Judge's gavelFederal Circuit Court Judge Denny Chin just issued an opinion in a consumer class action case that should send chills down the spines of debt collectors, perhaps including foreclosure-mill law firms and their process servers, nationwide.

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.
And remember, JPMorgan Chase (JPM) whistle-blower Linda Almonte said Chase's records about its customers' debts were often false, and that executives routinely robo-signed debt-related documents. Also, the The New York Times has more generally reported that inaccurate debt records and robo-signed documents are common. Similarly, sewer service is a common enough practice to have a name. So it's hard to imagine that the three businesses at the center of this case are the only ones that have this business model and thus are vulnerable to RICO charges.

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).

In fact, one of the cases pending against Stern is a class action that includes RICO claims against Stern and its bank clients for their practices in getting foreclosure judgments. A motion to dismiss is pending in that case, which the homeowner plaintiffs have to respond to tomorrow. A decision isn't expected for awhile. A recent decision from the U.S. District Court for the Eastern District of New York dismissing a similar suit on the grounds that foreclosure decisions, done by state judges, can't be appealed to federal court, suggests Stern and the others have nothing worry about.

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.

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