Smith, you will not be able to definitively ascertain you have the correct party with out such identifying information. If you access a credit bureau report in collection of the debt, you can compare the last four digits of the social security number on that report with to the information given to you by your client.
For an example of what can happen with an innocent mistake of identity, see Appendix M of this treatise and the Douglas v Douglas case.
The same success awaits you.