The Debt Effect

[February 6th, 2008]

One of the state’s top debt-collection lawyers now finds himself targeted by the Oregon State Bar and the people he sued, who claim he broke the law or used shady legal tactics in his effort to collect debts of thousands of dollars.

Derrick McGavic, a 69-year-old Eugene lawyer, may have his license yanked by the bar for violating professional standards. On a separate front, McGavic faces a pair of new federal lawsuits alleging he ran afoul of the 1978 Fair Debt Collection Practices Act by trying to squeeze debtors.

McGavic has already settled a string of six federal lawsuits in the past two years over his collection tactics, which allegedly included threatening defendants with jail time, hiring professional snoops to obtain personal information, and suing people who didn’t actually owe money.

McGavic declined to comment on the bar complaint or the amount of the settlements, but said his office would never knowingly violate the rules. “Suffice it to say, you get more flies with honey than you do with vinegar,” he says.

As the economy slouches toward recession and the average U.S. household’s credit-card debt tops $8,700, more Portlanders are finding themselves in the crosshairs of debt-collection lawyers like McGavic.

“The screws are really getting tightened,” says Keith Karnes, a Portland consumer lawyer who’s represented clients in suits against McGavic and other debt-collection lawyers. “I’m busier than I should be.”

After 45 years in business, McGavic has built one of the most successful debt-collection practices in the state, filing thousands of lawsuits each year, according to his competitors. Most of his work is in southern Oregon, but he also leaves a footprint in Portland—on one day alone last month, he filed 26 lawsuits in Multnomah County Circuit Court.

To understand why a lawyer might cross the line in his efforts to collect, it helps to know a bit about how America’s billion-dollar debt-collection industry works.

Credit-card companies sell their uncollected debts to debt-purchasing companies, who buy them by the thousands for up to 20 cents on the dollar. Many of those debts are past time to collect. Others have been discharged under bankruptcy. But if the companies play hardball, they can collect enough to turn a profit.

So they hire collection agencies and lawyers like McGavic, who can win a court order to raid bank accounts and garnish wages to pay off the debt. But there’s risk for the lawyers as well. They get paid only 25 to 30 percent of what they collect—if they turn up nothing, there’s no paycheck.

The lawyers file dozens of boilerplate lawsuits at a time, hoping a few pan out. Some debtors won’t respond at all. Then the lawyer wins a default judgment and the right to collect—though the deadbeats, if they can be located, often have nothing left to take.

Portland debt lawyer David Schumacher says the work is typically a lawyer’s last resort. “It’s the necessary evil,” he says. “If you do it right, you’ll be successful at it. I’m just amazed at the rules that are broken out there. It just blows me away.”

McGavic has racked up 35 bar complaints in the last 10 years, as far back as records are available. The bar found enough evidence on one of those to prosecute and on Jan. 3 filed a formal complaint against McGavic in Oregon Supreme Court.

The complaint alleges McGavic continued to contact a debtor after she referred all correspondence to her attorney, a breach of legal ethics. McGavic could face suspension or disbarment if the court rules against him.

McGavic also faces two federal lawsuits filed Jan. 11 at U.S. District Court in Portland. Both claim McGavic sent a document to debtors saying he could have them thrown in jail if they didn’t let him contact their employers.

“A lot of creditors call people’s work to harass and embarrass them,” says Karnes, the lawyer who filed both lawsuits. “McGavic tries to get permission to do that, and it’s illegal under the Fair Debt Collection Practices Act.”

Karnes says McGavic has paid to settle four other lawsuits brought by Karnes’ clients alleging McGavic made the same threat. McGavic has since added the word “optional” in the document he sends to debtors, but it’s still questionable whether it’s legal, Karnes says.

“Threatening anybody with jail is very risky and something that is very unusual,” says Portland debt-collection lawyer Brian Sullivan. “I certainly would never do that.”

Karnes says McGavic has settled two other suits he filed. One alleged McGavic sued the wrong debtor. Another accused McGavic of hiring an agent who lied to obtain personal information about a debtor over the phone.

McGavic isn’t the only prominent statewide debt-collection lawyer from Eugene facing a federal lawsuit. Another, Daniel Gordon, was sued Jan. 31 for pursuing a debt after the statute of limitations expired.

Gordon did not respond to requests for comment on the suit against him, but he defends his friend McGavic. “I would say he’s a very careful guy,” Gordon says. “In fact, sometimes I think he’s overkill on careful.”