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SANDUSKY — Andrea Schwarzentraub is no muscle-bound warrior, but the slight 32-year-old from Erie County has dented the nation's massive debt-collection dragon.

U.S. District Court Judge David Katz ruled that the commonly used affidavit submitted by one of the nation's biggest debt collectors to collect $4,100 from Mrs. Schwarzentraub — and the debts of many others — was not legal.

Judge Katz issued an injunction against the company, throwing into question thousands of collection lawsuits across the nation that used the affidavits to collect outstanding debts.

In a tersely worded rebuke of Midland Funding LLC and Midland Credit Management Inc. — subsidiaries of Encore Capital Group Inc. of San Diego — Judge Katz found that clerks at Midland Credit had, as a practice, signed affidavits stating that the individual clerk had “personal knowledge” of the debt being collected when they did not possess such knowledge, and that who signed the affidavit, upon which the company's collection lawsuits are based, was “an entirely random act” based solely on when the affidavit came off the company's printer.

Because the affidavits were false, the judge ruled that the company's collection process was not legal.

“It is unclear to this court why such a patently false affidavit would be the standard form used at a business that specialized in the legal ramifications of debt collection,” Judge Katz wrote as he issued an injunction against the debt collection agency's practices in August. He reaffirmed the decision Sept. 23.

Murray

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He left open for trial the underlying question of Mrs. Schwarzentraub's original alleged debt.

Mrs. Schwarzentraub's lawyer, Dennis Murray, Sr., of Sandusky, petitioned Judge Katz last month to certify his client's case as a class action against Midland and Encore's other affiliates.

Mr. Murray argues that Encore's affiliates violated the law if they collected debts under false pretenses and says potentially tens of millions of dollars paid by debtors might have to be given back.

“It's not clear what happens next. This is the opening of Pandora's box,” said Mr. Murray, whose Sandusky firm, Murray & Murray, specializes in class actions.

Paul Grinberg, a spokesman for Encore Capital, did not respond to several calls seeking comment.

Three lawyers representing the Encore subsidiaries in the suit also did not respond to calls seeking comment.

However, in court filings in the case, the attorneys representing the Encore subsidiaries argued that Judge Katz overstepped his authority to grant an injunction in the case and said the affidavits with which Judge Katz took issue were modified several months ago to alter the questioned language.

Collecting bad debts — everything from unpaid credit cards and gym memberships to overdue parking tickets — is a $40 billion industry in the United States and one that's grown in size and scope as the economy has weakened consumers' ability to pay their bills.

The process of debt collection, however, has evolved as information technology has advanced.

What was once an industry dominated by small, decentralized, and divergent companies, each with a handful of employees and a battery of phone lines, has grown — thanks in large part to the information now available on the Internet — into a data giant able to instantly match individuals to debts they may have owed decades ago.

According to the American Collectors Association, an industry group, Encore is one of the biggest players in distressed consumer debt collection, which purchased $1.9 billion worth of unpaid debt for $82 million in the second quarter of this year, according to the firm's filings with the U.S. Securities and Exchange Commission.

Encore subsidiary Midland Funding is no stranger to controversy.
Just last month, Maryland's commissioner of financial regulation issued a cease-and-desist order against Midland and other Encore subsidiaries, prohibiting them from continuing collection activities in the state.

The companies were not licensed to conduct collection activities in Maryland, yet had filed over 10,000 lawsuits and other debt-collection actions there in the last two years.

Ohio doesn't centralize its court records, so the amount of business Encore does in the state is less clear. Toledo Municipal Court records indicate that Midland Funding LLC has filed 1,530 cases there since Sept. 1, 2007, and an additional 700 delinquent-debt cases in Lucas County Common Pleas Court.

More than 200 such cases were filed in Sandusky over the same period, and more than 700 in Monroe County First District Court in Michigan.

For those on the receiving end of the company's lawsuits, such as Mrs. Schwarzentraub, the court notice can come out of the blue.

“I received an affidavit in the mail saying I was being sued for around $4,000; basically that I was to appear in [Sandusky Municipal] Court on this,” said Mrs. Schwarzentraub, who was being sued under her maiden name, Andrea Brent.

She contends she knew nothing about the debt.

Although Judge Katz has not ruled on the underlying issue of whether Mrs. Schwarzentraub is responsible for the debt, she says the company erred, and she hired Mr. Murray to fight the debt collection.

David Cherner is legal counsel and director of state government affairs with the American Collectors Association, a 5,300-member trade association for debt collectors that enforces, among other things, a code of ethics for its members.

After reviewing Judge Katz's rulings in the case, Mr. Cherner said he doesn't believe the behavior cited in the lawsuit is widespread within his industry.

“I don't think debt collectors have an incentive to pursue these deceptive practices,” Mr. Cherner said. The vast majority of debt collection efforts are negotiations between the person who allegedly owes the debt and either the lender or a third-party representative, Mr. Cherner said.

When those negotiations are not fruitful, “litigation ends up being the option of last resort, and filing a lawsuit is not cheap.”

State and federal laws are on the books to protect creditors from unscrupulous collection tactics. According to the National Association of Attorneys General, debt collection was the No. 1 consumer complaint filed with offices of state attorneys general during 2008.

Richard Cordray, Ohio's attorney general, told The Blade, “Not only is there a lot more debt collection going on, because people have a lot more bills, but debt collectors themselves are having a harder time staying within their guidelines, and [debt collection] companies are having a lot harder time controlling the actions of their employees, especially those that are working on a commission basis.”

Mr. Cordray said he couldn't comment on the Midland case specifically, nor on the company's practices in general, but he said that “there is nothing illegal about debt collectors using the legal process aggressively.”

He urged consumers faced with debt-collection problems to know their rights under state and federal laws and to contact his office if they believe their rights have been violated.

Contact Larry P. Vellequette at:lvellequette@theblade.comor 419-724-6091.

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