The ethical exploitation of the unrepresented consumer.

• Author: Haneman, Victoria J.

1. INTRODUCTION

   The scales of justice suggest a fairness in the law--an implied warranty, perhaps, that what will weigh in the legal process is only that which should, and outcomes will be blind to that which should not. The reality is very different. In a system based on advocacy by champions, differences in talent, education or experience tilt the scales against the less competent, the mistaken, or the unlucky. These differentials are tolerated because the system is generally fair, and as a practical matter, inequities cannot be fully eradicated. An institutional distinction may be drawn, however, when a very different kind of thumb tilts the scales, and a distortion occurs that is not only knowingly exploited but is explicitly authorized by the rules of the system themselves. The professional ethics of the American bar overtly permit attorneys to knowingly exploit the ignorance and inexperience of unrepresented litigants. Something is foundationally amiss.

   In a general sense, this observation is hardly new. Calls for a "civil Gideon" (1) have long been heard, and the debates have been fulsome between those who believe that truth and right emerge from the unremitting clash of adversaries and those who believe otherwise. This Article examines some of those same questions, but in a particular setting that has not previously been discussed--civil actions brought by attorney-represented debt buyers against unrepresented debtors, to collect debts against which the statute of limitations has already run. The significance of this one setting is several-fold. Debt buying is, first, a surprisingly robust industry affecting a large and growing proportion of individual consumers. (2) More to the point, the collection actions which follow the purchase of stale debts typify a larger class of cases, in which the presumptions underlying the adversary system of justice fail more patently than elsewhere. And, finally, developing a solution for exploitative attorney conduct in this context is a useful contribution to the continuing examination of the larger problem of which this is a particularly pressing instance.

   The following paradigm is typical (3): An attorney is retained to represent a wealthy investor who purchases distressed assets. Specifically, the client purchases large portfolios of charged-off credit card debt at steeply discounted prices, after the applicable statutes of limitations have expired. (4) One-half of the attorney's business is attributable to this client. Among the purchased debts is a $10,000 Visa account on which the last payment had been made nine years earlier. (5) The limitations period in this state is five years. The debt is therefore four years "out of statute"--a fact known to the client who owns the account, and to the lawyer retained to collect it. If the debtor were represented, the statute--an affirmative defense (6)--would be a complete bar to collection if it were raised, and malpractice on the part of the debtor's attorney if it were not. The consumer debtor, however, is almost always unrepresented (7) and unlikely to know much, if anything, about the statute of limitations or how to employ it in defense of the claim, even if it were understood. The debtor sees only this: an attorney (a professional licensed by the state) bringing a claim in a court (an extension of the state tasked to the cause of justice and application of the rule of law) asserting the validity of a debt. The typical consumer debtor would find it difficult to believe that a creditor's attorney could knowingly, and ethically, bring a lawsuit and obtain a judgment on an out-of-statute debt. But he can. (8)

   It is ironic that an unrepresented debtor would rely on the superior knowledge and expertise of the opposing attorney. Bringing a lawsuit on an out-of-statute debt is, of course, nothing but bluffing. While such "bluffing" might be acceptable behavior between two professional advocates, each of whom presumably has the ability to assess the threat for themselves, against a layperson it is unsporting and coercive. (9) Even if a layperson does understand that some time limit might restrict the legal viability of an old debt, the mere fact that an attorney has filed a claim with a court is too often a persuasive representation that this debt is not time-barred. The result, most often, is a judgment against the consumer debtor who typically defaults or, less typically, appears pro se (10) but without the knowledge or skill to use the statute effectively within the narrow "raise it or waive it" time. (11) The judgment gives new life to the debt, and supports collection efforts no longer barred by the passage of time. The judgment of the court has blessed the unethical exploitation of unrepresented consumer debtors. The unrepresented consumer (12) is thus the source of a financial windfall (13) to the consumer debt industry, and the behavior of attorneys working in the industry is ethically approved in the name of zealous advocacy. (14)

   This result cannot be easily dismissed as the ineradicable difference in skill between opponents. (15) It is an unjust tilting of the scale in favor of the represented party--contrary to the legal policies underlying the period of limitations (16)--flowing simply from disparate means, opportunity, and knowledge. It supports the truism that justice is more available to those who can afford it. (17) Worse still, it is like fishing with dynamite--as the unrepresented consumer does not have a sporting chance. (18)

   The attorney's conduct in the debt-buying vignette rests on the false premise that lies at the core of the American civil justice system: The foundational myth (19) is that the adversarial process works because the robust advocacy by the interests on opposing sides will illuminate for the neutral decision-maker the errors and excesses of each. A core presumption fails when one party is represented and the other is not. In the face of this foundational failure, the complex rules of engagement make no concession to modify an attorney's behavior or alter professional ethics. To the contrary, an irony inheres when the adversarial system itself is perverting the laws that allow, nay encourage, an unrepresented party to be exploited by counsel. When an attorney is expected to capitalize upon every opportunity to advance the client's case, including the advantage born of the opponent's mistakes, foibles, or incompetence, and the codes of professional responsibility and the structure of the adversarial system provide normative standards by which exploitation is not just tolerated, but effectively encouraged, exploitation of the unrepresented party is sanctioned. (20) Such a flaw is not a mere blemish, but a foundational crack. The result is not merely injustice to the unrepresented and a windfall to the unscrupulous, but a perversion of applicable law that is effected by the justice system itself. The bottom line is plain: these distortions will continue to occur until lawyers' professional ethics are made to accommodate the failure of the core assumptions underlying the adversarial system itself.

   This article begins in Section I with a brief overview of the debt industry. Section II describes the circumstances of an unrepresented defendant in the adversarial system of justice. The conventional codes of professional responsibility are weighed against a broader framework of normative ethics in Section III. Section IV illustrates how the particulars of the debt-buying setting are emblematic of broader issues. Two solutions are then discussed in Section V: One broadly targets the failure of attorneys' ethical codes to account for the collapse of the adversarial myth in cases involving unrepresented litigants; the other is a more tailored solution that addresses the specific abuses in the industry which serves as the concrete setting for this Article.

2. DEBT-BUYERS AND THEIR ATTORNEYS

   The focus of this Article is debt-buying, "'one of the sexiest, one of the most financially lucrative businesses you can get into.'" (21) It is nevertheless a segment of the debt industry (22) that has received virtually no legislative or scholarly attention. (23) Flourishing in this relative obscurity, the industry's attorneys (representing debt buyers or buying debts themselves) engage in behaviors unknown to anyone other than industry insiders. (24) Large debt-buyers in today's debt industry reap staggering profits by methodically cleaning financial carcasses left abandoned as recently as a decade ago. (25)

   The opportunities come about easily enough. A consumer (or "debtor") has a credit card issued by the originator of the account, referred to as the credit grantor or credit card issuer. (26) The debtor tenders the card at the point of sale to pay for goods or services, and in turn the credit grantor sends a statement to the consumer itemizing the debits incurred and the outstanding balance owed. For financial accounting purposes, the outstanding balances are treated as current assets or "accounts receivable." (27) Inevitably, a percentage of debtors fail to pay part or all of their outstanding balances. After a period of continued non-payment, the unpaid accounts are categorized as worthless assets to the credit grantor. (28) To be entitled to a bad-debt deduction under the Internal Revenue Code, the credit grantor must "charge-off" the portion of any debt that becomes worthless. (29) To satisfy this requirement, the credit grantor must remove the debt from the assets on its balance sheet. (30)

   These charged-off credit card receivables (31) are the debt instruments at the focus of this Article. A credit card account is characterized as a "charge-off" account (or worthless account for taxable purposes) when no payment has been received on the account for 180 days. Approximately 6% of all personal credit card accounts are charged off annually. (32) This percentage is generally within the control...