Debt Buyer Cavalry Responds to State Action; Vows to Defend

Accounts receivable management firm Cavalry said late Friday that it is defending an action brought by the West Virginia attorney general over proper licensing in the state.

In a statement provided to insideARM.com, the company detailed the circumstances that led to the action and noted that it had filed a motion Friday to dissolve an injunction issued by a state court.

The statement in its entirety is below:

In June 2010, the West Virginia Attorney General brought an action seeking a temporary injunction against various Cavalry entities alleging that Cavalry violated the West Virginia Consumer Credit and Protection Act by failing to maintain proper licenses. Specifically, the action alleges that the Cavalry passive debt buyers, which have no employees or operations and simply own the purchased portfolios, should have been licensed at the time the portfolios were acquired.

Prior to the commencement of this action, Cavalry’s attorneys and others in the industry had interpreted the relevant statute as not requiring passive debt buyers to obtain licenses. This opinion was substantiated by the West Virginia State Tax Department’s own interpretation of the statute.

Cavalry’s servicing entity, Cavalry Portfolio Services, LLC, was found by the court to have been properly licensed and bonded at all relevant times.

On April 26, 2010, the Tax Department reversed its historical position and issued a letter stating that passive debt buyers need to become licensed. Shortly thereafter, in accordance with the new interpretation, the Cavalry passive debt buyers applied for licensure, and were granted collection agency licenses in October 2010.

The Attorney General’s legal theory is contrary to the historical advice of the Tax Department and seeks to hold Cavalry liable for acts that were widely accepted as lawful within the industry and by the government regulator itself at the time those acts were undertaken. Additionally, the Attorney General’s position is legally flawed, as he is attempting to take what is, at most, a potential violation of a revenue statute, and turn it into a violation of a state consumer protection law.

The court’s order is not a determination as to the merits of the Attorney General’s position. Under West Virginia law, the merits of a case cannot be considered by the court at the temporary injunction phase. Moreover, the burden of proof that the Attorney General had to meet at this stage was extremely low. To prevail on a temporary injunction, he must only make a “minimal evidentiary showing,” according to the West Virginia Supreme Court.

This order affects 743 judgments by limiting collection litigation and judgment enforcement with respect to West Virginia accounts acquired by the Cavalry passive debt buyers during the time they were unlicensed (i.e., prior to October 2010). The validity of the judgments themselves remains unaffected during the pendency of the action. Collection activity and credit reporting by Cavalry Portfolio Services, LLC is unaffected.

Cavalry continues to vigorously defend this action, and filed a motion to dissolve the injunction on October 28, 2011.