Judge Chin decided that plaintiffs alleged enough information about the debt collectors in this case -- a law firm, a process-serving company and a debt-buying company -- to sue them for being a criminal enterprise under the Racketeer Influenced Corrupt Organization (RICO) law. Judge Chin also allowed claims under the Fair Debt Collection Practices Act.
Why should other companies in and related to the debt-collection business be so nervous?
Well, Monique Sykes and the other plaintiffs claim that the defendants' business model is as follows:
- Buy debt with little documentation that the debt is accurate.
- File lawsuits claiming personal knowledge of the debt but using robo-signed affidavits instead.
- Deliberately fail to tell the "debtor" that the lawsuit is pending (a practice called "sewer service").
- Get a "default" judgment against the debtor when she fails to show up in court to defend herself.
- Enforce the judgment, including by freezing the debtor's bank account.
Nothing to Worry About? Not Necessarily
Perhaps even more significant, the information about the Law Offices of David J. Stern that has come out in sworn testimony of former employees suggests that its efforts on the behalf of its bank clients is strikingly similar. The testimony claims sewer service was rampant and robo-signing was a standard operating procedure. Moreover, anecdotal evidence suggests the information about homeowners' debts is routinely wrong, particularly after the homeowners go into default (often at their mortgage-servicers' instruction).
However, Judge Chin's decision yesterday -- and he now sits on the court that the Eastern District case has been appealed to -- addressed the same doctrine and related arguments, and found they didn't apply to the RICO claims. Moreover, unlike the Eastern District case and similar to Judge Chin's, the plaintiffs are claiming sewer service was used, which is another factor in Judge Chin's analysis. So perhaps the defense isn't a slam dunk for Stern after all.
In short, one powerful judge gave hope yesterday to borrowers of all types that creditors must have their facts straight and play by the rules if they want courts to force the debtors to pay. How many borrowers are ultimately helped remains to be seen.