A federal judge in New York has rejected attempts by Leucadia National and the debt-collection law firm Mel Harris & Associates to dismiss a class-action lawsuit accusing them of a racketeering scheme to obtain judgments in New York courts against unwitting consumers around the country.
In the ruling issued Dec. 29, U.S. District Judge Denny Chin said the plaintiffs could proceed with claims they were the victims of a “sewer service” scheme in which process servers fraudulently told the court they’d presented debt-collection papers to their targets as required under the law.
READ THE FEDERAL COURT RULING AGAINST
Leucadia National and Mel Harris & Associates
The lawsuit on behalf of up to 100,000 borrowers claims lawyers at Mel Harris then used those statements to obtain default judgments against the consumers and threaten to garnish their wages or freeze money in their bank accounts. The customer for these services was Leucadia, a financial-services firm that bought hundreds of thousands of defaulted debt claims for pennies on the dollar and hired Mel Harris to recover what it could.
The suit has echoes of the “robosigner” controversy over home mortgages, but with important differences. Mortgages are loans secured by a physical property, so there’s rarely any dispute over what the homeowner owes and what the lender can seize if he doesn’t pay.
Leucadia was trying to collect on unsecured debt, where there is no collateral and little recourse for the lender. To get judgments against the borrowers, the judge said, a single Mel Harris employee named Todd Fabacher signed 40,000 affidavits attesting to the accuracy of debt claims.
Assuming 260 business days a year, Fabacher had to have personally (and purportedly knowledgeably) issued an average of twenty affidavits of merit per hour, i.e., one every three minutes, over a continuous eight-hour day.Mel Harris has drawn attacks from consumer advocates over its debt-collection practices, which include filing more than 100,000 lawsuits in state courts around the country. The Federal Trade Commission has expressed concern about debt collectors who obtain default judgments against consumers who were never told of the lawsuit against them and never appeared in court.The term “sewer service” refers to the practice of throwing service papers in the sewer but telling the court the target received them in person.
The judge dismissed RICO claims against individual employees of the debt collection firms but allowed them to proceed against the companies. He also rejected an attempt by Mel Harris to claim it isn’t a debt collector under federal law, as well as its argument statements it made in court were protected under the so-called “litigation exception” preventing suits over statements in court filings.
The class action is Monique Sykes vs. Mel Harris, 09cv8486, Southern District of New York.
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