Petitioner (the People) bring this proceeding against respondents seeking to (a) permanently enjoin them, from engaging in the fraudulent, deceptive and illegal practices alleged in the petition or otherwise violating 15 USC § 1692 et seq., Executive Law § 63 (12), and General Business Law (GBL) §§ 349 and 601; (b) direct respondents to provide a complete accounting of each dishonored check which respondents have sought to collect from a New York resident;(c) direct respondents to make restitution to New York consumers of amounts in excess of the face amount of the dishonored check plus a $20.00 service charge collected by respondents from such consumers; (d) direct respondents to pay civil penalties of $500 to the State of New York for each deceptive or unlawful act in violation of GBL Article 22-A; and (e) awarding petitioners the costs of this proceeding, including $2,000 in additional costs against each respondent, pursuant to CPLR 8303 (a) (6).

Respondents Boyajian Law Offices, P.C. (BLO) and JBC Legal Group P.C., formerly known as JBC & Associates, P.C. (JBC) are law firms owned by respondent Jack H. Boyajian, Esq. (Boyajian), a member of the California bar. The firms have been involved in debt collection. Based upon complaints from over 100 New York residents, Petitioner contends that respondents violated the Federal Fair Debt Collection Practice Act (FDCPA), by engaging in fraudulent, deceptive and illegal activities in their attempts to collect debts.

Among the prohibited activities that are alleged, the People contend: (a) That respondents failed to confirm that the debts they sought to collect, actually exist, and the amount of each such debt, when the debtor requested written verification or disputed the debt within 30 days of receipt of respondents' first letter. (b) In follow-up letters, respondents threatened litigation even [*2]when they had no intent to prosecute litigation, and (c) sought amounts in excess of those permitted by law, claiming that the additional amounts were "statutory fees." (d) Additionally, respondents threatened to sue on time-barred debts. (e) The People also aver that respondents implied that an attorney was prepared to sue on the debt even when there was no meaningful attorney involvement. (f) There were also many complaints of rude telephone communications, including threats of criminal prosecution, calling debtors at work after being asked not to do so, and telling third parties what the collector was calling about.

In his affidavit submitted in opposition, Boyajian states that JBC & Associates P.C. was incorporated as a professional corporation in 2001. It changed its name to JBC Legal Group, P.C., in December 2003. It ceased operations in July 2006. BLO is a separate law firm.

Both firms train their employees, which training includes instructions regarding the firms' obligations under the FDCPA.

Boyajian maintains that when a client refers matters to JBC, an attorney would review the information and make a determination as to whether or not to accept the matter. Boyajian developed a review and analysis procedure, which uses computerized search and analysis routines that identify legal matters with incomplete or potentially inaccurate information.

An attorney would make the decision of whether an initial letter or a follow-up letter would be sent to a debtor. Those letters were written by an attorney. Boyajian denied writing the JBC or BLO form letters.

Boyajian addresses many of the complaints that were filed with the Attorney General, and contends that the law firms did not receive letters from the debtors before the expiration of 30 days, and that the firms sent initial letters even when debtors stated that the first communication they received was what purported to be a follow-up letter. Boyajian also denied the complaints regarding the rude manner in which staff members spoke to debtors. He stated that the files containing the records of the telephone calls do not indicate any objectionable speech, and that, in some cases, those who made the telephone calls denied any improper conduct. Boyajian also contends that JBC and BLO intended to file lawsuits with respect to all the matters referred by their clients unless the matter was resolved, the client recalled the account, the correspondence was returned as undeliverable, the debtor filed for bankruptcy protection, or JBC or BLO determined that the debt was not in fact owing. He states that sometimes circumstances became known that made it impracticable to prosecute litigation, for example, inability to locate assets.

Petitioner contends that whenever JBC attempts to collect debts on behalf of a third party, it is acting as a debt collector, and must adhere to New York's FDCPA (NYFDCPA). Where JBC attempts to collect debts that have been sold or assigned to it, JBC is the principal creditor, and is also subject to NYFDCPA. The People maintain that, in violation of the FDCPA and other statutes, JBC repeatedly and persistently engaged in a number of fraudulent, deceptive and illegal practices aimed at coercing consumers into paying claimed debts and additional money that the consumers did not owe, and which JBC had no right to collect.

Executive Law § 63 (12)

Executive Law § 63 (12) grants the Attorney General authority to bring a special proceeding for a permanent injunction, restitution and damages whenever a person or business engages in persistent or repeated "fraud or illegality." Proof of bad faith or scienter is not [*3]required. The Attorney General contends that respondents engaged in repeated and persistent fraud by falsely representing the amount of the claimed debts they sought to collect, threatening legal action that they do not take in the regular course of business, threatening legal action on time-barred debts, falsely accusing debtors of criminal activity, using collection letters that contain misrepresentations and threats of action that respondents have no legal authority to take, harassing debtors, and falsely representing that the communications are from an attorney. Additionally, they continue collection efforts to collect debts for which consumers have requested verification, or which consumers have disputed, without providing verification to the consumer.

Respondents maintain that the Attorney General is relying on violations of the FDCPA to support his claims under the Executive Law. Thus, if respondents have not violated the FDCPA, the Attorney General's petition should fail.

There is no question that the Attorney General bases this proceeding on claimed violations of the FDCPA. Therefore, the claimed violations must be addressed in order to determine whether the Petitioner is entitled to the relief sought.

FDCPA

Respondents contend that the FDCPA was intended to allow debtors to challenge the validity of claimed debts before further steps to collect the debts are taken, while at the same time not penalizing debt collectors for honest mistakes. Pursuant to the FDCPA, 15 USC § 1692g (b) if a debtor disputes a debt in writing within 30 days of receipt of the validation notice, the debt collector must cease collection activity until it verifies the debt. Respondents assert that their letters were in compliance with the statutory obligations, even allowing for the "least sophisticated debtor standard" which applies to debt collection.

Requirement to Cease Collection Activity

Petitioner does not object to respondents' initial collection letters. However, the Attorney General maintains that respondents continued collection activity after receiving written communication from debtors challenging the debt or seeking verification. Such collection activity would presumably be a violation of the section.

On the papers before the court, it is impossible to determine whether respondents received written communications from debtors within 30 days, which would require respondents to cease collection activity. While there are statements from debtors, as well as copies of letters purportedly sent to debtors, respondents contend that they never received those timely initial letters challenging the debts. The issue of the timeliness of the debtors' responses are factual ones, and are referred to a Special Referee to hear and report. Specifically, the Special Referee is requested to report whether the Attorney general has proven a pattern of violation of the requirement that collection activity be suspended, or whether any violations were merely isolated instances.

Respondents argue that even if there were any such instances, they were isolated and would constitute bona fide error. In view of the number of complaints received by the Attorney General, it cannot be concluded on the papers before the court that such incidents were isolated, nor have respondents presented evidence that such incidents would constitute bona fide error. These issues should also be addressed at the hearing, and should be reported on by the Special Referee.

Improper Threat to Bring an Action [*4]

The Attorney General contends that JBC threatened to sue debtors in oral and written communications, even when it did not intend to commence a lawsuit. In order to evaluate that claim, the court must determine whether legal action was threatened, and whether such a threat was made without an intent to bring an action.

Respondents argue that the follow-up letters were merely prudent reminders of "potential" liabilities. They contend that the mere fact that the letters were from an attorney, and on a law firm's letterhead, does not alter the informational nature of the letter. Respondents rely on cases that hold that a debt collection notice cannot be misleading under FDCPA § 1692g (e) when it states that failure to pay "may" lead to certain consequences.

The follow-up letters at issue here do not merely state that an action "may" result. The letters state: "You may wish to settle this matter before we seek appropriate relief before a court of proper jurisdiction by a qualified attorney by remitting immediate payment to our offices." Petition, Ex B. This language goes beyond the "prudential reminder" that has been held to be acceptable. The clear meaning of the letter is that the author of the letter intends to sue the debtor unless the matter is settled.

Respondents contend that they did intend to bring an action on every debt, with few exceptions. However, they have not presented evidence to dispute the Attorney General's contention that they do not generally in fact, prosecute actions except in very rare instances. Further, according to their own letterhead, they have only two attorneys admitted to practice in the State of New York. The assertion that they intended to prosecute thousands of actions in this State with only two attorneys is difficult to accept. Accordingly, respondents have failed to rebut the Attorney General's showing that the threat of litigation was made without an intent to file suit. See Goins v JBC & Assoc., P.C., 352 F Supp 2d 262, 272 (D Conn 2005).

Statute of Limitations

Respondents contend that there was nothing improper about their attempts to collect time-barred debts. The Attorney General, however, did not raise the initial attempt to collect as a violation of the FDCPA. Rather, the Attorney General contends that respondents' threats to bring legal action on time-barred debts are violations. Respondents maintain that even pursuing legal action is permissible because in New York the statute of limitations is an affirmative defense which may be waived. Since the debt is not extinguished, respondents could still seek to collect it. Respondents cite a number of cases to support their position.

Respondents misstate the law. The cases that they cite merely support the proposition that they could seek to collect on a time-barred debt. However, even many of those cases state specifically that it is only in the absence of a threat of litigation that such collection activities are permitted. See Freyermuth v Credit Bureau Serv. Inc., 248 F3d 767, 771 (8th Cir 2001); Griffith v Capital One Bank, 2001 US Dist Lexis 21953, *4-5 (SD Ill July 23, 2001); see also Goins v JBC & Assoc., 352 F Supp 2d at 272; Stepney v Outsourcing Solutions, Inc., 1997 WL 722972, *12-13 (ND Ill Nov 13, 1997); Kimber v Federal Fin. Corp., 668 F Supp 1480, 1489 (MD Ala 1987). Here, respondents not only sought to collect time-barred debts, but threatened legal action on those debts. Such conduct is a violation of the FDCPA.

Accusation of Criminal Activity

The Attorney General contends that, in its follow-up letter, JBC accuses debtors of criminal activity. The follow-up letter contains the following language: "Our client(s) may now assume that you delivered the check(s) with intent to defraud, and may proceed with the [*5]allowable remedies." Petition, Ex B. Respondents deny that the statement is false, and rely upon Penal Law § 190.10, which contains a presumption that a dishonored check was written with the intent that it would be dishonored.

The Penal Law does not automatically make the presumption of criminal intent. Rather, Penal Law, section 190.10 provides that there may be a presumption that a drawer intended that the check would be dishonored if (a) the drawer had insufficient funds at the time of utterance; (b) the check was presented for payment within 30 days after the utterance; and (c) the drawer had insufficient funds at the time of presentation. Here, the only element that respondents can show is that there were insufficient funds at the time of presentment. Thus, respondents were not justified in using the accusatory language quoted above, of justification of an intent to defraud, even if the Penal Law would permit such accusation or presumption in other circumstances.

Abusive or Harassing Telephone Communications

The petition reports many complaints from consumers about harassing and abusive telephone calls made by representatives of JBC. Respondents maintain that JBC's policies and procedures prohibit such conduct, and that there is extensive training, including refresher courses and oversight, to avoid such behavior. Therefore, respondents maintain that if such conduct actually occurred, it would constitute bona fide error, and would not make respondents subject to liability under the FDCPA.

15 USC § 1692k (c) sets forth the bona fide error defense as follows:

A debt collector may not be held liable in any action brought under this subchapter if the debt collector shows by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such an error.

Most cases in which courts have found bona fide error concerned clerical errors. See e.g. Lewis v ACB Business Serv., Inc., 135 F3d 389 (6th Cir 1998); Bleich v Revenue Maximization Group, Inc., 233 F Supp 2d 496, 500-01 (EDNY 2002); Herbert v Monterey Fin. Serv., Inc., 2001 WL 1266299, *4 (D Conn Sept 28, 2001); Jenkins v Union Corp., 999 F Supp 1120 (ND Ill 1998). Here, the actions are of a different sort. The employees apparently intentionally spoke the improper words, and called debtors at their places of business. The court is justified in assuming that such actions were intentional - since the employees performed acts which are normally purposeful. Further, the burden of proving a "bona fide error" defense is on the Respondents. See Dunaway v JBC & Assoc., P.C., 2005 WL 1529574, *6 (ED Mich June 20, 2005).

Respondents also dispute the accuracy of the complaints regarding harassing telephone calls. JBC contends that its records reflect that the complained of statements were not made, or that the telephone conversation did not take place at all. It maintains that it is difficult to address these assertions on a case by case basis because many of the incidents occurred more than three years before the petition was filed, so the statute of limitations has expired and the employees who allegedly had the telephone conversations are no longer in its employ, and because petitioner has not cited to specific complaints.

Under the Executive Law, the statute of limitations is six years. Executive Law § 63 (12); State of New York v Cortelle Corp., 38 NY2d 83 (1975). The exhibits to the petition contain many complaints of harassing and abusive telephone communications. Respondents' [*6]assertion that it could not address specific claims is uncompelling. Nevertheless, at the hearing before the Referee, the issue of the propriety of the telephone calls should be examined into and reported on, rather than to try and determine the credibility of the complainants and complaints on papers alone. The Attorney General need not prove all of the complaints in order to obtain the relief sought, but must prove a substantial portion of them. The court will further discuss the method for proceeding on this issue with the parties prior to the hearing.

Improper Use of Lawyers' Letterhead

The Attorney General maintains that JBC and BLO violated the FDCPA because letters were sent on an attorney's letterhead when there was no meaningful involvement by an attorney. The Attorney General avers that such action is prohibited by section 1692e (3) of the FDCPA, which prohibits debt collectors from making a "false representation or implication that any individual is an attorney or that any communication is from an attorney."

Respondents argue that the letters were not signed by an attorney, but were merely sent on the firms' letterhead. Since the law firms were the debt collectors, it was appropriate that the letters were sent on their letterhead, and the letters were not false or misleading. Letters sent by a law office on an attorney's letterhead, need not necessarily be sent by an attorney.

This argument does not address the Attorney General's claim, which is that there was no meaningful involvement by an attorney, not that the letters were improperly sent on attorney letterhead.

Respondents contend that there is no specific section of the FDCPA that requires that an attorney must be meaningfully involved in the collection process. The courts have looked to section 1692e (3), which prohibits the "false representation or implication that any individual is an attorney or that any communication is from an attorney." Respondents argue that the purpose of the section and the intent of the Legislature was to prohibit debt collectors from posing as attorneys, or pretending that attorneys were involved when they were not, or from relying on the existence of in-house counsel who never reviewed the file and did not participate in collection activity. They distinguish their own position, saying that both JBC and BLO had an attorney review the information received from the clients, and counsel directed that the staff send specific letters, which were drafted by an attorney.

The Attorney General contends that respondents admit to seeking to collect on tens of thousands of dishonored checks, but have only four attorneys associated with the firms. Therefore, respondents' assertion that there is meaningful attorney involvement is not credible. Further, the computerized searches for anomalies in the data, use of which respondents assert is their regular practice, do not constitute "meaningful attorney review."

Courts have held that, in the absence of an attorney reviewing a debtor's individual case and an attorney making a considered, professional judgment, there is no meaningful attorney involvement. See Nielsen v Dickerson, 307 F3d 623, 631-33 (7th Cir 2002); Avila v Rubin, 84 F3d 222 (7th Cir 1996); Clomon v Jackson, 988 F2d 1314, 1320-21 (2d Cir 1993); Semper v JBC Legal Group, 2005 WL 2172377 (WD Wash Sept 6, 2005).

A factual hearing is required to determine whether there was meaningful attorney involvement in sending the letters at issue. Was the decision to send a collection letter in a specific action made by an attorney, or was it made as a matter of general policy by someone who was not an attorney. Was each debtor's action reviewed by an attorney before the collection procedures were initiated. These issues are also referred to the Special Referee to hear and [*7]report.

Amounts Sought to be Collected

The Attorney General alleges that respondents were seeking to collect amounts in excess of those permitted by law, specifically, more than the face amount of the dishonored check plus a $20 service charge. Respondents assert that JBC's initial letter informs the debtor that possible remedies include statutory damages, and that in addition, they are entitled to collect reimbursement for incidental damages which the Uniform Commercial Code (UCC) allows. Respondents rely on the provisions of UCC §§ 2-709, 2-710, and 2-706.

Article 2 of the UCC applies to sellers of goods, and respondents are not sellers of goods. Further, respondents did not incur the type of incidental damages referred to in the UCC, such as stopping delivery or caring for goods. Therefore, they are not entitled to the protections cited. Additionally, respondents set forth charges totally unrelated to any expense that was incurred. Thus, even if the UCC applied, they would not be entitled to the charges that they denominated "statutory fees" in their follow-up letters. See State of Minn. v JBC Legal Group, P.C., 2006 WL 1388453 (Minn Dist Ct April 13, 2006); Semper,2005 WL 2172377, *2.

Applicability of NYFDCPA

Respondents contend that NYFDCPA does not apply to the debts that respondents sought to collect, because the New York version of the FDCPA applies only to credit transactions, and petitioner cannot demonstrate that the dishonored checks created a credit transaction. They rely on Westco Closet Corp. v Friedman (2001 WL 940281 [Sup Ct, Westchester County 2001]), which discusses attributes of a transaction that involves the extension of credit. That case, however, is inapposite, because it does not involve dishonored checks or the FDCPA.

The NYFDCPA states that it applies to a debt "which arises out of a transaction wherein credit has been offered or extended." GBL § 600 (1). New York courts have not directly addressed the question of whether a dishonored check is to be treated as a credit transaction. However, in other contexts, checks are considered credit transactions unless the check is certified. See In Re Arnett, 731 F2d 358, 361 (6th Cir 1984); In Re Candor Diamond Corp., 44 BR 195 (SDNY 1984).

NYFDCPA is a remedial statute and, as such, should be liberally construed. Post v 120 East End Ave. Corp., 62 NY2d 19, 24 (1984); 577 Broadway Real Estate Partners v Giacinto, 182 AD2d 374 (1st Dept 1992). This is particularly true since the statute involves consumer protection. Karlin v IVF America, Inc., 93 NY2d 282, 290 (1999). Therefore, the courts reject an interpretation of the statute that would vitiate its remedial purpose. Scanlan v Buffalo Pub. School Sys., 90 NY2d 662, 677 (1997). It is clear that the NYFDCPA was intended to protect consumers from improper collection practices. Consequently, the court will not read the statute so as to preclude applying these protections to debtors whose checks were dishonored. Such a reading would emasculate the protections intended, on the dubious basis that dishonored checks do not qualify as credit transactions, despite the fact that they are so considered for other purposes.

Respondents also urge the court to find that the NYFDCPA does not apply based upon their singular reading of General Obligations Law (GOL) § 5-328 (2) (a) and (3). This section of relates to when a holder of a dishonored check may collect a $20 processing fee from the drawer. [*8]Respondents contend that the section distinguishes between checks written for a transaction that involves the extension of credit versus other types of transactions. Respondents argue that the distinction would be unnecessary if the dishonored check was itself an extension of credit, and under such circumstances, the two subsections would be superfluous.

GOL § 5-328 (2) (a) provides:

The holder of a dishonored check given in payment for a consumer transaction or an account may collect from, charge, or add to the outstanding balance of the account of, the person from whom such check was received or to whom such credit was extended, a dishonored check charge of not more than the lesser of the amount agreed upon, if contracted for, or twenty dollars. Subsection 3 provides:

Notwithstanding any other provision of law, any person to whom a check, draft or like instrument, other than a money order, bank cashier's check or certified check, is tendered for any transaction, other than a consumer transaction, may, if such instrument is dishonored charge or collect from the maker or drawer the amount of twenty dollars for the return of such unpaid or dishonored instrument.

The plain reading of the two subsections reveals that (2) (a) applies to consumer transactions, while (3) applies to transactions other than consumer transactions. Thus, respondents' argument that the two subsections are necessary because of an implication that a dishonored check is not a credit transaction is without basis. In subsection (2) (a), the reference to the extension of credit refers to the account on which there is an outstanding balance. It does not in any way pass upon the question of whether the check itself is an extension of credit.

Respondents' final ground for urging that a dishonored check does not constitute an extension of credit is a California case, Abels v JBC Legal Group, P.C. (428 F Supp 2d 1023 [ND Cal 2005]). In that case, a District Court Judge construed a Ninth Circuit case, Charles v Lundgren & Assoc. (119 F3d 739 [9th Cir 1997]) as having concluded that a check was not an extension of credit. That case, however, does not specifically state whether a check is an extension of credit; it merely states that a dishonored check is a debt within the federal FDCPA. Nor does Charles mention an earlier Ninth Circuit case, Greenway v Information Dynamics, Ltd. (524 F2d 1145, 1146 [9th Cir 1975]), which expressly states that a check is essentially an extension of credit. Under these circumstances, this court is not constrained to adopt the holding in Abels, and declines to do so.

Boyajian's Personal Liability

Respondents contend that the Attorney General has failed to set forth evidence to implicate Boyajian individually, and the allegations that he has control over the allegedly wrongful acts is refuted by Boyajian's affidavit.

Under Executive Law § 63 (12), corporate officers and directors are held liable if they personally participated in the illegal or fraudulent acts or had actual knowledge of them. People v Apple Health & Sports Clubs, Ltd., 80 NY2d 803, 807 (1992). Here, Boyajian owns and created the respondent debt collection firms, and also owns a company that bought many of the allegedly dishonored checks. He also created the computer program that analyzes the databases. [*9]Further, he has been sued for many of the same fraudulent and illegal practices and been held personally liable (see Goins v JBC & Assoc., P.C., 353 F Supp 2d 262(D Conn 2005). Therefore, any contention that he was unaware of these practices is without merit. Even if, as he alleges, he did not draft the form letters, his knowledge of them suffices to establish liability. He has not alleged that he had no knowledge of the form letters, or the operations of the debt collectors, nor would such allegations be credible, in view of his being the owner of the firms and his having been a defendant in prior actions against JBC alleging violations of the FDCPA.

Allegations as Against BLO

Respondents maintain that the Attorney General failed to establish any wrongdoing by BLO, since the allegation that BLO is a successor in interest to JBC was refuted.

The vast majority of the complaints in the petition are against JBC. Only a few are against BLO. BLO used different form letters from JBC, and those form letters are not as clearly violative of the FDCPA requirements. It is unclear from the documents before the court whether BLO was seeking to recover more than allowed pursuant to statute. However, there are allegations that BLO failed to stop collection procedures after an claimed debt was challenged, and that it pursued alleged debts that were suspect, at least as regards to the party that it contacted. Under these circumstances, there are material issues of fact that remain unresolved, and the determination of whether the allegations against BLO should result in the relief requested must await a hearing.

Accordingly, it is

ORDERED that the issues of

whether respondents harassed and abused consumers during telephone communications;

whether respondents continued to engage in collection activities after receiving debtors' challenges to the debt or requests for verification, and, if so, whether such incidents were isolated or constituted bona fide error;

whether respondent Boyajian Law Offices, P.C. engaged in fraudulent, deceptive and illegal practices violative of the Fair Debt Collection Protection Act;

how many deceptive or unlawful acts were committed in violation of General Business Law Article 22-A;

how much money respondents collected from New York consumers in excess of the face amount of the checks plus a $20 service charge, and from whom; and [*10]

the costs incurred by petitioner in bringing this proceeding

are referred to a Special Referee to hear and report with recommendations, except that, in the event of and upon the filing of a stipulation of the parties, as permitted by CPLR 4317, the Special Referee or another person designated by the parties to serve as referee, shall determine the aforesaid issue; and it is further

ORDERED that the motion is held in abeyance pending receipt of the report and recommendations of the Special Referee and a motion pursuant to CPLR 4403 or receipt of the determination of the Special Referee or the designated referee; and it is further

ORDERED that during the period that the motion is held in abeyance, respondents, their employees, officers, directors, agents, successors, assignees, affiliates, merged or acquired predecessors, parent or controlling entities, subsidiaries, and all other persons acting in concert or participation with them, are preliminarily enjoined from engaging in fraudulent, deceptive and illegal practices violating the Fair Debt Collection Protection Act or General Business Law §§ 349 and 601; and it is further

ORDERED that counsel for petitioners shall, within 30 days from the date of this order, serve a copy of this order with notice of entry, together with a completed Information Sheet,^[FN1] upon the Special Referee Clerk in the Motion Support Office in Rm 119 at 60 Centre Street, who is directed to place this matter on the calendar of the Special Referee's Part (Part 50 R) for the earliest convenient date.

Dated: September 18, 2007

ENTER:

____________/s/__________________

J.S.C.