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The page was mostly blank. It contained only a name, three words and a series of tiny numbers. But in Minnesota's creditor-friendly court system, the page became the sole legal evidence that Darren Sabinske had defaulted on a Citibank credit card nearly eight years ago.
Sabinske, a security technician from Albertville, was ordered to pay $7,595 to Debt Equities LLC of Golden Valley, whose business is collecting old debts. Sabinske insists he never owned a Citibank card but was soon to learn the frustration of trying to defend himself against a computer database that listed his name near that of the bank.
"All they had was a row of numbers," he said.
In the hands of the new breed of debt collectors, those rows of numbers have become gold mines. Firms with little known names, like LVNV Funding and Unifund CCR Partners, buy massive databases of unpaid debts for cents on the dollar, and then inundate courts with legal actions seeking to collect the full amount, plus interest and fees. These firms, known as debt buyers, base their claims on data up to 15 years old that can be impossible to verify.
The National Consumer Law Center, an advocacy group for low-income Americans, estimates that one in 10 debt-buyer lawsuits nationwide is based on inaccurate information. Bank accounts have been tapped, wages seized and people threatened with arrest for debts they don't owe or for inflated amounts.
In Minnesota, the court system rubber-stamps most debt claims without scrutinizing them for accuracy. Proof is needed only if a debtor disputes a debt claim in writing, which happens in less than 10 percent of cases. People disputing those claims often face an expensive legal fight in which the burden of proof falls on them to prove a database is wrong.
While regulators have been imposing new rules on credit card issuers in recent months to protect consumers, debt buyers operate with little regulation. Minnesota's rules for traditional debt collectors don't apply to them. And many debt buyers are associated with law firms, which Minnesota courts have ruled are exempt from the state debt collector law.
"When consumers make small mistakes, such as failing to answer a lawsuit, the full power of the courts comes down on them," said Sam Glover, a consumer rights attorney in Minneapolis. "But when a debt buyer flouts the law, it rarely experiences any consequences and keeps collecting as if nothing happened."
Debt buyers insist that mistakes are exaggerated by consumer attorneys. The aggressive pursuit of old debts should be cheered by those who pay their bills and want access to cheap credit, said Robert Markoff, a collection attorney from Chicago. "If you knew your neighbors didn't have to pay their bills, then why would you be a chump and pay yours?" he said. "Debt buyers fill a need, though not everyone is going to like it."
Valerie Hayes, general counsel for ACA International, an association in Edina that represents the collections industry, said there is no hard data to back up the claim that debt buyers are filing unsubstantiated lawsuits. "It's hard to solve the problem when you're not sure what the problem is," she said.
Forgotten debt blossoms
Bonnie Hanson of Rockford is still baffled about a forgotten $260 debt that turned into a $5,800 judgment.
In the late 1990s, she co-signed a Best Buy credit card agreement for her daughter. Hanson paid off the card in 1997 -- or thought she did --after her daughter defaulted.
Later, a new $260 charge showed up on the account, possibly from a purchase.
But Hanson says she didn't know of that charge or the ticking debt. By 2004, the card issuer had sold the debt to Sherman Financial Group, a large New York-based debt buyer whose collectors started calling Hanson. She sent the firm a copy of the payoff check -- still unaware of the additional $260 time-bomb -- and the collection effort stopped.
Three years later, Hanson got another demand, this time from Messerli & Kramer, a Minneapolis law firm associated with debt buyer Dakota Bluff Financial LLC, which had repurchased the debt. With accumulated interest and fees, the firm was seeking a judgment for $5,818.
"It's like they picked a number out of thin air," Hanson said.
Though her daughter protested by phone and a fax, the firm filed an "affidavit of no answer" with the court claiming that Hanson didn't respond to its lawsuit. In early 2008, the firm began garnishing Hanson's wages.
Hanson's husband, Jerry, happened to know a lawyer at Faegre & Benson, a Minneapolis law firm, who offered to help without charge. A Faegre & Benson attorney sent a letter to the Messerli firm accusing it of filing "materially inaccurate information" in court. Messerli immediately ceased collection efforts and returned Hanson's garnished pay.
Hanson remains bitter.
"At bare minimum, these firms should be required to provide evidence of a debt before they drag you through the mud," she said.
Messerli & Kramer said it has a policy of discontinuing collections actions after a debtor produces a canceled check. The firm said it has no record that the Hanson family ever sent it a check.
When bad debts died
Two decades ago, unpaid debts didn't live forever.
If a bank or credit-card company couldn't collect within two years, it typically would write off the account as uncollectible and take a tax deduction. A black mark was placed on a borrower's credit report, but the debt otherwise didn't follow the individual.
All of this began to change with the savings and loan debacle of the late 1980s. The Resolution Trust Corp., the federal entity that liquidated failed thrifts, auctioned off nearly $500 billion of unpaid loans, spawning an industry to buy, resell and collect old debts.
Later, these firms shifted to buying and collecting consumer debt, finding a rich vein of new business in unpaid credit card accounts. Between 1990 and 2005, outstanding credit-card debt in the United States grew from $214 billion to $830 billion.
The debt-buying industry got another boost in 2005 from sweeping changes to federal bankruptcy law that made it harder for people in financial distress to wipe the slate clean. Instead, many struggling borrowers defaulted on loans, expanding the debt buyers' market.
Today, buyers exist for almost every type of charged-off debt -- from unpaid cell phone accounts to hospital bills, and they are ready to hound people for years over old debts.
The nation's five publicly traded debt buyers last year paid $835 million to acquire $20 billion in old debts. That's 4.2 cents on the dollar. Debt buyers can lose money if they acquire a particularly bad portfolio of debts. But as a whole, the industry has been consistently profitable over the past decade, with some firms enjoying double-digit profit margins even as the economy soured.
Debtor databases contain tens of thousands of accounts, with a little information about each. Collection lawsuits are mass produced from the data, a major cause of a 63 percent surge in default judgments in Minnesota over five years.
Last year, the 10 largest debt buyers in Minnesota accounted for nearly 20 percent of default judgments in the state, up from a 6 percent share in 2005, court data show. Since 2005, the top 10 have obtained more than $220 million in judgments in Minnesota.
Messerli & Kramer files the most collections lawsuits of any law firm in the state. William Hicks, chairman of its collections practice, defends the system. He said computer records are more reliable than the boxes of credit files his firm used to rely on for entering debtor information into computers.
"You'd try to decode it and figure out exactly what it was, and you'd call the client and go back and forth," he said. "Now, everything just gets downloaded. It's all instantaneous."
One of the worst abuses in the industry involved the dead woman who seemingly pursued debtors from the grave.
The signature of Martha Kunkle appeared on thousands of sworn affidavits prepared over the past five years attesting to credit card debts in many states.
Kunkle, of Texas, died in 1995. For reasons that remain unclear, workers at a bank kept signing her name on debt-verification documents furnished to 30 debt buyers nationwide.
Last year, Portfolio Recovery Associates Inc. of Virginia and CACV of Colorado LLC, two of the nation's largest debt buyers, agreed to pay more than $1 million in damages in a class-action lawsuit representing about 30,000 people whose case documents allegedly contained the forgery. The two firms denied wrongdoing.
The Kunkle case wasn't the only one to bite the industry.
In an Ohio case, a federal judge found that a Midland Funding LLC employee had signed debt-verification documents at random.
Under questioning, Midland employee Ivan Jimenez admitted he signed up to 400 affidavits a day, asserting "personal knowledge" about each debt case, though he knew nothing about them. Midland, a unit of one of the nation's largest debt buyers, Encore Capital Management of San Diego, said any missteps were unintentional.
U.S. District Judge David Katz rejected Midland's explanation. The judge ruled in August that the firm's sworn assertions of personal knowledge were "clearly false statements" for which Midland "offered absolutely no legitimate explanation." He ordered the company to cease the practice.
Sworn affidavits often are the sole evidence courts use to validate a debt, the step that is necessary for a debt buyer to get a court order to seize money from someone's bank account or paycheck.
Krystyna Bartulska, a housekeeping manager at the Hilton Minneapolis hotel, said she sent a letter to Minnesota Attorney General Lori Swanson's office in May after a New York debt buyer, Erin Capital Management, began garnishing her paycheck for a 10-year-old debt. Bartulska said her ex-husband paid the debt in full in 2004, and she sent a copy of the canceled check to Swanson's office.
Three weeks later, the attorney general's office sent a letter saying it could not help. By then, Bartulska had been slapped with a default judgment. She contacted the state Commerce Department, which regulates traditional collectors but not debt buyers. She got no response.
"I've got no one else to complain to," she said.
No 'actual evidence'
Rather than complain to regulators, Mary Hanson of Chanhassen hired an attorney.
In early 2008, Hanson sued Livingston Financial LLC, a debt buyer associated with Messerli & Kramer, after the firm demanded payment of $13,000 on a U.S. Bancorp credit card that she said was never hers.
Hanson, a mortgage banker who is not related to Bonnie Hanson, spent about 14 months and nearly $18,000 in attorneys' fees to prove the credit card belonged to her ex-husband, and that she never used it.
In trial, a lawyer for Livingston Financial held up a mostly blank piece of paper with Hanson's name and Social Security number as evidence the card was hers. The lawyer asked Hanson how her name got there. She had no answer, except that she had no idea how the firm obtained her personal information.
"It was shocking to me," she said. "I never in my wildest dreams thought the legal system could work that way. I thought they needed to have actual evidence before they sued you."
A Carver County judge rebuked Livingston Financial for pressing its claim without proof or even investigating Hanson's concerns. The judge called the company's actions "abusive" and awarded Hanson her attorneys' fees.
"The court finds it bordering on ridiculous for [Livingston] to continue to assert that [Hanson] owes them over $13,000 in credit card debt ... despite the mountain of evidence showing that [she] owes nothing on this debt," Judge Janet Barke Cain said in her September 2009 ruling.
While Hanson and others have prevailed in court, the cases can take years to resolve, with no assurance of winning. Meanwhile, debts grow, often at double-digit interest.
Most debtors don't put up a fight or even stand before a judge. In Hennepin County, about two-thirds of default judgments are approved by clerks because the debtors didn't respond to lawsuits.
Judge Robert Blaeser, head of the Hennepin County District Court civil division, said he has seen cases where people don't respond because they don't recognize the names of debt buyers suing them. Debt buyers appear quicker to pursue legal action than other collectors, he added.
"It doesn't look like there's much attempt to collect before the lawsuit," he said. "They bought the debt and immediately sued it."
He said it would be sensible for the Legislature to require debt buyers to furnish more information up front, including the name of the original creditor and an itemized billing statement listing principal, interest and fees.
Judge Robert Awsumb, head of the Ramsey County District Court civil division, said he hasn't seen any collections cases based on inaccurate evidence. But he said the growing use of arrest warrants against debtors is another reason to get better documentation from collectors.
"When you see time after time people getting warrants at the tail end of a process, it makes you more mindful of the beginning of the process," he said. "When I see insignificant information, I ask for more."
Darren Sabinske, the Albertville security technician, spent more than a year and $15,000 on legal bills trying to prove that he never had a Citibank credit card.
Debt Equities produced only the row of data with Sabinske's name. The listed address is a place where he hasn't lived for more than two decades.
In March 2009, Sabinske said, Debt Equities told him to pay the $7,595 judgment or an arrest warrant would be issued.
Two weeks later, a man later identified as an executive with Debt Equities showed up at the Sabinske home.
Rachel Sabinske, Darren's wife, had their newborn baby in her car and was backing out of her garage, she said. The man parked his pickup truck across the width of her driveway, blocking her exit.
She stopped the car, and watched as the stranger approached in her rearview mirror. The man claimed to be a member of the Wright County Sheriff's Office and demanded to know the whereabouts of her husband, she said. When she refused to answer, he threatened to get a warrant for her arrest and to have her child thrown in protective custody, according to Sabinske. Then he sped off, leaving Sabinske fearing for her and her baby's safety.
Later, Sabinske identified the man as Thomas Labeaux, executive vice president at Debt Equities. Labeaux denied in court pleadings that he ever visited the Sabinske home.
The Sabinskes filed a federal lawsuit a year ago accusing Debt Equities of false imprisonment, invasion of privacy and other wrongs. Debt Equities settled the case last week, agreeing to pay Sabinske unspecified damages. Debt Equities did not return repeated calls seeking comment.
"It certainly seems like they were trying to intimidate us," Rachel Sabinske said. "But if you give money to someone who intimidates you, then you're encouraging extortion."
Rachel Sabinske, a stay-at-home mother, bought a handgun a week after the encounter in the driveway. She still keeps it near her driver's seat. It's always loaded.
Chris Serres • 612-673-4308