In Pounds, et al. v. Portfolio Recovery Associates, LLC, the North Carolina Court of Appeals recently issued an opinion that may have a significant impact on collections law and arbitrability.
Defendant is an entity that purchases consumer debt. Plaintiffs are individual credit card holders who had racked unpaid bills on their cards. Defendant purchased the debts of those individual plaintiffs, then brought suit and obtained default judgments against each.
In response, plaintiffs filed a class action alleging that the default judgments were void because they violated North Carolina’s Consumer Economic Protection Act. Plaintiffs moved for judgment on the pleadings, while defendant moved to compel arbitration.
The trial court denied defendant’s motion. Each plaintiff’s individual agreement with their credit card company had included an arbitration clause. The issue before the trial court was whether those arbitration clauses were included in the transaction when defendant purchased each plaintiff’s debt. The parties agreed that the relevant state contract law was Utah for one set of defendant’s purchases and South Dakota for the other set. Each state required proof of a valid arbitration agreement before arbitration would be compelled.
Following this law, the trial court concluded that the arbitration clause would be part of the purchase when the bill of sale for the purchase specifically included that clause. However, if the bill of sale was silent, the arbitration clause was not included in defendant’s purchase of the debt. Here, the bills of sale did not explicitly include the arbitration provision so the court denied defendant’s motion to compel arbitration.
In a unanimous published opinion, the Court of Appeals affirmed. It surveyed cases from other jurisdictions and held that where a bill of sale assigned to the purchaser (defendant debt collector) the individual plaintiff’s accounts and receivables but not all of the rights belonging to the original creditor, the arbitration agreement did not transfer to the purchaser of the debt.
In support of their appeal, defendant also cited Section 9-404(a) of the Uniform Commercial Code, which has been adopted in both South Dakota and Utah. Generally speaking, that section provides that the rights of an assignee are subject to the terms of the agreement between the account debtor (plaintiff) and the assignor (the credit card company). The Court of Appeals lamented that this issue was not extensively briefed, then found that the section’s applicability was “at least questionable.” The UCC allows parties to vary its terms by agreement so its applicability here was not a sure thing. In addition, Section 9-404(c) provides that the Section is subject to other law where the account debtor is an individual “who incurred the obligation primarily for personal, family, or household purposes.” Accordingly, the Court of Appeals did not apply the UCC to these sales.
The type of transaction at the root of this case is not uncommon, especially when the economy is struggling. It is probably safe to assume both that credit card companies turn to states with laws they find favorable when setting up agreements with creditors and also that Utah and South Dakota were chosen for that reason. If so, the holding here may apply to many instances where a business that purchases credit card debt seeks to impose an arbitration clause on a North Carolina debtor.
Although this case counts as a win for credit card users laden with debt, the Court of Appeals has left the door at least slightly ajar for companies such as defendant. The applicability of the UCC was neither fully briefed by the parties in this case nor fully explored by the Court of Appeals. We may see more litigation making new or different arguments based on the UCC.
What are your thoughts?