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Ninth Circuit Rejects Creative Attempt to Defeat FDCPA Claim

A lawsuit is an asset.  May a creditor execute upon a judgment against a debtor to take away the debtor’s FDCPA cause of action?  The United States Court of Appeals for the Ninth Circuit has held that it may not.

In Arellano v. Clark Cty. Collection Serv., No. 16-15467, 2017 U.S. App. LEXIS 23229 (9th Cir. 2017), Patricia Arellano sued a collection agency and its law firm for alleged violations of the Fair Debt Collection Practices Act.  The defendants had previously sued Arellano in a justice court proceeding and obtained a default judgment against her on her debt.  Upon learning of the FDCPA action, the defendants obtained a writ of execution on the judgment and sought to levy upon Arellano’s FDCPA cause of action.  The writ directed the sheriff “to satisfy this judgment with interest and costs as provided by law, out of the personal property of the judgment debtor,” and it described the targeted property as all “claims for relief, causes of action, things in action, and choses in action in any lawsuit pending in Nevada including, the rights of Patricia Arellano, in the civil action” pending against the collection agency and its lawyers.

Pursuant to the writ of execution, the sheriff sold Arellano’s suit in an auction sale, at which the collection agency bought the claims against itself for $250. The agency then moved in federal district court to dismiss the lawsuit, arguing that Arellano “no longer possesse[d] any rights of action in this case, and no longer possesse[d] any standing to sue.” The district court granted the motion and dismissed Arellano’s suit.  Arellano appealed.

Noting that “state law is pre-empted to the extent that it actually conflicts with federal law,” the Ninth Circuit observed that such a conflict occurs when “the operation of state law ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,’” or when it “interferes with the methods by which the federal statute was designed to reach [its] goal,”

After finding that “the collection agency’s strategy in seeking the writ was not to obtain personal property to satisfy the judgment, but to acquire the rights to Arelleno’s FDCPA lawsuit against the agency so it could have it dismissed,” the court of appeals concluded that the FDCPA preempted (and therefore prohibited) the state law remedy:

In addition to evading liability and preventing Arellano from pursuing her potential federal claims, the collection agency has literally used the execution mechanism to collect debt from Arellano, and argues that she “has received the benefit of [the $250] reduction in her judgment.” But a debt collector cannot be allowed to use state law strategically to execute on a debtor’s FDCPA claims against it under the guise of legitimate debt collection. Though the FDCPA does preserve debt collectors’ rights to collect what they are owed, the Act does not “authorize the bringing of legal actions by debt collectors.” See 15 U.S.C. § 1692i(b). Debt collectors cannot evade the restrictions of the Act by forcing a debtor’s claims to be auctioned, acquiring the claims, and dismissing them. To allow otherwise would thwart enforcement of the FDCPA and undermine its purpose. See 15 U.S.C. §§ 1692k, l.

The court of appeals reversed the district court, and remanded the case for further proceedings, holding that federal law preempts a private party’s use of state execution procedures to acquire and destroy a debtor’s FDCPA claims against it.   It is not clear that other federal circuits would reach the same outcome.

There are relatively few FDCPA cases dealing with preemption.   This case places the FDCPA ahead of a creditor’s right to enforce a valid, final, state court judgment.  To that extent, it appears to run afoul of multiple federal jurisdictional doctrines not addressed in the opinion.