NJ Business Law Blog

Is it a violation of the Fair Debt Collection Practices Act to sue a debtor in the wrong city?

The United States Court of Appeals for the Second Circuit recently held that a debt collector violated the Fair Debt Collection Practices Act (“FDCPA”) when it instituted a Syracuse City Court action in New York State against a debtor in a city where the debtor did not reside.  Hess v. Cohen & Slamowitz, LLP, No. 10-424, 2011 WL 612887 (C.A.2 (N.Y.) 2011).

The FDCPA establishes the proper venue where a debt collector may sue to collect on a debt.  The FDCPA requires that the lawsuit be brought “only in the judicial district or similar legal entity … in which [the] consumer resides at the commencement of the action.”  15 U.S.C. §1692i(a)(2)(B).  Debt collector Cohen & Slamowitz (“C&S”) brought a debt collection lawsuit against debtor Jonathan Hess in Syracuse City Court.  Hess’ motion to dismiss C&S’s complaint was granted by the trial court on the grounds that Hess did not reside in the City of Syracuse, nor in an adjacent town as required by the FDCPA. 

Following dismissal of C&S’s complaint, Hess sued C&S in the United States District Court for the Northern District of New York on the ground that C&S violated the venue provisions of the FDCPA by suing him in Syracuse City Court.  The District Court dismissed Hess’ complaint for failure to state a cause of action.  Hess appealed that decision to the United States Court of Appeals for the Second Circuit.

The Second Circuit noted at the outset that the matter presented a question of first impression, “whether a debt collector violates the FDCPA’s venue provisions by suing a consumer in a city court in the State of New York when that court lacks power to hear the action because the consumer does not reside in that city or a town contiguous thereto.”  Id. at *1.  The evidence revealed that Hess lived in the Town of Clay and never lived, worked, or maintained a place of business in Syracuse.  Also, Syracuse and Clay are not adjacent to one another.

Per the Second Circuit, the FDCPA was enacted “to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.”  Id. at *2.  Among those abuses is “the problem of ‘forum abuse’, an unfair practice in which debt collectors file suit against consumers in courts which are so distant or inconvenient that consumers are unable to appear, hence permitting the debt collector to obtain a default judgment.  As a result, Congress adopted venue provisions to ensure that a debt collector who files suit [does] so either where the consumer resides or where the underlying contract was signed.”  Id. at *2.

The issue was whether C&S filed suit “in the judicial district or similar legal entity where Hess resided as of the commencement of the action.”  Id. at *3.  The court determined that Congress meant the phrase “judicial district” to refer to a territorial subdivision of the courts.  Taking that analysis a step further, the court held that the term “judicial district” in the context of a debt collection action must be defined within the judicial system of the state where the action was brought. 

Applying its analysis to the facts, the court held that “the FDCPA’s term ‘judicial district,’ as applied to a case where a debt collector sues a consumer in one of New York State’s city courts, extends no farther than the boundaries of the city containing that court and the towns within the same county that are contiguous by land thereto.  Because the proper ‘judicial district’ here does not include the town where Hess resides, we hold that the district court erred by dismissing his complaint.”  Id. at *5.  Further, where “a state law outlines the required nexus between the residence or activities of the consumer and the location of the court, we hold that such a law sets forth the appropriate ‘judicial district’ for purposes of the FDCPA with respect to debt collection actions brought in that court, regardless of whether that provision is styled as jurisdictional or otherwise.”  Id. at *6.  Finally, “when a debt collector elects to sue in a court of limited jurisdiction, the FDCPA requires, at the very least, that the suit be brought in a court where the consumer’s non-residency or lack of contacts thereto does not serve as a bar to further proceedings.”  Id. at *7.

In conclusion, the Court of Appeals held that Hess stated a claim that the underlying debt collection action was not brought in the appropriate “judicial district.”  As a result, the Court of Appeals reversed the District Court’s dismissal of Hess’ complaint and remanded the matter to the District Court for trial.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

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Can a person be bound by an agreement that he did not negotiate or sign?

Recently, the Appellate Division of the Superior Court of New Jersey was asked to decide whether a person who neither signed nor negotiated a contract was nevertheless, bound by its terms.  YA Global Investments, LP v. Hackett, No. A-3033-09T2, 2011 WL 611200 (N.J.Super. 2010). 

Patrick and Juliann Hackett owned Patrick Hackett Hardware Company (“PHHC”).  Between 2001 and 2006, PHHC executed five promissory notes with Community Bank. N.A. totaling $2,730,000.  In 2006, Patrick and Juliann each signed a “Commercial Loan Guaranty” and became personal guarantors of all loans from Community Bank, N.A. to PHHC. 

In 2007, the Hacketts sold all shares of PHHC to Wisebuys Stores, Inc.  As part of the sales agreement, Wisebuys agreed to ensure that the Hacketts were released from their personal guarantees to Community Bank, N.A.  Shortly after the sale of the shares, Wisebuys was purchased by Seaway Valley Capital Corporation (“Seaway”).  Seaway refinanced PHHC’s debt with YA Global Investments and borrowed additional monies from YA. 

Several months later, YA and Seaway executed an Exchange Agreement (“Agreement”) that converted the five promissory notes into a single debt.  The Agreement also stated that it was governed by New Jersey law and selected New Jersey as the forum state for any litigation. 

In 2009, Seaway defaulted on the debt with YA.  YA demanded payment of the full balance from the Hacketts under their earlier guarantees to Community Bank that Community claimed were transferred to it via assignment.  YA filed suit against the Hacketts in the Superior Court of New Jersey, Hudson County.

The Hacketts asked the trial court to dismiss the case for lack of personal jurisdiction. They admitted that they had signed the original notes. However, they argued that the subsequent transaction to sell their business and be released from the notes rendered them free of that obligation. The trial court agreed with the Hacketts’ and dismissed YA’s case against them.  YA appealed the trial court’s decision to the Appellate Division.

The Appellate Division affirmed the trial court’s decision, holding that the Hacketts were not liable under the notes since they were not parties to the Agreement.  The Court reasoned that the plain language of the Agreement implied that the only parties to it were Seaway and YA.  The Agreement was also negotiated and executed only by representatives of Seaway and YZ.  The Appellate Division agreed with the trial court’s decision that the Agreement bound only Seaway and YA.  Since the Hacketts were not parties to the Agreement, they were not bound by the forum selection clause.

The Court similarly rejected YA’s argument that extrinsic (outside of the agreement) evidence should be permitted to determine whether the Hacketts were intended to be parties to the Agreement and bound by its terms.  Once again, the Court stated that the plain text of the Agreement made it clear that the only parties bound by its terms were Seaway and YA.  Thus, there was no need to examine extrinsic evidence as the language analyzed was not susceptible to more than one interpretation.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com

Enforcing a Foreign Judgment in the State of New Jersey

Commercial Litigation: Judgment Enforcement: You have obtained a judgment in another state and want to enforce it in the State of New Jersey, which is where all of defendant’s assets are located. What is the next step?

The New Jersey Foreign Judgment Act outlines the requirements with which a plaintiff must comply in order to enforce a foreign judgment in New Jersey. Most importantly, the plaintiff must establish that the foreign court that issued the judgment had jurisdiction over the defendant. A common situation arises where a plaintiff obtains a judgment against a defendant in a foreign jurisdiction through default – the defendant fails to answer or otherwise appear in the matter and the plaintiff obtains a default judgment against the defendant. Subsequently and when the plaintiff attempts to enforce the foreign judgment in the State of New Jersey, the defendant could very well challenge the enforceability by asserting that the foreign court lacked personal jurisdiction over the defendant.

However, a different situation arises where the defendant appeared in the foreign action, by answering or otherwise, and did not object to the jurisdiction of the foreign court. In that scenario, a subsequent challenge of the foreign court’s jurisdiction in the New Jersey courts will likely fail. This is even more so true where the defendant in the foreign action files a counterclaim without objecting to the foreign court’s jurisdiction. The New Jersey courts will likely construe the above situations as defendant consenting to the foreign court’s jurisdiction.

In that regard, where there is a claim that a foreign court does not have jurisdiction over a particular defendant, that defendant may take one of two approaches: (a) not answer or otherwise appear in the foreign action and then challenge the enforceability of the foreign judgment in the New Jersey courts by asserting that the foreign judgment did not have personal jurisdiction over the defendant; or (b) answer or otherwise appear and explicitly state any objections to the foreign court’s jurisdiction. The first approach should be used with extreme caution because if the New Jersey courts subsequently find that the foreign court did in fact have jurisdiction, it could very well enforce the foreign judgment despite the defendant’s failure to answer and/or otherwise appear in the foreign jurisdiction because he/she did not believe the foreign court had personal jurisdiction over him/her. At that point, the defendant may be deemed to have waived any of his rights or defenses.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com

Avoiding Potential Pitfalls of Electronic Discovery Rules

Commercial Litigation: Courts are taking a hard line in requiring litigants to preserve evidence. It is only logical that given the increased use of technology in our lives, courts are taking an active role in sanctioning litigants for destroying electronically stored data. The problem arises because electronically stored data can be voluminous and often erased by a mere click of a button. Sometimes evidence is destroyed by companies who routinely erase data. However, it can be difficult to determine whether documents were destroyed in the ordinary course of business or in an effort to avoid presentation in a lawsuit. For this reason, simply asserting that the destruction of electronic documents was routine might not avoid court sanctions.

The problem becomes more burdensome since many litigants are not aware of some of these rather elaborate court rules regarding discovery and yet the litigants are still required to follow the rules. And the consequences of failing to abide by electronic discovery rules may be harsh. Sanctions may include requiring a litigant to pay an adversary’s attorney’s fees, preclusion of evidence and/or striking a litigant’s pleadings, the latter two of which could certainly prejudice a litigant in his case.

Even more troubling are situations where discovery is destroyed prior to the filing of a lawsuit. A potential litigant should be aware that courts can impose sanctions for failing to comply with the litigant’s discovery obligations even if the destruction of the documents happened prior to the commencement of the litigation.

Accordingly, there are some steps that can be taken to help minimize the risk of sanctions. First, we generally recommend that all businesses have a document retention policy, that it has prepared with its attorney. This should outline what can be destroyed and when. Moreover, businesses should always be prepared for a situation where litigation is commenced or threatened. At that point, the attorney for the claimant may create what is called a “litigation hold.” During that time, there is usually a moratorium placed on any destruction of emails, documents and other materials in the possession of the business. In such event, the “hold” would likely interrupt the destruction that may have transpired in the ordinary course of business under the document destruction policy.

In short, it is important to consult an attorney sooner rather than later when a lawsuit is brought or threatened. In addition to evaluating the claim, defenses and potential counterclaims, you need an attorney to advise you as to the type of information that should be preserved and the amount of time that preservation should last.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com