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Chulsky v. Hudson Law Offices, P.C.

777 F.Supp.2d 832 (D. N.J. 2011)

ATTORNEYS; NOTES; CONSUMER FRAUD ACT — A professional corporation is not permitted to purchase outstanding notes with the intention getting income by collecting the amounts owed under those notes, but the Consumer Fraud Act does not apply in such situations because it does not apply to the purchasers of defaulted debt.

A law firm filed a complaint in the Small Claims section of the New Jersey Superior Court in an attempt to collect on a bank credit card debt from an individual. The firm purported to be a successor in interest to the debt from a bank. The action was dismissed. The individual later filed an action challenging the firm’s filing of the complaint under the Fair Debt Collection Practices Act (FDCPA), the New Jersey Consumer Fraud Act (NJCFA), and the New Jersey Truth in Consumer Contract, Warrant and Notice Act (TCCWNA). Specifically, the individual claimed that the firm’s purchase of the debt was ultra vires because professional services corporations, such as law firms, are prohibited from engaging in the purchase of consumer debts. In support, the individual pointed to New Jersey’s Professional Services Corporation Act (PSCA), which limits the business and investment activities of professional service corporations. The firm moved to dismiss.

The Court agreed with the individual that the firm’s alleged operation of a separate debt collection business under the auspices of its professional practice facially violated the PSCA. Further, the Court predicted that a professional corporation’s attempt to collect a debt that is in violation of the statute would not be enforced by New Jersey courts.

The individual’s FDCPA claims were predicated upon the notion that the law firm’s purchase of the debt was invalid, that the firm could not act as a debt collector, and, thus, the firm was not the true owner of the debt under New Jersey law. The Court found that the firm’s representation of itself as legal owner of the debt was not deceptive because the PSCA does not prohibit a firm from simply investing in debt. However, the Court found that a claim did exist for false representation because the debt being owned and prosecuted by a law firm could have created, in a least sophisticated consumer’s mind, an impression of legal validity not typically imputed to a creditor’s actions.

The claim under the NJCFA was that a debt buyer is subject to the Act for its alleged misrepresentations in connection with its debt collection practices. The law firm argued that a debt buyer is not subject to the Act because it does not engage in the sale of merchandise, as required by the Act. The Court observed that the New Jersey Supreme Court has held that the NJCFA applies to the provision of credit. However, the Court did not address whether the Act applies to assignees or debt buyers who purchase and attempt to collect upon defaulted debt. In deciding the issue, the Court surveyed numerous New Jersey and federal court decisions, but found no precedential authority. Thus, the Court looked to other states in an attempt to gather persuasive authority.

Most other state court decisions were unenlightening because they did not distinguish between debt buyers and other types of debt collectors. An Idaho court, in a split decision, did find that such debt fell under the consumer fraud statute even when collection was performed by a third party who had purchased the debt from a seller. However, a federal district court case in Oklahoma held that the actions of an independent debt collector did not fall within Oklahoma’s consumer fraud act. After concluding that this search was unpersuasive, the Court looked to the legislative history. This was equally unenlightening.

Finally, looking to the plain language of the Act, the Court noted that the Act’s “subsequent performance” language suggested that the actions of a seller in executing its agreement with a consumer fell within the NJCFA’s control. However, the Court found the language ambiguous because it did not suggest that the actions of assignees, particularly those who had purchased defaulted debt, were included, nor did it foreclose that possibility. Thus, the Court decided that there was no basis for predicting that New Jersey would hold that its legislature intended for the NJCFA to reach the debt collection activities of a debt buyer of defaulted credit card debt. The Court also noted that the New Jersey legislature had tried and failed to adopt its own fair credit collection act, suggesting that the Consumer Fraud Act should be read as excluding the debt collection activities of debt buyers.

Lastly, the Court considered the individual’s claim under the Truth-in-Consumer Contract, Warranty and Notice Act. This Act prohibits consumer contracts that violate a clearly established legal right of a consumer or clearly established legal right of a creditor. Here, the Court found that the individual’s claim had to fail because she did not allege that a provision in the underlying credit agreement with the bank contained a provision that violated her clearly established rights or the creditor’s clearly established responsibilities. Rather, she challenged the content of the complaint filed to collect on the debt.

As a result, the Court dismissed the individual’s action in its entirety except for the FDCPA claim.

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