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Most Charges Upheld in Debt Collector Fraud Suit

(CN) - A class action against a debt purchaser, law firm and process-service company, which allegedly conspired to obtain millions of dollars in default judgments through "sewer service," can proceed to trial after a federal judge in New York upheld most of the claims.

The plaintiffs claim that the law firm Mel S. Harris & Associates obtained default judgments against them for failure to answer collections complaints, but the alleged debtors say they never knew about the court dates because they were not served with summons and complaints as required by law.

So-called "sewer service" refers to process servers who file affidavits in court purporting to have delivered court papers, but have actually thrown the documents into sewers outside the debtor's home. Among companies that only pay process servers for completed service, employees rely on sewer service to get paid, the class claims.

The debt-purchasing company Leucadia National and shell companies L-Credit and LR Credit filed over 100,000 consumer debt collection actions since 2006 in New York City civil court. The class action claims the Mel S. Harris & Associates law firm represented Leucadia 99 percent of the time, and Leucadia regularly hired the Samserv process-serving agency.

U.S. District Judge Denny Chin noted from the complaint that a single Mel Harris employee named Todd Fabacher signed 40,000 affidavits claiming the debt claims were accurate.

"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," Chin wrote in the Dec. 29 ruling.

The defendants filed for summary judgment to dismiss the complaint, alleging several procedural deficiencies.

Chin mostly upheld the class's claims, but he dismissed one of the eight named plaintiffs, Fatima Graham, because the woman admitted to having received a copy of the summons and complaint by mail from the law firm before a default judgment was entered against her.

The ruling states that the class has sufficient standing for RICO, appropriate jurisdiction, and that the claims were not moot - even though the default judgments against plaintiffs have been vacated by the state courts or by agreement with defendants.

The Leucadia defendants claimed they were protected by privilege, arguing that the plaintiffs were trying to appeal a state-court judgment. Chin rejected that claim because those judgments were unrelated and had already been vacated.

He added that the defendants were barred from immunity and litigation privilege under the sham exception. Furthermore the litigation privilege protects against defamation, which is not an issue in the case.

Chin found that there was enough evidence for the class to pursue claims against Mel Harris for filing fraudulent affidavits.

Finding no evidence to connect the racketeering activity to David Waldman, a Mel Harris manager, and two Leucadia officers, Joseph Orlando and Philip Canella, the judge dismissed all the RICO claims that those three faced.

He also dropped RICO conspiracy and state-law claims against Waldman, Orlando and Canella "because of the insufficiency of the pleadings."

The RICO conspiracy and state-law charges were upheld for all of the other defendants, five individual process server defendants, Benjamin Lamb, Michael Mosquera, John Andino, Husam Al-Atrash and Assmat Abdelrahman.

The substantive RICO charges were dropped against those five process servers, however, because the complaint only alleges that they were associated with the racketeering enterprise without directing or controlling it in any way.

Chin also specified that the class could sue the three defendant companies for conspiring with each other but not among their own shell companies.

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