A class-action settlement filed late Thursday awarded $59 million to tens of thousands of New Yorkers who had their bank accounts frozen and wages garnished in an illegal collection scheme. The settlement, filed in Federal District Court in Manhattan, also prohibits a major network of collectors from continuing the practice. 

The law firm that had collected the debt, Mel S. Harris & Associates, went out of business in September. The settlement names several debt buyers with variations on the name L-Credit, which are subsidiaries of Leucadia National, a publicly traded holding company. A spokeswoman for Leucadia said the company had no comment.

The settlement gives hope to a larger group of low-income, minority New Yorkers who are under a cloud of approximately $800 million in default judgments that the collectors won using fraudulent documents in court, according to legal filings. The plaintiffs are likely to have those judgments vacated, according to the settlement, and a large network of firms will be forced to stop buying and collecting debt.

A class-action lawsuit filed in 2009  accused the debt collectors of using a practice known as "sewer service.”  This occurs when a debt collector fails to serve a notice of complaint and then files a false affidavit claiming the notice has been properly served. When the debtor doesn’t show up in court, the collector can then apply for, and almost always wins, a default judgment.

Consumer advocates state that victims often first learn they are being targeted when property is seized or bank accounts are held. A default judgment on its own can follow someone for decades, making it difficult for that person to do basic things like rent an apartment, open a bank account or get a job.

Sarah Ludwig, the founder and a co-director of the advocacy group the New Economy Project, which filed the lawsuit along with MFY Legal Services and the law firm of Emery Celli Brinckerhoff & Abady, said that the majority of judgments were entered against people living in minority neighborhoods. 

The settlement, which advocates say is unprecedented in its scale, curtails the activity of companies along the whole debt collection chain, from the debt-buying companies to the law firm hired to collect the debt and the process-serving firm that is supposed to notify debtors.

Samserv Inc., of Brooklyn, the process-serving company named in the lawsuit, agreed to stop serving process in consumer debt collection cases and to start paying process servers as much money for unsuccessful attempts as for successful ones, according to the settlement. Advocates say unbalanced rates put pressure on servers to lie about whether they had actually served notice, and state inquiries have suggested that servers sometimes claim to be in several places at once.

Advocates said the monetary scale of the settlement would most likely reverberate across the industry. Debt collectors already have become more constrained by state reforms enacted since the lawsuit was filed that require them to provide more evidence in cases, said Carolyn Coffey, the supervising attorney at MFY.


Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.