Monday, September 10, 2012

FYI: 7th Cir Holds Assignment of Legal Claims Void Under Illinois Law, Assignee Plaintiff Had No Claims Under FCRA or FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently held that an assignment of legal claims was void as against Illinois public policy, because the assignment was a vehicle for the assignee plaintiff's unauthorized practice of law. 
The Court also ruled that(1) the federal Fair Credit Reporting Act preempted plaintiff's state-law claim that a collection agency negligently failed to report to credit reporting agencies that it no longer owned a debt, and (2) plaintiff failed to state a claim under the federal Fair Debt Collection Practices Act, because he never alleged that the collection agency attempted to collect a debt that it longer owned.          
A copy of the opinion is attached.
Defendant debt collection agency ("Collection Agency") obtained a debt account from a telecommunications company for purposes of collecting on an unpaid debt owed by a customer ("Debtor") of the company.  Collection Agency reported the debt to various credit reporting agencies.   Later, however, the telecommunications company recalled the debt from Collection Agency, but Collection Agency allegedly did not report this event to the credit bureaus.   
Plaintiff Michael Todd ("Todd") entered into an agreement with Debtor whereby Debtor's rights, title, and interest in her legal claims against Collection Agency were assigned to Todd.  The agreement referred to Debtor as Todd's "client" and provided that Todd paid for the assigned claims. 
As the purported assignee of Debtor's legal claims, Todd filed a lawsuit against Collection Agency under the federal Fair Debt Collection Practices Act ("FDCPA") and under Illinois law.  In his complaint, Todd alleged that Collection Agency had negligently failed to report to the credit bureaus that it no longer owned the debt owed by Debtor, and that Collection Agency had supposedly violated the FDCPA by using "false, deceptive, or misleading" means in connection with the collection of the debt.  Todd did not assert a claim directly under the federal Fair Credit Reporting Act ("FCRA"). 
Collection Agency moved to dismiss on the grounds that Debtor's assignment of the claims to Todd violated Illinois public policy and was void, because Todd was using the assignment to engage in the unauthorized practice of law.  Collection Agency also argued that Todd had failed to allege a violation of the FDCPA and that the FCRA preempted the state-law negligence claim.  In response, Plaintiff argued that he was not engaged in the unauthorized practice of law, because he was representing only himself and was pursuing claims that he owned. 
Noting that Todd had a history of filing lawsuits based on assigned legal claims, the district court dismissed the complaint without leave to amend, ruling that the assignment of the claims to Todd violated Illinois public policy, because Todd had purchased the claims for the purpose of litigating and to practice law without a license.  The district court also ruled that Todd's negligence claim was preempted by the FCRA, and that Todd failed to state a claim under the FDCPA.  Todd appealed.  The Seventh Circuit affirmed.
As you may recall, the FDCPA prohibits "debt collectors" from using "any false, deceptive or misleading representation or means in connection with the collection of any debt" and provides that debt collectors will be liable for damages caused by their violations of the FDCPA.  15 U.S.C. §§ 1692a(6), 1692e, 1692k.
In addition, the Seventh Circuit noted that FCRA expressly preempts state-law claims based on alleged violations of FCRA, and creates no private right of action for violations of the duty to report accurate information to consumer reporting agencies.  15 U.S.C. §§ 1681t(b)1)(F)(state law preemption), 1681s-2(a)(duty of furnishers of information to provide accurate information), 1681s-2(d)(limitation on enforcement).
Rejecting Todd's various assertions, including the arguments that he was actually serving the public interest by protecting consumers from the illegal practices of debt collectors and that the claims were his own to pursue, the Seventh Circuit observed that Illinois public policy prohibits the assignment of legal claims to non-attorneys in order to litigate without a license. See, e.g., King v. First Capital Fin. Servs. Corp., 828 N.E.2d 1155, 1166 (Ill. 2005); Chicago Bar Ass'n v. Quinlan and Tyson, Inc., 214 N.E.2d 771, 775 (Ill. 1966)(protection of public requires that only licensed attorneys provided legal advice for consideration); Lazy 'L' Family Pres. Trust v. First State Bank of Princeton, 521 N.E.2d 198, 200-01 (Ill. App. Ct. 1988)(pursuing assigned claims pro se was engaging in authorized practice of law).  Accordingly, the Circuit Court agreed with the district court that the assignment of Debtor's claims to Todd was void, and ruled that the lower court properly dismissed Todd's complaint without leave to amend.
The Seventh Circuit also ruled that, even if the assignment were not void, FCRA preempted the state-law negligence claim and that there was no private right of action based on Collection Agency's alleged failure to notify the credit bureaus that it no longer owned the debt.    
Finally, noting that Todd never made the critical allegation that Collection Agency attempted to collect on a debt it no longer owned, the Court further ruled that Todd failed to state a claim under the FDCPA that Collection Agency made a "false, deceptive, or misleading representation" in connection with the collection of a debt.   

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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