Private Debt Collection Companies Contract with District Attorney’s Offices
Private Debt Collection Companies Contract with District Attorney’s Offices
by David M. Reutter
Numerous lawsuits have been filed against companies that contract with prosecutors to collect debts in bad check cases because, opponents say, the firms contact debtors on official district attorney letterhead and use draconian tactics such as harassing people and threatening them with jail time if they don’t pay the debts they owe plus additional fees.
Consumer protection groups claim the practices used by such companies, including California-based CorrectiveSolutions and Missouri-based BounceBack, would be illegal were it not for legislation passed by Congress following a vigorous lobbying campaign in which one of the companies spent hundreds of thousands of dollars to influence members of the U.S. House and Senate.
Critics say efforts by local governments to reduce costs and increase revenue have driven them to enter into contractual agreements that effectively give private firms law enforcement power and authority over citizens. Such collaborations allow the companies to profit from fees, debt collection and even public safety functions.
Privatization and outsourcing are not new to local governments; many have turned to private companies in recent decades for garbage collection, or to manage utilities such as water or park services. More recently, lured by promises of reduced expenses and new or increased revenue streams, some localities have contracted with companies to perform services that extend to policing efforts and threaten to intrude on civil rights.
Such arrangements go beyond the well-known examples of privately-operated prisons and jails or the privatization of probation services and electronic monitoring for offenders on community supervision. [See, e.g.: PLN, Jan. 2014, p.18; Jan. 2012, p.20].
For instance, the town of Center Point, Alabama contracted with Arizona-based Redflex Traffic Systems, Inc. to set up traffic enforcement cameras in the city. The cameras would take photos of license plates on cars that ran red lights, and citations would be sent to the vehicle owners. The contract became the city’s second-largest source of revenue, averaging between $80,000 to $100,000 per month; only sales taxes brought in more money.
The traffic cameras were deactivated in late 2012 after a class-action lawsuit challenged the appeals process for people who received citations through the Redflex program. Several claims were dismissed by a federal court in December 2013 and others were remanded to state court, which denied the defendants’ motion to dismiss. The case remains pending. See: Stubbs v. City of Center Point, U.S.D.C. (N.D. Ala.), Case No. 2:13-cv-01200-KOB.
A class-action suit challenging a similar traffic camera program in five towns in New Jersey, also involving Redflex, settled in May 2014. The lawsuit alleged that drivers had been ticketed due to yellow lights that were timed too short. The company agreed to pay $2.1 million plus attorney fees and costs of more than $412,000. See: Spector v. Cherry Hill Township, U.S.D.C. (D. NJ), Case No. 3:12-cv-05198-PGS-LHG.
But far more troubling, civil liberties and consumer advocates say, are agreements between private debt collection agencies and prosecutors’ offices. According to the National District Attorney Association, such agreements exist across the nation – from California and Washington to Massachusetts and Maryland.
The two main debt collection firms, CorrectiveSolutions and BounceBack, enter into contracts that allow them to use the letterhead of local district attorney’s offices to threaten bad check writers with prosecution and jail time. The companies collect millions of dollars through bad check diversion programs, and prosecutors sometimes get a cut of the fees charged by the firms – giving them a financial incentive to agree to such arrangements.
The collaboration between private companies and prosecutors, which has been ongoing since the 1980s, has led to a plethora of lawsuits.
In 2002, a federal court in Michigan ruled that by using district attorney letterhead and threatening consumers with criminal penalties, a company called Check Enforcement Unit, Inc. had violated the Fair Debt Collection Practices Act and Michigan Collection Practices Act. The court awarded a judgment of $1,000 to the plaintiff – the maximum statutory amount – plus $77,680.44 in attorney fees and costs. See: Gradisher v. Check Enforcement Unit, Inc., 210 F.Supp.2d 907 (W.D. Mich. 2002).
In another case, a federal court in California heard arguments that District Attorney Technical Services, Ltd. (DATS), a debt collection company, charged unlawful fees, pretended to be the district attorney’s office and made false threats to arrest bad check writers. The court held that such practices violated the Fair Debt Collection Practices Act and California law. The case resulted in a $741,387.05 judgment against the company and an individual defendant, although DATS filed for bankruptcy and only $160,286.78 was recovered. See: Schwarm v. Craighead, 814 F.Supp.2d 1025 (E.D. Cal. 2011).
American Corrective Counseling Services (ACCS), the predecessor of CorrectiveSolutions, has been sued in California, Florida, Indiana and Pennsylvania – the latter suit resulting in a $2.55 million settlement in 2009. In one case, the California District Attorneys Association filed a friend of the court brief in support of the company.
In San Jose, California, a class-action suit was brought against ACCS and the company’s owners, Donald R. Mealing and Lynn R. Hasney, who reportedly made millions by charging fees for a bad check diversion class and imposing other fees on bad check writers. The district court found they had violated the Fair Debt Collection Practices Act by impersonating the district attorney’s office in letters and phone calls to debtors, and by claiming they would prosecute anyone who did not pay the fees. See: Del Campo v. American Corrective Counseling Serv., 718 F.Supp.2d 1116 (N.D. Cal. 2010). Following a trial and class decertification, the case settled in May 2014, after 13 years of litigation, for $225,000 to $250,000.
District attorneys have defended their collaboration with private debt collection companies. “It’s hugely beneficial to taxpayers because we as prosecutors can then assign resources to more violent crimes and save taxpayers thousands of dollars every year,” said Gerald Stewart, the second assistant district attorney in Suffolk County, Massachusetts.
Stephanie Guyotte, a spokeswoman for Middlesex County, Massachusetts District Attorney Gerard Leone, agreed. “Those who have committed a crime of larceny are given the opportunity to not be criminally prosecuted, while the victim merchants have the opportunity to have the matter addressed in lieu of filing a criminal complaint.”
However, Paul Arons, an attorney who has filed multiple class-action lawsuits against CorrectiveSolutions, characterized the prosecutors’ actions as “unethical.”
“This is guilty until proven innocent,” he stated. “Their letters [from the debt collection firms] come on letterhead from the district attorneys. That’s a lie. They’re not from the district attorneys.... What the DAs are doing is renting out their stationery.”
Arons also said it is misleading for the companies to threaten bad check writers with criminal prosecution. “It is rare that anyone ever gets prosecuted for a bad check,” he noted. “You don’t even have to attend the classes as long as you make good on the check.”
Consumer advocates worry that the arrangements allow for-profit companies, under the guise of district attorney’s offices, to bully accused bad check writers for private gain. In some states, writing a bad check is not a crime unless it was done with the intent to commit fraud.
“I would be surprised if there were not a disproportionate number of low-income, less sophisticated people who get these letters,” said Nadine Cohen, managing attorney for the Greater Boston Legal Services’ consumer rights unit.
Faced with public pressure due to news media coverage, district attorneys in six Massachusetts counties ended their contracts with CorrectiveSolutions and BounceBack in February 2013 out of “an abundance of caution.”
“When I took a look at the letter that goes out, I didn’t feel it was appropriate because it was giving the erroneous impression that it was being sent by me, as opposed to BounceBack,” said David Sullivan, the chief prosecutor in Northwestern County, Massachusetts. “So I pulled the plug.”
David Cotney, the state Commissioner of Banks, had told prosecutors that the debt collection firms were not complying with the Massachusetts Consumer Protection Act; however, bad check writers in Massachusetts continued to receive letters from the companies for another three months.
“It is truly unfortunate that the district attorneys didn’t immediately shut the whole thing down and stop the collectors from fleecing the public, who the DAs are bound to protect,” said Robert Bertling with the Harvard Legal Services Center.
The practice of using private companies to collect bad check debts is highly profitable. A study by The Boston Globe determined that on average, bad check writers in Massachusetts paid roughly double the value of the checks they bounced. In just four counties, for example (Suffolk, Middlesex, Cape and Islands, and Northwestern), CorrectiveSolutions and BounceBack collected a combined $103,216 in bad check debts in 2011. They also collected $107,186 in fees. Almost $9,000 of the fee income was shared with prosecutors.
Matthew Connolly, a former deputy district attorney in Norfolk, Massachusetts, accused prosecutors of abdicating their responsibility by contracting with debt collection firms. “By doing so they are enriching a private company while intimidating people wrongly and charging them exorbitant fees,” he said. “It’s outrageous.”
Nationwide, more than 300 district attorney’s offices have contracts that essentially loan out their letterhead to private collection companies. The impression the companies give – which concerns consumer protection advocates – is that the failure of the bad check writer to respond and pay what they owe, including fees, could lead to criminal charges.
Kathy Pepper accidently wrote a $68 bad check in the midst of a divorce that made a mess of her finances. She received a letter signed by the district attorney for Santa Clara County, California, advising her that a “bad check restitution program” would allow her to avoid “the possibility of further action ... by the District Attorney’s Office.”
Fearing prosecution, she agreed to pay $170 to attend a “financial accountability” class. The letter had actually been sent by CorrectiveSolutions without a prosecutor determining whether she had committed a crime.
In 2012, The New York Times reviewed five agreements between prosecutors and CorrectiveSolutions. The agreements allowed businesses to send bad checks directly to the company, bypassing the prosecutor’s office altogether. The businesses first had to make an attempt to contact the debtor, but they could turn the bad checks over to a collection agency after only 10 days.
CorrectiveSolutions is by far the larger of the two debt collection firms. The company boasts “over 140 prosecutor offices as customers. Those offices are in jurisdictions with a total population of over 55 million.” Meanwhile, Gale Krieg, a vice president at BounceBack, said his company has contracts with district attorneys in 38 states.
Bad checks are big business. According to data from the Federal Reserve System, about $127 billion in bad checks was incurred nationwide in 2009, though statistics show that number had fallen from $182 billion in 2006.
In the first half of 2012, CorrectiveSolutions sent out 16,955 letters on behalf of the Los Angeles County district attorney’s office. County data indicates that only 635 people attended the company’s diversion classes. There was no oversight by prosecutors.
Priscilla Cruz, an assistant director in the Los Angeles County district attorney’s office, said no one reviews bad check cases before CorrectiveSolutions sends the letters.
Debt collection companies operate with impunity thanks to a loophole created in federal law in 2006 following vigorous lobbying efforts by proponents of bad check repayment programs, CorrectiveSolutions, BounceBack and the National District Attorneys Association. An exemption was added to federal law for debt collection firms representing prosecutors, despite opposition from Public Citizen, the National Consumer Law Center and other consumer advocacy groups.
With only a few qualifying criteria, the exemption allows debt collection companies to use district attorney letterhead to send letters to bad check writers, threaten them with jail time and collect fees.
According to ProPublica, CorrectiveSolutions spent more than $660,000 on lobbying between 2003 and 2006, and made donations to key U.S. Senators such as Sen. Christopher Dodd, and prominent House members such as Rep. Barney Frank – then a member of the House Financial Services Committee. Rep. Frank said he supported the exemption because bad check programs help people avoid criminal records.
Yet critics claim that some district attorneys appear to have delegated their “prosecutorial discretion” – the decision as to which cases to prosecute – to debt collection firms. And as partnerships between private companies and prosecutors proliferate, more and more people risk having their rights and freedom determined by corporations that are primarily concerned with generating profit.
Meanwhile, lawsuits continue to challenge the practices of private debt collection companies that collude with district attorney’s offices.
A class-action suit filed in federal court in the Northern District of California settled in March 2014, with a member class of around 500,000 consisting of “all individuals who received written communications in connection with Bad Check Diversion Programs operated by National Corrective Group or American Corrective Counseling Services in California between January 4, 2006 and August 31, 2011 or in Pennsylvania between January 25, 2004 and August 31, 2011.” Pursuant to the settlement, the defendants agreed to pay $3.25 million, inclusive of $700,000 in attorney fees and costs. See: Smith v. Leichtman, U.S.D.C. (N.D. Cal.), Case No. 10-cv-00010-JSW.
And on July 18, 2014, a class-action lawsuit was filed in Washington state against BounceBack and its parent company, Stone Fence Holdings, claiming violations of the state Consumer Protection Act and the Fair Debt Collection Practices Act. According to Courthouse News Service, BounceBack “‘rented’ county prosecutor’s seals to threaten consumers with jail time unless they paid alleged debts, and gave the prosecutors a share of the collection fees.” See: Cavnar v. BounceBack, Inc., U.S.D.C. (E.D. Wash.), Case No. 2:14-cv-00235-RMP.
Due to such lawsuits and media coverage, public officials are starting to take action. In June 2013, Oregon Governor John Kitzhaber signed into law a bill that ended bad check diversion programs involving private companies and prosecutors’ offices in that state. The law went into effect in January 2014; a similar bill was introduced in Washington in 2013, but failed to pass.
Sources: The New York Times, www.blog.al.com, www.checkrestitution.com, www.correctivesolutions.org, The Boston Globe, www.ocweekly.com, Courthouse News Service, http://bracketprograms.com, www.fireredflex.com, www.insidearm.com
Related legal cases
Spector v. Cherry Hill Township
|Cite||U.S.D.C. (D. NJ), Case No. 3:12-cv-05198-PGS-LHG|
Cavnar v. BounceBack, Inc.
|Cite||U.S.D.C. (E.D. Wash.), Case No. 2:14-cv-00235-RMP|
Stubbs v. City of Center Point
|Cite||U.S.D.C. (N.D. Ala.), Case No. 2:13-cv-01200-KOB|
Schwarm v. Craighead
|Cite||814 F.Supp.2d 1025 (E.D. Cal. 2011)|
Smith v. Leichtman
|Cite||U.S.D.C. (N.D. Cal.), Case No. 10-cv-00010-JSW|
Del Campo v. American Corrective Counseling Serv.
|Cite||718 F.Supp.2d 1116 (N.D. Cal. 2010)|
Gradisher v. Check Enforcement Unit, Inc.
|Cite||210 F.Supp.2d 907 (W.D. Mich. 2002)|