Two Huge Debt Buyers to Vacate $16 million in Judgments in NY AG Action

New York Attorney General Eric T. Schneiderman today announced that his office has secured settlements with two major debt collectors who he says were bringing improper debt collection actions against New York consumers and continuing to collect on default judgments after the state changed relevant rules in 2010.

Under the terms of the settlement, Portfolio Recovery Associates (NASDAQ: PRAA) and Sherman Financial Group will pay a combined $475,000 in penalties and vacate and stop collection activities on some $16 million in judgments.

PRA and Sherman, two of the largest debt buyers in the U.S., are among the most active debt collection plaintiffs in the state, according to Schneiderman. Sherman filed its suits through an affiliate, Resurgent Capital Services LP.

The settlement focused on a provision of New York law that adds an additional layer to suits filed on time-barred debt. In order for an action to be timely filed in the state, it must be commenced not only within New York’s own statute of limitations, but also within the statute of limitations of the state where the cause of action accrued (if other than New York). In debt collection actions, a cause of action accrues where the original creditor of the debt resides. New York’s statute of limitations to collect on a debt is generally six years, but if the original creditor on the debt was located in Delaware for example, which has a three-year statute of limitations, the shorter statute of limitations would govern the action.

The AG’s investigation found that for many years, the debt buying industry failed to ensure that their claims were timely under the statutes of limitations where the causes of action accrued, which are often shorter than New York’s statute of limitations.

In April 2010, the New York Court of Appeals, in a case involving Portfolio Recovery Associates, reaffirmed that all New York litigants, including the debt buying industry, must strictly comply with the requirements of New York’s borrowing statute.

Since that time, Schneiderman said that both Portfolio Recovery Associates and Sherman Financial Group have sought to comply with the requirement that the companies file only new debt collection actions that are timely under both New York’s statute of limitations and the statute of limitations of the state where the causes of action accrued. Both companies, however, continued to collect on the faulty judgments that they had obtained prior to the Court of Appeals’ decision.

It is those judgments that Schneiderman was seeking to void with the action.

“Debt collectors must follow the same rules the rest of us do when bringing lawsuits—in this case, suing for debts that were not enforceable in the first place,” said Schneiderman.

In a statement provided to insideARM, Sherman and Resurgent said they worked cooperatively with the AG’s office in addressing the concerns. Sherman’s and Resurgent’s management team met in person with representatives of Schneiderman’s office and were pleased with the open dialog and interest in resolution.

“We are pleased that we were able to reach an amicable resolution with the Office of the Attorney General of the State of New York,” said Tom Thurmond, Division President of Resurgent. “We are committed to working proactively with all regulators in a manner that reflects our dedicated concern for consumer protection and our commitment to ethical corporate behavior.”

PRA also noted that it is committed to strict compliance with consumer protection laws, and referenced the change in practices noted by the AG after the 2010 opinion.

“In 2010, following an opinion issued by the New York Court of Appeals, which reversed prior decisions of lower courts regarding the manner of determining the applicable statute of limitations, PRA adjusted its practices,” the company said in a statement. “We are proud of our longstanding culture of compliance and our willingness to cooperate with our customers to help them satisfy their obligations.”

Portfolio Recovery Associates and Sherman Financial Group will pay $300,000 and $175,000, respectively, to the state as civil penalties and costs. Neither company admitted wrongdoing in the settlement. In addition to the penalties and vacation of certain judgments, the companies agreed to changes concerning the collection of old debts, including:

Disclosing in any written or oral communication with a consumer about a debt that is outside the statute of limitations that the company will not sue to collect on the debt.
Disclosing in any written or oral communication with a consumer about a debt that is outside the date for reporting the debt provided for by the federal Fair Credit Reporting Act that, because of the age of the debt, the company will not report the debt to any credit reporting agency.
Alleging certain information relevant to the statute of limitations in any debt collection complaint filed by the company, such as the name of the original creditor of the debt, the complete chain of title of the debt, and the date of the consumer’s last payment on the debt.
Submitting an affidavit with any application for a default judgment specific to the statute of limitations that, among other things, attests that after reasonable inquiry, the company or its counsel has reason to believe that the applicable statute of limitations has not expired.

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