NYC Federal Court Green Lights Class Action Certification In Alleged Sewer Service Racket Involving Fraudulently Obtained Default Judgments, Zombie Debt Buyer, Process Server, Law Firm

From a recent client alert from the law firm Ballard Spahr LLP:

• A recent decision by a New York federal court provides yet another example of the documentation-related challenges that creditors and debt buyers are increasingly facing in collection actions involving non-mortgage consumer debts. In its opinion in Monique Sykes v. Mel Harris and Associates, LLC, issued September 4, 2012, the U.S. District Court for the Southern District of New York granted class certification in a case alleging that a debt buyer, law firm, and process service company had engaged in a scheme to fraudulently obtain default judgments against more than 100,000 consumers in debt collection actions filed in state court. The complaint alleged that the process service company had regularly engaged in "sewer service" by failing to serve the summons and complaint. It further alleged that, after a debtor failed to appear in court for lack of notice of the collection action, the debt buyer and law firm would seek a default judgment based on a false "affidavit of merit" attesting to their personal knowledge of the "facts and proceedings" relating to the action and a false affidavit of service. According to the court, the plaintiffs had established that the affidavits of merit were "generated en masse by sophisticated computer programs and signed by a law firm employee who did not read the vast majority of them and claimed to, but apparently did not, have personal knowledge of the facts to which he was attesting." The employee typically did not receive the original credit agreement for a particular debt included in a portfolio of purchased debts. Instead, the employee received a bill of sale for the portfolio that included sample credit agreements and warranties from the portfolio seller. The court noted that even if the credit agreement existed (which it often did not), the employee's standard practice was to rely on the warranties and database information instead of reviewing the agreements before signing an affidavit of merit. The evidence showed that after producing the affidavits of merit in batches of up to 50 at a time, the law firm's employee would do a "quality check" of one affidavit per batch to confirm that the affidavit information matched the database information. If both sets of information matched, he would sign the remaining affidavits without reviewing them. The employee would sign as many as 350 affidavits of merit in any given week. The plaintiffs also alleged that, because the defendants had regularly engaged in "sewer service," the affidavits of service that accompanied the affidavits of merit were also often false. According to the court, evidence showing hundreds of instances of the same process server executing service at multiple locations simultaneously provided substantial support for the plaintiffs' "sewer service" allegations. In addition to claiming that the defendants' conduct violated the Racketeer Influenced and Corrupt Organizations Act and New York's General Business Law and Judiciary Law, the complaint alleged that the defendants had violated the Fair Debt Collections Practices Act by filing false affidavits in the collection actions. The court, in finding that the plaintiffs had satisfied the commonality requirement for class certification, noted that there is conflicting case law on whether making false representations in court, rather than to the debtor, violates the FDCPA.

Source:  New York Federal Court Certifies Class Alleging Fraudulent Collection Practices Based on Documentation Deficiencies. For the court ruling, see  Monique Sykes v. Mel Harris and Associates, LLC,  No. 09 Civ. 8486 (S.D.N.Y.  September 4, 2012).