Midland Funding And its Attorneys Sanctioned By Court For Frivolous Debt Collection Lawsuit

It is well known that some debt collection attorneys mass produce lawsuits and do so without properly reviewing their own documents. As one former collection attorney, quoted in Jake Halpern’s Bad Paper, put it “[t]here’s no way that you could effectively double-check all that stuff.” Despite  slipshod review of the case files, the collection attorney’s firm netted “astronomical” profits.

However, the New York courts are not happy with this sort of behavior and Midland Funding LLC v. Austinnam is an excellent expression of their displeasure. In Austinnam, the court imposed a fine as a sanction on both the plaintiff, Midland Funding LLC, and its attorneys.

[T]he Court finds that the plaintiff prosecuted a baseless claim to the detriment of defendant. The Court further finds that the failure of plaintiff and plaintiff’s counsel . . . to obtain the requisite documentary proof of the claim alleged, including the entire chain of assignment(s), prior either to commencing the instant action or to obtaining a default judgment against defendant constitutes frivolous conduct.

How It Happened

The facts underlying the case are best explained with a diagram.

Midland v. Austinnam

Alleged Chain of Assignment in Midland v. Austinnam

Midland Funding, LLC, bought debts from BlueStem Brands, Inc., which in turn bought them from WebBank. WebBank was the original creditor for some of the debts, but others came from MetaBank (and a third original creditor). However, when Midland Funding sued Ms Austinnam, it told the court that the chain of title was the green chain in the diagram, beginning with WebBank. Midland got a default judgment against Ms Austinnam on the strength of that claim. Then, for reasons known only to Midland and its attorneys, Midland started asking BlueStem Brands questions about the chain of title. Midland then claims to have discovered that WebBank was not the original creditor at all – the original creditor was MetaBank. So, Midland asked the court to vacate the default judgment and dismiss the case.

This is a rather strange step for Midland to take: either Midland owned the debt, in which case it had every right to the judgment and no reason in law to dismiss the case, or it did not own the debt and should never have filed the case in the first place. The court demanded an explanation and was not happy with what Midland said:

plaintiff stated that upon further review of its file it had determined that MetaBank was the original creditor of the subject credit account, rather than WebBank as alleged in its complaint, and based upon the new information it no longer wished to proceed with the action. Although the Court found plaintiff’s explanation for its decision to vacate the judgment and discontinue the action with prejudice patently incoherent and nonsensical
[the court vacated the default judgment]

So, the court ordered Midland and its attorneys to appear in court, provide a proper explanation and provide evidence that Midland actually owned Ms Austinnam’s debt.

Midland was not able to do either. Although it provided a variety of sworn affidavits and statements from BlueStem Brands and WebBank, none of these satisfied the court.

Specifically, the documents provided did not show that defendant’s alleged account was part of the accounts assigned. A copy of the schedule of the specific accounts assigned, as referred to in each assignment (redacting all but the defendant’s account information), was NOT provided to the Court. Simply stated, plaintiff failed to show that it owned defendant’s account.

Midland tried to satisfy the court, after the hearing, with yet another affidavit from BlueStem, but the court dismissed its contents as “inconsequential” and hearsay.

Why Were The Attorneys Sanctioned?

The Plaintiff could not prove its case. Plaintiffs lose all the time and neither they nor their attorneys face sanctions, so why was Midland sanctioned in this case?

Midland can, and should, know whether the documents it has show that it owns the paper before it ever files a lawsuit. As court put it:

under the circumstances presented here, plaintiff’s counsel . . . did not and could not properly have certified the complaint filed in the instant action. . . . [A] proper certification of a complaint can only be made after an inquiry reasonable under the circumstances establishes that the claim asserted in the complaint has merit in law and asserts truthful factual allegations. Plaintiff’s counsel should have known what documentary proof was required for a meritorious lawsuit under New York law and knew that they did not have the required proof in the instant case when they filed suit.

In other words, Plaintiff’s counsel should have made sure that she had some document linking Ms Austinnam’s debt to the bulk purchases of debt by Midland from BlueStem, and so on back to the original creditor, whoever that really was. Because Plaintiff’s counsel failed to do this, and failed to correct her mistake at any stage in the case, she was sanctioned.

This ruling should not have come as a surprise to Midland, since its previous counsel was sanctioned by the New York courts for essentially the same behavior.

The Court finds that plaintiff’s counsel’s failure to produce the directed documentary proof is even more egregious given that plaintiff has previously prosecuted a similar action in which plaintiff’s prior counsel was sanctioned by this Court for conduct hauntingly similar to plaintiff’s in-house counsel’s conduct.

The Wider Context

The clear message of this case is that debt-buyers should not file lawsuits without reviewing the documents properly. If they do, they and their attorneys run the risk of sanctions.

Midland v. Austinnam raises some other interesting questions. Jake Halpern’s investigation of the debt-buying business presented a picture of buyers hunting for paper to buy. Although the shortage of paper may have been worse for the lower-level debt buyers Halpern focused on, the debt involved in Austinnam suggests that large buyers like Midland may be stretching for paper to buy, too.

Metabank, the supposed original creditor, was not one of the megabanks that routinely sells off huge amounts of consumer debt. It appears to be mostly a prepaid credit card provider which was once in trouble with federal regulators for providing payday loans. BlueStream Brands is not an intermediate debt-buyer or broker, but an actual company. It’s “Fingerhut” brand, which appears to have been the one involved in Austinnam, is “a retailer that offers payment options—and low monthly payments. We help people afford everything from national-brand furniture and bedding to washers to wedding rings to the latest electronics.”