In a significant escalation by debt collectors who pursue consumers for payment, a major Canadian bank has threatened to foreclose on the homes of hundreds of Californians unless they pay back old credit card debts.
California law generally makes foreclosure available only to lenders using residential properties as security, and collectors of unsecured debts, like credit card loans, normally are limited to attaching wages or bank accounts.
But Credigy Receivables -- a unit of the National Bank of Canada, which has more than $150 billion in assets -- has taken advantage of California's relatively lax debt collection laws. The bank has repeatedly bypassed a legal hurdle that normally prevents credit card companies from threatening to take away the homes of debtors who refuse or are unable to pay.
Little-noticed except by debtors and consumer attorneys, Credigy's unusual collection efforts begin with the purchase of judgment liens issued in California lawsuits filed by credit card lenders and other unsecured creditors. Credigy then names debtors who own residential properties as defendants in foreclosure lawsuits.
A California Watch review of court records identified foreclosure lawsuits filed by Credigy since December 2009 in superior courts in Alameda, Fresno, Kern, Los Angeles, Marin, Orange, Sacramento, San Bernardino, San Francisco, San Mateo and Solano counties.
A spokesman for Credigy's owner, the National Bank of Canada, declined to comment, citing pending litigation.
The company's tactic -- which consumer advocates say is designed to intimidate debtors -- has sparked outrage. Paul Leonard, director of the California office of the Center for Responsible Lending, a consumer advocacy group, called Credigy's targeting of the homes of alleged debtors "totally reprehensible."
The threat of foreclosure can blindside a consumer who decided against risking his or her house by borrowing against home equity and instead used a credit card. Credigy's strategy takes aim at the homes of consumers who took out unsecured loans, like credit cards, which are generally more expensive.
Among those targeted was 71-year-old Helen Jones, who lives in a modest house in Oakland's Highland Terrace neighborhood and works as a cashier at a San Francisco hospital.
Jones learned that the bank wanted to sell the house she had lived in for 37 years when, in July 2010, a process server came to her door and handed her a copy of a complaint for judicial foreclosure filed in Alameda County Superior Court.
At issue was a $1,803 judgment issued in 2000, after her ex-husband allegedly didn't pay $1,636 he owed on a Wells Fargo credit card, according to court filings. Jones said the company asked her to pay $7,000 to settle the old debt.
Jones, who was not named as a defendant in the 2000 lawsuit that resulted in the judgment, said the unpaid debt was incurred after she divorced her ex-husband.
The mere prospect of losing her three-bedroom, two-bathroom, 1,300-square-foot house with an estimated value of $180,000 prompted Jones to pay $3,800 to settle Credigy's claim.
"I just wanted to get it over with," she said of Credigy, "because they are awful."
Credigy's tactics illustrate how consumers and collectors often face confusing and uneven legal terrain in California.
Some legal experts say they see nothing unusual about Credigy's approach. It is "a very common procedure in the commercial world," where a property can be attached in order to compel a business to pay an obligation, said Grant Nelson, a law professor at Pepperdine University.
A lender or collector seeking to compel payments on an unsecured loan may go to court, obtain a judgment and record a lien against a property. Tax collectors and ex-spouses seeking child support frequently file liens to compel payments.
"You can record a judgment (by) a creditor that becomes a lien on the property," said Laurence Platt, a consumer credit expert for K&L Gates law firm. "It's the home equivalent of a garnishment of wages."
Theoretically, a consumer targeted by a debt collector will have his or her day in court. "The protection the debtor has," Nelson said, "is they have the right to tell the judge at a hearing why they shouldn't get a judgment against them."
But debtors often fail to show up in court. Moreover, said Dan Birkhaeuser, a consumer lawyer in Walnut Creek, home foreclosures are legally "only available to somebody that holds the mortgage or a deed of trust." In a lawsuit against Credigy, Birkhaeuser characterizes Credigy's approach as not aimed at obtaining foreclosures but at intimidating alleged debtors.
Birkhaeuser is asking the Orange County Superior Court for class-action status on his lawsuit, which accuses Credigy of "purposely misusing mortgage foreclosure statutes to extort consumers into satisfying its demands for payment on judgments arising from entirely unrelated and unsecured ... credit card and other debts."
In some cases, Credigy has taken a circuitous route in its efforts to use foreclosure.
Credigy filed a verified complaint for judicial foreclosure in December 2010 in Alameda County Superior Court seeking the sale of a house on Ninth Street in Alameda to satisfy an 8-year-old judgment for $7,381 against Richard Archuleta.
In addition to Archuleta, who lost the house in a 2008 foreclosure by his mortgage lender, the lawsuit named as defendants Bank of America, California's Franchise Tax Board, the U.S. government and Christina Fong, who bought the house in the 2008 foreclosure sale.
The lawsuit came out of the blue to Fong.
"Both my wife and I were in shock," said Kai Lam, Fong's husband. "The first question that came to our minds was, 'Can they really do that?'"
Eventually, the couple's title insurer wrote a check for $6,500 to settle Credigy's claim. Glen Olives, a former attorney for Fidelity National Title Insurance Co., represented Fong in the foreclosure lawsuit.
Olives said that in some cases, Fidelity National "paid rather than litigated" because it was cheaper than fighting a lawsuit.