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‘Sewer Service’ Classes Upheld by 2nd Circuit

MANHATTAN (CN) - Debt collectors must face a class action by more than 100,000 people decrying their business model as a "sewer service," the 2nd Circuit said Tuesday, touching on but not dictating the reach of federal anti-rackeering law.

Bronx resident Monique Sykes brought the class action four years ago, alleging that a debt-buying company, a law firm, a process-service company and others conspired to hoodwink debtors and New York administrative law judges.

Buying debt for pennies on the dollar, the companies failed to serve a complaint on the debtors and then filed false affidavits claiming that the notice has been served, according to the lawsuit.

Sykes said judges awarded tens of thousands of judgments on this basis, violating the RICO statute, the Fair Debt Collection Practices Act and New York General Business Law.

She wants tens of thousands of defaulted cases reopened en masse.

Mel S. Harris Associates LLC and its co-defendants have attacked the lawsuit so far mostly on procedural grounds, arguing that litigation on these issues would be better served under different statutes in New York state court.

Affirming a federal judge's certification of two classes in 2013, the 2nd Circuit ruled 2-1 on Tuesday that the debt collectors cannot demand that "their alleged widespread fraudulent behavior be dealt with in a piecemeal fashion."

"In the first place, there is no basis to assert that plaintiffs' claims even could be heard as a class in the New York City civil court," Judge Rosemary Pooler wrote for the majority. "These courts have jurisdiction only over those actions in which the value of the controversy is $25,000 or less."

Judge Guido Calabresi joined in the 66-page majority opinion.

"While individual plaintiffs might seek to bring their actions in such a court based on this amount-in-controversy limitation, there is no basis to conclude that plaintiffs could proceed as a class there," the opinion states.

Dissenting Judge Dennis Jacobs agreed on this point but added that "class litigation is not an end in itself."

"It is simply a 'device to vindicate the rights of individuals class members,'" he wrote.

Believing New York court to be "superior in every way," Jacobs called the Sykes case "class litigation for the sake of nothing but class litigation."

Jacobs concluded his scathing dissent with a prediction. "Certification of this misbegotten class will generate grinding of gears and spinning of wheels for years to come, notwithstanding an effective, superior, and immediately available remedy in state court," he wrote.

Court watchers also have followed the Sykes case as a key battleground in an arcane controversy over the reach of federal anti-racketeering law.

Miguel Estrada, a Washington-based partner for Gibson, Dunn & Crutcher, representing the debt collector Leucadia National Corp., wrote a brief arguing that the RICO statute does not allow a judge to issue the injunction the debtors wanted.

This position directly contradicted that of Gibson Dunn's other client Chevron, which won an injunction under the RICO statute last year blocking a $9.5 billion verdict against the company in Ecuador.

No matter which side the 2nd Circuit took on this controversy, one of Gibson Dunn's client would have lost.

To the likely relief of both of Gibson Dunn's clients, the 2nd Circuit majority declined to resolve this issue until the District Court decides it.


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