Debt collector loses round in legal battle with check bouncers

Newly confirmed federal Judge Vince Chhabria Newly confirmed federal Judge Vince Chhabria Photo: SF City Attorney's Office / SF City Attorney's Office Photo: SF City Attorney's Office / SF City Attorney's Office Image 1 of / 1 Caption Close Debt collector loses round in legal battle with check bouncers 1 / 1 Back to Gallery

A debt-collection company that uses California prosecutors’ authority to go after suspected bounced-check writers must face the debtors’ complaints in open court rather than in private arbitration, a federal judge has ruled.

The collectors are using state law to exercise law enforcement powers, and their actions must be “subject to judicial review,” U.S. District Judge Vince Chhabria of San Francisco said Thursday.

The ruling is the first in the nation on the issue and, if upheld on appeal, would apply equally to other companies that have gained government powers, such as private prisons, said Deepak Gupta, a lawyer for debtors in a proposed class-action suit on behalf of hundreds of thousands of Californians against Victim Services Inc.

Michael Taitelman, a lawyer for Victim Services, said the ruling was “not in line with well-established Supreme Court precedent concerning arbitration.” The company is considering an appeal.

California law allows district attorneys to designate private companies to run diversion programs for people charged with writing bad checks with the intent to defraud. The program allows debtors to avoid prosecution if they reimburse the victim, take a course in financial responsibility, and pay fees for the class and for each bounced check. The county gets a small percentage of the fees.

Victim Services, which does business as CorrectiveSolutions, has operated the programs for prosecutors in many California counties, including Alameda, Contra Costa, San Mateo and Sonoma.

Debtors have accused the company of abusing its authority, and in April 2015 the U.S. Consumer Financial Protection Bureau ordered CorrectiveSolutions to stop using district attorneys’ letterheads, making other efforts to impersonate prosecutors, or trying to extract excessive fees with threats of criminal punishment.

Taitelman said Thursday that the company is complying with the order.

The proposed class-action suit, filed in December 2014, accused CorrectiveSolutions of charging unauthorized fees and targeting people who had not been singled out for prosecution by a district attorney.

In Thursday’s case, from El Dorado County, the company sought to enforce a provision in its letter to debtors requiring them to take all disputes to private, individual arbitration, unless they opted out within 60 days. The letter bore the signature of the county district attorney, a practice that was later forbidden by the federal consumer bureau.

The debtor challenged the arbitration clause in court. In his ruling, Chhabria said the arrangement between the debtor and the collection company was not a typical commercial contract, which can be subject to arbitration, but an exercise of state police powers that isn’t covered by federal arbitration law.

The judge did not address the debtors’ complaints about the company’s practices, at issue in the pending lawsuit. But Gupta, the plaintiffs’ lawyer, said the ruling “suggests serious questions about the legality of this program.”

Bob Egelko is a San Francisco Chronicle staff writer. Email: begelko@sfchronicle.com Twitter: @egelko