Thursday, May 29, 2008

Debt Buyers Win Respect in New Opinion

Debt buyers are not the most popular people these days. However, their role as economic scavengers was acknowledged in a recent opinion from Judge Leif Clark of San Antonio. In re Salvador Santana, No. 07-30027 (Bankr. W.D. Tex. 5/21/08).

In Santana, Portfolio Recovery Associates, LLC filed a Notice of Transfer of Claim with respect to a claim that they had acquired from Capital One in the amount of $604.19. The Debtor objected on the basis that "a third party purchasing the instrument at a very reduced cost and having [the] Bankruptcy Court enforce payment is not in the best interest of the debtor."

While the Debtor's objection was no doubt accurate (that is, that is not in the best interest of the debtor to recognize the transferred claim), this was not a valid objection.

Judge Clark recognized that a purchaser of claims was entitled to enforce the full amount of the claim regardless of what it paid. While the creditor might receive a windfall, it was also assuming the risk of default by the debtor. As a result, the benefit should accrue to the debt buyer and not the debtor.

Judge Clark wrote:

"The holder of a claim is permitted to sell the claim for less than the face amount of the claim, and the transferee is entitled to enforce the claim for its face value, even though the transferee bought the claim at a discount. In other words, the debtor is not entitled to the benefit of the discount. This is so because the discount represents the transferee's assumption of risk of payment at less than the face amount of the debt. The transferor 'cashed out' its risk of nonpayment by agreeing to accept less than face value from the transferee, but again the debtors are not entitled to the benefit of that de facto writedown. Insofar as the debtor is concerned the original debt is till owed to whomever is the current rightful owner of the obligation. the transferee 'bought' the obligation, and is now the rightful owner entitled to enforce the debt at its face value. Because this is a chapter 13 case, it is almost certain that the debt will not be paid at its face value. . . . Thus, the transferee has factored in these risks when it set the price to be paid for the claim that it purchased. To realize the benefit of its bargain, however, it needs to be able to enforce the full amount of the claim purchased. And so the law allows."

Only in bankruptcy court would a claim for $604.19 merit such a thoughtful opinion!

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