Hawthorne et al v. NCO Financial Systems, Inc.

Filing 76

MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 4/15/2013: For the reasons stated in this decision, the Court grants defendants' motion for summary judgment 62 and denies plaintiffs' motion for summary judgment 53 . The Court sets the cases for a status hearing on April 18, 2013 at 9:30 a.m. for purpose of determining what, if anything, remains to be litigated. (mk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

ROCIO GALVAN and JOSEPH
HAWTHORNE, individually
and on behalf of a class,
Plaintiffs,
vs.
NCO FINANCIAL SYSTEMS, INC.,
Defendant.
-----------------------------------------------------------ROCIO GALVAN and JOSEPH
HAWTHORNE, individually
and on behalf of a class, and
PEOPLE OF THE STATE OF ILLINOIS
ex rel. ROCIO GALVAN and
JOSEPH HAWTHORNE,
Plaintiffs,
vs.
NCO PORTFOLIO MANAGEMENT, INC.,
Defendant.

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Case No. 11 C 3918

Case No. 11 C 4651

MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
Rocio Galvan and Joseph Hawthorne, on behalf of themselves and two certified
classes, have sued NCO Portfolio Management, Inc. (NCO Portfolio) and NCO
Financial Systems, Inc. (NCO Financial) under the Illinois Collection Agency Act

(ICAA).1 Plaintiffs contend that NCO Portfolio violated the ICAA by attempting to collect
on debts it owned and that NCO Financial violated the ICAA by undertaking efforts to
collect the debts for NCO Portfolio despite knowing that NCO Portfolio had no right to
collect. Both sides have moved for summary judgment. For the reasons stated below,
the Court grants the defendants’ motion and denies the plaintiffs’ motion.
Background
NCO Portfolio and NCO Financial are both corporations whose principal place of
business is Pennsylvania. Between June 8, 2006 and June 28, 2011, NCO Portfolio
purchased a large amount of consumer debt accounts allegedly owed by Illinois
consumers. NCO Portfolio then referred those accounts to its sister company, NCO
Financial, for purposes of collection. NCO Portfolio also hired a law firm to initiate
collection lawsuits against certain consumers in Illinois state court. As a result of these
efforts, plaintiffs made payments to NCO Financial or the Illinois law firm that NCO
Portfolio retained.
Although NCO Financial is registered in Illinois as a collection agency, NCO
Portfolio is not. According to Gregory Stevens, NCO Financial’s vice president of audit
and compliance, NCO Portfolio has stopped referring its accounts to the law firm for
purposes of filing suit, and the company is currently defunct.
The Court previously granted plaintiffs’ motion for class certification. Galvan v.
NCO Fin. Sys., Inc., Nos. 11 C 3918 & 11 C 4651, 2012 WL 3987643 (N.D. Ill. Sept. 11,
2012). Specifically, the Court certified two related classes, consisting of: (1) all Illinois
residents from whom NCO Portfolio collected a debt between June 8, 2006 and June

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Hawthorne also sued NCO Financial under the federal Fair Debt Collection Practices Act, but
that claim was not part of the class certification order.

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28, 2011 who did not release their claims as part of a settlement in the case of CastonPalmer v. NCO Portfolio Management, Inc., Case No. 08 C 2818 (N.D. Ill.); and (2) all
Illinois residents from whom NCO Financial demanded and collected payment of a debt
allegedly owed to NCO Portfolio between June 8, 2006 and June 28, 2011 who did not
release their claims as a part of the Caston-Palmer settlement.
Discussion
Summary judgment is appropriate when the evidence demonstrates that there is
“no genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a); Bielskis v. Louisville Ladder, Inc., 663 F.3d 887,
898 (7th Cir. 2011). The nonmoving party cannot rest on its pleadings alone and must
“submit evidentiary materials that set forth specific facts showing that there is a genuine
issue for trial.” Siegal v. Shell Oil Co., 612 F.3d 932, 937 (7th Cir. 2010) (internal
quotation marks omitted). When cross-motions for summary judgment are filed, a court
applies the same standard to each motion. Harms v. Lab. Corp. of Am., 155 F. Supp.
2d 891, 906 (N.D. Ill. 2001); Stimsonite Corp. v. Nightline Markers, Inc., 33 F. Supp. 2d
703, 705 (N.D. Ill. 1999). Because, however, the two parties’ motions include
overlapping issues, the Court will address both motions together.
Plaintiffs argue that NCO Portfolio is a collection agency, and that as such, it
violated section 4 of the ICAA when it operated in Illinois and engaged in the business
of collecting debts without first registering with the state. Plaintiffs argue that NCO
Portfolio acted as a collection agency when it “directed” NCO Financial to contact Illinois
consumers to collect payment on the consumer debt accounts that NCO Portfolio
owned. Pls.’ Brief at 7. Plaintiffs also contend that NCO Portfolio acted as a collection

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agency by referring its accounts to an Illinois law firm, which initiated collection lawsuits
against plaintiffs in Illinois state court. With regard to NCO Financial, plaintiffs contend
that it knew NCO Portfolio was operating in violation of the ICAA and consequently had
no right to collect the alleged debts. When NCO Financial contacted members of the
plaintiff class to collect from them on behalf of NCO Portfolio despite that knowledge,
plaintiffs contend, NCO Financial ran afoul of sections 9(a)(20), 9(a)(26), and 9(a)(29) of
the ICAA.
Defendants argue that NCO Portfolio was not required to register as a collection
agency under the ICAA because the Act, which was recently amended, did not apply to
NCO Portfolio at any point between June 8, 2006 and June 28, 2011. Because NCO
Portfolio did not violate the ICAA by failing to register as a collection agency, defendants
argue, NCO Financial did not run afoul of the Act by undertaking collection efforts on the
debts held by NCO Portfolio. Defendants alternatively argue that the ICAA does not
allow for the relief that plaintiffs have requested.
A.

The ICAA amendments
Section 4 of the ICAA requires collection agencies to register in Illinois if they

“operate in this State, directly or indirectly engage in the business of collecting, solicit
claims for others, have a sales office, a client, or solicit a client in this State, exercise
the right to collect, or receive payment for another of any account, bill or other
indebtedness . . . .” 225 ILCS 425/4.
The Act’s definition of a “collection agency” was modified twice between June
2006 and June 2011, the time frame relevant to this lawsuit. From June 2006 until
January 2008, section 2.02 defined “collection agency” as “any person, association,

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partnership, corporation, or legal entity who, for compensation, either contingent or
otherwise, or for other valuable consideration, offers services to collect an alleged
delinquent debt.” Id. § 425/2.02 (2005) (repealed Jan. 1, 2008). Section 3 of the ICAA
provided that a legal entity acts as a collection agency when, among other things, it
“[b]uys accounts, bills or other indebtedness with recourse and engages in collecting the
same . . . .” Id. § 425/3(d) (2005) (amended 2008).2
In January 2008, the Illinois legislature amended the ICAA, and both statutory
definitions of the term “collection agency” changed. First, the legislature repealed
section 2.02 and added a new definition of collection agency to section 2: “’Debt
collector,’ ‘collection agency,’ or ‘agency’ means any person who, in the ordinary course
of business, regularly, on behalf of himself or herself or others, engages in debt
collection.” 225 ILCS 425/2 (2008) (amended 2013). Second, although section 3
remained largely the same, the words “with recourse” were deleted from subsection (d).
Id. § 425/3(d) (2008) (entity acts as collection agency when it “[b]uys accounts, bills or
other indebtedness and engages in collecting the same”).
The Illinois legislature amended the ICAA again in January 2013, adding two new
provisions that specifically addressed “debt buyers.” Section 8.5 of the statute provides
that “debt buyer[s] shall be subject to all of the terms, conditions, and requirements of
this Act,” except for a few enumerated exceptions laid out in section 8.6. 225 ILCS
425/8.5–8.6 (2013).
B.

NCO Portfolio’s control over NCO Financial
Plaintiffs argue that because NCO Portfolio “directed” NCO Financial to contact

2

As discussed more fully later in this decision, it is not at all clear why the ICAA has two
separate provisions that define what a collection agency is.

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the plaintiffs to collect their alleged debt, NCO Portfolio acted as a collection agency
without registering with the state, in violation of the ICAA. It appears that NCO Portfolio
and NCO Financial were both wholly owned by the same parent company at one point
in time. Plaintiffs have offered no evidence, however, that NCO Portfolio ever contacted
the alleged debtors directly. Instead, NCO Portfolio referred its accounts to NCO
Financial—a registered collection agency—which in turn contacted the debtors to collect
the debts. Plaintiffs have similarly failed to offer any evidence that NCO Portfolio had
any control over NCO Financial’s contacts with debtors. Plaintiffs have thus failed to
provide evidence from which a reasonable jury could conclude that NCO Portfolio
“engage[d] in debt collection” under the ICAA, requiring the company to obtain
certification from the state, simply by referring its accounts to a registered collection
agency. Id. § 425/2.
Plaintiffs cite to a line of cases decided under the federal Fair Debt Collection
Practices Act, holding that a communication between a debt collector and a debtor need
not specifically demand payment on the debt in order to be considered a communication
“in connection with an attempt to collect a debt.” Gburek v. Litton Loan Servicing LP,
614 F.3d 380, 386 (7th Cir. 2010) (offer to discuss repayment options); Ruth v. Triumph
P’ship, 577 F.3d 790, 798–99 (7th Cir. 2009) (defendants’ notice letter included in the
same envelope as collection demand). Leaving aside that these cases interpret a
federal statute, not the ICAA, the defendants in Gburek and Ruth were communicating
directly with the alleged debtors. Gburek, 614 F.3d at 382; Ruth, 577 F.3d at 793. In
this case, by contrast, NCO Portfolio did not communicate with debtors directly but
instead retained NCO Financial, a legally distinct entity that was registered as a

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collection agency, to collect the debts on its behalf. See Leeb v. Pendrick Capital
Partners, LLC, 891 F. Supp. 2d 1002, 1005 (N.D. Ill. 2012) (debt purchaser’s referral of
accounts to third-party collection agency with no direct contact with the alleged debtors
did not render debt purchaser a collection agency under the ICAA). As such, NCO
Portfolio did not “engage[] in debt collection” when it referred the accounts to NCO
Financial. 225 ILCS 425/2 (2008). Because plaintiffs have not shown that NCO
Portfolio communicated with the alleged debtors directly or exerted control over the way
in which NCO Financial attempted to collect the debts, plaintiffs are not entitled to
summary judgment on this ground.
C.

NCO Portfolio’s referral to an Illinois law firm
Plaintiffs also argue that when NCO Portfolio referred its accounts to an Illinois

law firm to initiate collection lawsuits on its behalf, it acted as a collection agency for
purposes of the ICAA. Thus the Court must determine whether NCO Portfolio
“engage[d] in debt collection” under section 2 or “engage[d] in collecting” the debts that
it previously purchased under section 3(d) by filing lawsuits in Illinois state court against
Illinois consumers to recover on debts that it had purchased from third-party creditors.
Id. § 425/2–3. Previous decisions by judges in this district (including by the undersigned
judge) have not addressed this precise question. See Leeb, 891 F. Supp. 2d at 1005;
Wisniewski v. Asset Acceptance Capital Corp., No 08 C 2793, 2009 WL 212155, at *1–
2 (N.D. Ill. Jan. 29. 2009); Kim v. Riscuity, Inc., No. 06 C 1585, 2006 WL 2192121, at *1
(N.D. Ill. July 31, 2006) (Kennelly, J.). The Court concludes that NCO Portfolio did not
act as a collection agency by referring the accounts to a law firm for the purpose of filing
suit.

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It is difficult to discern why the ICAA presents two overlapping but not identical
definitions of a “collection agency.” The statute is not exactly a model of clarity in this
regard. The legislative history also reveals little. Nothing in the ICAA, however,
suggests that the legislature intended to require an entity to register as a collection
agency as a prerequisite to filing suit to collect a debt the entity owns. Section 8a-1
specifically addresses a collection agency’s referral of an account to an attorney for
litigation and provides additional requirements that the agency must satisfy before
referring the account. Id. § 425/8a-1. The existence of section 8a-1 indicates that the
legislature considered litigation to be separate and distinct from the conduct that would
render a company a “collection agency” in the first place such that it must register with
the state. There is no basis to doubt that the legislature knew that litigation is a possible
consequence of an entity’s ownership of consumer debt. Thus the fact that the
legislature did not provide that filing a lawsuit (or referring an account to an attorney for
litigation) amounts to “act[ing] as a collection agency” counsels against a conclusion
that initiating litigation is sufficient to trigger the ICAA’s registration requirement. See In
re O.H., 329 Ill. App. 3d 254, 260, 768 N.E.2d 799, 803 (2002) (“The inclusion of one is
the exclusion of another, a generally accepted canon of construction, construes the
express inclusion of a provision in one part of a statute and its omission in a parallel
section as an intentional exclusion from the latter.”). Additionally, the ICAA has always
specifically exempted licensed attorneys from regulation under the Act. 225 ILCS
425/2.03. This express exemption further suggests that the legislature regarded
lawsuits concerning consumer debt as separate from conduct that constitutes
“engag[ing] in debt collection.” Id. § 425/2.

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The 2013 amendments also support this construction of the Act. The
amendments subject “debt buyers” to the ICAA for the first time and provide that “[a]
debt buyer shall be subject to all of the terms, conditions, and requirements of this
Act . . . .” Id. § 425/8.5. The amendments include in its definition of a “debt buyer” a
company like NCO Portfolio, whose only conduct after purchasing consumer debt is to
hire “an attorney-at-law for litigation in order to collect such debt.” Id. § 425/2. The
legislature’s decision to regulate debt buyers like NCO Portfolio in 2013 strongly implies
that it did not intend to regulate them previously. See People v. Hicks, 119 Ill. 2d 29,
33, 518 N.E.2d 148, 151 (1987) (“Absent substantial considerations to the contrary, an
amendatory change in the language of a statute creates a presumption that it was
intended to change the law as it theretofore existed.” (internal quotation marks
omitted)); W. Nat’l Bank of Cicero v. Vill. of Kildeer, 19 Ill. 2d 342, 354, 167 N.E.2d 169,
175 (1960) (“The addition of a new provision in a statute by amendment is an indication
of the absence of its implied or prior existence.”).
Daniel Kelber, senior legal counsel for the Illinois Department of Financial and
Professional Regulation (IDFPR), testified during his deposition in a related case—
Caston-Palmer v. NCO Portfolio Management, Inc., No. 08 C 2818—that there was a
“general agreement” between Kelber, Deputy General Counsel Mark Thompson, and
other attorneys in the IDFPR’s Division of Professional Regulation that the ICAA did not
apply to “passive debt buyers” like NCO Portfolio. Defs.’ Ex. B at 22. Kelber defined
“passive debt buyers” as companies that “purchas[e] debt and then either hir[e] a
collection agency to collect on that debt or hir[e] an attorney to file suit on their behalf to
collect the debt.” Id. at 19. Because the ICAA exempts attorneys from the licensing

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requirement, 225 ILCS 425/2.03(5), Kelber and other attorneys at the IDFPR concluded
that a company that owned debt did not “engage in collecting the same” by hiring an
attorney to file a collection suit on its behalf. Id. § 425/2–3. Kelber has, on behalf of the
IDFPR, responded to a number of inquiries by law firms and companies regarding this
point, expressing the position discussed above and stating that this should be
“construed as a statement reflecting the interpretation of the Department on the
particular matter . . . .” Defs.’ Ex. B at 31.
IDFPR is the agency responsible for investigating a collection agency’s
unlicensed activity, and it has the authority to issue cease and desist letters to
companies that it concludes have violated the ICAA. Id. § 425/4.5. As such, the
IDFPR’s interpretation is entitled to some deference. Hadley v. Ill. Dep’t of Corr., 224 Ill.
2d 365, 370, 864 N.E.2d 162, 165 (2007) (“[W]here . . . an agency is charged with the
administration and enforcement of the statute, courts will give deference to the agency’s
interpretation of any statutory ambiguities.”); Fried v. Danaher, 46 Ill. 2d 475, 478, 263
N.E.2d 820, 822 (1970). Although the IDFPR’s interpretation of the ICAA is not binding,
the Court finds that it is persuasive and carries some weight.
A ruling that filing a lawsuit, without more, renders an entity a collection agency
that must register with the state would greatly extend reach of the pre-2013 ICAA and,
correspondingly, the power of the IDFPR. Under plaintiffs’ proposed reading of the pre2013 Act, a creditor would have had to register as a collection agency before it could file
suit in Illinois on a consumer debt that it owned. The ICAA specifies that in order to
obtain a certificate of registration, a company’s officers must:
(a) be of good moral character and of the age of 18 years or more;

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(b) have had at least one year experience working in the credit field or a
related area, or be qualified for an original license under Section 6(c) of
this Act;
(c) have an acceptable credit rating, have no unsatisfied judgments; and
not have been officers of a former registrant under this Act whose
certificates were suspended or revoked without subsequent reinstatement.
225 ILCS 425/7. Thus a debt-owning company—assuming that it did not qualify for the
general exemptions set forth in section 2.03—could not set foot in state court to obtain
an adjudication of its rights vis-à-vis the debtor unless and until the IDFPR had
determined that the company’s officers were “of good moral character” and had an
“acceptable” credit rating. Id. The Court sees no basis to read the pre-2013 ICAA as
granting such broad powers to a state agency—effectively, the power to grant or deny a
company the ability to sue to collect debts that it owns—without an express statement
by the legislature that it intended the ICAA to apply to such activity.
Plaintiffs argue that the Illinois Appellate Court’s decision in LVNV Funding, LLC
v. Trice, ___ Ill. App. ___, 952 N.E.2d 1232 (2011), is dispositive on the issue. In LVNV
Funding, the court stated that an unlicensed company “committed a crime when it
purchased the debt and sued to collect it.” Id. at 1236. The court further held that “a
complaint filed by an unregistered collection agency is . . . a nullity, and any judgment
entered on such a complaint is void.” Id. at 1237. Plaintiffs contend that the Court
should follow the appellate court’s holding in LVNV Funding and rule that when NCO
Portfolio filed its first lawsuit in Illinois, it simultaneously became a collection agency
under the ICAA and violated that Act for having filed suit without first having registered
with the state.
Because jurisdiction in this suit is based on the parties’ diversity of citizenship,

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the Court’s task is “to ascertain the substantive content of state law as it either has been
determined by the highest court of the state or as it would be by that court if the present
case were before it now.” Woidtke v. St. Clair Cnty., 335 F.3d 558, 562 (7th Cir. 2003);
see also Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630, 635 (7th Cir. 2002). The
Seventh Circuit has advised that “[w]hen the state Supreme Court has not decided the
issue, the rulings on the state intermediate appellate courts must be accorded great
weight, unless there are persuasive indications that the state’s highest court would
decide the case differently.” State Farm Mut. Ins. Co. v. Pate, 275 F.3d 666, 669 (7th
Cir. 2001). Yet if an examination of state law indicates that the intermediate appellate
court’s decision was reached “without consideration of a critically important datum of
state law such that [the Court is] persuaded that the state supreme court would rule
differently, [its] duty is not to apply the majority appellate rule mechanically but rather to
follow the course the state supreme court would take.” Roberts v. W.-S. Life Ins. Co.,
568 F. Supp. 536, 544 (N.D. Ill. 1983).
The Illinois Supreme Court has already called into question at least part of the
appellate court’s holding in LVNV Funding. See Downtown Disposal Servs., Inc. v. City
of Chi., ___ Ill. 2d ___, 979 N.E.2d 50 (2012). In Downtown Disposal Services, the
court held that there is no automatic nullity rule, and courts in Illinois instead should
analyze the particular circumstances present in each case to determine whether the
lawsuit may proceed despite a technical error on the part of a party. Id. at 57. Plaintiffs
correctly point out that the court in Downtown Disposal Services was not interpreting the
ICAA, and its holding was focused on the effect of a violation of a legal rule, rather than
whether particular conduct violated the rule at all. Id. Yet the fact that at least part of

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the LVNV Funding court’s holding has been abrogated by the Illinois Supreme Court—
namely, that a company’s violation of the ICAA in filing suit automatically renders the
court’s judgment in that suit void—counsels against giving the decision of the court in
LVNV Funding the degree of deference that plaintiffs urge.
The appellate court in LVNV Funding did not have the benefit of the 2013
amendments or the IDFPR’s interpretation of the statute when it decided the case.
These two pieces of information provide significant evidence that legislature did not
consider the institution of litigation to render an entity a collection agency subject to
registration under the ICAA.
When the Court reads the ICAA in its entirety, it is persuaded that the Illinois
Supreme Court would not consider a creditor’s institution of litigation to be sufficient to
trigger the statute’s registration requirement. The ICAA declares that its purpose is to
subject collection agencies to “regulation and control in the public interest.” 225 ILCS
425/1a. Section 1a further states that the ICAA was enacted “to protect consumers
against debt collection abuse.” Id. Illinois courts already have ample authority to
protect debtors from abusive or harassing litigation, including the courts’ authority over
parties in a particular lawsuit and their power to regulate attorney conduct generally.
See Ill. Sup. Ct. R. 137 (providing sanctions for an attorney or party who signs a court
document that is designed to harass another party); Horwitz v. Holabird & Root, 212 Ill.
2d 1, 16, 816 N.E.2d 272, 280 (2004) (“A lawyer is prohibited . . . from acting on behalf
of a client in any manner that serves merely to harass or maliciously injure another.”). If
the Illinois legislature intended an additional safeguard regulating a party’s ability to file
a lawsuit to collect a consumer debt, it likely would have done so expressly.

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For these reasons, the Court concludes that the pre-2013 ICAA did not consider
a company that simply filed collection lawsuits on debts that it owned to be a collection
agency subject to the Act’s registration requirement. Summary judgment in favor of
NCO Portfolio and against plaintiffs is therefore appropriate.
Plaintiffs’ claims against NCO Financial rest entirely upon their contention that
NCO Portfolio became a collection agency when it filed lawsuits against them in June
2006 through June 2011. They have articulated no other independent basis for
recovery against NCO Financial. Because the Court has concluded that NCO Portfolio
did not act as a collection agency under the ICAA during the relevant period, plaintiffs’
claims against NCO Financial necessarily fail. Thus summary judgment in favor of NCO
Financial is also appropriate. Plaintiffs’ corresponding motion for summary judgment is
denied. Because this conclusion forecloses plaintiffs’ claims, the Court need not
address defendants’ alternative argument regarding the plaintiffs’ ability to recover the
relief they request under the ICAA.
Conclusion
For the reasons stated above, the Court grants defendants’ motion for summary
judgment [docket no. 62], and denies plaintiffs’ motion for summary judgment [docket
no. 53]. The parties have reported that they have settled plaintiffs’ FDCPA claims, but
no order disposing of those claims has yet been entered. The Court therefore sets the
cases for a status hearing on April 18, 2013 at 9:30 a.m. for purpose of determining
what, if anything, remains to be litigated.

MATTHEW F. KENNELLY
United States District Judge
Date: April 15, 2013

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