Lack of Substitution of Counsel & Retention of Money in Violation of Court Order Found not Violative of FDCPA, Holds New York Federal Court

New York State defense litigation collides again with the Fair Debt Collection Practices Act ("FDCPA"), this time producing a fairly harsh result to the consumer.

This office represents consumers ("debtors") who have been sued for credit card debts, many of whom have sustained default judgments and are faced with frozen bank accounts or wage garnishments.

The federal case discussed in this blog entry arises from a state-court default judgment and alleged conduct related to the enforcement of that judgment.

The case[1] was brought against Palisades Collection, LLC, its attorneys Houslanger & Associates, PLLC and New York City Marshal, Ronald Moses.

Federal District Court Judge Gabriel Gorenstein made the following rulings:

  1. A debt collector (Palisades Collection, LLC) could be vicariously liable for the actions of its attorneys (Houslanger); but
  2. A failure to notify debtor of a change of counsel did not violate the FDCPA;
  3. Attorney's instruction to Marshal to retain debtor's money in violation of court order did not violate the FDCPA; and
  4. Collector's refusal to comply with court order also did not violate the FDCPA.

Firstly, worth noting is the court's ruling that a showing of "control" is not required to hold a debt buyer responsible for the conduct of its attorney. Applying a basic agency principal, the court held that a debt collector subject to the FDCPA should "bear the burden of monitoring the activities of those it enlists to collect debts on its behalf." This reasoning is especially persuasive where the attorney and client both constitute debt collectors under the FDCPA (as here). A case prosecuted by this office, Bodur v. Palisades Collection, LLC,[2] was cited for its holding going the other way. In other words, in Bodur, the court declined to impute vicarious liability to Palisades for its attorney's conduct without a showing that it exercised control over that attorney's conduct.

This decision reiterates the general points that 1) a violation of state law is not an automatic violation of the FDCPA; and 2) the "materiality" doctrine remains a powerful defense by collection professionals whose technical missteps fall short of liability under the FDCPA.

This decision is especially relevant for this office since it is basically an extension of legal application discussed in our last blog: LR Credit & Mel Harris Case Dismissed for Failing to Substitute New Counsel. In that blog, a debt buyer judgment was vacated and the case dismissed outright for Mel Harris' failure to file a "consent to change" attorney while claiming it "no longer had the file." That case infers that new counsel – without proper substitution having been filed – will also lack the authority to appear in the underlying case when called to action.

In this Okyere case, coincidentally, the same Mel Harris law firm failed to file a "consent-to-change" attorneys before handing the file over to Houslanger to continue judgment enforcement.

An upset consumer sued Portfolio and Houslanger in part for their failure to file a consent-to-change ("substitution") attorney required under CPLR § 321.

The court declined to fit the substitution failure within the rubric of the FDCPA. The debtor argued that the lack of substitution made it "more difficult to enforce the stay or obtain his money and allowed defendants to assert that they did not receive notice of the court orders."

The court strained to understand the plaintiff's reasoning as to why an FDCPA violation was alleged. Perhaps the failure created the "false impression" as to the attorney of record. But even if said representation was false, it was not "material" – not related to the consumer's ability to challenge the debt or the process used to collect it. Contrarily, the court found Okyere was aware of Houslanger's involvment in the case since the dispute arose.

Perhaps it was weak drafting on the part of Okyere or her attorneys. The court found that CPLR § 321 "has no relation to debt collection activities, because Okyere does not allege any actual harm that was caused by defendants' failure to comply with the substitution statute.

Next, in a surprisingly literal interpretation of FDCPA § 1692e(5), the court declined to find liability with respect to Houslanger's and Marshal Moses' knowing retention of the consumers' garnished money in violation of a court order. The court cited the plain language of FDCPA § 1692e(5) in doing so:

[A debt collector may not make a] "threat to take any action that cannot legally be taken or that is not intended to be taken."

The court refused to extrapolate (within the confines of Plaintiff's legal allegations) from the above-cited language that the statute covers actions actually taken, regardless of their legality. The court "join[ed] those courts that have construed the statute in accordance with its unambiguous language."

FDCPA law requires that any allegedly false, deceptive or misleading representation be made directly to the debtor to trigger liability. Therefore, the debtor's claim that Houslanger deceptively instructed Marshal Moses to retain money fell short of establishing liability under 1692e.

The debtor's attempt to claim liability FDCPA § 1692d ("Harassment or Abuse") for Defendants' retention of Debtor's money was rejected by the court. That section typically involves harassment occurring outside of a litigated matter, like repeated phone calls.

Since the court dismissed all of the debtor's federal FDCPA claims, it further declined to exercise supplemental jurisdiction over the claims against the defendants – including the Marshal – for conversion (unlawful taking or retention of money).

Although FDCPA § 1692f ("Unfair Practices") was cited in the plaintiff's complaint, it was not pursued on argument. I tend to infer that the plaintiff simply did not include enough relevant law to fully advocate the debtor's position.



[1] Okyere v. Palisades Collection, LLC et al., 12 CIV 1453 (SDNY, March 22, 2013).

[2] 829 F.Supp.2d 246 (SDNY 2011).

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