RICO Case Against ARM Firms Proceeds as Industry Watches

A federal appeals judge in New York has allowed a potential class action lawsuit to proceed alleging that a debt buyer, the law firm it hired to litigate cases, and the process company it hired to serve debtors conspired to fraudulently collect millions.

Some of the charges allege violations of the Fair Debt Collection Practices Act (FDCPA). But the lawsuit also asserts that the companies conspired in a way that could be interpreted as racketeering under the Racketeer Influenced and Corrupt Organizations Act (RICO) .

The alleged racketeering claims, if proven, would have a chilling impact on how debt buyers validate debt and how collections are pursued through the court system. If proven, many ARM firms would have to re-examine common business practices.

In the case — Monique Sykes et al, vs. Mel Harris & Associates, LLC et. al, — eight debtors allege that over the course of three years debt buyer Leucadia National Corp., process server Samserv and debt collections law firm Mel Harris engaged in a “massive scheme” to fraudulently obtain default judgments against them and more than 100,000 other consumers in state court. The lawsuit claims that the defendants committed the fraud by engaging in “sewer service,” the practice of failing to serve a summons and complaint and then filing a fraudulent affidavit attesting to service. When the debtors didn’t appear in court because they did not have notice of the lawsuits, Leucadia and Mel Harris obtained default judgments against them, which allowed them to freeze debtors’ bank accounts and threaten to garnish wages or property to obtain settlements.

Debt collection defense attorney Barbara Sinsley said it is important that the debt collection industry follow the case, but that there is no need at this point for firms to make changes to their business model.

“At this time I don’t think this lawsuit raises questions about law firms business practices or that their model should be changed,” said Sinsley, a partner with Florida-based Barron, Newburger, & Sinsley PLLC.  “But it’s always important for collection attorneys to do management by wandering around.  Know what their vendors are doing,”

Debt collection industry trade group ACA International agreed. “Clear, accurate and respectful communication between collectors and consumers is essential to maintaining a balanced debt collection system,” said Valerie Hays, ACA’s general counsel and vice president of legal and government affairs.  “The same is true when collectors work with the courts to seek default judgments or other action,”

All of the firms named as defendants are based in New York, where the state attorney general has brought sewer service charges against process server American Legal Process and launched investigations into other process servers and debt collection firms. Process servers are typically paid based on verified delivery of court papers, a model that is currently under heavy scrutiny.

Although Samserv is not among the companies being investigated, Plaintiffs’ Attorney Claudia Wilmer told insideARM.com that the lawsuit alleges similar practices.

“What we see is that practices American Legal Process used are standard practices across the industry when it comes to these debt collection lawsuits,” Wilmer said.

Arthur Sanders, a partner with Mel Harris, disagrees but said he wasn’t surprised that U.S. District Judge Denny Chin allowed the lawsuit against the firm and its associates to proceed because the law required that the judge assume the pleadings in the motion are true.   “When you take into account that the court has to treat it as true, it’s hard for us to win the motion.  But we are still optimistic that the right outcome will happen because there was not conspiracy.  The other side has a lot to prove,” Sanders said

Sanders acknowledged that the allegations are enough to send chills down the spines of debt collection professionals who must pursue payment on most of their accounts through the courts.

The complaint notes that Leucadia, a publicly traded holding company with interests in financial services, filed more than 100,000 consumer debt collection lawsuits between 2006 and 2009 in New York City civil court and that Mel Harris represented the company 99 percent of the time. It also notes that Todd Fabacher, Mel Harris’ designated custodian of record, signed the vast majority of the approximate 40,000 affidavits of merit the firm filed each year.

“Assuming 260 business days a year, Fabacher had to have personally (and purportedly knowledgeably) issued an average of 20 affidavits of merit per hour, i.e., one every three minutes, over a continuous eight-hour day,” Judge Chin wrote in his ruling last month allowing the case to proceed.  Chin said after the default judgments were issued, Leucadia and Mel Harris threatened to garnish debtors’ wages or seize their property, causing them to incur litigation costs and impaired credit ratings.

Chin noted in his ruling that government agencies have recognized that abusive debt collection practices are a public concern and he mentioned the Federal Trade Commission’s report last year that discussed industry-wide problems with debt buyers failing to substantiate their legal claims against consumers.

Wilmer, a senior staff attorney with the Neighborhood Economic Development Advocacy Project (NEDAP), likened Fabacher’s sworn affidavits to the robo-signing practices banks have allegedly used to expedite mortgage foreclosures. She said NEDAP operates a legal hotline for low-income residents and attorneys there have taken numerous calls from New York area residents sued by Mel Harris over credit debt.

“They all have similar stories,” she said. “We believe that the same thing that happened to them happened to our clients.”

Wilmer said that all the lawsuits Mel Harris filed against the plaintiffs in the lawsuit have been dismissed.  But she said the case isn’t about whether or not the plaintiffs owed the debt and the lawsuit doesn’t seek to keep debt collectors from pursuing legitimate debt.

“Our case revolves around the way these defendants allegedly obtained judgments though false means,” she said. “The primary motivation for this lawsuit is to put an end to these fraudulent and deceptive practices.”

Sanders agrees that the lawsuit attempts to draw similarities to the robo-signing mortgage scandal that briefly halted housing foreclosures last October, but he said “I think at the end of the day they are not going to be able to do that.”

Sanders said Mel Harris and its business associates acted appropriately and the firm has no plan to change how it does business because the allegations against the firm and its associates are not true.

“There’s only the allegation that we didn’t act appropriately.  Our client bought debt that’s valid debt. It’s not our practice to give instructions to process servers not to deliver notices,” Sanders said. “When all the information is out there, we will be vindicated.”