BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 641| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- UNFINISHED BUSINESS Bill No: SB 641 Author: Wieckowski (D) Amended: 8/27/15 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 SENATE FLOOR: 29-10, 5/22/15 AYES: Allen, Beall, Block, Cannella, De León, Galgiani, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Pan, Pavley, Roth, Stone, Vidak, Wieckowski, Wolk NOES: Anderson, Bates, Berryhill, Fuller, Gaines, Moorlach, Morrell, Nguyen, Nielsen, Runner ASSEMBLY FLOOR: 45-26, 9/9/15 - See last page for vote SUBJECT: Debt buying: default judgment SOURCE: Public Good DIGEST: This bill adds a provision to the Fair Debt Buying Practices Act (FDBPA) to provide consumers, in limited circumstances involving actions brought by debt buyers, extended time to file a motion to set aside a default or default judgment and for leave to defend an action relating to debt, if the service of summons did not result in actual notice to the consumer in time to defend the action. This bill requires, except in cases of identity theft or mistaken identity, that the consumer serve and file the notice of motion within a reasonable SB 641 Page 2 time, but in no event exceeding the earlier of either: (1) six years after entry of the default or default judgment; or (2) 180 days of the first actual notice of the action, as specified. Assembly Amendments (1) require that service and filing of the motion be made within a reasonable amount of time; (2) limit the scope of the bill to defaults or default judgments entered on or after January 1, 2010; (3) allow for the introduction and consideration of evidence in support of or against the motion; and 4) make other clarifying changes. ANALYSIS: Existing law: 1) Provides that 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 SB 641 Page 3 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. 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 must 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 the party to defend the action. SB 641 Page 4 This bill: 1) Creates a limited exception to the current timelines to bring a motion to set aside a default or default judgment and for leave to defend the action under the FDBPA. Provides that if service of a summons has not resulted in actual notice to a person in time to defend an action brought by a debt buyer and a default or default judgment has been entered against the person in the action, the person 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. 2) Requires, generally, that the notice of motion be served and filed within a reasonable time, but in no event exceeding the earlier of: Six years after entry of the default or default judgment against the person. One hundred eighty days of the first actual notice of the action. 1) Requires, notwithstanding the above, that in the case of identity theft or mistaken identity, the notice of motion be served and filed within a reasonable time, but in no event exceeding 180 days of the first actual notice of the action. In the case of identity theft, the person alleging that he or she is a victim of identity theft must provide the court specified documentation. In the case of mistaken identity, the moving party must provide relevant information or documentation to support the claim that he or she is not the party named in the judgment or is not the person who incurred or owes the debt. 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 stating 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. Permits either party to SB 641 Page 5 introduce, and permits the court to consider, evidence in support of its motion or opposition, including evidence relating to the process server who appears on the proof of service of the summons and complaint. 3) Provides upon a finding by the court that the motion was made within the periods permitted by the bill, above, and that a person'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. If the validity of the judgment is not challenged, the court may select an appropriate remedy other than setting aside the default or default judgment. 4) Provides that the above provisions apply to a default or default judgment entered on or after January 1, 2010, except in the case of identity theft or mistaken identity, in which case these provisions shall apply regardless of the date of the default or default judgment. 5) Provides that the above provisions shall not limit the equitable authority of the court or other available remedies under law. 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 July 2010, the Federal Trade Commission (FTC) issued a report, Repairing a Broken System, examining debt collection litigation and arbitration proceedings that concluded the "system for resolving consumer debt collection disputes is broken" and recommended significant reforms. 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 SB 641 Page 6 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. 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 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 debt buyer. Comments As stated by the author: SB 641 Page 7 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 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 [ . . . ] debt buyers. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: Yes SB 641 Page 8 According to the Assembly Appropriations Committee, minor and absorbable costs to the Judicial Council; potential increase in caseload, though likely modest, to state courts. SUPPORT: (Verified9/9/15) Public Good (source) Attorney General Kamala Harris State Treasurer John Chiang Bay Area Legal Aid California Labor Federation California Professional Firefighters California Reinvestment Coalition Center for Responsible Lending Consumers for Auto Reliability and Safety Consumers Union East Bay Community Law Center Katharine & George Alexander Community Law Center Los Angeles Democratic Party Chairman Eric Bauman National Consumer Law Center National Employment Law Project Public Counsel Western Center on Law & Poverty OPPOSITION: (Verified9/9/15) California Association of Collectors California Bankers Association California Creditors Bar Association DBA International ARGUMENTS IN SUPPORT: 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 SB 641 Page 9 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. 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) write in opposition to 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) and, furthermore, 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 SB 641 Page 10 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 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. ASSEMBLY FLOOR: 45-26, 9/9/15 AYES: Bloom, Bonilla, Bonta, Burke, Calderon, Campos, Chau, Chiu, Chu, Cooley, Dababneh, Dodd, Eggman, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, SB 641 Page 11 Hadley, Roger Hernández, Holden, Irwin, Jones-Sawyer, Levine, Linder, Lopez, Low, McCarty, Medina, Mullin, Nazarian, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark Stone, Thurmond, Ting, Weber, Williams, Atkins NOES: Achadjian, Travis Allen, Baker, Bigelow, Chang, Chávez, Dahle, Beth Gaines, Gallagher, Gray, Grove, Harper, Jones, Kim, Lackey, Maienschein, Mathis, Mayes, Melendez, Obernolte, Olsen, Patterson, Steinorth, Wagner, Waldron, Wilk NO VOTE RECORDED: Alejo, Brough, Brown, Cooper, Daly, Frazier, O'Donnell, Perea, Wood Prepared by:Ronak Daylami / JUD. / (916) 651-4113 9/9/15 19:28:11 **** END ****