District Court (N.Y.) Approves $60M Class Action Settlement By Debt Buyer, Law Firm, and Process Server Who Engaged in “Sewer Service” and Filed False Affidavits to Obtain Default Judgments

In Sykes v. Mel Harris & Assoc., Inc., 2016 WL 3030156 (S.D.N.Y., 2016), Judge Chin affirmed a $60M class action settlement.

In this class action, Plaintiffs allege that Defendants — a debt-buying company, a law firm, a process service company, and affiliated entities and individuals — engaged in abusive debt collection practices to obtain default judgments against hundreds of thousands of consumers in state court. Plaintiffs allege that Defendants did so by engaging in “sewer service,” the practice of filing fraudulent affidavits attesting to service of a summons and complaint when service was not in fact made. When debtors failed to appear because they did not have notice of the lawsuits, Defendants obtained default judgments against them.  After almost seven years of litigation before this Court and in the Second Circuit, the parties have settled the action in two separate agreements (together, the “Settlement”) and ask the Court to approve the Settlement pursuant to Rule 23(e) of the Federal Rules of Civil Procedure.   I find that the Settlement is fair, reasonable, and adequate. Indeed, the Settlement brings this hard-fought litigation to a remarkable resolution, as it will bring concrete and extraordinarily meaningful benefits to tens of thousands of individuals. Those benefits include the following:

• Defendants will pay over $60 million into a settlement fund;

• the settlement fund will be used to pay damages to class members who suffered losses because they had judgments entered against them and were subjected to wage garnishments, bank levies, and other means of collection;

• some 8,300 class members (those with the strongest legal claims) will receive between approximately 96-98% of their money back; another 7,400 class members (those with somewhat weaker claims) will receive approximately 81-83% of their money back; and an additional 1,700 class members (those with relatively weaker claims) will receive approximately 66-68% of their money back;

• class counsel will work with the New York State Office of Court Administration (“OCA”), with cooperation from Defendants, to vacate all default judgments entered against class members, and more than $1 billion in judgments and outstanding notes will be extinguished; and

• Defendants have agreed to substantial permanent injunctive relief: certain defendants will no longer engage in the debt-buying business; the law firm defendant has terminated its operations; its former partners have agreed not to act as attorneys in any future consumer debt collection proceedings; and the process service company will no longer serve process in consumer debt collection cases.

The monetary relief is significant, but the benefits that will result from Defendants’ agreement to cease collections and allow judgments to be vacated are just as important. Wage garnishments will end and bank accounts will be unfrozen. Credit reports with adverse entries will be cleared, and class members should have an easier time obtaining credit and finding housing and employment. The Settlement will have an immediate and enormously positive impact on the lives of many.  Accordingly, the parties’ request to approve the Settlement is granted.