State Supreme Court Hears Debt Buyer's Challenge to AG Action

The West Virginia Supreme Court Tuesday heard oral arguments in an appeal of an action taken by the state’s attorney general against a debt buyer. The action began as a licensing issue, but the ARM firm is now questioning the subpoena power of the AG without an administrative hearing and the impact of dismissing legitimate debts due to proper licensing issues.

In June 2010, then-West Virginia AG Darrell McGraw filed an action against certain passive debt purchasing entities of Cavalry Portfolio Services claiming that the businesses were not properly licensed to collect in the state.

Cavalry’s servicing entity, Cavalry Portfolio Services, LLC, was found by the court to have been properly licensed and bonded at all relevant times. But the passive debt buying entities were not, due in large part to guidance from West Virginia regulators. All of Cavalry’s businesses became licensed in October 2010.

In October 2011, a judge sided with McGraw and issued a temporary injunction against the firm and ordered Cavalry to stop all wage garnishments stemming from judgments obtained by its companies before they became licensed. At the time, Cavalry vowed to fight the order.

Which brings us to the Supreme Court arguments this week.

“Whether or not the [Cavalry] had a license when they collected those debts, they are debts that the debtors bargained for, and that they are not suffering any undue or unforeseen burden in paying,” argued the company. “Should the Attorney General prevail in the end, the debtors may simply enjoy a windfall, having a debt that they incurred forgiven because of an administrative error made by the entity that purchased their debt; an entity of which they likely had no knowledge, and an error that had no effect on them whatsoever.”

Cavalry noted that prior to the commencement of the action, the company’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. 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.

Cavalry is also arguing that the lower court judge was wrong to enforce McGraw’s investigative subpoena, which it says was not supported by probable cause and was issued without an administrative hearing.

“By filing a verified complaint, the Attorney General was evincing the fact that he had concluded to his satisfaction that such violations (of the West Virginia Consumer Credit and Protection Act) had indeed occurred,” Cavalry’s argued. “Therefore, under the black letter of the law, his subpoena power was at an end, any further investigation he wished to make would have to be done pursuant to the rules of civil discovery.”

Current West Virginia Attorney General Patrick Morrisey is vigorously defending the appeal.

“Cavalry failed to produce a single case in support of (its) position because there are none,” the AG’s office argued. “It is well settled that commencement of a civil action does not terminate an administrative agency’s investigative authority nor moot its administrative subpoena.”