BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 641|
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THIRD READING
Bill No: SB 641
Author: Wieckowski (D)
Introduced:2/27/15
Vote: 21
SENATE JUDICIARY COMMITTEE: 5-2, 4/21/15
AYES: Jackson, Hertzberg, Leno, Monning, Wieckowski
NOES: Moorlach, Anderson
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
SUBJECT: Debt buying: default judgment
SOURCE: Public Good
DIGEST: This bill adds a provision to the Fair Debt Buying
Practices Act (FDBPA) to provide that, notwithstanding existing
law's timelines for serving a notice of motion to set aside the
default or default judgment and for leave to defend the action,
if a service of summons has not resulted in actual notice to a
debtor in time to defend an action brought by a third party debt
buyer and a default or default judgment has been entered against
the debtor in the action, the debtor may serve and file a notice
of motion and a motion to set aside the default or default
judgment and for leave to defend the action within 180 days of
the first actual notice of the action, as specified. This bill
provides that this extended timeline to file a notice of motion
and motion to set aside the default or default judgment would
apply to debt buyers with respect to all consumer debt,
regardless of the date it was sold, despite the limited
application of the FDBPA to debt buyers with respect to all
consumer debt sold or resold on or after January 1, 2014.
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ANALYSIS:
Existing law:
1) The FDBPA regulates the activities of a person or entity
(debt buyer) that has bought charged-off consumer loans for
collection purposes.
2) Provides that a debt buyer shall not bring suit or initiate
an arbitration or other legal proceeding to collect a
consumer debt if the applicable statute of limitations on the
debt buyer's claim has expired.
3) Requires that in an action brought by a debt buyer on
consumer debt, specified facts must be alleged in the
complaint.
4) Provides that in an action initiated by a debt buyer, no
default or other judgment may be entered against a debtor
unless business records, authenticated through a sworn
declaration, are submitted by the debt buyer to the court to
establish the specific facts required to be alleged, above.
5) Provides that no default or other judgment may be entered
against a debtor unless a copy of the contract or other
document described, as specified, authenticated through a
sworn declaration, has been submitted by the debt buyer to
the court.
6) Provides that in any action on a consumer debt, if a debt
buyer plaintiff seeks a default judgment and has not complied
with the FDBPA, the court shall not enter a default judgment
for the plaintiff and may dismiss the action.
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7) Provides that, except as provided in the FDBPA, the above
default judgment provisions are not intended to modify or
otherwise amend existing procedures established under Section
585 of the Code of Civil Procedure (which provides a
procedure for judgment to be had if a defendant fails to
answer or otherwise respond to a complaint).
8) Provides, under the Code of Civil Procedure, that when
service of a summons has not resulted in actual notice to a
party in time to defend the action and a default or default
judgment has been entered against him or her in the action,
he or she may serve and file a notice of motion to set aside
the default or default judgment and for leave to defend the
action within a reasonable time, but in no event exceeding
the earlier of: (a) two years after entry of a default
judgment against him or her; or (b) 180 days after service on
him or her of a written notice that the default or default
judgment has been entered.
9) Requires that a notice of motion to set aside a default or
default judgment and for leave to defend the action, above,
designate as the time for making the motion a date prescribed
under a specified provision (which sets forth the statutory
timelines for filing and serving specified noticed motions,
opposing papers, and reply papers), and that the notice be
accompanied by an affidavit showing under oath that the
party's lack of actual notice in time to defend the action
was not caused by his or her avoidance of service or
inexcusable neglect. The party shall serve and file with the
notice a copy.
10) Provides that upon a finding by the court that the motion
was made within the time period permitted, above, and that
his or her lack of actual notice in time to defend the action
was not caused by his or her avoidance of service or
inexcusable neglect, the court may set aside the default or
default judgment on whatever terms as may be just and allow
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the party to defend the action.
This bill:
1) Specifies within the FDBPA that, notwithstanding the above
Code of Civil Procedure timelines for bringing a motion to
set aside a default or default judgment and for leave to
defend the action, if service of a summons has not resulted
in actual notice to a debtor in time to defend an action
brought by a third party debt buyer and a default or default
judgment has been entered against the debtor in the action,
the debtor may serve and file a notice of motion and motion
to set aside the default or default judgment and for leave to
defend the action within 180 days of the first actual notice
of the action.
2) Provides that a notice of this motion shall designate as the
time for making the motion a date prescribed under existing
law, and shall be accompanied by an affidavit showing under
oath that the party's lack of actual notice in time to defend
the action was not caused by his or her avoidance of service
or inexcusable neglect. The party must serve and file with
the notice a copy of the answer, motion, or other pleading
proposed to be filed in the action.
3) Provides upon a finding by the court that the motion was
made within the period permitted by subdivision (a) and that
debtor's lack of actual notice in time to defend the action
was not caused by his or her avoidance of service or
inexcusable neglect, the court may set aside the default or
default judgment on whatever terms as may be just and allow
the party to defend the action.
4) Provides that the above provisions shall not be limited by
the time period specified in the FDBPA (which limits the
applicability of the FDBPA to debt buyers with respect to all
consumer debt sold or resold on or after January 1, 2014) and
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shall be applied to debt buyers with respect to all consumer
debt, regardless of the date it was sold.
Background
Debt buyers are companies that purchase delinquent or
charged-off debts from a creditor for a fraction of the face
value of the debt. Those companies have become subject to
increased scrutiny due to numerous complaints on behalf of
consumers. In 2010, the Federal Trade Commission (FTC) issued a
report examining debt collection litigation and arbitration
proceedings that concluded the "system for resolving consumer
debt collection disputes is broken" and recommended significant
reforms. (FTC, Repairing a Broken System (July 2010) at p. i.)
The FTC noted that:
. . . very few consumers defend or otherwise participate in
debt collection litigation. The Commission therefore
recommends state and local governments consider making a
variety of reforms to service of process, pleading, and court
rules and practices to increase the ability of consumers to
defend or otherwise participate in debt collection litigation.
The report also finds complaints and attachments in debt
collection cases often do not provide adequate information for
consumers to answer complaints or for judges to rule on
motions for default judgment. The FTC therefore recommends
that courts more rigorously apply existing rules to require
that collectors provide adequate information and that
jurisdictions consider adopting rules mandating the
information which must be included in or attached to the
complaint. The report additionally finds that state statutes
of limitations on filing actions to recover on debt are
sometimes variable and complex, and generally not understood
by consumers. The Commission suggests that states consider
modifying their laws to make it simpler to determine the
applicable statute of limitations, and to require that
collectors provide consumers with important information about
their legal rights when collecting debt they know or should
know is time-barred. (Id. at p. 2.)
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In 2012, the federal Consumer Financial Protection Bureau (CFPB)
published a rule allowing for federal supervision of the larger
consumer debt collectors. (CFPB, Consumer Financial Protection
Bureau to Oversee Debt Collectors (Oct. 24, 2012) .) The CFPB
noted that, "[a]pproximately 30 million Americans have, on
average, $1,500 of debt subject to collection. Debt collectors
often report consumers' collection status to the credit bureaus.
If they get the information wrong, this can be the difference
between getting approved or denied for such financial products
as a mortgage or a car loan."
As a matter of state law, in response to these and other issues
concerning debt buying practices, the Legislature enacted SB 233
(Leno, Chapter 64, Statutes of 2013), the FDBPA, to further
regulate the activities of persons and entities that purchase
"charged-off consumer debt." At the time SB 233 was being
considered, the bill's sponsor, the Attorney General, recognized
that such concerns are compounded by the fact that a very high
percentage of debt collection litigation result in default
judgments, where consumers do not appear to present whatever
defenses may be available to them. Accordingly, that bill
included provisions that prohibit a default or other judgment
from being entered against a debtor, unless business records,
authenticated through a sworn declaration, are submitted by the
debt buyer to the court to establish the information that is
alleged in the complaint, and unless a copy of the contract or
other document evidencing the debtor's agreement to the debt,
authenticated through a sworn declaration, has been submitted to
the court. Moreover, SB 233 prohibited buyers from bringing
suit or initiating other legal proceedings to collect a debt if
the applicable statute of limitations on the debt buyer's claim
has expired.
Under existing law, an individual may set aside a default
judgment (which is a judgment entered against a defendant who
has failed to plead or otherwise defend against the plaintiff's
claim) if they did not receive notice in time to defend the
action. A motion to set aside the default judgment must be
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filed within the earlier of two years after the entry of a
default judgment, or, 180 days after written notice that a
default judgment has been entered. This bill, sponsored by
Public Good, creates a separate default judgment rule to extend
the time that a consumer would have to bring a motion to set
aside a default judgment entered against them in an action
brought by a third party debt buyer.
Comment
As stated by the author:
There are far more default judgments in collection cases
brought by debt buyers against consumers than there are in any
other type of case. Yet despite increased education and media
attention around this issue, the number of default judgments
in collection cases remains very high in California. For
example, in Sacramento County Superior Court, collections
cases resulted in default judgments in 74 [percent] of cases
filed in 2013 and 79.3 [percent] for cases filed in the first
[five] months of 2014. [ . . . ]
Prior to the passage of California's Fair Debt Buying
Practices Act (FDBPA) in 2013, debt buyers were not required
to provide the Court with any evidence that the Defendant
being sued actually owed the debt. [ . . . ] For many
consumers with default judgments entered against them, the
first time they are made aware they have been sued on a debt
is when they are served post-judgment with a notice of wage
garnishment.
Although the FDBPA has made great strides in reforming debt
collection litigation, it has no effect on default judgments
entered before January 1, 2014. It's these default
judgments-ones obtained before the FDBPA was signed into
law-that SB 641 will affect. [ . . . ] Moreover, it now
appears that at least certain debt buyers are purposely
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waiting for the two-year mark to pass after having obtained a
default judgment and only then seeking a garnishment order,
leaving consumers no recourse to challenge the validity of the
debt.
SB 641 will allow a consumer, in limited circumstances, to
file a motion to set aside a default judgment that is more
than two years old so the consumer may challenge the validity
of the debt in court and try the case on the merits. The
effect of SB 641 is limited to cases brought by third party
debt buyers.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: Yes
SUPPORT: (Verified5/8/15)
Public Good (source)
Bay Area Legal Aid
California Reinvestment Coalition
Center for Responsible Lending
Consumers for Auto Reliability and Safety
Consumers Union
East Bay Community Law Center
Public Counsel
OPPOSITION: (Verified5/4/15)
California Association of Collectors
DBA International
ARGUMENTS IN SUPPORT: Public Good provides the following
example of the problem with the current default judgment rule
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for actions involving third party debt buying of consumer debt:
. . . "Maryann" lives in Northern California. She has never
even visited Los Angeles. Yet[,] in 2009, a debt buyer
allegedly served her at a Los Angeles residence. The Los
Angeles Superior Court entered a default judgment against
Maryann. Wage garnishment-in Northern California-commenced in
2015, and that was how Maryann learned about the lawsuit. In
fact, Maryann did not owe this credit card debt: she has only
one line of credit, which is in good standing. Because more
than two years have passed since the court entered judgment,
current law affords Maryann no relief unless she files a new
lawsuit to challenge the judgment. Consumers like Maryann
rarely have the ability or resources to bring suit on their
own. If they do, their lawsuits often burden the courts. SB
641 will create an accessible, efficient remedy for people
like Maryann who have been bushwhacked by a judgment through
no fault of their own.
Bay Area Legal Aid, in support, notes that they frequently see
default judgments granted in cases "wherein the underlying
accounts were fraudulent, the result of identity theft, or
otherwise incorrect and the defendant was 'served' at a location
that they did not live or work. Nonetheless these defendants
are often precluded from setting aside the judgment by an
arbitrarily imposed deadline. This law would provide
individuals with an opportunity to have their issues heard
regarding both service of the summons and complaint and the
underlying debt collection lawsuit. For the working poor living
paycheck to paycheck a default judgment, with its accompanying
wage garnishment and bank account levies, can lead directly to
homelessness and other severe consequences." Bay Area Legal Aid
argues that this bill will prevent abuse by debt buyers where
the vast majority of debt collection lawsuits result in default
judgments; provide relief for low-income wage earners facing
collection on unsubstantiated default judgments and give low
income litigants the chance to have their cases heard on the
merits; and resolve an unsettled area of law where some courts
recognize the principle that judgments that are void for lack of
service may be set aside after two years under existing law.
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Public Counsel emphasizes that "[o]nly consumers who lack actual
knowledge of debt buyer suits will have recourse under the new
law. They will have to act within a reasonable time after
learning about the lawsuit. In addition, they will have to
submit an affidavit sworn under penalty of perjury that their
lack of notice did not result from avoidance of service or
inexcusable neglect, and then will have to defend the action on
the merits. This new bill is no free ticket out of debt."
ARGUMENTS IN OPPOSITION:DBA International (DBA) and the
California Association of Collectors (CAC) oppose this bill in
part because they believe existing law provides an adequate
methodology to vacate judgments when an individual contends they
did not receive actual notice in time to defend an action.
Moreover, they assert that, even if the time period under
existing law has expired, "any litigant still has the ability to
file an independent action in equity seeking to set aside the
judgment." DBA and CAC also oppose on the following grounds:
This bill allows for discriminatory treatment of default
judgments obtained by companies in one industry, namely debt
buying companies. "Defaults obtained by debt buying companies
are not inherently suspect-in fact, given the requirements of
the industries national certification program, California's
[FDBPA], and the requirements of federal agencies such as the
Consumer Financial Protection Bureau (CFPB), Federal Trade
Commission (FTC), United States Comptroller of the Currency
(OCC)[,] it can be argued that debt buying companies are in
fact more capable of compliance than many companies for which
this bill does not apply. Furthermore, this bill would create
a highly unusual fact pattern where a default judgment
obtained by a bank would be subject to the two year period
contained [under existing law] and the mere act of selling the
judgment on the secondary market (with no other factual
changes) would subject that judgment to significantly lower
thresholds to vacate in perpetuity.
This bill questions the competency of the judiciary, given
that a court cannot enter judgment by default in favor of
anyone (including debt buying companies) unless the court is
satisfied that the defendant has been properly served the
defendant has failed to respond, and the plaintiff has put
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forth sufficient evidence to base the judgment upon. "There
simply is no basis for imposing on the industry higher levels
of evidentiary requirements for a default judgment [as
required under the FDBPA] and then pairing it with the lowest
threshold to vacate default judgments via the provisions of SB
641."
This bill conflicts with document retention and destruction
policies and rule of law concerning judgments. "The effect of
a judgment is to fold all data, documentation, and evidence
concerning the legitimacy of the underlying obligation into
the judgment. Absent a fraud on the court . . . a judgment is
a legally binding document that stands in place of all that
existed prior to the judgment." Due to companies' mandatory
data and document retention and destruction policies that are
based on current law, insofar as this bill allows motions to
be filed to vacate five or even 10 year old judgments, this
bill "would all but virtually guarantee that some of the
evidence which was reviewed by the court no longer exists due
to mandated destruction policies."
This bill creates the potential to inundate the courts as a
result of zealous legal representation that uses every
available legal option the law permits, regardless of the
legitimacy of service or high quality of the evidence
considered by the court at the time of [default] judgment.
Prepared by:Ronak Daylami / JUD. / (916) 651-4113
5/8/15 16:39:19
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