3 Things You Can Learn About Debt Collection Lawsuits from Barbosa v. Midland Credit Management
A legal opinion about debt collection and arbitration was recently issued by a federal appeals court. Consumers had tried to file a class-action lawsuit against two debt collectors, Midland Credit Management, and its collection attorneys at Schreiber/Cohen LLC (now called Schreiber Law LLC).
The basis of the lawsuit was that Midland and Schreiber/Cohen filed collection lawsuits against consumers even though the statute of limitations had passed. The credit card agreements used Delaware law, which has a three-year statute of limitations on credit card debt. The applicable state law, however, has a six-year statute of limitations. All the people in the class action had credit cards that were older than three years.
To avoid having to go to court, Midland and Schreiber/Cohen filed a motion to force the case into arbitration. The credit card agreement with the original bank, Barclays, said that disputes should be resolved in arbitration, not court. (Interestingly, most of the people in the class action were people who had previously been sued – in court – by Midland and Schreiber/Cohen.)
The consumers did not want to arbitrate the case and asked the court to let the case go forward. The consumers pointed out that their arbitration agreement was with the original bank, Barclays, not with Midland or Schreiber/Cohen.
As an aside, our office agrees that for this type of case it is better to have your day in court than to fight a credit card company or a debt collector in a private arbitration. Most arbitrations are paid for by the collectors, so it just takes a little common sense to guess how most of those cases work out for consumers.
The consumers lost at the lower court level, then appealed to the federal court of appeals, which made a final decision. The consumers had to arbitrate all their claims because the credit card agreements gave Midland and Schreiber/Cohen the same rights that Barclays had, including the right to force arbitration. All the consumers in the class action were forced into arbitration.
The name of the case is Barbosa v. Midland Credit Management.
Though this was not a good outcome for the consumers (our office was not involved in the case), there are three important things to learn from the court of appeals’ decision.
1. The Debt-Collection Industry is Massive and Lucrative – but Sloppy.
The appeals court provided an overview of the debt-collection industry. The industry is huge, worth over $13 billion dollars a year. That means that $13 billion in consumer (and sometimes business) credit card accounts is sold from big banks and credit card issuers to debt buyers whose only business is to purchase bad debts, and then collect and file lawsuits. The court called debt collection “a massive and lucrative industry.”
That said, it’s a sloppy industry. Most consumers do not defend themselves in court, but when they get a lawyer, they often win. The contracts that purportedly assign ownership of the credit card accounts are often incomplete or fail to name the consumers or their accounts. Legally, they’re not sufficient. This is a lesson to consumers – if you are sued by a debt buyer or debt collector, you should fight back.
2. The Consumers’ Argument About the Credit Card Statute of Limitations is Still an Open Question.
The court would not let the parties argue about anything but whether or the claims had to be arbitrated, but the main issue in the case was whether the accounts were past the statute of limitations. The court never addressed this issue, so it is still an open question.
It is important for consumers to look at their cardholder agreements to see what state’s law was used. State statutes of limitations generally range from 3 to 6 years, but the law of the cardholder agreement may be different from the law of the state that the lawsuit is filed in.
The analysis of which state’s statute of limitations applies is often a complex analysis of multiple factors, such as the extent of any negotiations between the parties before entering the contract, the state residency of each of the parties, and which state is most relevant to the overall agreement.
There are arguments that our office has used to obtain a dismissal of cases when one of the limitations periods is shorter.
If a credit card is past the statute of limitations when a lawsuit is filed, the remedy is simple: file a motion to dismiss. The short-circuits the lawsuit and resolve the lawsuit in your favor without having to go to trial.
3. Credit Card Arbitration Agreements Are Construed Broadly.
Even though Barclays (the credit card issuer that had the arbitration agreement) had sold the account to Midland, Midland wanted to be able to enforce arbitration. This seems counterintuitive – why should a consumer who never made an agreement with Midland be forced to arbitrate the dispute? The reason for this is the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq.
Big business, including debt collectors, does not like to have to go to court when they break the law. That’s why debt collectors just love the Federal Arbitration Act, which says that arbitration agreements in form contracts are enforceable, even if consumers do not know that they agreed to arbitrate. When a dispute goes to arbitration, the lawsuit is put on hold or dismissed and the parties have to go to a private arbitrator.
Contract law says that if one party to a contract assigns (sells) the contract to someone else, the buyer of the contract has the same rights as the seller. Here, this means that when banks like Barclays sell bad credit card debts to companies like Midland, Midland can enforce the arbitration clause, too.
The case of Barbosa v. Midland Funding involved many issues – debt buyers, debt collection, statutes of limitations, and arbitration. The outcome was that the consumers had to file their claims for illegal debt collection in private arbitration. They didn’t lose, but they didn’t win – not yet, at least. What is certain is that more debt collectors will continue to sue consumers, and at least a few consumers will stand up and assert their rights to have their day in court.
Dye Culik PC is a consumer protection law firm representing individuals in Massachusetts and North Carolina against debt collectors, debt buyers, collection attorneys, and credit card companies. We have represented consumers in both state and federal courts, and we are aggressive in pursuit of our clients’ rights. If you have a collection issue, contact us to see if we can help.