Antitrust Law Daily Wrap Up, RICO—2d Cir: Class certification upheld in fraudulent debt collection scheme case, (Feb 11, 2015)

By Linda O’Brien, J.D., LL.M.

A district court did not abuse its discretion in certifying two classes of consumers in their action against a lending company, its law firm, and a process server for allegedly engaging in a fraudulent debt collection scheme, the U.S. Court of Appeals in New York City has ruled. Thus, the appellate court affirmed certification of (1) a class of persons who were sued by the law firm on behalf of the lending company asserting RICO claims and (2) a class of persons who were sued by the law firm on behalf of the lending company and where a default judgment had been obtained (Sykes v. Mel S. Harris and Associates, LLC, February 10, 2015, Pooler, R.).

Leucadia National Corporation, through various subsidiaries, purchases and collects consumer debts. Mel S. Harris and Associates LLC is a law firm specializing in debt collection litigation. Samserv, Inc. is a process service company.

Monique Sykes is a consumer who was sued by the Leucadia in a debt collection action and, although she denied being served in that action, Leucadia obtained a default judgment against her. Sykes and a group of consumers filed a putative class action against Leucadia, the Harris law firm, and Samserv, alleging, in part, violations of Racketeering Influenced and Corrupt Organizations Act (RICO) and the New York General Business Law (GBL). The plaintiffs asserted that the defendants engaged in a default judgment scheme to purchase consumer debt portfolios, initiate debt collection actions against the alleged debtors, file fraudulent affidavits of service, and attempt to collect on fraudulently obtained default judgments. The district court granted the plaintiffs’ motion for class certification, certifying two proposed classes, and the defendants appealed.

Rule 23(a). The appellate court found that the proposed classes satisfied the requirements of commonality and typicality under Federal Rule of Civil Procedure 23(a). The plaintiffs alleged that the defendants fraudulently affirmed that they actually served their victims, when they did not, and that they had admissible proof that the debt was owed, when they did not. The district court did not err in determining that the defendants’ scheme, which had multiple components, was a unitary course of conduct that depended on false affidavits of the merits of the debt to procure fraudulently obtained default judgments.

Both wire and mail fraud, the predicate acts underlying the plaintiffs’ RICO claim, could be established by false or fraudulent representations and the defendants’ false affidavits of merit provided an independent basis for liability. Thus, a fraudulently obtained default judgment what depended on the filing of a false affidavit of merit could serve as a common issue satisfying Rule 23(a).

Rule 23(b)(3). Additionally, questions of law or fact common to the class predominate over any questions affecting only individual members. According to the appellate court, every potential class member’s claim arose from the defendants’ uniform, widespread practice of filing automatically generated form affidavits of merit and affidavits of service in order to obtain default judgments against debtors. Although individualized damages inquiries may exist, those issues did not predominate in this case.

Furthermore, the district court did not err in determining that individual causation issues did not predominate. To pursue a claim under RICO, the plaintiff must show that the alleged injury to its business or property was caused by the substantive RICO violation. The injuries to the plaintiffs, which included the freezing of personal bank accounts and incurring legal fees to challenge the default judgments, were sufficient to identify a property interest that has protected by RICO and that the injury was caused by the RICO violation.

Rule 23(b)(2). Finally, the appellate court determined that the proposed injunctive relief would benefit all class members. The plaintiffs sought an injunction directing the defendants to (1) cease unlawful debt collection practices; (2) notify class members that had a default judgment entered them that they have the right to reopen their case; (3) serve process in compliance with the law; and (4) file affidavits of merits in future actions that reflect their personal knowledge of the facts. The defendants’ argument that individualized issues of service differentiated class members from one another and individual class members were not entitled to different injunctions was rejected. The appellate court noted that the relief to each class member did not have to be identical, only that it was beneficial. Thus, the district court did not abuse its discretion that the proposed injunctive relief would benefit each class members.

Dissent. In a dissenting opinion, Circuit Judge Jacobs maintained that the superiority ruling by the district court was in error because a statutory procedure for redressing fraud was available. The predominance ruling also could not be sustained since the district court failed to perform a rigorous analysis weighing common and individualized issues.

The case is No. 13-2742.

Attorneys: Matthew D. Brinckerhoff (Emery Celli Brinckerhoff & Abady LLP) for Monique Sykes. Paul D. Clement (Bancroft PLLC) for Mel S. Harris and Associates LLC. Miguel A. Estrada (Gibson, Dunn & Crutcher LLP) for LR Credit 18, LLC, L-Credit, LLC, Leucadia National Corp., and LR Credit, LLC. Jordan Sklar (Babchik & Young LLP) for Samserv, Inc.

Companies: Mel S. Harris and Associates LLC; LR Credit 18, LLC; L-Credit, LLC; Leucadia National Corp.; LR Credit, LLC; Samserv, Inc.

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