Debt Buyer Gets Mixed Result in State Supreme Court Appeal Against AG

The West Virginia Supreme Court of Appeals last week sided mostly with the state’s attorney general in a case brought by a debt buyer challenging the investigative powers of the AG’s office. But the justices did rule with the ARM company on one matter involving subpoenas.

The case, Cavalry SPV I, LLC v. Patrick Morrisey, Attorney General, etc., was fairly complicated in that the justices were considering two different consolidated cases and up to three questions. The opinions across the cases were, however, unanimous among the five-justice panel. Oral arguments were heard on October 1.

The supreme court ruled that AGs have the right to issue investigative subpoenas without an administrative hearing and that consumer-submitted complaints were enough probable cause to launch an action. The court did, however, find that after an action is launched, subsequent investigative subpoenas could be subject to the rules of civil discovery.

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.

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.

In October 2011, pursuant to McGraw’s June 2010 action, a judge sided with the AG, ordering Cavalry to comply with the subpoena and issuing a temporary injunction against the firm which forced 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.

After a lower court ruled entirely in McGraw’s favor, Cavalry appealed to the supreme court, arguing that 1) the investigative subpoena was not lawful because there was not probable cause nor an administrative hearing, 2) subsequent subpoenas filed after McGraw’s action were not lawful because they were subject to discovery, and 3) the temporary injunction was unenforceable.

The court ruled that the initial subpoena was valid, writing, “Contrary to the Petitioners’ assertions, the Attorney General was not required to possess concrete proof of the specific alleged wrongdoing or to describe in detail the nature of the potentially nefarious misconduct at the time he issued his investigative subpoena. Rather, the purpose of an investigative subpoena is precisely as its name implies: to investigate. Such an investigation is designed to ascertain whether a violation of the Act has, in fact, occurred so as to permit the filing of an enforcement proceeding against the alleged offender.”

The court noted that consumer complaints constituted probable cause and also wrote that state law does not require an administrative hearing before the attorney general issues an investigative subpoena.

But the opinion noted that enforcing investigative subpoenas after a case has been filed is a different matter because the rights of the defendants might be eroded. “Insofar as the circuit court’s order does not distinguish between those areas of investigation that remain subject to the Attorney General’s investigative subpoena and those inquiries that relate to the complaint’s allegations against the Petitioners, we reverse the circuit court’s order enforcing the Attorney General’s investigative subpoena in toto,” the court wrote.

The justices ordered the case remanded to the circuit court to determine which portions, if any, of the investigative subpoena have been supplanted by the civil complaint against Cavlary, and as such, are subject to civil discovery in the pending enforcement proceedings.

The justices also held that the temporary injunction was appropriate and upheld the lower court’s ruling on that matter.