US court allows 'sewer service' debt collection class action

NEW YORK, Feb 10 (Reuters) - A divided federal appeals court in New York allowed more than 100,000 potential plaintiffs to pursue class action litigation accusing Leucadia National Corp and a law firm of fraudulently cutting corners to win default judgments in debt collection cases.

Tuesday’s 2-1 decision by the 2nd U.S. Circuit Court of Appeals came after the U.S. Consumer Financial Protection Bureau and Federal Trade Commission warned that a contrary ruling could undermine the Fair Debt Collection Practices Act, a 1977 law designed by Congress to police unscrupulous debt collectors.

The lawsuit focused on “sewer service,” a long-running practice where debt collectors fail to serve complaints on debtors, and later falsely certify to courts that service was made and that the cases have merit.

Sewer service often ends in default judgments because debtors do not know to appear in court. It can lead to bank account seizures, wage garnishments and ruined credit scores.

Four New York City residents, led by Monique Sykes of the Bronx, challenged lawsuits filed from 2006 to 2009 in New York City civil courts on behalf of Leucadia, which like rivals buys consumer debt at pennies on the dollar and tries to collect in full.

Leucadia was represented in more than 99 percent of the collection lawsuits by the Mel S. Harris law firm, a debt collection specialist that the plaintiffs called a “default judgment mill.” A process server, Samserv Inc, was also sued.

In September 2012, Circuit Judge Denny Chin certified class actions arising from the Harris firm’s lawsuits.

Writing for the 2nd Circuit majority, Circuit Judge Rosemary Pooler agreed that the plaintiffs’ claims had enough in common to allow a class action.

Pointing to allegations that one Harris employee supposedly certified the merits of 20 lawsuits per hour, Pooler said it was “undisputed” that he did not review the underlying documents.

Circuit Judge Dennis Jacobs dissented. He said there were too many individual issues to justify a “unwieldy” class action where “hungry lawyers” might earn a big payday.

“This is class litigation for the sake of nothing but class litigation,” Jacobs wrote.

Leucadia also owns the Jefferies Group investment banking and securities firm. The company, its lawyer Miguel Estrada, the Harris firm’s lawyer Paul Clement, and a Samserv lawyer did not immediately respond to requests for comment.

The plaintiffs’ lawyer Matthew Brinckerhoff welcomed the decision.

“The problem of unscrupulous debt collectors is nationwide,” he said in an interview. “This class action provides a framework to obtain relief for a large number of victims.”

In a brief supporting the debtors, the Consumer Financial Protection Bureau and FTC said the 1977 debt protection law was meant to curb abuses that could cause bankruptcies, marital instability, job losses and privacy invasions.

They said “the act’s purposes would be disserved” by accepting defense arguments that debtors could not recover because any false statements were directed at the civil court, not the debtors themselves.

The AARP and the National Consumer Law Center also supported the plaintiffs.

The case is Sykes et al v. Mel S. Harris and Associates LLC et al, 2nd U.S. Circuit Court of Appeals, No. 13-2742. (Reporting by Jonathan Stempel in New York; Editing by David Gregorio)