Several thousands of New Yorkers affected by a major debt collection scheme will receive $59 million in a class-action settlement filed in the Federal District Court in Manhattan. This settlement will have a significant effect on the debt collection industry, which in recent years bought up charged-off debt at low rates in hopes of seeking full recovery of such debts. The settlement will likely allow for about $800 million to be vacated due to the use of fraudulent documents to obtain the corresponding default judgments. A major network of firms and collectors are currently barred from buying and collecting debt due to the terms of the settlement.
The class action suit was filed in 2009 and accused debt collectors of using a practice known as “sewer service.” Sewer service occurs when a debt collector fails to serve a notice of complaint and then files a false affidavit claiming that the notice has been properly served. Those who should have been served remain unaware that a complaint exists and therefore, do not make an appearance on the corresponding court date. This, in turn, allows the collector to apply for and in most cases obtain default judgment against the alleged debtor. As a result, often it is not until a bank account is seized or a lien is threatened that the alleged debtor learns about default judgment.
Examples of this deceitful practice include:
- An instance where process server swore in an affidavit to leaving papers with a man from Queens at the plaintiff’s home. The plaintiff had never heard of the alleged recipient of the complaint and did not learn of the judgment against her until her bank account was frozen and she was charged a $125 legal processing fee.
- An instance where plaintiff received a marshal’s notice, which stated that a judgment had been won against her nine months earlier. The marshal’s notice was the first time plaintiff had been made aware of the proceeding. The affidavit of service claimed that the process server served a notice to a woman whom plaintiff and her neighbors had never heard of and only plaintiff or her husband would have been home at the time of service.
Several entities were named in the original suit including several subsidiaries of Leucadia National, Mel S. Harris & Associates, and Samserv Inc. The process servicing company, Samserv Inc, agreed to stop serving process in consumer debt-collection cases and to start paying process servers an equivalent amount both when they are successful and unsuccessful at serving documents. The previous rates paid to servers arguably put pressure on servers to lie about successful service attempts.
The class-action lawsuit encompassed an entire debt collection system, ranging from the debt-buying companies, to the law firms hired to collect the debt, to the process-serving firms used to notify debtors. The lawsuit was filed by MFY, the Neighborhood Economic Development Advocacy Project, and the law firm of Emery Celli Brinckerhoff & Abady. Mr. Brickerhoff of Emery, Celli, Brinckerhoff & Abady, said that the firm’s projections showed that those who participated in the settlement would have all the money they paid returned. Approximately 75,000 people are expected to receive monetary compensation and approximately 115,000 default judgments are expected to be vacated.