Liberal U.S. justices hit debt collector’s business practices

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By Lawrence Hurley | WASHINGTON

WASHINGTON Liberal U.S. Supreme Court justices
on Tuesday questioned the practices of a firm that buys unpaid
consumer debt for pennies on the dollar then seeks to recover it
from people in bankruptcy even when barred from doing so by
state statutes of limitations.

During arguments in a case involving debt collection company
Midland Funding, a subsidiary of California-based Encore Capital
Group, liberal justice Sonia Sotomayor said she had “a
great deal of difficulty with this business model.”

Fellow liberals Elena Kagan and Ruth Bader Ginsburg also
posed tough questions to Midland’s lawyer, indicating sympathy
for an Alabama debtor named Aleida Johnson, who entered
bankruptcy in 2014 and sued the company after it sought payment
of $1,879 in debt incurred more than a decade earlier.

Alabama law sets a six-year statute of limitations for debt
to be collected.

Noting that Midland buys old debt it knows is not legally
recoverable because of various state laws preventing collection
after a number of years, Sotomayor asked, “Apparently, you
collect on millions of dollars of these debts. So is that what
you do?”

The company’s lawyer, Kannon Shanmugam, said Sotomayor’s
question was not based on a “valid understanding” of what the
company does. Shanmugam said Midland “makes every effort not to
purchase time-barred debt,” although he conceded that “they’re
not always correct in their assessments.”

The tough questions by the three liberal justices may not
doom Midland’s chances of winning the case because conservative
justices appeared more sympathetic to its legal arguments, as
did the court’s fourth liberal, Justice Stephen Breyer. The
court has four liberals and four conservatives.

Ginsburg also touched upon Midland’s business strategy,
saying that there would be “no point” in filing claims that it
knew to be time-barred “unless there’s a chance it will be
overlooked” during the bankruptcy proceedings.

Kagan said the law as interpreted by Midland would mean
debtors “will pay on things that they shouldn’t be paying on.”

Breyer seemed concerned about bankruptcy-related issues
being litigated in federal court, where fair-debt lawsuits are
filed, rather than in bankruptcy court.

“I thought the point of the bankruptcy code was to have
bankruptcy matters decided in a bankruptcy court,” Breyer said.

Lawyers for debtors have said it is common practice for debt
collection companies to attempt to recoup debt that is not
legally recoverable under state law unless the creditor actually
agrees to pay it.

If the debtor does not object, claims can be made against
them when they have entered bankruptcy even if there is no legal
basis for the debt to be collected.

Lawyers for the debt collection companies said bankruptcy
law allows them to file such claims even when there is no legal
mechanism for them to collect.

A ruling is due by the end of June.

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