‘Sewer Service’ Appeal Has 2nd Circuit Skeptical

MANHATTAN (CN) - The 2nd Circuit seemed reluctant Friday to kill a class action brought on behalf of more than 100,000 people whose debts were bought for pennies on the dollar.

Monique Sykes is the lead plaintiff in the federal anti-racketeering lawsuit against a debt-buying company, a law firm, a process-service company and others that they said ran a "sewer service." The practice involves buying debt on the cheap, failing to serve a complaint on the debtor and then filing a false affidavit claiming that the notice has been served.

The plaintiffs contend that New York courts have been awarding tens of thousands of default judgments based on a scheme that violates RICO, the Fair Debt Collection Practices Act and New York General Business Law.

Judge Denny Chin certified the Sykes class over a year ago on claims carrying the possibility of injunctive relief, declaratory relief and damages. A 2nd Circuit judge himself, Chin nevertheless presided over Sykes in the Southern District of New York by designation.

Mel S. Harris Associates LLC and its co-defendants appealed that decision on the grounds that these cases should be brought individually and in state court.

A three-judge panel of the 2nd Circuit peppered both sides Friday on proper venue. The roughly two-hour hearing focused mostly on arcane procedural issues that could have wide ramifications beyond the immediately affected debtors.

Miguel Estrada, a Washington-based partner of the firm Gibson, Dunn & Crutcher, for example, wrote a brief asking the court to declare that the RICO law does not allow the debtors to seek an injunction.

If that argument succeeds, Gibson Dunn client Chevron could lose its racketeering lawsuit that asks U.S. District Judge Lewis Kaplan to block a $9.5 billion judgment against the company in Ecuador.

Chevron indicated that, if Gibson Dunn prevails on this issue in the 2nd Circuit, it will seek to overturn the ruling in the Supreme Court.

Estrada, who represents several of the defendants sued by Sykes, kept mum on this topic during oral arguments.

His adversary Matthew Brinckerhoff, who represents the debtors as a partner for the firm Emery Celli Brinckerhoff & Abady LLP, appeared to relish the irony on the other hand. Brinckerhoff said that barring injunctive relief would be "contrary to the big trial that Judge Kaplan just had over the Chevron case."

Judge Guido Calabresi noted that Gibson Dunn has advocated both sides of this issue for different clients, and that "they have the perfect right" to do so.

Chief Judge Dennis Jacobs noted that the 9th Circuit stands in the debt-collectors' favor on this issue, as does dicta from the 2nd Circuit.

Another bone of contention involved whether the Rooker-Feldman doctrine means that the plaintiffs chose the wrong venue. The rule - which derives from two U.S. Supreme Court cases, Rooker v. Fidelity Trust Co. and District of Columbia Court of Appeals v. Feldman - precludes relitigation in federal court of state court cases.

Sykes is unrelated to Chevron's dispute with the Ecuadoreans, but it mirrors a similar controversy. The Ecuadoreans contend that a New York federal judge should not sit in judgment over a ruling made by their home country.

Likewise, the appellate panel suggested Friday that a federal judge might not be in the best position to "obliterate" thousands of state court judgments.

Chief Judge Jacobs wryly noted that the administrative judges in question "must have a phone number" and suggested that New York's attorney general could also get involved.

Attorney General Eric Schneiderman's office did not respond by press time.

Former U.S. Solicitor General Paul Clement defended the business model of his clients, which he believed would withstand scrutiny.

Calabresi quipped that Clement's confidence should prompt him to fight the class action in discovery and trial rather than try to defeat it procedurally.

"Then, you win on the merits," Calabresi said. "God save you."

The third judge on the panel, Rosemary Pooler, appeared skeptical about the supposedly "sophisticated" and "proprietary" software that the defendants purport to use.

She said it was little more than a "mail merge" program, but Clement said it had other features for handling bounced back mail.

Samserv's lawyer Jordan Sklar had no easier time trying to convince the panel that his client should not be a defendant as a mere service provider.

"If the service was good, we did our job," Sklar said.

Pooler countered that GPS evidence showed servers were not at the locations that they said, but Sklar insisted that his clients could show contradictory data.

The judges reserved decision after nearly two hours of grueling and arcane argument.

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