Commercial Litigation and Arbitration

Class Actions — Individualized Monetary Claims Arising from Common Course of Misconduct Remain Certifiable — Comcast “Did Not Rewrite the Standards Governing Individualized Damage Considerations” (Good Quote)

Sykes v. Harris, 2015 U.S. App. LEXIS 2057 (2d Cir. Feb. 10, 2015):

These consolidated appeals are taken from the September 4, 2012 class certification opinion, Sykes v. Mel Harris & Assocs., LLC, 285 F.R.D. 279 (S.D.N.Y. 2012) ("Sykes II"), and March 28, 2013 class certification order of the United States District Court for the Southern District of New York (Denny Chin, Circuit Judge). Defendants in this case comprise three entities: "(1) various subsidiaries of Leucadia National Corporation ("Leucadia") that purchase and collect consumer debt; (2) Mel S. Harris and Associates LLC ("Mel Harris"), a law firm specializing in debt collection litigation; [and] (3) Samserv, Inc. ("Samserv"), a process service company." Sykes II, 285 F.R.D. at 283. Defendants also include "associates of each of the foregoing entities," id., and we respectively refer to them as the Leucadia defendants, Mel Harris defendants, and Samserv defendants (as did the district court).

The district court's March 28, 2013 order certified two classes. The first class, certified pursuant to Rule 23(b)(2) of the Federal Rules of Civil Procedure, comprises "all persons who have [*5]  been or will be sued by the Mel Harris defendants as counsel for the Leucadia defendants . . . assert[ing] claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961; New York General Business Law (GBL) § 349; and New York Judiciary Law § 487." Special App'x at 46.

The second class, certified pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure, comprised "all persons who have been sued by the Mel Harris defendants as counsel for the Leucadia defendants in . . . New York City Civil Court and where a default judgment has been obtained. Plaintiffs in the Rule 23(b)(3) class assert claims under RICO; the Fair Debt Collection Practices Act [(FDCPA)], 15 U.S.C. § 1692; GBL § 349; and New York Judiciary Law § 487." Special App'x at 47.

We conclude that the district court did not abuse its discretion in certifying either class.



I. Plaintiffs

"Monique Sykes, Rea Veerabadren, Kelvin Perez, and Clifton Armoogam are New York City residents who were each sued by various defendants in debt collection actions commenced in New York City Civil Court between 2006 and 2010." Sykes II, 285 F.R.D. at 283. Each plaintiff "denies being served with a summons and complaint in their respective action. . . . Defendants, nevertheless, were able to obtain default judgments against them." Id.

II. Defendants' Alleged Default Judgment Scheme

A. Default Judgments

These default judgments, in the words of plaintiffs, are the result of defendants' construction of a "default judgment mill." The "mill" operates in this fashion: first, by obtaining charged-off consumer debt; second, by initiating a debt-collection action by serving a summons and complaint on the purported debtor; and third, by submitting fraudulent documents to the New York City Civil Court in order to obtain a default judgment.

At the first step, "[p]laintiffs allege that the [*7]  Leucadia and Mel Harris defendants entered into joint ventures to purchase debt portfolios, and then filed debt collection actions against the alleged debtors with the intent to collect millions of dollars through fraudulently-obtained default judgments." Id.

At the second step, Mel Harris would employ "a software program . . . designed by [Mel Harris employee] Mr. [Todd] Fabacher." Appellees' App'x at 157. Fabacher is employed as a "director of information technology for Mel Harris." Sykes II, 285 F.R.D. at 284. His program "selects and organizes debts for the generation of a summons and complaint for each debt. These documents are signed by an attorney, and bundled together in batches of 50. Each batch is sent to a single process serving company." Appellees' App'x at 157. Further, the process serving company associated with each debt is saved by this computer program, so "the process serving company associated with any particular debt can be readily ascertained." Appellees' App'x at 157.

To effectuate this second step, Leucadia and Mel Harris defendants would hire a process server, often Samserv. Sykes II, 285 F.R.D. at 283. Plaintiffs allege that "Samserv routinely engaged in 'sewer service' whereby it would fail to serve the summons [*8]  and complaint but still submit proof of service to the court." Id. This proof of service was first delivered to Mel Harris, which, "[a]fter process [wa]s allegedly served, . . . receive[d] from the process serving company an electronic affidavit of service." Appellees' App'x at 157. After receiving this affidavit of service, the system designed by Fabacher "automatically organize[d] and print[ed] a motion for a default judgment [and] an affidavit of merit . . . within approximately 35 days after the date of service of process." Appellees' App'x at 157-58.

Having generated these documents, at the third step, "[a]fter a debtor failed to appear in court for lack of notice of the action, the Leucadia and Mel Harris defendants would then apply for a default judgment by providing the court with . . . an 'affidavit of merit' attesting to their personal knowledge regarding the defendant's debt and an affidavit of service as proof of service." Sykes II, 285 F.R.D. at 283 (emphasis added).

Before the district court at the class certification stage, there was substantial evidence of the scope and impacts of this alleged scheme. "Between 2006 and 2009, various Leucadia entities filed 124,838 cases," and Mel Harris represented Leucadia in 99.63 percent of those cases. Id [*9] . at 284. "The 'vast majority' of such cases were adjudicated without appearance by the defendant debtors, indicating the likelihood that a default judgment was entered." Id. Further, "[b]etween 2007 and 2010 various Leucadia entities obtained default judgments in 49,114 cases in New York City Civil Court." Id.


a. Damages

In making its decision on the propriety of class certification, the district court reasoned as follows:

   Every potential class member's claim arises out of defendants' uniform, widespread practice of filing automatically-generated, form affidavits of merit based on 'personal knowledge' and, in many instances, affidavits of service, to obtain default judgments against debtors in state court. Whether this practice violates the FDCPA, New York GBL § 349, New York Judiciary Law § 487, and/or constitutes a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c) and (d) does not depend on individualized considerations. . . . The Court recognizes that should defendants be found liable on some or all of these claims, individual issues may exist as to causation and damages as well as to whether a class member's claim accrued within the applicable statute of limitations. This, however, does not preclude a finding of predominance under Rule 23(b)(3).

Sykes II, 285 F.R.D. at 293.

Plaintiffs' operative complaint seeks three kinds of damages: statutory damages; "actual and/or compensatory damages . . . in an amount to be proven at trial"; and what plaintiffs refer to as "incidental damages." Joint App'x at 219-20. It is not disputed that [*38]  statutory damages under GBL § 349 can be assessed on the basis of common proof, as they are capped at $50. N.Y. Gen. Bus. L. § 349(h). Furthermore, Congress has devised a generally applicable formula for class action damages under the FDCPA, one which caps damages at $500,000 and provides that district courts consider, among other factors, the scope of the violations of the FDCPA as well as the number of individuals implicated by fraudulent debt collection practices. 15 U.S.C. § 1692k(b)(2).

The only individualized damages inquiries that "may exist," Sykes II, 285 F.R.D. at 293, are those that turn, in plaintiffs' words, on "the return of the money extracted from them as a result of . . . fraudulent judgments," as well as incidental damages. We conclude that inquiries into these damages are not sufficient grounds on which to conclude that the district court's determination that individualized damages issues will not predominate in this case was an abuse of discretion. In the first place, plaintiffs point out that the amount of any money extracted from plaintiffs is stored by defendants themselves. Because the evidence necessary to make out such damages claims, while individual, is easily accessible, such individual damage considerations do not threaten to overwhelm [*39]  the litigation. See Leyva, 716 F.3d at 514.

Second, defendants misstate the central holding of Comcast in an attempt to advance the argument that individual damages issues predominate in this case. It is true that the Court, in Comcast, reversed a grant of class certification on the grounds that individual damages issues precluded certification. But these damages claims were individual because, based on undisputed evidence, the plaintiffs' "model f[e]ll[ ] . . . short of establishing that damages [were] capable of measurement on a classwide basis." 133 S. Ct. at 1433. This was only so, however, because the sole theory of liability that the district court determined was common in that antitrust action, overbuilder competition, was a theory of liability that the plaintiffs' model indisputably "failed to measure" when determining the damages for that injury. Id. This is not the case here. The common theory of liability that plaintiffs advance is dependent on a fraudulent course of conduct that was allegedly engaged in by defendants, in violation of multiple federal and state statutes. That liability model is uniquely tied to the damages, which plaintiffs claim they are entitled to with respect to each claim that they advance, whether [*40]  under the FDCPA, RICO, or state statutes. Comcast did not rewrite the standards governing individualized damage considerations: it is still "clear that individualized monetary claims belong in Rule 23(b)(3)." Dukes, 131 S. Ct. at 2558. All that is required at class certification is that "the plaintiffs must be able to show that their damages stemmed from the defendant's actions that created the legal liability." Leyva, 716 F.3d at 514. Plaintiffs in Comcast, admittedly, could not do so. Plaintiffs here have satisfied that standard.

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