Debt Buyers Must Follow Rules Too, Says Missouri

25 Jan Debt Buyers Must Follow Rules Too, Says Missouri

When credit card debt goes bad, banks sometimes sell it to vulture investors at a steep discount. The vulture debt buyer then often tries to sue on the account to collect more than they paid. And their lawsuits are often the final straw forcing folks bankruptcy, where the debt buyer usually wants a share of any repayment too.

Buying bad — “distressed” — debt is a large, highly automated and risky business. The debt buyers pay very little and get very little information about the account history, the borrowers, and how the balances are calculated. And consumers are encouraged to take on faith that the balance was calculated properly — and that the debt buyer is really the owner of the account. Debt buyers would prefer that courts accept their word of honor too.

The Missouri Supreme Court recently disagreed though. The Court ruled that a debt buyer had to be able to properly prove it owned an account before it could try to sue to collect the debt. In effect, it ruled that the court is not simply an extension of the collection process — it is an independent arbiter where a case must be proven, not presumed.

That would seem like a simple idea, right? How can you sue over a loan if you can’t prove you are the one owed any money? It’s a simple idea at the heart of all court cases. It’s called “standing,” which comes from the old idea that you have to have a right to “stand” in court to ask for help from a judge. Standing is so fundamental that federal rules (based on the Constitution) as well as Missouri law say that a party’s standing to be in court is always subject to review by the court and cannot be waived by another party.

In the 2012 Missouri case, the court ruled that a debt buyer had to be able to provide testimony from the original lender how the records of the account and transfer to the final alleged owner were prepared. In other words, they could rely on business records from other companies — but those companies needed to provide witnesses to testify how those records were created and kept in order to use them in court. The debt buyer couldn’t simply use its own record-keepers — even if they knew how the bank usually did its work — to “authenticate” another company’s records.

This should not be hard to understand. I can’t testify from first-hand knowledge how my neighbor balances his checkbook unless I sat there and watched him do it. I might know he’s an accountant and very careful and, in my opinion, would not lie. But how do I know how he did the math last week?

It would be surprising if any court let me testify about something like that. But judges sometimes see complicated business records like credit card account sales deals and assume everything was proper, and forget that they should not assume anything. In the case of debt buyers who are not original lenders, a “bill of sale” of a huge list of accounts does not prove standing to be in their courtrooms asking for the time of day.

The problem here is identical to the problem of “robo-signing” and fraudulent or non-existent mortgage foreclosure documents. The mortgage industry is simply a variety of debt buyer. Most of the mortgage loans are not owned by the original lender and proving that they own the loan and have the right — standing — to enforce it is how they got into so much trouble in the last couple years.

All of this begs the question how some courts can allow debt buyers to have claims in a bankruptcy case, or prosecute motions for relief from stay, if they can’t prove ownership of the loans. Some courts have asserted that the debtor putting this information on their schedules amounts to admission they owe the money. The state supreme court concluded that standing can’t be granted by a party but is fundamental to invoke the courts’ power. So it remains to be seen if more bankruptcy courts will take up concerns about standing in the future.

Photo Credit: The National Archives

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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