Collection agencies and debt buyers collecting from people in Arkansas must have a license to operate in the state if they want to legally do so, the Arkansas Supreme Court ruled.

The court responded to a question from a federal judge in a lawsuit between Patty Simpson of Newport, Ark. and Cavalry SPV LLC.

Simpson v. Cavalry was filed in 2013 after a law firm working for Cavalry won a default judgment against Simpson over a delinquent $1,078 credit card account. Cavalry had bought Simpson's delinquent HSBC Bank credit card account and hired McHughes Law Firm of Little Rock, Ark., which then filed the lawsuit to collect the debt.

Simpson had argued that Cavalry violated the Fair Debt Collection Practices Act and the Arkansas Fair Debt Collection Practices Act by assigning a debt for collection without being licensed in the state.

The court rejected arguments from Cavalry that the firm was within the law because it had only "assigned" the debt to an attorney. While Arkansas law requires a collection agency to have a license to collect or solicit accounts, with no exemptions for out-of state agencies, Cavalry argued it does not meet the definition of "collection agency" because it assigned the debt to McHughes, a licensed Arkansas law firm. Officials at Cavalry could not be reached for comment.

The Arkansas Supreme Court disagreed, ruling that the argument that Cavalry was not directly collecting the debt lacks merit.

The court, in its ruling, also rejected the following 2012 statement from the Arkansas State Board of Collection Agencies where they recognized as exempt from collection agency licensure in Arkansas "any entity that purchases or receives an assignment of ownership of a debt that is in default at the time of assignment provided that the debt buyer: 1) does not attempt to collect debts directly either for itself or others; 2) undertakes collection efforts solely through third-party collection agencies or law firms; 3) maintains no place of business in Arkansas."

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