Finding Violation of New York’s Champerty Laws, Federal Court Dismisses Fair Debt Collection Practices Act Lawsuit

Finding Violation of New York’s Champerty Laws, Federal Court Dismisses Fair Debt Collection Practices Act Lawsuit

Agreements among a credit repair organization, a law firm, and a New York woman were unenforceable or otherwise ran afoul of the law, a federal court ruled this week.  The reasons?  The credit repair organizations agreement with the woman violated a federal statute, and an agreement with the law firm violated New York’s champerty laws and other rules, the court said.

Judge Robert W. Sweet, of the U.S. District Court for the Southern District of New York, issued the July 17 ruling in Taylor-Burns v. AR Resources, Inc., 16 Civ. 1259, 2017 U.S. Dist. LEXIS 110638 (S.D.N.Y. Jul. 17, 2017), granting the motion of defendant AR Resources (“ARR”) and dismissing the complaint that had alleged a violation of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”).

As set forth in Judge Sweet’s opinion, the plaintiff, Tonya Taylor-Burns, alleged that “ARR failed to list an account as disputed after she purportedly sent a letter to ARR disputing the debt” and that “ARR’s failure to report the debt as disputed violates multiple provisions of the FDCPA.”  The dispute hinged on a June 2015 letter, which – as the plaintiff admitted in deposition testimony – was not written, signed, or sent by her.  Instead, it came from a credit repair organization, Credit Shield 360 (“CS360”), said the court.

ARR argued that the letter was written and sent without actual or apparent authority because CS360 is a credit repair organization, subject to the Credit Repair Organizations Act (“CROA”), 15 U.S.C. § 1679 et seq., and the contract between the Plaintiff and CS360 did not meet the CROA requirements.  The court agreed, and concluded that the “lack of a CROA-compliant contract between CS360 and Plaintiff – and therefore the lack of a valid contract between CS360 and Plaintiff – means that CS360 had no authority to send the Letter on Plaintiff’s behalf” and, since “no valid dispute was made, ARR cannot be liable for an alleged failure to report the debt as disputed . . . .”

The court also addressed an agreement between the plaintiff and RC Law Group.  The issue, said the court, “is whether the RC Law Agreement violates New York’s champerty laws and ethical rules.”  The court, which discussed the meaning of “champerty” and analyzed the terms of the agreement, concluded that the agreement violated New York law:

‘Champerty, as a term of art, grew out of the practice where someone bought an interest in a claim under litigation, agreeing to bear the expenses but also to share the benefits if the suit succeeded.’  Justinian Capital SPC ex rel. Blue Heron Segregated Portfolio v. WestLB AG, 37 Misc.3d 518, 523-24, 952 N.Y.S.2d 725 (N.Y. Sup. Ct. 2012) (quoting Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d 726, 731 N.E.2d 581, 585, 709 N.Y.S.2d 865 (N.Y. 2000)).  Champerty was developed ‘to prevent or curtail the commercialization of or trading in litigation.’  Id.  New York adopted the prohibition against champerty by statute, providing:

An attorney or counselor shall not:

Directly or indirectly, buy, take an assignment of or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, with the intent and for the purpose of bringing an action thereon.

N.Y. Judiciary Law § 488(1) (McKinney).

The facts . . . establish that CS360 identifies potential individuals to act as plaintiffs in consumer protection lawsuits filed by RC Law Group.  The CS360 Agreement states that CS360 provides free credit repair services to clients, and CS360 receives payment of $150.00 ‘from FDCPA settlement funds collected for Client in excess of $200.00.’ . . . .  However, CS360 is not a law firm and cannot represent clients in FDCPA lawsuits.  The CS360 Agreement further provides that CS360 is authorized ‘to share any info that could be a potential claim against such companies with RC Law Group so that it may pursue such claims on my behalf.’ . . . . RC Law Group identifies CS360 as a client in its fee agreement. . . .  As evidenced by the CS360 Agreement, the RC Law Agreement, and the deposition of Bergida, CS360 and RC Law Group are intertwined entities, generating revenue through the filing of lawsuits such as this one.

The CS360 Agreement and the RC Law Agreement show that these entities’ operations depend upon clients signing over the majority of their interests in their lawsuits to CS360 and RC Law Group, allowing the entities to pursue FDCPA claims as they please and share in the majority of any recovery.  The RC Law Agreement states that RC Law Group is providing ‘legal advice and services for suits and issues that may arise’ under the FDCPA.  . . . .  It further states that ‘RC Law will investigate potential claims and if RC Law deems such potential claims viable, RC Law will file suit on Client’s behalf and/or seek to have the debt collector(s) settle the claim(s).’  . . . .  Based on this language, RC Law Group is retained by clients such as the Plaintiff in the instant action, through those clients’ agreements with CS360, to pursue claims not identified at the time of the alleged agreement.  RC Law Group thereby assumes a direct interest in the lawsuit.

The RC Law Agreement provides that RC Law is entitled to take 45% of any actual damages recovery, 80% of any statutory damages, and all attorney’s fees and costs.  Given that there is no evidence of actual damages in this case, Plaintiff therefore stands to recover at most $200, and likely only $50 after payment of CS360’s $150 fee for a successful FDCPA claim. . . .  Through the RC Law Agreement and CS3 60 Agreement, RC Law Group has directly or indirectly taken over an interest in the Burns’ cause of action, which is prohibited by the champerty laws of New York.

In addition, Rule 1.8 (i) of New York Rules of Professional Conduct prohibits a lawyer from acquiring a proprietary interest in a lawsuit.  By taking an 80% contingent fee on statutory damages and 45% contingent fee on actual damages, in addition to all attorney’s fees and costs, RC Law Group took a proprietary interest in this lawsuit.  NY ST RPC Rule 1.8 (i) (McKinney).

Concluded the court: “Based on the violations of the New York Rules of Professional Conduct, and the champerty laws discussed above, ARR’s motion for summary judgment is granted and the Plaintiff’s claim for attorney’s fees is dismissed.”

The full opinion is available here.

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