A sum uncertain: preserving due process and preventing default judgments in consumer debt buyer lawsuits in New York.

Author:Duffy, Conor P.
Position::I.Background C. Debt Collection Lawsuits 2. Debt Collection Lawsuits in New York City through Conclusion, with footnotes, p. 1174-1200
  1. Debt Collection Lawsuits in New York City

    In New York City, nearly all consumer debt cases are litigated in the city's Civil Court. The Civil Court was established in 1962 (187) and has monetary jurisdiction over claims up to $25,000. (188) By volume, the Civil Court is the largest civil jurisdiction court in the United States and its filings comprise 25% of the New York State Unified Court System's total filings. (189) Every consumer debt lawsuit in Civil Court begins with the purchase of an index number and the filing of a summons and complaint. (190) After filing the summons and complaint with the clerk, the plaintiff serves the summons and complaint on the defendant pursuant to the service rules of New York's CPLR. (191)

    Debt collection law firms retained by debt buyer or original creditor plaintiffs rely on process server agencies to serve defendants. (192) Although there has been, (193) and continues to a lesser extent to be, service abuse in consumer debt cases in New York City, key reforms have been adopted by the Civil Court. (194) For example, the Civil Court's Section 208.6(h) notice created a new notice form that the court is required to send to each defendant, informing the defendant that they have been sued and that if a judgment is entered in the plaintiff's favor, the plaintiff may be able to seize the defendant's property, garnish the defendant's wages, or both. (195) If this notice is returned as undeliverable or the plaintiff fails to produce an affidavit of service showing that 208.6(h) service was made, a default judgment may not be entered by the clerk on behalf of the plaintiff. (196) This notice is required in addition to the normal service requirements found in the state's procedural rules. (197) Between May 2008 and September 2009, 28,422 of these notices were returned to the court as undeliverable. (198) Moreover, New York City requires process servers licensed by the DCA (199) to carry an electronic device with global position system to establish the time, date, and place when service was attempted or carried out, (200) to pass an examination, (201) and to maintain records of service. (202)

    There is a great disparity in legal representation in consumer debt lawsuits. While 100% of debt collector plaintiffs are represented by counsel, only 4% of defendants have legal representation. (203) As a result, many defendants fail to take advantage of all available defenses and enter into settlement agreements with plaintiff's counsel. (204) Typically, the plaintiff's attorney will ask the defendant to discuss the case in the hallway before they go before the judge. (205) According to one report, plaintiffs' counsel uses these discussions to pressure unrepresented defendants into one-sided and sometimes unaffordable settlement agreements. (206) It has also been alleged that plaintiffs' counsel strategically use repeated adjournments to further develop their cases, hoping that unrepresented defendants will not be able to make subsequent court dates because of work or other reasons, which could result in default judgments for the plaintiffs. (207)

    Debt collector plaintiffs have several causes of action against consumer defendants. Some collectors pursue breach of contract actions against consumer defendants. Under this cause of action, debt buyers allege that the consumer entered into a credit agreement, subsequently breached that agreement, and caused the creditor to incur damages as a result of the breach. (208) To satisfy a breach of contract action, collectors must produce a contract and evidence of individual charges that make up an unpaid balance. (209)

    Debt collectors also pursue "account stated" causes of action against consumer defendants. (210) In this cause of action, the plaintiff argues that an account statement was sent to the defendant, it was accepted as correct, and the defendant agreed to pay the amount stated on the account. (211) Thus, for an account stated cause of action, a plaintiff must produce "(1) prior transactions that establish a debtor-creditor relationship between the parties, (2) an express or implied agreement between the parties as to the amount due, and (3) an express or implied promise from the debtor to pay the amount due." (212) Although debt buyers often argue

    that the defendant never objected when the credit card bills were filed, or when the lawsuit was filed, or when the plaintiff sent a demand of payment to the defendant ... [t]his argument fails because "the mere rendition of an account, by one party to another, does not alone establish an account stated." (213) Moreover, for an account stated claim, the plaintiff must also establish an independent basis for liability, because "'[t]he account stated can only determine the amount of the debt' and cannot 'create liability where none existed."' (214) In addition to these requirements, debt buyer plaintiffs must produce affidavits from an official of the credit card issuer that demonstrate that (1) the consumer agreed to pay "any interest on the account," (2) that the account was received by the consumer, and (3) that the consumer failed to protest and to pay the amount due. (215)

    In the majority of consumer credit actions in Civil Court, plaintiffs are able to obtain default judgments against unrepresented defendants. From a plaintiff's perspective, default judgments are a "desired commodity" primarily "because they provide parties with the spoils of successful litigation without the hassle of actually litigating controversies." (216) Under CPLR section 3215, if a defendant fails to appear or defaults in some other manner, (217) the plaintiff may apply for a default judgment. (218) A defendant's default, however, does not mean that the court must automatically enter judgment on behalf of the plaintiff for the amount sought in the complaint. (219) Indeed, "[a] defendant who defaults concedes only liability." (220) Additionally, "New York holds that default in a money action does not concede the amount of the plaintiff's damages." (221)

    Therefore, a plaintiff is still required to "support its motion for default judgment with 'enough facts to enable the court or the clerk to determine that a viable cause of action exists."' (222) To do so, the plaintiff must satisfy three requirements. First, the plaintiff must submit proof of service of the summons and complaint. (223) Second, the plaintiff must submit proof of the facts constituting the claim. (224) And third, the plaintiff must submit proof of the defendant's default. (225) The proof of claim requirement is normally made through an affidavit from the plaintiff "buttressed, if need be, by additional affidavits of other having first-hand knowledge" of the facts constituting the claim. (226)

    Depending on the type of claim, the plaintiff may apply to either the court or the clerk for the default judgment. (227) A plaintiff may apply to the clerk for a default judgment if his or her claim is for "a sum certain or for a sum which can by computation be made certain." (228) If the claim is for a sum certain, the clerk, upon plaintiff's submission of requisite proof, "shall enter judgment for the amount demanded in the complaint plus costs and interest." (229) Application to the clerk, if applicable, "is the preferable procedure because it gives the plaintiff a final judgment on papers alone, a ministerial procedure with nothing to try." (230) By contrast, application to the court necessarily involves judicial review of the plaintiff's papers and "may even require a testimonial hearing." (231)

    When the claim is for a sum certain, the clerk may only enter the default judgment if there is "no reasonable question about the amount of the judgment." (232) Indeed, "[a]nything that prevents mere arithmetic from reducing a claim to a sum certain requires that the application be made to the court" rather than to the clerk. (233) In Reynolds Securities, Inc. v. Underwriters Bank & Trust Co., the New York Court of Appeals held that the sum certain requirement was intended to ensure that the clerk would "function in a purely ministerial capacity." (234) In consumer credit lawsuits, a default judgment for a sum certain may only be granted if it is based on a "detailed affidavit of merit, made upon first hand knowledge," including "a properly documented assignment of proof of the validity of the underlying claim." (235) The CPLR does not specify what information is required in an affidavit of facts supporting a default judgment for a sum certain, or what supporting documentation should be required in support of such motion. Courts have noted, however, that the current practice, in which debt collector plaintiffs rely on affidavits that do not specify, among other things, how the sum alleged was calculated, is not sufficiently specific enough to explain the complexity of consumer credit agreements and show that amount claimed is for a sum certain. (236)

    In those cases that do not end in default judgment, debt buyer plaintiffs have difficulty establishing the merits of their claims. Debt buyers routinely pursue actions despite having limited evidence to support their claims in the hopes of obtaining a default judgment. (237) Indeed, the legality of debt buyer default judgments and collection lawsuits is being litigated across the country. (238) Debt buyer plaintiffs commonly resort to discovery requests, such as interrogatories, document requests, and Notices to Admit to garner evidentiary support for the claims asserted in their complaints. (239) Frequently, unrepresented defendants rail to respond to these requests or "make unknowing admissions." (240) For instance, Judge Philip S. Straniere of Richmond County has observed,

    [a] third-party debt buyer who only receives a computer printout of the debtor's account could utilize the Notice to Admit to force a debtor to produce documentation to establish the plaintiff's case, when the plaintiff lacks any evidence...

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