PHILIP S. STRANIERE, J.
In May 2012, this court issued decisions in the above captioned cases staying the enforcement of all judgments entered by these five plaintiffs, Centurion Capital Corporation (Centurion), Colonial Credit Corporation (Colonial), Great Seneca Financial Corporation (Great Seneca), Monarch Capital Corporation (Monarch) and Platinum Financial Services Corporation (Platinum) in Civil Court Richmond County based on several factors.
The reasons primarily were that as all five entities were Maryland corporations (1) the business model they adopted as consumer debt collectors required them to use the court system to try to collect these debts which made it necessary for them to register with the Department of State as they were doing business in New York and the failure to be properly registered barred them from bringing actions in New York courts; and (2) as debt collectors they were required to register with and be licensed by the New York City Department of Consumer Affairs.
The court gave each of the plaintiffs an opportunity to challenge the sua sponte court-imposed stay by submitting documentation and legal briefs challenging the assumptions and findings of the court's decision. Such papers have been filed by the same counsel for each of the plaintiffs. Because of the common issues of law and fact in these five cases and the uniformity of the argument made by counsel for each of the plaintiffs, the court will address the issues in one decision.
What initially triggered the court analyzing these files was numerous assignments of the judgment from each of the named plaintiffs to Palisades Acquisitions XVI, LLC (Palisades) along with a consent to change attorneys. As noted in their individual decisions, each plaintiff was incorporated in Maryland between 1997 (Platinum) and 2005(Centurion) and all met their legal demise on March 25, 2009 when Articles of Dissolution were filed in Maryland. Although each corporation had different incorporators at the birth, the same four individuals signed their corporate "death certificates."
Counsel for Palisades prepared extensive papers in support of its position that there was no need for any of the entities to register as a foreign corporation with the Department of State or Consumer Affairs as a debt collector and that the court should not have sua sponte raised these issues in view of the fact that the applications to file the notice of assignment and consent to change attorneys were unopposed. Counsel provided the legislative history of Business Corporation Law §1312 on the issue of registration of foreign corporations.
The thrust of plaintiffs' argument is that the five corporations were not "doing business" in New York in the traditional sense of "doing business"so as to require filing pursuant to BCL §1301 with the Department of State in that the plaintiffs were not "engaged in continuous, systematic, and regular activity in the state" [Carvalo v Mel S. Harris and Associates, LLC, 2004 WL 1555193 (EDNY)]. Plaintiffs apparently do not maintain offices in New York, own real or personal property in the state, and have no employees here, nor have they made contracts here and whatever business they do in New York is incidental to their regular business in interstate commerce. Plaintiffs place a great deal of reliance on Carvalo because it involves Great Seneca, one of the plaintiffs herein.
There are several problems with the applicability of the Carvalo case to the facts that now exist. Carvalo refers to consumer credit litigation commenced by Great Seneca in November 2003 less than one year after the corporation was formed in Maryland. The court noted that merely bringing a few hundred cases as part of a debt collection business would be insufficient to require the plaintiff to register as a foreign corporation doing business in New York. The court must wonder would the Carvalo court reach the same conclusion if it knew that in its six-year two-month existence Great Seneca commenced more than 26,000 cases just in the Civil Court of the City of New York
The situation which exists in regard to these out-of-state consumer debt buyers and their collection activities in New York appears to be an opportunity to apply the "Sodom and Gomorrah" standard for determining when to act but in reverse. In Genesis 18, God tells Abraham that Sodom and Gomorrah will be destroyed because of the wickedness of the residents. Abraham starts negotiating with God by asking would God destroy the cities if there were fifty righteous people in the cities. God agrees not to rain down destruction if there are fifty righteous people. Abraham having gotten a concession from God in regard to not harming a number of righteous people, as any good lawyer would, starts to negotiate the number. Abraham then asks God to spare the city for forty people, then thirty, twenty and finally ten. As we well know, there were not even ten righteous residents of Sodom and Gomorrah so the cities were destroyed. But the point is, at some number action could be taken. Likewise, the court is asked to question at what point does an out-of-state corporation file enough litigation to be required to comply with the BCL filing requirements? There does not appear to be any statute, regulation or case establishing a standard.
From a public policy point of view, businesses such as the plaintiffs herein are presumably generating income from their use of the court system to collect on these debts and yet are escaping having to pay the franchise tax imposed by Tax Law§209. We have just completed a presidential election where the "fairness" of the current federal tax system was questioned and how people have to pay their "fair share." Plaintiffs have been utilizing the New York courts maintained by New Yorkers from their state and local taxes and yet plaintiffs do not have to pay any taxes on the revenue generated from their purposeful activity in New York of collecting debt through the court system. How does this pass the "fairness" test? I believe it will be conceded that the filing fees paid by plaintiffs like all litigants who seek to commence litigation in the New York courts are woefully inadequate to run the courts on a daily basis.
When it comes to the plaintiff and its collection cohorts the court is faced with how many cases may an out-of-state plaintiff commence in New York before it has to register with the Secretary of State? Clearly Carvalo found a few hundred by one company was insufficient. But what about one thousand? Five thousand? Ten thousand? The five plaintiffs currently before the court just in the New York City Civil Court have a low of 1,163 filings for Monarch to 26,068 for Great Seneca. If this is not "continuous, systematic and regular" activity in New York then nothing reaches that level.
It should be noted that the assignee in these actions, Palisades Acquisition XVI, LLC (XVI) is a Delaware entity that has chosen to register with the New York Department of State as a foreign limited liability company as of November 15, 2007. The address listed for the service of process is in Englewood Cliffs, New Jersey. There is no such registration for the assignor Palisades Acquisition XV, LLC or for any of the other Roman numeral bearing Palisades Acquisitions. Obviously, someone decided that registration was either now required or a good business decision. Based on the information before the court, XVI would be exempt from such filing because it has no offices or employees in New York, entered into no contracts here and owns no real or personal property.
Apparently entering into a contract with a New York law firm to collect on the consumer debt and to commence litigation against the debtor, make that thousands of debtors, is not sufficient activity to warrant an out-of-state entity from registering. This rule makes sense when the foreign business is merely hiring counsel to assert its rights in isolated matters. But does it make sense when the business of the foreign entity is filing law suits in New York to collect on consumer debt and as a corporation or similar entity they must appear by counsel [CPLR§321(a)]? If they are not engaging in any collection activity, as they contend, other than hiring counsel to bring a suit, and as corporations they must hire counsel or have their cases dismissed, this activity is their business plan. Plaintiffs litigation practices are not brought about by an isolated incident where the plaintiff is required to use the New York courts to enforce its rights, this is the business model adopted by the plaintiffs and logic dictates plaintiffs should be registered.
In fact, another issue exists in regard to plaintiffs' activities. As "foreign corporations" not registered to do business in New York, pursuant to CPLR §8501(a) plaintiffs could have been ordered to post "security for costs" as of right by the defendant upon motion without notice. [See also New York City Civil Court Act §1900]. However, the fact that about two-thirds of consumer credit cases result in default judgments being entered against the defendant for failure to appear or answer and over 95% of the defendants who do answer are unrepresented, the odds of a defendant asking for this relief is minimal. I daresay many attorneys are probably unaware of this requirement. In fact, this court cannot recall of the issue ever being raised by any defendant, represented or unrepresented, in regard to consumer credit litigation. Would plaintiffs have decided to register with the Department of State if they were required to comply with CPLR §8501(a)? Obviously a business decision was made not to register and pay franchise taxes as that would have less effect on their bottom line then having to post "security for costs" on the rare occasion a defendant made such a request.
The above being said, plaintiffs makes two compelling points challenging the action of the court in these cases. The first is that the court sua sponte took this action in that in none of these five actions did a defendant raise this or the other issues. The second is that what the court is now seeking to impose as a requirement for foreign corporations, registration with the Department of State in order to maintain an action against a New York debtor, would be a fundamental change in the law from how it existed at the time the actions were commenced and as such it would be unfair.
The court agrees. As to the first point, the court would never have been examining these files if there were not so many defects detected by the clerk in the large number of filings of assignments of the judgments and consents to change attorneys submitted by plaintiffs. Particularly discrepancies between the name of the plaintiff and designated counsel in the court file and those on the papers being submitted by plaintiffs were so fundamental, that in order to ensure the rights of the defendants had been protected, the court had to intervene, examine what had occurred and determine if due process rights had been protected.
As to the second point, if the Department of State or the legislature agrees that the rules should be changed in the area of required filings by out-of-state debt buyers, then it is up to them to act to clarify the law and it would be unfair for the court to change the rules after the fact. What constitutes sufficient activity in the debt collection industry by out-of-state entities to be considered doing business for registration purposes needs to be addressed.
In their submission, the plaintiffs admit that their business is the buying of debt and then using the court system to collect the debt. They deny undertaking traditional collection activities in New York such as sending dunning letters or making telephone calls to debtors homes or places of employment. Because if they engaged in such collection activities, they would have to register as debt collectors with the New York City Department of Consumer Affairs (DCA). This, like filing with the Department of State, is another registration requirement the plaintiffs assert did not apply to them.
Plaintiffs have also addressed the courts concern that they were required to register as a "debt collector" with the DCA. Plaintiffs argue that during the years before they dissolved in 2009 the position of the Consumer Affairs was that the licensing requirement only applied to "active" debt buyers and not "passive" debt buyers such as their business model. Plaintiffs rely on a letter from the General Counsel of DCA dated March 7, 2007 in which she interpreted the City regulation as not being applicable to "passive" debt buyers because they did not conduct any collection activities and therefore could not be engaged in any of the abusive collection practices from which the legislation was designed to protect consumers.
Plaintiffs also reference Kuhne v Cohen & Slamowitz, LLP, 2008 WL 608607 (SDNY 2008) for support of that position. The Kuhne court acknowledged that Centurion Capital Corp. v Druce, 14 Misc.3d 564 (2006) found that the DCA regulations defined a collection agency as "entities which collect defaulted debt, whether or not the debt they collect is due themselves or others" but distinguishes Druce and other cases making similar holdings because none of them dealt specifically with the issue of "what types of activities constitute debt collection, while, here, this Court must determine whether filing a lawsuit, with nothing more, requires a debt collection license" [Kuhne p. 4]. The Druce decision predates the DCA opinion letter by about three months and as a court decision, perhaps should be entitled to greater deference than the agency's opinion of counsel.
Kuhne was appealed to the Second Circuit, In Kuhne v Cohen & Slamowitz, 579 F.3d 189 (2009), that court certified to the New York Court of Appeals the issue of the retroactive effect of the amendments to the New York City Administrative Code concerning debt collection activities and the need to register. The appeal was withdrawn by the parties at the Court of Appeals so there never has been a final interpretation of the DCA regulations.
Plaintiffs and Kuhne ignore the fact that the court in Druce dismissed the action brought by Centurion Capital (coincidentally one of the five entities in this litigation) precisely because Centurion was not licensed and therefore its complaint was defective in failing to plead its license as required by CPLR §3215(e) so it never had to address the issue of what constitutes collection activities. In fact, in spite of the ruling in Druce, which apparently was not appealed by Centurion, Centurion for more than two years until it dissolved as a corporation, continued to bring collection lawsuits in the Civil Court without registering with the DCA, ignoring the holding of the Druce court.
Plaintiffs and its industry advocates would have the court and others believe it purchases debt either for the "fun" of it or to wallpaper the walls of their offices as if it were useless Confederate money circa 1866 or unredeemable stock certificates after the October 1929 crash, when the real purpose is to try to collect the debt from the debtors. To not require them to be licensed is akin to the "brains" of the operation in some film noir classic gets off the hook but the guys who do the dirty work go to jail, Sherlock Holmes' inability to catch Professor Moriarity while arresting Moriarity's minions, or Nathan Detroit's inability to understand why the police are always after him when all he does is run "the oldest established permanent floating crap game in New York"
These debt buyers obviously are taking part in the process. They are negotiating with original creditors to buy accounts, paying money for the accounts, preparing or signing assignments of the accounts and bills of sale for them, opening the account files in their offices, sending the file information to third parties either another entity or attorneys for the actual collection activities, and presumably collecting some money along the way to put in a bank account and distribute to their shareholders or investors. But because they do not actually "contact" the debtor, they have a third party do it for them, the reasoning goes, they should be exempt from registering with DCA.
As they argued in regard to registering with the Department of State, plaintiffs assert that the court should not be acting sua sponte as they were operating under the then current rules in effect, relying on the opinion of counsel letter from DCA and the Kuhne case. A better question is if you are a third-party debt buyer, why would not you register? Is the filing fee so onerous that it will adversely affect the bottom line?
It should be noted that the assignee of these plaintiffs, Palisades Acquisition XVI, LLC is registered as a debt collection agency with DCA at least as of 2010.
The court agrees with plaintiffs for the same reasons set forth above in regard to the Department of State filing. But as the court noted above, the plaintiffs triggered this examination by filing papers containing information which substantially differed from the information contained in the court files. On the other hand, by accepting plaintiffs reasoning this issue of what constitutes collections activities will remain unresolved.
Plaintiffs in their papers argue that they neither had to register with the Department of State nor the Department of Consumer Affairs because they conduct no business activities in New York and they undertake no collection activities. Plaintiffs admit that they purchased debt and undertook no collection activities other than enforcing the debt by bringing litigation in the New York courts. This leads to the question of whether this activity constitutes champerty under New York law which would make the sale of the debt to the plaintiffs illegal and void.
Champerty is the practice of buying an interest in a claim under litigation, funding the expenses of the litigation and then sharing in the recovery, if any. Champerty is prohibited in New York by Judiciary Law §488, which applies to attorneys, and Judiciary Law §489 which covers corporations and collection agencies.
Judiciary Law §489 provides:
Subsection (2) of Judiciary Law §489 says that the above cited subsection (1) does not apply if the debt of the obligor is "at least five hundred thousand dollars." Because these cases deal with consumer credit debt, mostly generated from credit card charges, it is unlikely that any of the debt purchased by these plaintiffs would be exempt from the champerty law. It is improbable that even Scrooge McDuck, Auric Goldfinger, or Oliver Warbucks could run up credit card debt in that amount.
Case law has held that the language of the statute covers the assignment of judgments and proceedings to enforce judgments [Bottenus v Blackman, 71 Misc.2d 583, (1972) rev'd on other grounds, 43 A.D.2d 846 (1974). It has also been established that an assignment made in violation of the champerty statute is void and may not be sued upon [Semi-Tech Litigation, LLC v Bankers Trust Co., 272 F.Supp.2d 319 (2003)].
The above being said, New York has long held that it is champerty only if the primary intent in acquiring the debt is to sue on the claim. The intent to bring suit must be primary and not incidental and contingent to be champerty [Bluebird Partners, LP v First Fidelity Bank NA, 94 N.Y.2d 726 (2000); Justinian Capital ex rel Blue Heron Segregated Portfolio v West LB AG, NY Branch, 37 Misc.3d 518 (2012)Portfolio Recovery Associates, LLC v Rand, 34 Misc.3d 52 (App Term 2011)]. The purchase of a debt with the purpose of enforcing a legitimate claim by using litigation is not champerty.
These cases also point out that champerty is a defense with the burden of proof being on the defendant. As no defendant has appeared in this litigation in regard to the court's action in staying enforcement of these judgments, the court lacks sufficient information in the record to conclude that champerty exists.
The existence of champerty will have to be raised as a defense by some defendant at a future date when all of the facts behind the purchase of the debt from the original creditors by these plaintiffs can be investigated. As of now, it would be speculative for the court to conclude that the purchase of these accounts by the plaintiffs was void by reason of champerty.
An argument can be made that all of the above issues are moot. The current holder of the debt in these five cases is Palisades Acquisition XVI, LLC. Although it is a foreign corporation, it is registered with the Department of State and presumably paying all fees and taxes so as to eliminate that issue. It is also registered with the Department of Consumer Affairs as a debt collector so that its activities are subject to scrutiny and consumers with complaints have an administrative agency at which they seek redress.
The five named plaintiffs all ceased doing business and terminated their legal existence in March 2009 with Maryland, the state in which they were incorporated. As a practical matter, there is no entity to pursue in regard to the defects the court noted in the five underlying decisions. Perhaps the New York Attorney General and the Department of Consumer Affairs have some avenue to further investigate these issues and seek redress if there are violations.
Plaintiffs did attach documentation to establish that the assignments from these plaintiffs to Palisades all took place while plaintiffs were still in existence and registered in Maryland.
As noted by the plaintiffs, none of the defendants in these five actions raised these issues initially as defenses nor have they sought to participate in the process since the court sua sponte questioned the plaintiffs' activities.
It should be noted that the issues concerning the attorneys of record in the initial litigation have not been addressed by the assignee and new counsel. This too should be addressed either by the attorney general or through the grievance process. What is the legal effect of the fact that many of the process servers of the initial summons and complaint have had their process serving licenses either suspended, revoked or voluntarily surrendered, is also a matter to be dealt with in the future either by the DCA or by an answering defendant.
Based on the submission from Palisades Acquisition XVI, all stays on maintaining litigation brought by these five plaintiffs and enforcement of the judgments entered in their favor in Richmond County are lifted. Palisades Acquisition XVI, may take steps to enforce these judgments and litigate any of the matters brought by these five plaintiffs not yet reduced to judgment.
However, any defendant who seeks to vacate a judgment obtained by one of these plaintiffs shall have the right to raise these issues as a defense and have the court deal with each matter on its merits.
The foregoing constitutes the decision and order of the court.
