Federal appeals court in New York City OKs class-action status for debt collection lawsuits

Lawsuits aimed at stopping debt collectors from using fraudulent means to collect money can proceed on behalf of a larger class of potential victims, a federal appeals court said Tuesday in a case watched closely by consumer groups.

The decision by the 2nd U.S. Circuit Court of Appeals in Manhattan came on a 2-to-1 vote. Judge Dennis Jacobs dissented, saying class-action status will benefit lawyers but leave trivial benefits for consumers.

The lawsuits pertain to consumers who were subjected to nearly 50,000 default judgments from a New York City court during a three-year period. The lawsuits claim that a debt collection company, a law firm and a process-serving company created a "default judgment mill" that relied on fraud to obtain favorable court rulings.

Lawyers for defendants did not immediately comment.

Matthew D. Brinckerhoff, an attorney for plaintiffs, called the ruling a "significant victory for our clients and for all low-income New Yorkers victimized by abusive debt collection lawsuits."

He said the appeals decision would provide "a blueprint" for others who bring similar lawsuits nationwide.

Meanwhile, Brinckerhoff said, attorneys in New York were looking "forward to securing real relief for hundreds of thousands of New Yorkers who have suffered as a result of defendants' unscrupulous practices."

The appeals decision stemmed from a series of lawsuits brought by individuals who were sued by debt collection businesses in New York City Civil Court between 2006 and 2010.

The 2nd Circuit noted that the plaintiffs said the defendants obtained default judgments even though none of the defendants was ever notified that a debt was being pursued in court.

The lawsuits maintained that default judgments were obtained through false claims that the plaintiffs were notified of a pending court case and fraudulent documents submitted to back up the claims.

A lower-court ruling had found common injuries to plaintiffs — including the freezing of personal bank accounts and the incurring of legal costs to challenge default judgments — supported their right to proceed as a class on behalf of others who might come forward to say they were victimized.

Among legal papers supporting the plaintiffs filed with the 2nd Circuit were arguments by AARP, the National Association of Consumer Advocates and the National Consumer Law Center also submitted arguments.

AARP said it was "greatly concerned about fraudulent and abusive practices being used to collect stale and invalid debt, to which older people are especially vulnerable."

"Many older people believe they will go to jail if summoned to court on an alleged debt," the group's lawyers wrote.

"Older people are more easily distressed by the threat of a court judgment against them, and many believe that they will lose their homes, pensions or bank accounts if they are sued by a debt collector. As a result, older people often feel coerced into paying debts they had already paid in full or never owed in the first place, such as debts of a deceased loved one," they added.