When debt collectors began hounding Tim McCollough to pay an old credit card bill, the Laurel man fought back and won big.
A federal jury in April awarded McCollough $311,000 from a North Dakota law firm for violating federal and state debt collection laws.
McCollough and three other Montanans are succeeding in court against large out-of-state debt collectors, saying their hardball tactics are illegal and, in one case, amount to racketeering.
The McCollough case is one of three lawsuits filed by Billings attorney John Heenan in U.S. District Court in Montana. The suits allege unfair, deceptive and illegal practices, including forging false affidavits.
McCollough's jury award along with proposed settlements with some of the defendants exceed $1.3 million. The settlements could benefit more than 14,000 people nationwide.
The goal is "to force the collection industry to play by the rules in Montana,'' Heenan said. "It's a big deal to sue somebody in Montana. If you sue someone and you don't have the facts, it's not OK. A lot of people have been acting with impunity for a long time.''
McCollough's case stemmed from a debt he owed to Chase Manhattan Bank from the 1990s.
In 1990, McCollough suffered a disabling head injury. His sole income is Social Security, which is exempt from collections. After his injury, McCollough used credit cards for household expenses and for his wife's medical bills.
The banks began demanding payments, and McCollough did his best.
"I worked with everyone that would work with me, and they got paid,'' he said.
Chase was the only company that wouldn't work with him, McCollough said. The debt was sold to a Denver-based collection firm, CACV of Colorado, which sued him in 2005. Defending himself in justice court, McCollough said the statute of limitations had expired, he had no money, and he had been harassed by Chase. The judge dismissed the case.
Two years later, the Bismarck, N.D., law firm of Johnson, Rodenburg and Lauinger on behalf of CACV sued McCollough in state district court for $9,800, of which $6,000 was for interest and attorney fees.
This time, McCollough hired Heenan, again got the case dismissed and fired back.
"The more I found out about these guys, the madder I got. I was ticked. I wanted these people to know they did wrong,'' McCollough said.
McCollough sued the Johnson firm and CACV, alleging that they violated the federal Fair Debt Collection Practices Act and related state law by engaging in abusive, unfair and unlawful litigation. CACV settled for $10,000.
U.S. Magistrate Judge Carolyn Ostby ruled that the Bismarck law firm violated Montana law by illegally demanding attorney fees; by pressing a case barred by the statute of limitations; and by serving on McCollough requests for information that were "an abusive, unfair and unconscionable'' attempt to collect a debt that was legally uncollectible.
The jury further found that the law firm violated the Montana Unfair Trade Practices Act, engaged in malicious prosecution and abused the process. The panel's award included $250,000 for emotional distress, $60,000 in punitive damages, which was the maximum allowed based on the company's net worth, and a maximum $1,000 for violating the federal law.
The judge awarded Heenan about $110,000 in legal fees and offset the jury award by $10,000 that CACV paid. Ostby recently denied the law firm's requests for a new trial and reduction in jury award.
Debt collection industry
The debt collection industry, Heenan said, has grown from local companies to large corporations that buy bundles of old credit card debts for pennies on the dollar from banks, which write off the losses. Debt collection companies and law firms try to collect against people for the face value of the debt, plus interest and attorney fees.
Portfolio Recovery Associates, of Norfolk, Va., which is a defendant in two of the lawsuits, is a publicly traded company that buys and collects on charged-off consumer debts and manages accounts receivable. Since going public in 2002, the company has invested $1 billion to buy consumer debt, and its consumer debt portfolio has increased from $5.1 billion to more than $35 billion, its Web site said.
"It's an incredible profit margin,'' said Heenan, a solo practitioner whose interest is consumer law. "It's so frustrating for people who don't know their rights.''
Collecting debt is perfectly legal, but consumers have protections under federal and state laws. A debt collector is someone who collects debts for others and includes collection agencies, lawyers and companies that buy delinquent debts and then try to collect. Companies that collect their own debt are not subject to the same laws.
According to Heenan, the collection agencies count on 90 percent of the consumers ignoring their letters and lawsuits and then getting default judgments.
A default judgment, which a judge issues when a defendant doesn't respond, allows wages or bank accounts to be garnished for payment.
Debt collectors pressure consumers and sue them, Heenan said. "It can be overwhelming. Frankly, the collection industry counts on that,'' he said. "What better way (to pressure consumers) than to throw them into the legal process. It's definitely an intimidating process. It's the real deal when you've been sued by a debt collector. Once they have a judgment, they can do pretty serious things.''
Consumers often call him after it's too late - after a judgment has been issued or a deadline has passed, Heenan said. "They didn't assert their rights like Tim did,'' he said. "It is super-critical people assert their rights.''
During the McCollough trial, Heenan presented evidence that the Johnson firm had filed 2,700 collection suits - about 150 cases a month - in Montana during an 18-month period ending in mid-2008, often without documenting its claims.
Neither Portfolio nor CACV is a stranger to federal lawsuits.
Court records show that Portfolio has been sued in more than 200 consumer or debt-related cases in other federal district courts across the country in the past three years. CACV, an affiliate of Collect America in Denver, has been named in more than 20 cases.
Billings case settled
Another Billings lawsuit, a class-action complaint alleging that debt collectors were illegally charging attorney fees, was settled recently.
Billings resident Kerri Henan sued Portfolio and the Johnson firm, alleging that they sought attorney fees without legal basis under Montana law. (Henan spells her name differently and is not related to attorney Heenan.)
The settlement calls for the defendants to pay Kerri Henan $4,500 and to pay 32 other Montanans who are members of the class $500 each. The defendants are to pay Heenan $35,000 in legal fees.
Neither Portfolio nor the Johnson firm admitted any liability but settled to avoid expensive litigation, the agreement said.
Chief U.S. District Judge Richard Cebull has given preliminary approval to the settlement.
Portfolio and the Johnson firm sued Kerri Henan in state court for an old debt and tried to collect about $500 in attorney fees. She hired Heenan to defend her, and Portfolio voluntarily agreed to dismiss its complaint.
Under Montana law, attorney fees may be collected only if a contract gives the right to seek the fees, Heenan said. Kerri Henan contended that she didn't have such a contract so there was no basis for recovery.
"It's piling on when they beef up the debt in a way they can't prove,'' Heenan said.
Testifying at McCollough's trial, Kerri Henan said the first time she heard of Portfolio was when someone came to her door one night and served her court papers.
"I didn't know what to do, to be honest. I was embarrassed, and I didn't want to do anything. I was hoping it would somehow go away,'' she said.
Attorneys for Portfolio and the Johnson firm declined to comment.
Great Falls case alleges racketeering
A third case, filed in Great Falls, is class-action complaint that accuses debt collectors of civil racketeering by filing fraudulent affidavits against consumers. The Great Falls case could affect thousands of consumers nationwide.
The Great Falls case accuses the Johnson firm, CACV and Portfolio, along with the now-bankrupt Washington Mutual Bank and two individuals, of violating civil racketeering and debt-collection laws. Racketeering claims against the two individuals were dismissed recently.
The complaint alleges that the defendants engaged in an illegal enterprise by using fraudulent affidavits in legal proceedings against consumers to collect debts.
The defendants' conduct is "a complete affront to the legal system'' as well as to the "tens of thousands of individuals who suffered adverse consequences,'' the complaint said.
After two days of mediation in April, Portfolio, which denies liability, agreed to settle the case for nearly $1 million. The agreement calls for Portfolio to pay from $25 to $200 to an estimated 14,710 members in the class. One of the plaintiffs, Hill County resident Jeanie Cole, would get $2,000.
Last week, U.S. Magistrate Judge Keith Strong put on hold the proposed settlement along with other pending motions to give all parties an opportunity to reach a settlement.
Missoula attorney Nick Pagnotta, who represents CACV, said earlier that the company is defending itself. "CACV believes once the case is decided on the merits, it will be found to have acted lawfully to collect valid indebtedness,'' he said.
Attorneys for the other defendants declined to comment.
The lawsuit, Heenan said, grew from a state case in which he represented Cole. Portfolio, through the Johnson firm, sued Cole, alleging that she owed a debt on a Providian National Bank credit card.
Portfolio tried to prove the debt by filing a notarized affidavit provided by a Martha Kunkle, who purported to be Providian's agent.
"We made an effort to meet Martha Kunkle and verify what she said. It all kind of snowballed from there. They never made her available,'' Heenan said.
The state judge ruled in Cole's favor and sanctioned Portfolio with a $6,000 penalty for disregarding his order to make Martha Kunkle and the notary public available for depositions.
Further investigation found that "Martha Kunkle'' was actually her daughter, Lorraine Kunkle, a Washington Mutual employee in Texas, court records said. Lorraine Kunkle authorized other employees to sign the name "Martha Kunkle'' on thousands of affidavits, the complaint said. Martha Kunkle died in 1995 and never worked for Washington Mutual or Providian, court records said.
The Cole case alleges that Portfolio and CACV bought charged-off debt from Washington Mutual and that the bank operated "a false affidavit factory.''
Any time one of the companies met resistance to their collection attempts, they would prepare "false and misleading affidavits like the Kunkle affidavit'' for Washington Mutual employees to sign and return for use in court cases, the complaint said. "(Portfolio) and CACV took the false and misleading affidavits and utilized them to secure judgments against hundreds, and perhaps thousands, of alleged debtors.''