Author Topic: "Value added": Why a JDB shouldn't be able to get it on their "salvaged" goods.  (Read 3897 times)

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Rottweiler

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In the past, there has been discussions pertaining to "assumption of risk" (specifically "volenti non fit injuria") as a defense for consumers.  The concept is that the JDB, by buying defaulted, charged-off account files, is NOT entitled to demand the ledger card value but should be able to recover only the amount they actually risked to buy the account to begin with plus actual costs of recovery.  The logic behind this is that no JDB offered credit per the original contract nor did they ever offer any credit on the account being sued upon even after they were assigned the account as a result of the sale.  The risk they took by paying the heavily-discounted sales price was far less than the OC did by making the original loan and they knew the risks involved in trying to collect anyway (and is why they could buy the stuff cheaply to begin with).

The view so far is that this defense has nothing in case law or statute to support the argument to date and such an argument would therefore likely be one of first impression.  Precedent-setting.  Risky. 

However, is that view--"assumption of risk" as a defense--necessarily totally "out-there".  I say "No.", at least to a degree.  The reason, though, really has less to do with "assumption of risk" (a defense in tort, normally used in personal injury cases) and more to do with asset value, the concept of "value added" and the resale of "salvaged" goods (assets).
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Next post:  Assets.
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Rottweiler

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Assets: Definition.
« Reply #1 on: January 25, 2009 06:56:36 AM »
Let's start with the definition of an "asset": 

An asset is defined as:

http://www.lectlaw.com/def/a077.htm

Quote
ASSET - Property, including real property (for example, land or buildings) and personal property (for example, cash, stocks or vehicles) that belongs to a person, corporation, estate, or other entity; A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.

As we can see, an asset need not be a tangible object, but is anything that is worth something to someone.  In a retail situation, that value, basically, is what the seller can get a buyer to pay for the asset.  Or, in the case of one business selling an unwanted asset to another, what the buyer will pay for it.

And, yes, an asset includes that credit account one defaulted upon. :)

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Next post:  Debt sales, "salvage value".
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Rottweiler

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Debt sales: What the JDB is seeking and what they get.
« Reply #2 on: January 25, 2009 06:58:12 AM »
When a creditor sells defaulted, charged-off accounts to a JDB, the accounts are sold at a deep discount, typically pennies on the dollar.  This "sales price", in effect, is what would be referred to in accounting as the "salvage value" of a depreciated asset, in this case the charged-off accounts receivable.  In plain English, the sales price is what the "junk" is worth to the buyer (the JDB).  An anaolgy?  Think "tag/garage sale"; the sale of debt to a debt buyer/broker really is no different in concept, only in scale.

What does the JDB get?  The JDB gets more than they bargained for!  The JDB legally gets the right to collect on the entire amount allegedly owed plus any additional interest or fees allowed per the original contract.  On a depreciated asset (the charged-off debt IS a depreciated asset which has been amortized by the creditor)! 

Is this fair?  No.  The reason may not be all that obvious, but let me continue in the next post.

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Rottweiler

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Can a JDB "rehab" "junk debt" to full market value? Unlike hard goods, no.
« Reply #3 on: January 25, 2009 07:03:54 AM »
In the last post, I mentioned that the JDB, by buying the debt, is getting more than one might imagine they are by buying "junk" at salvage value.  Is it possible that the JDB is actually going to return real value to the purchased items (the defaulted, charged-off accounts)?  Is this even possible with salvaged assets of any kind?

Well, sometimes it is possible to return real market value to salvaged junk:

If we are talking about a physical item--say a car--paying "salvage value" for depreciated "junk" is not necessarily going to add up to the actual value of the item on resale.  The buyer of the good has the choice of whether to try to "rebuild" or "rehab" the item prior to resale or not.  Whether they go to the trouble or just try to sell the thing for parts/recycling hinges on a number of factors, including what the resale value of the "rehabbed" item is or is likely to be.

So the businessman buys the "junk" car.  Assuming it is in good enough condition (or valuable enough once restored), by putting time, money, and effort into the vehicle, it is possible to increase the value of that car.  In some cases, it might actually be worth as much or more than the car was worth when it was new, in essence recovering the full value of the item.  Even if the depreciation is not totally recovered on resale, this "rehab" of the car represents measurable "value-added" to the car making the cost of the original acquisition NOT the same as the sales price and legitimately so since the buyer, now seller, has risked money, effort, and time up front of their own to "improve" the good.

However, can this "value-added" situation apply to the "product" a JDB has to offer?  Hardly: 

Unlike that car, the very fact that the account has "aged" without being paid off is a form of depreciation that can NEVER be recovered.  (Think the "time value of money" here.)  The JDB cannot "repair" the problem or "restore" the asset to full value due to the nature of the asset.  Therefore the JDB, by demanding full payback, is doing the same thing as if the buyer of the junk car would if they tried to sell the badly-depreciated asset (that junk car) "as-is" for the original new car sticker price.

Most of us would call selling broken-down "junk" at new item prices a "rip-off".  BUT that's EXACTLY what the JDB is trying to do:  Ask full price for something that is no longer worth that amount and can never be worth that much ever again.

If it gets to litigation?  By demanding that "full price" for an item that they DID NOT improve upon and could not improve upon within the limits of the JDB's business model as "damages" is asking the court, in essence, to defraud the defendant debtor.  How?  If the full amount is awarded in damages, the judgment debtor is being made to "reimburse" the JDB an amount far and beyond the actual amount they risked to get the "product" plus a reasonable fee for the JDB's time and trouble to the extent of a usurious rate of return on a "defective" product.
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LUEser

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One state has actually adopted this train of thought in its black letter law.
In Kentucky- http://www.lrc.state.ky.us/krs/371-00/chapter.htm
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K.R.S. 371.050 Assignee to aver consideration -- Amount recoverable.
In an action on any assignment of a writing, the consideration for the assignment shall be averred. The plaintiff shall recover no more than the consideration actually paid by him for the note or assignment.

Now if only we could get more state legislators to adopt this policy. Seems every citizen in Kentucky has a prima facie FDCPA violation by trying to collect more then they're legally entitled to under KY law.
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*I'm not a lawyer, just a consumer rights advocate.

dls7406

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That's a  :censored: good find LUEser.

Among the other implications one jumps out at me personally:

As an investor in mortgage notes (which I buy at a discount from face value to create my yield) I would not want to be on the wrong end of a lawsuit in Kentucky over a default. If I could only recover what I paid for the note I would be losing out on all expected gains. If I financed the note purchase I would actually lose money after paying the interest.

Scary for investors of all sorts. Great for FDCPA defense against JDBs though.
« Last Edit: November 30, 2009 08:16:03 AM by Admin6572 »