Assign things to come? | Fox Rothschild LLP
In Books, et al. vs. Portfolio Recovery Associates, LLC, the North Carolina Court of Appeals recently issued an opinion that could have a significant impact on the law of collections and arbitrability.
The defendant is an entity that purchases consumer debt. The plaintiffs are individual credit card holders who had accumulated unpaid bills on their cards. The defendant purchased the debts of these individual plaintiffs, then sued and obtained default judgments against each.
In response, the plaintiffs filed a class action lawsuit alleging that the default judgments were void because they violated North Carolina’s Consumer Economic Protection Act. The plaintiffs requested judgment on the pleadings, while the defendant requested compulsory arbitration.
The trial court dismissed the defendant’s motion. Each plaintiff’s individual agreement with his credit card company included an arbitration clause. The issue before the trial court was whether these arbitration clauses were included in the transaction when the defendant purchased each plaintiff’s debt. The parties agreed that the relevant state contract law was Utah for one set of defendant’s purchases and South Dakota for the other set. Each state required proof of a valid arbitration agreement before arbitration was imposed.
Following this law, the court of first instance concluded that the arbitration clause would form part of the purchase when the deed of sale for the purchase specifically included this clause. However, if the deed of sale was silent, the arbitration clause was not included in the defendant’s purchase of the debt. Here, the bills of sale did not explicitly include the arbitration clause, so the court denied the defendant’s motion to compel arbitration.
In a unanimous published opinion, the Court of Appeal upheld. She considered cases from other jurisdictions and held that where a bill of sale assigned to the buyer (the defendant debt collector) the accounts and claims of the individual plaintiff, but not all the rights belonging to the original creditor, the arbitration agreement did not transfer the debt to the buyer.
In support of their appeal, the defendant also cited Section 9-404(a) of the Uniform Commercial Code, which has been adopted in both South Dakota and Utah. Generally, this section provides that the rights of an assignee are subject to the terms of the agreement between the account debtor (applicant) and the assignor (the credit card company). The Court of Appeal lamented that this issue had not been widely advised, then concluded that the section’s applicability was “at least questionable”. The UCC allows parties to vary its terms by agreement, so its applicability here was not a sure thing. In addition, Section 9-404(c) provides that the section is subject to another law when the account debtor is a person “who entered into the obligation primarily for personal, family, or household purposes.” Therefore, the Court of Appeal did not apply the UCC to these sales.
The type of transaction behind this case is not uncommon, especially when the economy is struggling. It’s probably safe to assume both that credit card companies look to states with laws they find favorable when putting in place agreements with creditors and that Utah and North Dakota Sud were chosen for this reason. If so, the detention here may apply to many cases where a company purchasing credit card debt seeks to impose an arbitration clause on a North Carolina debtor.
While this case counts as a victory for debt-ridden credit card users, the Court of Appeals left the door at least slightly ajar for companies like the defendants. The applicability of the UCC was neither fully advised by the parties in this case nor fully explored by the Court of Appeal. We could see more litigation presenting new or different arguments based on the UCC.
What are your thoughts?