Berman v. City of N.Y., 09-CV-3017 (ENV) (CLP)

CourtUnited States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
Writing for the CourtERIC N. VITALIANO
PartiesERIC M. BERMAN, P.C., LACY KATZEN, LLP, DBA ASSET HOLDINGS CORP., Plaintiffs, v. CITY OF NEW YORK, NEW YORK CITY COUNSEL, NEW YORK CITY DEPARTMENT OF CONSUMER AFFAIRS, JONATHAN MINTZ, in his official capacity as the Commissioner of the New York City Department of Consumer Affairs, Defendants.
Docket Number09-CV-3017 (ENV) (CLP)
Decision Date29 September 2012

JONATHAN MINTZ, in his official capacity as the Commissioner of
the New York City Department of Consumer Affairs, Defendants.

09-CV-3017 (ENV) (CLP)


Dated: September 29, 2012



New York City has been involved in regulating debt collection since at least 1984, when it began requiring debt collection agencies to obtain a municipal license in order to practice in the city. In March 2009, New York City Council passed Local Law 15, which, inter alia, amended the debt collection ordinance to cover debt buyers and attorneys engaging in debt collection activities. Plaintiffs contend that these amendments are contrary to New York state law, violate the Commerce and Contract Clauses of the United States Constitution, and render the debt collection ordinance unconstitutionally vague. Both plaintiffs and defendants have now moved for summary judgment. For the reasons set forth below, plaintiffs' motion is GRANTED in part and DENIED in part, as is defendants'.


A. Legislative History

In 1984, New York City Council passed Local Law 65, which required debt collection agencies to obtain a license in order to practice in the city. In the prefatory legislative

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declaration, City Council stated that, "[w]hile the majority of those engaged in [the debt collection] business are honest and ethical in their dealings, there is a minority of unscrupulous collection agencies in operation that practice abusive tactics such as threatening delinquent debtors, or calling such people at outrageous times of the night." N.Y. City Admin. Code § 20-488 (1984). In the Council's view, "[t]hese actions constitute tactics which would shock the conscience of ordinary people." Id. For this reason, Local Law 65 made it "unlawful for any person to act as a debt collection agency without first having obtained a license." Id. § 20-490. "Debt collection agency" was defined as "a person engaged in business the principal purpose of which is to regularly collect or attempt to collect debts owed or due or asserted to be owed or due to another," but specifically excluded "any attorney-at-law collecting a debt as an attorney on behalf of and in the name of a client." Id. § 20-489. Agencies covered under this definition had to apply for a two-year license, at an application or renewal fee of $75, or else face penalties for failure to adhere to the licensing requirements. Id. §§ 20-491, 20-492, 20-494.

In December 2007, the Council introduced Int. 660, a bill to amend the debt collection ordinance. As originally proposed, the bill made two changes to the ordinance. First, it amended the definition of debt collection agency to include "a buyer of debt who refers such debt to another for collection or to an attorney-at-law for litigation in order to collect such debt." (Decl. of Nicholas Ciapetta in Support of Cross Motion for Summary Judgment ("Ciapetta Decl."), Ex. D.) Second, the exclusion for attorneys was clarified to cover "any attorney-at-law or law firm collecting a debt in such capacity on behalf of and in the name of a client . . . through legal activities such as the filing and prosecution of lawsuits to reduce debts to judgments," but not "any attorney-at-law or law firm who regularly engages in activities traditionally associated with debt collection, including but not limited to, sending demand letters or making collection

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telephone calls." (Id.) In other words, under the proposed bill, "buyers of debt"—organizations that purchase debt from originating or other creditors and outsource debt collection to third-parties, including law firms—and attorneys or law firms regularly engaging in non-litigation debt collection activities would be required to apply for a debt collection license.

In hearings on the bill in February 2009 before the City Council's Committee on Consumer Affairs, witnesses discussed the growth in the debt-buying industry, a shift particularly evident in the explosion of debt collection-related lawsuits brought by these organizations. Relying largely on a 2007 study by the Urban Justice Center ("UJC"), City Councilmembers, the Director of Legislative Affairs for the New York Department of Consumer Affairs, and representatives of various advocacy groups testified that approximately 90% of the more than 300,000 consumer credit collection actions being filed in Civil Court annually were brought by debt collection organizations that did not originate the debt at issue. (See, e.g., id., Ex. E, at 13 (oral testimony of Andrew Eiler, Director of Legislative Affairs for the Department of Consumer Affairs).) The same witnesses expressed concern that these organizations have different incentives than originating creditors. In the words of the Director of Legislative Affairs, for example, "[w]hen the debt has been sold for the purpose of collecting it, the person buying it doesn't care about any ongoing relationship. The only thing he cares about is collecting the money." (Id. at 43-44.) Thus, while "[t]he originating creditor might have reasons for dampening the extent to which he pursues the claims that he may have," a debt buyer "does not have these inhibitions." (Id. at 44.)

In addition to expressing continued concerns regarding the harassing practices that had motivated Local Law 65, many of the witnesses testified to the use of aggressive tactics by debt

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buyers and their lawyers in collection actions against vulnerable consumers.1 For example, of the consumer credit cases brought by debt buyers in 2006, the UJC found that 99% were submitted using invalid evidence. (Id., Ex. G, pt. 2, at 6-7 (written testimony of Harvey Epstein, Project Director of UJC Community Development Project); see also id. Ex. E, at 113 (oral testimony of Claudia Wilner, Senior Staff Attorney, Neighborhood Economic Development Advocacy Project ("NEDAP")) (estimating that in cases brought by debt buyers in which NEDAP was involved, 40% were completely devoid of merit).) Thus, according to several legal services organizations that testified before the committee, in cases in which these organizations represented debtors against debt buyers, they rarely lost. (See, e.g., id., Ex. G, pt. 1, at 2 (written testimony of Legal Aid Society) ("In several years of representing clients against debt buyers in the Civil Court, we have never lost a case against a debt buyer—why? Because when put to the test, most debt buyers cannot prove their case."); id. Ex. G, pt. 3, at 19 (written testimony of Claudia Wilner on behalf of NEDAP) ("If challenged, debt buyers are often unable to come up with any admissible evidence that the defendant owes any money at all."); id. at 2 (written testimony of Carolyn E. Coffey, Staff Attorney, Consumer Rights Project, MFY Legal Services) ("[O]ver the past three years, not one consumer credit case handled by the Consumer Rights Project . . . has gone to trial, chiefly because the debt buyer could not prove its case . . . or could not prove that it actually owned the debt in question.").) In the vast majority of cases, however, debtors were not represented or failed to appear, often because of inadequate notice. (See id., Ex. E, at 113 (Wilner oral testimony) (finding that in cases brought by debt buyers in which NEDAP was involved, 79% of debtors were not properly served with a summons and a

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complaint).) Indeed, of the cases sampled in its study, the UJC found that over 80% resulted in default judgments, allowing debt buyers to garnish the wages and freeze the bank accounts of defaulting debtors. (See id., Ex. G, pt. 2, at 7 (Epstein written testimony).)

Over the strenuous objections of representatives from the debt collection industry that Int. 660 would violate the federal Constitution and New York state law, witnesses testified that the proposed amendments were necessary to address these problems and bring previously unlicensed debt buyers and their agents under the licensing aegis of the City. In the words of one witness, debt buyers that contracted collection activities to third parties were "among the worst perpetrators of abusive collection practices against city residents." (See id., Ex. E, at 107 (oral testimony of Janet Ray Kalson, Chair of the Civil Court Committee of New York Bar Association).) However, because many debt buyers outsourced actual collection to other organizations and employed law firms to pursue legal action, they arguably were not covered by Local Law 65's definition of "debt collection agency." (See id. at 5 (introductory remarks of Leroy Comrie, Chair of Committee on Consumer Affairs) ("[D]ebt buyers claim that since they outsource the collection duties to other parties . . . they [are] exempt from the licensing requirements.").) Int. 660 accordingly was drafted to require these organizations, as well as law firms regularly engaging in debt collection activities, to obtain a license from the Department of Consumer Affairs. (See id. at 8 (oral testimony of Councilmember Dan Garodnick).). Obtaining a license would also subject them to the Department's investigatory and sanctioning authority. (See id. at 30 (Eiler oral testimony) ("The most important thing is that the...

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