Assembly line collection firm faces its own legal troubles

The Consumer Financial Protection Bureau has sued a Georgia law firm, Frederick J. Hanna & Associates, P.C., and three of its principal partners, charging that the firm operates "a debt collection lawsuit mill that uses illegal tactics to intimidate consumers into paying debts they may not owe." (For a complete copy of the CFPB's Complaint, click here.)

Debra Cassens Weiss posted about the suit on July 15 on ABA Journal Law News Now. According to Weiss, the Hanna firm "filed more than 350,000 debt-collection suits from 2009 through 2013" in Georgia alone (the firm also boasts offices in the St. Louis and Ft. Lauderdale areas). Weiss writes that the suit charges that one lawyer in the firm "signed an average of about 1,300 collection suits a week."

Now, let's assume that non-lawyers prepare the suit papers. Indeed, the government's suit (which says the Hanna & Associates operates more like a factory than a law firm) alleges "non-attorney support staff produce the lawsuits and place them into mail buckets, which are then delivered to attorneys essentially waiting at the end of an assembly line. The Firm’s attorneys are expected to spend less than a minute reviewing and approving each suit."

Let's do the math.

There are 60 minutes in an hour. There are, allegedly, eight hours in the typical business day. (I'll pause here until you stop snickering.) 60 x 8 = 480.

There are, again allegedly, five business days in the week. 480 x 5 = 2,400.

Clearly, the government's charges are exaggerated. The man or woman who signed 1,300 suits in a week could have lavished a good 90 seconds on each case and still found time, occasionally, to go to the bathroom or scarf down a sandwich.

And, remember, these are debt collection suits -- not antitrust pleadings. After all, how long does it take to say 'the deadbeat defendant owes my already megarich corporate masters even more money'?

Except... while some of the firm's clients are giant credit card issuers seeking to collect from their own customers, the firm also represents zombie debt buyers -- "companies," as the Washington Post Wonkblog explained, "that purchase old accounts for collection -- such as Portfolio Recovery Associates and Midland Funding."

Here's the deal: John Q. Public buys a widget from the store, charging the $100 purchase price on his Megabank MultiCharge (note that MultiCharge is not a real card issuer -- I can't afford to get sued). The store gets paid a discounted amount -- $97 or $98 from Megabank -- but the store is happy because it has most of its money up front and doesn't have to worry about collection.

If John Q. pays his MultiCharge bill in full on or before the due date, Megabank makes only $2 or $3 on the transaction. Unless, of course, it gets an annual fee or a membership fee (some cards command these). But MegaBank really makes out when John Q. Public can't quite pay the entire balance when the MultiCharge bill comes due. Depending on the card, John Q. may be accumulating annual interest charges of 10, 12, 15 or even 24, 25 or 29%. Considering that, these days, MegaBank pays virtually nothing to borrow money (if, for example, it had to borrow money to pay the store in the first place), the bank's profit margin gets pretty darn plump pretty darn fast.

But, now and again, a MultiCharge customer will fall behind in his or her payments. These losses can be readily absorbed by the obscene profits made from other Megabank customers, but discipline in the ranks must be maintained. The offending customer must be dunned.

If those efforts are not successful, for some reason -- perhaps the credit card customer, taking a page from the corporate giants, decided to decamp in the middle of the night to another venue in order to capitalize on tax advantages -- the charge (still accruing interest the whole while) may be "written off."

But that does not mean that Megabank has given up on collecting. No, it packages its uncollectable accounts and sells them to a zombie debt buyer for pennies on the dollar. The zombie can sue for the entire amount of the indebtedness, still piling up interest according to the original cardholder agreement; it need not hit on very many of these long-shots to make a huge profit on its investment. But the zombie's pleadings should be a little more complex: It addition to allegations of fact showing the validity of the original debt, the complaint needs to document how the zombie came to possess the debt. This documentation might be easy enough if the zombie is the first purchaser of the debt from the credit card issuer, but zombies sell downstream, too.

And the debts written off and sold by the card issuers are not just the ones where the cardholders moved in the middle of the night and left no forwarding address. Some debts were discharged in bankruptcy, others may have been run up on cards fraudulently issued (it's not always a Russian or Bulgarian syndicate that gets a phony credit account started, sometimes it's a spouse who never tells his or her partner about the card issued in both spouses' names).

And then there's the problem of mistaken -- as opposed to stolen -- identity. Computers are wonderful devices, but the accuracy of the information stored within varies according to the humans who enter that information. Mistakes can be made. There may not be too many persons named Xxzyz in any given town (and probably not any, but let's pretend). So the odds that the Stanley J. Xxzyz named by the zombie in its complaint being the one and only Stanley J. Xxzyz in the town phone book are probably pretty good. But it ought to take a little more time to evaluate whether the right defendant has been named if the defendant is named Smith or Jones, right?

I don't know what the rule might be in Georgia, but in Illinois a lawyer's obligations with respect to pleadings is spelled out by Supreme Court Rule 137. An attorney must not only sign every new complaint, but the attorney's signature is meant to be "a certificate by him that he has read the pleading...; that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good-faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."

In other words, an Illinois attorney is expected to vouch for the legitimacy of every complaint he or she files -- not that it's a dead-bang winner, but that it states, in good faith, a legitimate dispute. Where the complaint is prepared by staff and the attorney sees it for the first time in a pile of pleadings to be signed, whether he or she spends less than a minute on the 'review' or spends 90 seconds or even two full minutes, it seems unlikely that, in any but the simplest and most straightforward of cases, that anyone could realistically comply with Rule 137. If Georgia's rule is similar (and I'll bet it is) it will be interesting to see whether, regardless of the outcome of the CFPB suit, there are disciplinary consequences for the attorneys who signed these pleadings or those who set up the assembly line system.

The takeaway for the layperson who comes across this post is that one should never, ever assume that suit papers, even though (in your view) clearly erroneous, can be safely ignored. It will not matter to the court that a zombie debt collector has sued the wrong John Jacob Jingleheimer Schmidt. The court will not know the complaint is erroneous -- not unless you appear to say so. If you are a John Jacob Jingleheimer Schmidt, but never had a MegaBank MultiCharge account, but if you are served with a complaint that says you did, and you do not go to court and prevent it, you will be defaulted. You will wind up with a judgment on your record, possibly a garnishment summons on your employer. His name is your name, too, and, if a default judgment is entered against you, his debt is yours as well.

Put it this way: The Rockies may crumble, Gibraltar may tumble; they're only made of clay -- but, in Illinois, after 30 days, a default judgment is here to stay.