Illinois Supreme Court Debates Effect of Failure to Register as Debt Collector

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Our reports on the oral arguments during the May term of the Illinois Supreme Court continue with a direct appeal pursuant to Supreme Court Rule 302 – LVNV Funding v. Trice.

LVNV began when the defendant used a credit card to pay for plumbing services. When the defendant failed to pay the credit card issuer the full amount of the charge, the issuer sold its interest in the account to the plaintiff, who sued the defendant to collect the debt.  The matter went to trial with the defendant appearing pro se, and judgment for the plaintiff was entered. After trial, the defendant hired counsel. The new attorney moved to vacate the judgment on the grounds that the plaintiff had never registered as a collection agency under state law, making the judgment void (the plaintiff had gotten its license after filing the suit, but before entry of judgment). The plaintiff responded that the trial court had jurisdiction over the parties and the subject matter, and that was all that was needed to make the judgment not void.

The case went up on appeal for the first time in 2011. The Third Division of the First District found that both buying the debt from the issuer and suing the defendant would be criminal acts if the plaintiff was not licensed, the Court held. The Court remanded for the sole purpose of determining when the plaintiff had become licensed. Instead, the Circuit Court entered an order on remand striking down the licensing statute on constitutional grounds. As a result, the second appeal came directly to the Supreme Court.

Counsel for the defendant began the oral argument. Counsel argued three points: (1) the statutory licensing law prohibits anyone from operating in the state without a license, and imposes criminal and civil penalties for violators; (2) the legislature has declared a strong public policy regarding the business of debt collection, finding that the business affects the public welfare and should be regulated for the protection of debtors; and (3) previous precedent recognizes a distinction between failure to license as a business and the unlicensed practice of law with respect to the appropriate remedy. Justice Burke asked whether the Act expressly states that judgments are void if the plaintiff is unlicensed, and counsel answered that that result was mandated by the Court’s nullity rule. Justice Burke asked whether the defendant gets a windfall if the judgment is unenforceable. Counsel answered that the legislature has made the judgment that a party cannot sue without a license. Unlicensed debt collection is contrary to the public welfare, and since the plaintiff was unlicensed at the time it sued the defendant, the voidness rule applied.

Counsel for the State, which had intervened to argue the constitutionality of the licensing statute, followed. Counsel argued that the case was somewhat unusual, in that not even the defendant was defending the Circuit Court’s holding on the grounds the Court relied upon. There can be no equal protection violation where a statute doesn’t distinguish between similarly situated parties, counsel argued. Nor was the statute arbitrary or irrational simply because the conduct prohibited was unlikely to lead to physical injury or death given the long tradition of financial crimes. The plaintiff had argued that the statute was void for vagueness in that it was impossible to know what was and what was not “debt collection.” Counsel for the State disagreed. Counsel pointed out that there is a distinction between ordinary statutory ambiguity and constitutional vagueness. Ambiguity exists when multiple reasonable readings exist, but it only rises to the level of a constitutional problem when a statute is entirely incapable of intelligent interpretation. The dormant commerce clause argument failed, since the statute doesn’t treat in-state and out-of-state commerce differently.

This leaves only the rational basis argument, according to counsel. The FTC has documented abuses in the debt collection industry, including specifically in litigation, counsel argued. Most lawsuits end in default judgments, and some collectors play the odds, hoping enough people won’t bother to defend their suits that they’ll come out ahead. Since nobody was defending the Circuit Court’s judgment, counsel suggested that the Court summarily vacate the decision and remand the case for resolution of the defendant’s remaining arguments. This was appropriate, counsel argued, because otherwise the defendant would be in effect bootstrapping a Rule 308 appeal through Rule 302, getting a number of non-constitutional issues before the Court through a non-substantial constitutional appeal. Counsel disputed the defendant’s argument that the ethical rules governing attorneys were a sufficient check on litigation abuse, arguing that there is evidence to the contrary. Nevertheless, counsel argued, it was not necessary that the legislature’s action be narrowly tailored to the problem in this constitutional context.

Counsel for the plaintiff followed. Counsel argued that the case should have ended at the Appellate Court since only subject matter and personal jurisdiction defects make a judgment entirely void – not failure to license. The nullity rule applying to corporations is an exception to that principle, but since an attorney filed the complaint, the nullity rule was inapplicable. Counsel argued that all four factors cited in previous Supreme Court cases regarding the nullity rule favor the plaintiff here – the lawsuit was filed without knowledge of the licensing requirement and the plaintiff acted diligently in correcting the mistake. Justice Thomas asked whether the Court should assess the constitutional argument and remand the rest. Counsel answered that the lower court had already ruled on nullity, so there was nothing to remand. The plaintiff merely buys debt and hires attorneys to file lawsuits, counsel argued; it was not a traditional collection agency. Justice Theis suggested that since a lawyer is acting on behalf of the client, the argument is that it’s the plaintiff contacting and suing the debtor. Counsel answered that before 2008, only a debt buyer “with recourse” was subject to the Act. In 2008, the legislature removed the words “with recourse,” but still, nothing in the Act suggests that filing a lawsuit necessarily is debt collection. Justice Karmeier asked counsel whether he was defending the constitutionality rulings of the trial court, and counsel said yes, in part. Justice Karmeier asked whether counsel’s non-constitutional issues still needed to be litigated. Counsel argued that the State hadn’t specified where it proposed to remand the matter to. Everything the plaintiff briefed was argued and decided in either the Circuit or Appellate Court. Justice Kilbride asked whether the trial court had decided the non-constitutional issues, and counsel answered that the court’s view was if you file a lawsuit, you’re a debt collector. Justice Kilbride explained that he was trying to determine whether the decision below complied with Supreme Court Rule 18, requiring that a case be decided if possible on non-constitutional grounds before reaching the constitutional issues. Counsel answered that the trial court had concluded that it was stuck with the Appellate Court holding, and the plaintiff clearly was a debt collector. Justice Thomas asked why the Court shouldn’t hold the statute constitutional under the rational basis test. Counsel argued that the statute was unconstitutional because there was no reasonable way for a party to know when it was violating the law. Here, the Department had advised the plaintiff that it didn’t need to register, and that the 2013 amendment to the statute had been needed because the law was unclear. Federal District Court judges have adopted the plaintiff’s position about the meaning of the statute, counsel argued. Counsel concluded by suggesting that the Court should merely hold that the judgment was not void, and that was the end of the case.

Counsel for the defendant began rebuttal arguments by arguing that the plaintiff had conceded that the constitutional holdings below were wrong. Justice Thomas asked how public welfare is promoted by counsel’s interpretation. Counsel answered that maintaining the regulatory system over the industry was very important; debt buyers wanted to be out from under the statute merely by hiring counsel, but that wasn’t the intent of the legislature. Chief Justice Garman asked whether any violations of the law had been shown beyond the lack of a license. Counsel answered that at the outset of the lawsuit, there had been a dispute as to whether the defendant actually owed the debt.

Counsel for the State ended the argument, arguing that the easiest resolution was to vacate the judgment and remand the case. The plaintiff has not defended the Circuit Court’s reasoning, counsel argued; it was offering a “better” version of the Court’s rational basis argument. Counsel once again suggested that the best approach to mandatory jurisdiction Rule 302 cases is to dispose of an insubstantial constitutional argument and remand the rest to ensure that Rule 302 doesn’t become a vehicle for a lot of other issues to come up. Counsel asked whether there was a problem with the rulings on the issues the Court would be sending back. Counsel responded that the application of the statute hasn’t been passed on. Justice Thomas pointed out that counsel for the State was at odds with everyone else in the case urging the Court to resolve all issues. Counsel answered that he understood the impulse to seek complete resolution, but the case now presents nine different issues. Counsel argued again that it was more appropriate to send the non-constitutional issues back. Justice Karmeier asked whether, if the Court merely decided constitutionality and remanded the rest, the case goes back to the trial court in the same posture it was in following the first appeal. Counsel said yes – the Circuit Court would be able to consider the issue of whether the statute applied.

We expect LVNV Funding to be decided in four to five months.

Image courtesy of Flickr by Jason Taellious

 

 

Topics:  Debt, Debt Collection, Registration

Published In: Civil Procedure Updates, General Business Updates, Constitutional Law Updates, Consumer Protection Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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