The Illinois Court of Appeals for the First District recently held that the Illinois Collection Agency Act requires that third party "collection agency" plaintiffs identify the accounts transferred, the consideration paid, and effective date of the transfer as to assignments for collection, but not as to transfers to debt buyers.
A copy of the opinion is available at: http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1113658.pdf.
A borrower defaulted on his credit card debt. The lender sold the debt to a debt buyer; the debt buyer sold the account to a second debt buyer; the second debt buyer assigned its interest to a collection agency; and that collection agency assigned its interest to a second collection agency. The second collection agency is the plaintiff in this matter.
As you may recall, in the predecessor case to the instant litigation (see our update below), the Appellate Court held that Illinois law permits an assignee for collection to file suit for collection in its own name to collect a debt. The Court also construed the Illinois Collection Agency Act to require that, in order to establish an assignment of a collection account, a collection agency must attach exhibits identifying the accounts transferred, the consideration paid, and the effective date of the transfer. See 225 ILCS 425/8b ("Sec. 8b").
These documents "must be in the form of contracts of assignment or documents that are incorporated by reference into those contracts, rather than in the form of an affidavit." Unifund CCR Partners v. Shah, 407 Ill. App. 3d 737 (2011) ("Shah I" -- see our prior update below).
Following the decision in Shah I, the plaintiff collection agency filed a new complaint, which included as exhibits the contracts of assignment and related documents for the last two transfers. However, the plaintiff collection agency did not demonstrate the consideration paid for the first two transfers.
The lower court held that the plaintiff collection agency's pleading was insufficient under the Illinois Collection Agency Act, and dismissed the complaint. The plaintiff collection agency appealed.
The Appellate Court began its analysis by surveying the ways in which creditors may collect a debt. The Court explained that a creditor may bring an action in its own name; hire a collection agency, whereby the creditor retains equitable title for itself but assigns legal title to the collection agency; or sell its entire interest in a debt to a third party, known as a "debt buyer."
The Appellate Court then explained the pleading requirements for various types of transfers. Where a creditor hires a collection agency to collect its debt -- assigning legal title to the collection agency -- the agency must file a verified complaint that alleges that the agency is the actual bona fide owner at least of legal title to the debt, and sets forth how title was acquired. 735 ILCS 5/2-403(a) ("Sec. 403(a)"). The agency must also make the three factual allegations required under Shah I (i.e., identify the accounts transferred, the consideration paid, and effective date of the transfer as to assignments for collection).
Similarly, where a creditor assigns legal title to a collection agency, who in turn assigns its interest to an additional collection agency, the plaintiff must set forth how title was acquired in its complaint -- and trace how it acquired title back to the original creditor. Otherwise, the Court explained, "[t]he debtor (and more importantly, the court) would have no way of knowing whether the plaintiff actually had legal standing."
However, the Court noted that it is unclear from the plain language of the Illinois Collection Agency Act whether a plaintiff is required to satisfy the requirements of Sec. 8b for each assignment of title, as the language of the statute refers to "assignment" in the singular. The Court concluded that it does apply to each assignment, reasoning that "if that legislature thought that the stringent protections of section 8b were necessary...where legal title has been assigned only once, then we cannot believe that the legislature did not intend for those same requirements to apply in situations where legal title has been assigned multiple times..."
Next, the Court considered the pleading requirements that apply where a creditor sells its entire interest to a debt collector. Although the Court noted that it was clear that the requirements of Sec. 403(a) applied, it was less clear as to whether Sec. 8b applied.
Accordingly, the Court scrutinized Sec. 8b. It determined that "[b]y referring specifically to assignments for collection, the plain language of section 8b indicates that the legislature intended to exclude sales of an account to a debt buyer from the section's reach." Therefore, the Court held that debt buyers need comply only with the requirements of Sec. 403(a), and not also the requirements of Sec. 8b.
Having determined the applicable legal standards, the Court turned to the facts of the case. It noted that here, the original creditor sold the relevant account to a debt buyer; the debt buyer sold the account to a second debt buyer; the second debt buyer assigned its interest to a collection agency; and that collection agency assigned its interest to a second collection agency.
Accordingly, the Court determined that the second collection agency -- the plaintiff -- was required to file a verified complaint or affidavit explaining "how and when each entity in the chain acquired title." The plaintiff here was further required to satisfy the requirements of Sec. 8b as to the two assignments for collection, but not for the sales to debt buyers.
Applying its ruling, the Court held that the plaintiff collection agency did not meet its burden, because the plaintiff collection agency failed "to include a complete and unredacted version of the complaint's supporting documents," which rendered the Court unable to determine whether Sec. 8b's requirements were satisfied.
In light of the foregoing, the Court determined that it "must assume that the circuit court ruled correctly when it dismissed the complaint." Accordingly, the Court affirmed the lower court's decision.
The Illinois Appellate Court, First District, recently held that a collection agency has standing to sue, where the agency pleads and proves that it has legal title to accounts receivable assigned "for collection purposes only." The Court also held that an agency may establish such an assignment through multiple incorporated documents attached as exhibits to the complaint. However, the documents provided must include contracts of assignment or incorporate such contracts by reference; the agency may not rely merely on affidavits to establish an assignment. Further, the documents provided must also identify the accounts transferred, the consideration paid, and the effective date of the transfer of the accounts.
A copy of the opinion is available online at: http://www.state.il.us/court/Opinions/AppellateCourt/2011/1stDistrict/February/1100855.pdf
Defendant borrower defaulted on a Citibank credit card account. Citibank then sold the account to Unifund Portfolio A, L.L.C. On the same day, Portfolio A sold the account to Cliffs Portfolio Acquisition I. Cliffs Portfolio then assigned its legal interest in the account to Palisades Collection, L.L.C., to enable Palisades to collect on the account, but purported to retain an equitable interest in the debt itself. Finally, Palisades then assigned its interest in the account to the collection agency plaintiff.
In support of its complaint, the collection agency plaintiff provided an affidavit of an employee who had reviewed plaintiff's internal records, as well as various contracts of sale and assignment for defendant's account, along with other incorporated agreements. The defendant debtor moved to dismiss, arguing that the purported assignments of his account were inadequate under section 8b of the Collection Agency Act because required information, such as the account information, the consideration paid, and the effective date of assignment were scattered among plaintiff's exhibits, rather than contained in a single document.
The Appellate Court first considered whether an assignee of a debt has standing to sue where legal title was assigned "for collection purposes only." The Court examined Section 2-403 of the Illinois Code of Civil Procedure, which states "[t]he assignee and owner of a non-negotiable chose in action may sue thereon in his or her own name." Because a chose in action is a "proprietary right in personam, such as a debt owed by another person," the Court ruled, "[c]hoses in action like plaintiff's debt in this case are assignable."
The Court further noted that "[a]lthough Illinois cases have not explicitly addressed this issue, long-standing modern practice in other jurisdictions allows the owner of a debt to transfer the entire chose in action outright to a third party, retaining no ownership interest in it, or to transfer only the owner's legal interest in the action, retaining an equitable or beneficial interest."
The Court also examined Section 8b of the Illinois Collection Agency Act, which states that "[a]n account may be assigned to a collection agency…to enable collection of the account in the agency's name as assignee for the creditor." Thus, the Court ruled, "[w]hen the two statutes are read together, it is apparent that an assignee for collection has standing to bring suit in its own name in order to collect a debt" and that "section 2-403 encompasses not only assignees who take complete ownership of an account but also those who merely take legal title for the purpose of collecting the debt while the creditor retains the beneficial interest and equitable title."
The Court then considered the requirements for pleading assignment of a debt under Section 8b of the Collection Agency Act. Observing that a collection agency can bring suit to collect on a debtor's account only when "[t]he assignment is manifested by a written agreement, separate from and in addition to any document intended for the purpose of listing a debt with a collection agency," the Court considered whether an assignment must be manifested by only a single document or must consist of multiple incorporated documents.
In analyzing this question, the Court noted that "the key phrases in Section 8b are 'assignment manifested by a written agreement' and 'document manifesting the assignment'" and thus that "assignment of the account must be manifested by a legal document in the formal sense, that is, by a written contract of assignment… that is completely separate from any contract to list the account with the collection agency."
Further because "[i]t is a fundamental principal of contract law that 'an instrument may incorporate all or part of another instrument by reference'," then "it follows that the terms of the assignment may be found in either the contract of assignment itself or in any other document incorporated by reference." Thus, the Court ruled, "assignment under Section 8b can be established through multiple documents that are incorporated by reference into the contract of assignment."
Having concluded that an assignment can be manifested by multiple incorporated documents, the Court then considered the content required for those documents to satisfy Section 8b, which "requires that the contract of assignment 'specifically state and include' both the effective date of the assignment and the consideration given for the assignment." Further, the Court ruled, "[i]mplicit in the statute is a third requirement that the contract of assignment specifically state the relevant identifying information for the account that is being assigned."
Although the plaintiff collection agency provided "three broad categories" of documents in support of their complaint, including "affidavits, contracts of assignment, and incorporated documents," the Court ruled that "[p]laintiff's use of the affidavit in support of its claim…is problematic," because the "plain language of [Section 8b] provides only a single method of proving the existence of an assignment, and this method does not include affidavits." The Court further noted that "[l]imiting the methods of proof of an assignment to only written contracts furthers…legislative policy because it requires collection agencies to clearly demonstrate that they and they alone are the proper parties for a debtor to be dealing with regarding their debt."
Therefore, the Court ruled, bare "affidavits…cannot be used by a collection agency to prove the assignment and state a claim to a debtor's account."
The Court then examined the contracts of assignment and incorporated documents provided in support of the plaintiff's collection agency's complaint. Although it declined to rule on their sufficiency, noting that "it is for the circuit court to determine whether all of the documents that plaintiff has attached to its complaint in this case satisfy the requirements of section 8b," the Court specifically noted that "Section 8b requires each contract of assignment in the chain of title for the account, beginning with the original creditor and ending with the plaintiff, to specifically state and include the effective date of assignment, the consideration paid, and the identifying information for the account transferred."
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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