Friday, March 05, 2010, 10:16 AM

COA Places Duty on Financial Company to Detect Identity Theft

In Credigy Receivables, Inc. v. Whittington, the North Carolina Court of Appeals held that a financial company that tries to recover a debt incurred on a customer’s credit card must first determine whether its customer was the victim of identity theft prior. Failure to make this determination prior to enforcing a judgment may expose the financial company to liability to pay the attorneys’ fees incurred by the identity theft victim in having the judgment set aside.

At some point in the late 1990s, Fleet Bank issued a credit card to Blanche Whittington of 107 Courtland Place, Goldsboro, North Carolina. In May 1999, the account opened under Whittington’s name fell into delinquent status. Fleet Bank transferred the delinquent account to First Select Corporation who filed suit to recoup the amount owed. In July 2001, First Select served the summons and complaint by certified mail. The certified letter was sent to the Goldsboro address listed on the account application and the signature on the return receipt read “Blanche Whittington.” When no answer was filed, First Select obtained a default judgment against Whittington for approximately $7,000.

After First Select unsuccessfully attempted to serve Whittington with a Notice of Right to Have Exemptions Designated (“Notice of Right”) at the Goldsboro address, it assigned the default judgment to Credigy Receivables, Inc. for $10.00. Credigy also attempted to serve Whittington with a Notice of Right at the Goldsboro address, but the Wayne County Sheriff’s Office returned the Notice of Right with a notation indicating that Whittington no longer lived at that address.

In February 2008, Credigy located Whittington in Kinston, North Carolina and began the process of enforcing the default judgment. It was at this point that Credigy learned that Whittington was a victim of identity theft. Whittington never lived in Goldsboro, never applied for a Fleet Bank credit card, and had spent the past several years attempting to resolve issues related to the theft of her identity by Mary E. Atkinson.

In April 2008, Whittington sought relief from the default judgment under Rules 6 and 60 of the North Carolina Rules of Civil Procedure. Whittington also sought to recover the attorneys’ fees incurred in having the default judgment set aside under North Carolina General Statutes Section 6-21.5. This provision authorizes an award of attorneys fees to a prevailing party if the losing party either was “reasonably … aware, at the time the complaint was filed, that the pleading contained no justiciable issue” or “persisted in litigating the case after the point where [the party] should reasonably have become aware that pleading [the party] filed no longer contained a justiciable issue.”

In a September 4, 2008 Order, Judge Timothy I. Finan set aside the default judgment and awarded Ms. Whittington over $26,000 in attorney’s fees on the ground that Credigy instituted a non-justiciable claim against Whittington. Credigy appealed the award of attorney’s fees arguing that (1) the default judgment was presumptively valid and presented a justiciable issue as to Whittington’s identity and indebtedness and (2) the company had suspended its enforcement efforts when it received competent evidence that Whittington was not liable on the judgment.

The Court of Appeals, in an opinion written by Judge Robert N. Hunter, Jr., found that the award of attorneys’ fees was proper because Credigy and its predecessors in interest instituted and pursued a non-justiciable claim against Whittington. The Court held that although the credit card was taken out in Whittington’s name and a default judgment entered against Whittington, First Select had not obtained a default judgment against Whittington. Instead, First Select had obtained a valid judgment against Mary Atkinson – an individual not named as a defendant in the underlying action.

Although there is no indication that anyone at Fleet Bank, First Select, or Credigy was aware of the identity theft issue until 2008, the Court of Appeals found that the claim was non-justiciable since the time the First Select filed its complaint in 1999. “Credigy never had the right to enforce its purchased judgment against Ms. Whittington, because it stepped directly into the shoes of Fleet Bank, who never had a claim against Ms. Whittington for the underlying debt.” The lack of a right to enforce the judgment meant Credigy had pursued a non-justiciable claim and, therefore, was liable for Whittington’s attorneys’ fees under Section 6-21.5.

The take away message from the Court of Appeals’ Opinion is that financial companies seem to have a duty to confirm that their customers have not been victims of identity theft prior to instituting collections proceedings. Failure to comply with this duty may expose the financial company to the possibility of being required to pay the attorneys’ fees incurred by the identity theft victim in setting aside the judgment.

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