Antitrust Law Daily Wrap Up, RICO—S.D. Ind.: Class certification denied in RICO action against debt collectors, (Jan 25, 2016)

By Michael Menzhuber, J.D., LL.M.

The federal district court in Indianapolis has denied class certification in an action alleging that a debt collection company and its subsidiary violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and Fair Debt Collection Practice Act (FDCPA). The court determined that: (1) the proposed sub-classes were impermissible “fail-safe” classes and (2) the class certification requirements of typicality, adequacy, and predominance were not met (Cox v. Sherman Capital LLC, January 22, 2016, Pratt, T.).

Sherman Capital LLC is a debt collection company. LVNV Funding LLC is the holding company. Resurgent Capital Services LP is a subsidiary of Sherman and LVNV and the master servicer of the LVNV collateralized debt obligation.

Andrew Cox, Lucinda Cox, Stephanie Snyder, and Robert Goodall each had an unpaid consumer debt that was “written off” by the originating creditor after a period of 180 days of non-payment. Thereafter, each was the subject of collection activities by the defendants (Sherman, LVNV, and Resurgent). Pursuant to each of these collection activities, the defendants and their agents repeatedly indicated that each plaintiff owed a debt to LVNV.

The plaintiffs brought a class action that alleged, among other things, violations of RICO and the FDCPA. They alleged that, as a result of securitization, LVNV did not own their debts: (1) because their debts were “written off” by the originating bank, the defendants could only purchase “data” of debts or receivables; (2) even if LVNV could eventually acquire title to their debts, the collection activities began while it was still only in possession of “data”; and (3) the defendants securitized whatever it owned (either debt or “data”) and, as a result, became a “servicer” to the new asset-backed security rather than an “owner.”

Fail-safe class. The plaintiffs sought certification of three sub-classes of Indiana citizens who: were subject to collection activities that “violated the FDCPA”; paid money pursuant to the defendants’ “scheme to defraud” in violation of RICO, and paid money in payment of an “alleged debt” owed to the defendants.

The defendants opposed the class certifications on the basis that each the proposed sub-classes constituted an impermissible “fail-safe” class. The court agreed, noting that a “fail-safe” class is defined as a class where the qualification for membership depends upon whether a person has a valid claim. Each of the proposed sub-classes included the language of a valid claim in its definition: (1) “violate the FDCPA”; (2) “scheme to defraud”; and (3) “alleged debt.” Consequently, the proposed sub-classes were improperly “fail-safe.”

Rule 23(a). Even assuming that the plaintiffs’ claims could be amended to avoid being “fail-safe”, the court determined that class certification was not appropriate because all of the requirements of Rule 23(a) could not be satisfied. The court found that the “typicality” requirement was not satisfied primarily on the basis that there was no indication of how the plaintiffs would establish their primary legal theory of “securitization,” particularly in regard to the four named plaintiffs. Because the plaintiffs were unable to produce evidence to demonstrate their primary legal theory after three years of discovery, the court also determined that the “adequacy” requirement was not met.

Rule 23(b). The court found that, even if the requirements of Rule 23(a) could be satisfied, the plaintiffs could not satisfy the additional requirement of predominance under Rule 23(b)(3) because they were unable to demonstrate that their legal theory was capable of proof through evidence that was common to the class, rather than individual to its members. In reaching this determination, the court found that individualized proof would be necessary for each of the class members’ claims that their debt: (1) was securitized; (2) was “written-off” by the originating bank or servicer; and (3) was sold either as “data” or as debt to the defendants, with the sale taking place prior to the defendants’ collection activities against the individual class member.

The case is No. 1:12-cv-01654-TWP-MJD.

Attorneys: Amy E. Romig (Plews Shadley Racher & Braun LLP) for Andrew Cox. James W. Riley, Jr. (Riley Bennett & Egloff LLP) and James A. Rolfes (Reed Smith LLP) for Sherman Capital LLC, Sherman Financial Group LLC, and LVNV Funding LLC.

Companies: Sherman Capital LLC; Sherman Financial Group LLC; LVNV Funding LLC

Cases: RICO IndianaNews