A federal judge in New York has okayed a class action lawsuit that accuses Leucadia National Corp., a financial services firm, the debt-collection law firm Mel S. Harris & Associates, and a Brooklyn-based process serving agency Samserv Inc., of a racketeering scheme that allowed them to fraudulently secure default judgments in New York courts against unwitting consumers around the country.

In a ruling issued Dec. 29, U.S. District Judge Denny Chin said the plaintiffs can go ahead with claims that they were the victims of a 'sewer service' scheme allegedly perpetrated by Leucadia and Mel Harris.

The so-called 'sewer service' refers to a practice of throwing debt-collection and other service papers in the sewers near the home of debtors and obtaining a default judgment from the court by filing a phony affidavit attesting to service.

The lawsuit, filed on behalf of up to 100,000 borrowers, claims Leucadia purchased 'portfolios' of defaulted debts for pennies on the dollar and then attempted to collect the full face value of the debts for themselves.

The plaintiffs allege that Leucadia had hired Mel Harris to recover the debts and Mel Harris, in conspiracy with Leucadia, began debt collection en masse against the alleged debtors, and sought to collect millions of dollars by resorting to 'sewer service' and fraudulently obtained default judgments against the debtors.

After obtaining the default judgments, Leucadia and Mel Harris then proceeded to restrain plaintiffs' bank accounts, threatened to garnish their wages or seize their property, caused them to incur litigation costs, and impaired their credit.

The lawsuit claims that between 2006 and 2008, Mel Harris had filed a total of 104,341 debt collection actions in New York City Civil Court and had hired Samserv to serve process.

In one instance, a single Mel Harris employee named Todd Fabacher had signed 40,000 affidavits attesting to the accuracy of debt claims.

Leucadia had limited proof to substantiate its claims because it typically did not purchase documentation of the consumers' indebtedness to the original creditors, Judge Chin said. Nonetheless, the Mel Harris defendants' 'designated custodian of records,' Todd Fabacher, signed the vast majority of the approximately 40,000 affidavits of merit they filed each year.

The judge also questioned the speed with which Fabacher, who had to aver to personal knowledge that the debt was due and owing, signed the affidavits.

Assuming 260 business days a year, Fabacher had to have personally (and purportedly knowledgeably) issued an average of twenty affidavits of merit per hour, i.e., one every three minutes, over a continuous eight-hour day, Chin said.

Overall, the plaintiffs allege, more than 90 percent of the individuals they sued did not appear in court and most defaulted because they were not actually served. After a consumer failed to appear in court, Leucadia and Mel Harris would receive default judgments by providing the court with proof of service, proof of additional mailed notice to the consumer, an affidavit attesting to whether the consumer was in the military, and an 'affidavit of merit' attesting to their personal knowledge of facts substantiating their legal claims to the court.

The matter has been compared to the 'robosigner' controversy that hit the home mortgage industry last year.

In October, the attorney generals of all 50 U.S. states and the District of Columbia had initiated a joint investigation to find whether mortgage companies have violated state laws after receiving complaints that some of them did not properly review files or submitted false statements to evict delinquent borrowers from their homes during the foreclosure crisis that has become one of the most visible wounds of the 2007-2009 recession.

The allegation is that some banks have used mid-level bank executives or walk-in hires, dubbed 'robo-signers,' because of the speed with which they signed thousands of foreclosure affidavits a month without reviewing them carefully.

In the 'sewer service' case, the plaintiffs allege violations of the Fair Debt Collection Practices Act (FDCPA), the Racketeer Influenced and Corrupt Practices Act (RICO), New York General Business Law and New York Judiciary Law.

The pleadings sufficiently allege substantive RICO violations and plausibly established an agreement among the defendants, Chin said.

Though two of the eight named plaintiffs had statute of limitations problems, the judge held that the statute in their case was equitably tolled because the defendants deprived them of notice of their debt collection actions.

Judge Chin also noted that the plaintiffs did not simply claim that the law firm defendants lacked physical evidence of the debt.

They also have alleged, he said, that they (Mel Harris) knowingly authorized defendant Fabacher to file false affidavits of merit - misleading both the Civil Court and consumer-defendants - to secure default judgments that enabled them to freeze bank accounts, threaten to garnish wages, or pressure individuals into settlements.

The judge, however, dismissed racketeering claims against five individual process servers, Mel Harris manager David Waldman and two officers of Leucadia or its subsidiaries.

He also rejected the plaintiffs' claim that there were three distinct racketeering enterprises. Nonetheless, the judge found that the complaint properly alleged a single racketeering enterprise.

Judge Chin also ruled that, under General Business Law §349, which governs deceptive acts or practices, the plaintiffs' claims were not moot even though the default judgments have been vacated by state courts or by agreement with the defendants.

The judge also rejected the argument by Mel Harris that it isn't a debt collector under federal law and is protected by a litigation exception from having statements made in court filings used as the basis of suit.

He refused to dismiss the claim against the Mel Harris defendants under Judiciary Law §487, under which an attorney can be charged with a misdemeanor and be liable for damages when he engages in any deceit, or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party.

A status conference has been scheduled for Jan. 11.

The class action is Monique Sykes vs. Mel Harris, 09 Civ.8486, Southern District of New York.

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