Consumer debt ruling could affect thousands of cases

NEW YORK, Sept 11 (Reuters) - A ruling in Manhattan federal court has turned a spotlight on what consumer advocates describe as abusive consumer-debt litigation tactics that have allegedly kept individuals from contesting their cases in court.

On Sept. 5, U.S. Circuit Judge Denny Chin certified a class of potentially thousands of plaintiffs who had been sued in New York City civil court over allegedly unpaid debts and had default judgments entered against them. They claimed that Leucadia National Corp, a company that purchases consumer debt, and law firm Mel S. Harris Associates, which specializes in debt collection, used tactics designed to keep them from finding out about the legal action until after a default judgment was obtained. One of these tactics, "sewer service," led to notices of the lawsuit being either improperly delivered or never served at all, according to court filings from the plaintiffs.

Chin, a district judge sitting by designation, said the plaintiffs had provided "substantial support" for their claims against Leucadia and Harris Associates.

In a statement, Brad Scher, an attorney representing Harris Associates, said that the firm was disappointed with the ruling and intended to appeal.

"It's important to note that this decision in no way addresses the merits of the case, and has no bearing on liability, but simply allows the case to move forward as a class," he said.

A spokeswoman for Leucadia declined to comment.

Harris Associates said in earlier court filings that it had not broken any laws and that plaintiffs had not proven the existence of an alleged conspiracy to defraud defendants.

But Susan Shin, a staff attorney with the Neighborhood Economic Development Advocacy Project, which represented the plaintiffs, claimed that debt buyers have been using tactics like sewer service for a "long time."

When consumers are not properly served, they may not show up to contest the proceedings and have default judgments entered against them, Shin said. When a default judgment is entered, the creditor can seek to garnish the defendant's wages or freeze their bank accounts to collect the unpaid debt.

Debt buyers are "using the courts as an arm of their collection efforts," Shin said.

Carolyn Coffey, an attorney at MFY Legal Services who also represents the plaintiffs, said she hoped the case would send a strong signal to debt buyers who used unfair litigation tactics to collect on their investments.

Some of the same alleged abusive tactics are at the core of complaints about unfair practices in mortgage foreclosures, she noted.

The case will now move forward with discovery on claims that allege violations of the Racketeer Influenced and Corrupt Organizations Act, the Fair Debt Collection Practices Act and the New York General Business Law.

The case is Sykes v. Mel S Harris and Associates, U.S. District Court for the Southern District of New York, No. 09-8486.

For the plaintiffs: Matthew Brinckerhoff and Elisha Kain of Emery Celli Brinckerhoff & Abady; Claudia Wilner, Susan Shin and Josh Zinner of NEDAP; Carolyn Coffey, Andrew Goldberg and Anamaria Segura of MFY Legal Services.

For Mel Harris and Associates: Brett Scher and Yale Pollack of Kaufman Dolowich Voluck & Gonzo.

For Leucadia: Lewis Goldfarb, Ryan Mulvaney and Philip Lamparello of McElroy, Deutsch, Mulvaney & Carpenter.