Saturday, February 12, 2011

FYI: Ill App Ct Answers Certified Questions re: Assignments of Consumer Debts

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:

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
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874

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FYI: 8th Cir Affirms FCRA Furnisher Liability Ruling in Favor of Mortgage Servicer

The United States Court of Appeals for the Eighth Circuit recently affirmed the lower court's grant of summary judgment in favor of defendant mortgage servicer as to the borrower's claim under the federal Fair Credit Reporting Act ("FCRA"), 15 U.S.C. §§ 181o, 1601s-2(b).  A copy of the opinion is attached.

Defendant EMC Mortgage Company ("EMC") credited Plaintiff-borrower's ("Plaintiff") loan account with a payment received in December 2006, but presented a substitute check to Plaintiff's bank in March 2007 due to the original check having been lost or destroyed.  However, by March of 2007, Plaintiff had closed that bank account and the payment was dishonored by Plaintiff's bank.  EMC "un-credited" Plaintiff's account for December and, although Plaintiff had otherwise kept current with his payments, EMC notified the credit reporting agencies ("CRAs") that Plaintiff's account was thirty days past due.  Plaintiff then made an "extra payment" to bring his EMC account current, but by that time supposedly lost favorable financing for a real estate purchase because of the adverse credit reports.

Plaintiff brought suit against EMC alleging that EMC violated the federal Fair Credit Reporting Act ("FCRA"), 15 U.S.C. §§ 1681o, 1681s-2(b), by "furnish[ing] inaccurate information."  After the case was removed to federal court, the district court granted of summary judgment in favor of EMC as to the FCRA claim because the Plaintiff's "account was more than thirty days past due as a matter of law when EMC reported that account status in April and May 2007."  The Eighth Circuit affirmed.

On appeal, Plaintiff argued "that summary judgment was inappropriate because the district court noted that an 'Experian entry is inaccurate insofar as it states that Plaintiff's account was delinquent in May and June (as opposed to April and May),' and EMC failed to investigate and correct this inaccuracy."  The Plaintiff's argument was based primarily upon a document entitled "Your Credit Report" dated June 25, 2009, which is a summary of credit reports from the CRAs.

The Eighth Circuit disagreed with the Plaintiff, holding that "the 'Your Credit Report' document failed to raise a genuine issue of material fact whether EMC violated 15 U.S.C. §§ 1681o and 1681s-2(b) by failing to investigate and correct an immaterial discrepancy as to which two months in 2007 Anderson's account was thirty days past due."  The Court reasoned that "a furnisher's obligation to conduct a reasonable investigation under § 1681s-2(b) arises when it receives a notice of dispute from a CRA, and it need investigate only 'what it learned about the nature of the dispute from the description in the CRA's notice of dispute.'"

In this case, dispute notifications from the "CRAs notified EMC that its reporting of the account as past-due for two months had been challenged.  EMC investigated, correctly determined that the reported account status was accurate, and verified that information to the CRAs."  EMC's "duties as a furnisher of information under the FCRA required no more."  Accordingly, the Court affirmed the judgment of the lower court.

The Court also noted that "the duties of EMC as a furnisher of credit information under 15 U.S.C. § 1681s-2(b) are triggered by notice that its information is being disputed from a CRA, not from the consumer. See § 1681i(a)(2)."  The Plaintiff's "complaint alleging that EMC reported inaccurate data failed to allege a triggering CRA notice and therefore failed to state a claim against EMC under the FCRA."  However, "rather than challenge the sufficiency of Plaintiff's Complaint, EMC moved for summary judgment after the close of discovery."


Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874

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Tuesday, February 8, 2011

FYI: FDIC Issues Final Rule on Deposit Insurance Assessments

Implementing changes to the deposit insurance assessment system mandated
by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the
Federal Deposit Insurance Corporation approved a final rule on
Assessments, Dividends, Assessment Base and Large Bank Pricing.

As required, the rule revises the base on which deposit insurance
assessments are charged from one based on domestic deposits to one based
on assets.

A copy of the final rule is available at:

According to FDIC Chairman Sheila C. Bair, the new large bank pricing
system will result in higher assessment rates for banks with high-risk
asset concentrations, less stable balance sheet liquidity, or potentially
higher loss severity in the event of failure. Over the long term, Bair
said, large institutions that pose higher risk will pay higher assessments
when they assume these risks rather than when conditions deteriorate.

The final rule also retains the unsecured debt adjustment, which lowers an
institution's assessment rate to recognize the buffer that long-term
unsecured and subordinated debt provides the Deposit Insurance Fund. This
adjustment is recalibrated in the final rule to ensure that the incentive
for issuing this debt remains the same with the change to a larger
assessment base.

The final rule also revises the assessment rate schedule effective April
1, 2011, and adopts additional rate schedules that will go into effect
when the Deposit Insurance Fund (DIF) reserve ratio reaches various
milestones. These future rate schedules should accomplish the goals of
maintaining a positive fund balance, even during periods of large fund
losses, and maintaining steady, predictable assessment rates throughout
economic and credit cycles.

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874

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