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Law360: Class Cert. Upheld In Leucadia ‘Default Judgment Mill’ Row

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By Caroline Simson

The Second Circuit upheld class certification for more than 100,000 consumer debtors who allegedly fell prey to a fraudulent debt-collection default judgment scheme by a Leucadia National Corp. debt-buying affiliate and its law firm and process server, finding Tuesday that common issues predominated.

The panel agreed with the district court’s September 2012 conclusion that while individual issues existed in the case — specifically, damages, the claims’ timeliness, and whether class members were properly served the debt collection suits — the classes met the commonality requirement because the overarching claim was that the defendants filed false affidavits to fraudulently procure default judgments.

“In short, the district court properly considered the evidence before it. It concluded that, while individual issues existed in this case, they did not predominate over common issues. Defendants wish the district court had performed this balancing equation differently. But that is not sufficient for us to find that the district court abused its discretion in certifying this class under Rule 23(b)(3),” the panel said.

The plaintiffs claim that process server Samserv Inc. routinely engaged in “sewer service,” in which Samserv didn’t serve the summons and complaint seeking payment on debts that Leucadia and law firm Mel S. Harris & Associates LLC had purchased, while still submitting proofs of service to the court. 

Addressing the damages aspect, the appellate panel found that while individual inquiries may exist on how much each plaintiff is due under his or her particular fraudulent judgment, it wasn’t enough to conclude that the lower court abused its discretion in finding that common issues predominated.

As for timeliness, the panel said some class members may, in fact, be able to assert racketeering or other claims based on the complaint’s filing date, but that didn’t mean that those class members’ interests were antagonistic to the other class members.

Nor did individual causation issues on whether class members were properly served sink the common issues to the class, because even if some class members did owe a debt and the default judgment was achieved through proper service, those were single individual issues among myriad common issues, according to the opinion.

The panel also rejected a novel theory from Mel Harris that the litigation should have been concentrated in New York City Civil Court because the affidavits were filed with that court, ruling there was no basis on which to show the claims could be heard as a class there. Moreover, the panel said, the defendants appeared to want to fragment the plaintiffs’ claims by arguing for the different forum.

And the suit’s claims center not on the actions of the New York City Civil Court or the default judgments that came from there, but on the fraudulent means the defendants used to obtain the judgments, the panel said.

The opinion upheld the certification of the class, which seeks to bar the defendants from carrying out the scheme, and to require the defendants to notify class members about their individual default judgments and their right to reopen their cases. The panel said the injunction would benefit each class member, even those whose judgments had already been vacated.

“This is a huge victory for our clients and for all low-income New Yorkers who have faced abusive debt collection lawsuits,” said Claudia Wilner of the New Economy Project, who is part of the team representing the plaintiffs. “We are thrilled that we can finally proceed on a classwide basis, and we look forward to securing relief for the tens of thousands of New Yorkers who have been harmed by the defendants’ fraudulent practices.”

In a dissent, U.S. Circuit Judge Dennis G. Jacobs called the case “class litigation for the sake of nothing but class litigation.” He said that the panel’s decision to uphold class certification ignored that court in New York could vacate the judgments en masse.

The plaintiffs, who sued in October 2009, claim Leucadia subsidiary LR Credit 18 LLC bought debt portfolios then employed Mel Harris to file debt collection actions against the debtors in New York City Civil Court, according to the ruling.

The plaintiffs allege that the defendants constructed a “default judgment mill” where they bought charged-off consumer debt, initiated a debt-collection action, then submitted fraudulent documents to New York City Civil Court to obtain a default judgment.

The first of the two classes, both of which were certified in March 2013, comprises people who were sued by Mel Harris while representing Leucadia and who are asserting claims under the Racketeer Influenced and Corrupt Organizations Act. The second class comprises all people sued by Mel Harris in New York City Civil Court where a default judgment was obtained.

U.S. Circuit Judges Dennis G. Jacobs, Guido Calabresi, and Rosemary S. Pooler sat on the panel.

The class is represented by Matthew D. Brinckerhoff, Jonathan S. Abady, Vasudha Talla and Debra L. Greenberger of Emery Celli Brinckerhoff & Abady LLP; Josh Zinner, Susan Shin and Claudia Wilner of New Economy Project; Carolyn E. Coffey, Ariana Lindermayer and Jeanette Zelhof of MFY Legal Services Inc.; and Charles J. Ogletree Jr. of Harvard Law School.

Mel S. Harris & Associates LLC is represented by Paul D. Clement and Candice Chiu of Bancroft PLLC; James R. Asperger, Maria Ginzburg and Marc A. Becker of Quinn Emanuel Urquhart & Sullivan LLP; and Brett A. Scher of Kaufman Dolowich & Voluck LLP. Leucadia National Corp. is represented by Miguel A. Estrada and Scott P. Martin of Gibson Dunn; Ralph C. Ferrara and Mark D. Harris of Proskauer Rose LLP; Michael D. Zimmerman of Zimmerman Jones & Booher LLC; and Lewis H. Goldfarb and Adam R. Schwartz of McElroy Deutsch Mulvaney & Carpenter LLP. Samserv Inc. is represented by Jack Babchik of Babchik & Young LLP.

The case is Sykes et al. v. Mel S. Harris & Associates LLC et al., case numbers 13-2742,13-2747 and 13-2748, in the U.S. Court of Appeals for the Second Circuit.