Court Resolves How Federal Debt Collection and State Consumer Sales Laws Impact Debt-Buyers and Collection Lawyers
A lawsuit against a debt-buying firm and lawyers seeking to collect on a defaulted credit card account can proceed after the Ohio Supreme Court ruled today on several issues regarding the application of federal and state laws governing debt collection.
In a lead opinion written by Justice Paul E. Pfeifer, the Supreme Court ruled the estate of Sandra Taylor Jarvis, who defaulted on a credit card in 2005, can pursue claims of unfair collection practices by a firm that bought her debt and sued her five years later in Summit County for nearly twice the outstanding account balance plus 24 percent for future interest.
The case centered on where and when the actual default on the credit card took place because that determined what statute of limitations applied and the deadline for filing a lawsuit. Taylor Jarvis accused the company of illegally trying to collect a “time-barred” debt because the case was filed after the statute of limitations ran out.
Taylor Jarvis died while the case was pending, and Justice Pfeifer wrote the Court reached five key conclusions that allow her estate to continue the litigation:
- The underlying default on the credit card “accrued” in Delaware, the home state of the bank that issued the card.
- The Delaware statute of limitations – through Ohio’s borrowing statute – determines whether the collection action was timely filed.
- A time-barred collection action may form the basis of a violation under both the federal Fair Debt Collection Practices Act (FDCPA) and the Ohio Consumers Sales Practices Act (OCSPA).
- A consumer can bring claims under FDCPA and OCSPA based on a debt collector’s representations made in legal filings, specifically on the debt collector’s claim for interest that is unavailable to the collector by law.
- Debt buyers of credit card debt and their attorneys are subject to the OCSPA.
In a dissenting opinion, Chief Justice Maureen O’Connor wrote that Ohio’ statute of limitations applied, and that under Ohio’s statute of limitations, the collection action was timely filed. Accordingly, she concluded the firm and lawyers did not violate state or federal law by filing the collection action. She would also hold that the lawyers did not violate the OCSPA or the FDCPA by requesting from the trial court the rate of interest that they sought.
Taylor Jarvis Defaults, But Makes Some Payments
Taylor Jarvis obtained a credit card in 2001 that was eventually acquired by Chase Bank USA, and used it to make purchases over several years. She was eventually unable to make scheduled minimum payments, and the account was declared delinquent. In February 2008, Chase sold its rights to Taylor Jarvis’s account to Unifund Portfolio A, which in June 2008, sold those rights to First Resolution Investment Corporation (FRIC). FRIC had incomplete documentation of the terms of the credit-card agreement. Justice Pfeifer noted despite the importance of the credit-card agreement to both sides in the case, nether was able to produce the original signed agreement.
FRIC hired Cheek Law Offices and attorney Parri Hockenberry to collect on the debt. In November 2009, Cheek sent Taylor Jarvis a letter stating she owed $15,818.50 on the account. Four months later Cheek filed suit against Taylor Jarvis in Summit County Common Pleas Court claiming she breached her contract and sought $8,765.37 on the account, accrued interest of $7,738.99, and future interest of 24 percent. Cheek filed a motion for default judgment less than two months later, which was granted a few weeks later.
Taylor Jarvis discovered the judgment against her, and moved to set aside that default judgment. FRIC and Hockenberry did not oppose the motion, and the trial court agreed to set aside its default judgment. Taylor Jarvis then filed her own counterclaims against FRIC and Cheek, arguing they violated the FDCPA and the OCSPA. FRIC dismissed its claims against Taylor Jarvis and the case proceeded on Taylor Jarvis’s counterclaims against FRIC, Cheek and Hockenberry.
Competing Statutes of Limitations at Issue
Taylor Jarvis claimed FRIC and Cheek violated state and federal law by filing the lawsuit after the Delaware statute of limitations had run, and by seeking an amount of interest that was not permitted by Ohio law.
Taylor Jarvis alleged that threatening to file and actually filing a time-barred claim against her constituted misleading and deceptive collection practices under state and federal law. She also asserted that FRIC and Cheek improperly sought 24 percent interest on her debt, which is purportedly the rate owed under the terms of the cardholder agreement that neither side could produce. Taylor Jarvis argued that since FRIC could not produce a written contract, state law limited the rate of interest to 4 percent, and attempting to seek a higher interest rate violated federal and state law.
Justice Pfeifer explained Taylor Jarvis’s statute-of-limitations-based claims are based on her position that the breach took place, or “accrued,” in Delaware and the debt collection process is governed by Delaware’s statute of limitations through operation of Ohio’s borrowing statute, R.C. 2305.03(B).
Delaware has a three-year statute of limitations for actions to collect on debts. Ohio imposed either a six- or 15-year statute of limitations, depending on whether there was a written contract between the parties. FRIC countered its suit was timely because it was brought within six years of Taylor Jarvis’s breach.
The trial court held the breach accrued in Ohio and the borrowing statute did not apply, but rather the Ohio statute of limitations applied. It concluded the case was filed on time so FRIC and Cheek did not violate the law. Taylor Jarvis appealed to the Ninth District Court of Appeals.
The Ninth District Court reversed, holding that Delaware’s statute of limitations applied, and remanded the matter to the trial court to consider Taylor Jarvis’s claims. FRIC and Cheek appealed to the Ohio Supreme Court, which agreed to hear the case.
Court Process Used to Collect Debt
Justice Pfeifer explained when a creditor sells an individual’s debt to a private entity that attempts to collect the debt, the private debt collectors often employ the court process to get paid.
“The threat of a lawsuit, an executed lawsuit, or a judgment can be a powerful, intimidating force against a consumer,” he wrote.
He observed that creditors usually bundle written-off debt they cannot collect and it is purchased by debt buyers in a bidding process, and often the documentation about the debt is not provided or is lost. Debt collectors go to court with the information they have. A predictable result of debt buyers filing a high volume of lawsuits based on imperfect information is that the lawsuits are regularly filed after the right to collect debts has expired or seek a debt that his not owed, he explained.
“It is dependent in large part on the acquiescence, ambivalence, or ignorance of consumers,” Justice Pfeifer wrote.
Borrowing Statute Affects Time Limit for Lawsuit
Justice Pfeifer wrote that typically if a lawsuit is filed in this state, Ohio law determines the statute of limitations. But Ohio has a borrowing statute, which is an exception to the rule, and directs a court to “borrow” the limitation period of another state if the cause of action accrued in the other state and that state’s limitation period is shorter than Ohio’s.
Absent the borrowing statute, the applicable limitation period for FRIC’s suit would be supplied by R.C. 2305.07, which would have limited the filing to six years after the Taylor Jarvis breach accrued.
“Where the cause of action accrued is the key element of the borrowing statute,” he wrote. “Thus, we must determine where the underlying collection claims accrued in this case. The most relevant precedent favors the conclusion that the cause of action accrued in Delaware, which is where the debt was to be paid and where Chase suffered its loss.”
Justice Pfeifer cited the Court’s 1950 Meekison v. Groschner decision, which concluded a claim arose not where the contract was executed — Michigan — but where the contract was made payable — Ohio. He also noted more recent decisions in New York, Pennsylvania, and Kentucky involving suits based on defaulted credit cards required using the statute of limitations in the bank’s home state.
When Time Breach Accrued Also Debated by Parties
Not only where the breach accrued, but also when is an important consideration in this case not only to determine from what point the statute of limitations begins to run, but also if Ohio’s borrowing statute can be applied, the opinion stated.
FRIC and Cheek argued the debt accrued before the borrowing statute was in effect. Ohio had a borrowing statute, repealed it for a number years, and re-enacted it to take effect starting in April 2005. Similarly to the trial court, the lead opinion agreed with FRIC and Cheek that Chase’s claim of a breach accrued when Taylor Jarvis failed to make the minimum monthly payment in January 2005. Since Chase’s claims accrued before the effective date of the statute, the borrowing statute could not apply, FRIC and Cheek argued.
“We agree that the cause of action accrued when Taylor Jarvis failed to make her minimum payment in January 2005, but we hold that R.C. 2305.03(B) nonetheless applies to the cause of action against her,” Justice Pfeifer wrote.
He stated that Article II, Section 28 of the Ohio Constitution prohibits the General Assembly from enacting retroactive laws, and the General Assembly did not intend R.C. 2305.03(B) to be retroactive. He noted the Court has held that a law that only shortens an existing statute of limitations is constitutionally permissible when it does not destroy the ability to file a lawsuit. He explained that the application of the borrowing statute to FRIC’s claims reduces the applicable statute of limitations from six years to three, but even with that shortening, there existed a reasonably long period of time for FRIC to file suit.
“With Delaware’s statute of limitations controlling this case, FRIC’s complaint was filed well outside the applicable statute of limitations,” he wrote.
Interest Rate Sought Required Written Contract
Justice Pfeifer wrote that R.C. 1343.03(A) limits the interest a creditor can collect to a rate set by law unless a written contract provides a different interest rate. The law also states an invoice or monthly statement does not constitute such a writing, and because there was no written agreement between FRIC and Taylor Jarvis, the rate was determined by a formula in state law that set the interest rate at 4 percent, not the 24 percent it sought in its complaint against Taylor Jarvis.
“FRIC filed its complaint in March 2010, without including a copy of the credit-card agreement. It quickly sought a default judgment. But it never had the necessary documentation to back up its claim (for 24 percent interest),” Justice Pfeifer wrote. “FRIC in this case attempted to collect an interest rate that it could not legally collect; only a written contract could except FRIC from the statutory rate of interest under R.C. 1343.03(A).”
FRIC had argued that the claim for 24 percent interest was not a demand made of Taylor Jarvis, but simply a prayer for relief from the court. Justice Pfeifer noted that other courts “have held that a court filing is not a safe harbor for debt collectors under the FDCPA” and that “litigation-related conduct, including the filing of formal complaints, can give rise to claims” against debt collectors. Justice Pfeifer concluded that “FRIC’s claim in its complaint for interest that is unavailable by law was a demand made upon Taylor Jarvis rather than an aspirational request to the trial court and thus can be the basis of an actionable claim under the FDCPA and the OCSPA.
OCSPA Can Be Invoked
FRIC and Cheek also stated that the OCSPA does not apply to them because there was no “consumer transaction” and they are not a “supplier” under definitions of the state law.
Justice Pfeifer wrote the Court had little trouble concluding that Cheek and FRIC are “suppliers,” because part of the definition of “supplier” includes companies that are “soliciting consumer transactions.” He stated FRIC and Cheek both solicited Taylor Jarvis in an effort to recover her debt or resolve it and that made them suppliers within the meaning of the OCSPA.
Cheek also asserted that the definition of “consumer transaction” excludes transactions between financial institutions and their customers, and that the exemption extends to “bank assignees,” which Cheek contended includes both FRIC and Cheek.
Neither FRIC nor Cheek is a financial institution within the meaning of the OCSPA, Justice Pfeifer wrote. He explained the exemption applies only to transactions with certain specific entities, namely, banks and financial institutions, and nothing in state law confers an exemption to a debt buyer that purchased a debt that originated in a transaction involving a financial institution and its customer.
The Court affirmed the Ninth District’s ruling and remanded the case to the trial court for further proceedings consistent with its opinion.
Justice William M. O’Neill joined Justice Pfeifer’s opinion.
Justice Lanzinger concurred in judgment only.
Justice Sharon L. Kennedy concurred in part and wrote a separate concurring opinion, which Justice Terrence O’Donnell joined.
Concurring Opinion Uses Different Timeline
In a concurring opinion, Justice Sharon L. Kennedy joined in Justice Pfeiffer’s opinion except for when the cause of action accrued. Justice Kennedy wrote that the issue of when the cause of action accrued is resolved by case law pertaining to an action on an account. Applying the principle that the statute of limitations for an action on an account begins to run on the date of the last item appearing on the account, Justice Kennedy concluded that the cause of action accrued in June 2006, the date Taylor Jarvis made her last payment on the credit-card account.
Justice Kennedy alternatively recognized the principle that for an open account, a cause of action accrues for statute-of-limitations purposes on the date the relationship between the parties has come to an end other than for purposes of paying amounts due or past due. She noted that Chase did not conclude that the parties’ credit relationship was irreparable when Taylor Jarvis failed to make a minimum monthly payment. Applying this alternative analysis, Justice Kennedy reasoned that the cause of action against Taylor Jarvis accrued, and the statute of limitations began to run at the very earliest on April 8, 2005, when Chase terminated Taylor Jarvis’s charging privileges.
Justice Kennedy observed that under either analysis, the cause of action accrued after the effective date of the borrowing statute and, therefore, it was not necessary to determine whether the law applied retroactively. She wrote that the Delaware statute of limitations controlled and the attempt to collect the debt was time-barred.
Dissent Maintains Breach Accrued in Ohio
In her dissent, Chief Justice O’Connor noted the amounts of unpaid debt stemming from the Great Recession are “staggering,” and that in 2008, credit card lenders “wrote off” about $45 billion in bad debt.
“The real debt, however, does not magically disappear,” she wrote. “The companies owed the debt suffer the loss of that money, and ultimately they shift the burden of paying the debt to other credit-card holders through higher interest rates and fees.”
She wrote that companies do engage in the sometimes unsavory, but now common, phenomenon of “debt sales,” and the debt market involves both the bad behaviors of irresponsible consumers and the tragedies of responsible ones.
“I understand the majority’s indignation with perceived injustices, but I cannot join its analysis, which is driven by the result it seeks to achieve rather than thoughtful considerations of precedent and public policy,” she wrote.
Chief Justice O’Connor stated the proper analysis of the claims should lead to the conclusion that Ohio law controls and the complaint was timely filed. She noted the trial court applied the reasoning of a Kentucky federal district court’s 2001 Combs v. Internatl. Ins. Co. decision, which held the breach accrues in the state where the borrower failed to make payments. In this case the breach occurred in Ohio because Taylor Jarvis made the decision not to make her payments while she was in Ohio, she wrote.
“I agree with the trial court’s approach — which is grounded in law and common sense — that the location where the debtor lives, primarily uses the card, and decides not to make the payments is more significant to the breach than the place where payments would have been sent if there had been no breach,” Chief Justice O’Connor stated.
She maintained while the majority relies on the Meekison decision, no court in the nation has ever applied it in a reported decision involving a credit-card debt, and it has been 35 years since an Ohio appellate court last cited Meekison in any context.
She also faulted the lead opinion for the retroactive application of the borrowing statute, and stated it does not explain how halving the six-year Ohio statute of limitations to three years is “reasonably long,” particularly since it “obliterates FRIC’s claim” while breathing life into Taylor Jarvis’s counterclaims.
She wrote as a general matter she agreed that debt collectors, including attorneys engaged in debt collections, can be held liable under both the OCSPA and the FDCPA. However, before today’s decision there was ample precedent to support a debt collector bringing suit in an Ohio court against an Ohio debtor for a debt that was less than six years old, she noted. She concluded FRIC and Cheek’s lawsuit did not violate the statutes.
Chief Justice O’Connor agreed that FRIC ultimately did not establish that it was entitled to interest at the rate claimed. But she disagreed with the majority’s determination that by requesting the rate in the prayer for relief in the complaint, that FRIC, Cheek and Hockenberry violated the FDCPA and the OCSPA. Had FRIC produced the actual agreement at issue in this case and had the agreement provided the interest rate the company claimed, FRIC might have been entitled to an award of interest at that rate. But she also noted that the majority’s conclusion means that requests for relief made by a plaintiff’s attorney in a complaint can be used to establish liability against the attorney as well as the attorney’s client.
“Debt collection can be a hardhearted business. When debt collectors violate consumer-protection laws, they should be held accountable. However, no violations occurred in this particular case,” Chief Justice O’Connor concluded.
Justice Judith L. French joined the dissenting opinion.
Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.
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