The U.S. Court of Appeals for the Second Circuit recently affirmed the district court’s grant of 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 Second Circuit’s decision in Monique Sykes v. Mel Harris and Associates, LLC, highlights the potential risks for creditors and debt buyers facing documentation-related challenges in collection actions.

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. 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 plaintiffs alleged that the filing of the false affidavits violated the Fair Debt Collections Practices Act (FDCPA). (For more on the district court’s decision, see our prior legal alert.)

A divided Second Circuit panel ruled that the district court had not abused its discretion in certifying two classes under Rule 23 of the Federal Rules of Civil Procedure: a Rule 23(b)(3) class seeking money damages for persons sued by the defendant law firm where a default judgment was obtained and a Rule 23(b)(2) class seeking equitable and declaratory relief for all persons who have been or will be sued by the law firm where a default judgment has been or will be sought.

According to the Second Circuit, the district court did not abuse its discretion in finding that the Rule 23(b) prerequisites—numerosity, commonality, typicality, and adequacy of representation—were met. The Second Circuit reasoned that a common issue was provided by the plaintiffs’ claim that the affidavits of merit on which the defendants relied to obtain default judgments were fraudulent. The plaintiffs alleged that a single law firm employee, who did not review the original credit agreements for the debts but instead relied on warranties made by the sellers of the debts and database information, generated affidavits on a mass basis.

The Second Circuit also found it possible for the plaintiffs to prove that the affidavits of service were false on a classwide basis, given the district court’s finding that the plaintiffs had produced evidence that substantially supported the plaintiffs' "sewer service" allegations. Among such evidence were records showing hundreds of instances of the same process server executing service at multiple locations simultaneously.

The Second Circuit ruled that it was not an abuse of discretion for the district court to find that the additional requirements for a Rule 23(b)(2) and (b)(3) class were satisfied. The requirements for a Rule 23(b)(3) class include a determination by the district court that a class action is a superior method for resolving the controversy. According to the dissent, however, the instant federal class action was not superior “to the adequate remedial scheme already offered by the courts of New York.”

Under New York law, an interested party can move to vacate a judgment for grounds that include “excusable default” as well as “fraud, misrepresentation, or other misconduct of an adverse party.” In addition, on application by an administrative law judge, default judgments can be vacated en masse upon a showing that the judgments “were obtained by fraud, misrepresentation, illegality, unconscionability, lack of due service, violations of law, or other illegalities.”

According to the dissenting judge, vacatur en masse by an administrative judge “is a remedy that is broad, wholesale, effective, and easy,” whereas “[t]he only salient advantage of this class action is attorneys’ fees, which do not much help the members of the class.” The dissenting judge labeled the grant of Rule 23(b)(2) class certification “likewise deeply flawed,” observing that injunctive relief requiring the defendants to change their collection practices would do “absolutely nothing” for the named plaintiffs because their default judgments had already been vacated or discontinued.

On February 19, 2015, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Are New York’s Debt Collection Regulations a Sign of What the CFPB Has in Store?” A link to register is available here.

Attorneys in Ballard Spahr’s Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. To assist clients in responding proactively to the documentation-related challenges being faced by the debt collection industry and creditors attempting to collect their own debts, the Group has formed a Collection Documentation Task Force. Attorneys in the Group also prepare clients for Consumer Financial Protection Bureau examinations.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, or Collection Documentation Task Force Chair Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com.


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have. 

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