Sykes v. Harris

Citation757 F.Supp.2d 413
Decision Date29 December 2010
Docket NumberNo. 09 Civ. 8486 (DC).,09 Civ. 8486 (DC).
PartiesMonique SYKES et al., Plaintiffs,v.MEL HARRIS AND ASSOCIATES, LLC, et al., Defendants.
CourtU.S. District Court — Southern District of New York


Emery Celli Brinkerhoff & Abady LLP, by: Matthew D. Brinckerhoff, Esq., Eisha Jain, Esq., Neighborhood Economic Development Advocacy Project, by: Susan Shin, Esq., Claudia Wilner, Esq., Josh Zinner, Esq., MFY Legal Services, Inc., by: Carolyn E. Coffey, Esq., Andrew Goldberg, Esq., Anamaria Segura, Esq., New York, NY, for Plaintiffs.Wilson, Elser, Moskowitz, Edelman & Dicker LLP, by: Brett A. Scher, Esq., New York, NY, for Mel Harris, Defendants.McElroy, Deutsch, Mulvaney & Carpenter, LLP, by: Adam R. Schwartz, Esq., New York, NY, for Leucadia, Defendants.Babchick & Young, LLP, by: Jordan Sklar, Esq., White Plains, NY, for Samserv, Defendants.


CHIN, Circuit Judge:

In this case, eight plaintiffs allege that a debt-buying company, a law firm, a process service company, and others engaged in a “massive scheme” to fraudulently obtain default judgments against them and more than 100,000 other consumers in state court. Plaintiffs allege that defendants did so by engaging in “sewer service”—the practice of failing to serve a summons and complaint and then filing a fraudulent affidavit attesting to service. When the debtors failed to appear in court because they did not have notice of the lawsuits, defendants obtained default judgments against them.

Plaintiffs sue on behalf of themselves and all others similarly situated. Their second amended complaint (the “Complaint”) asserts claims under the Fair Debt Collection Practices Act (the “FDCPA”), 15 U.S.C. § 1692 et seq., the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq., New York General Business Law (“GBL”) § 349, and New York Judiciary Law § 487. Plaintiffs seek injunctive relief, declaratory relief, and damages.

Defendants move to dismiss the Complaint pursuant to Rules 9(b), 12(b)(1), and 12(b)(6) of the Federal Rules of Civil Procedure, challenging the sufficiency of every claim and the subject matter jurisdiction of this Court. For the reasons that follow, the motions to dismiss are denied in part and granted in part.

A. The Facts

The facts alleged in the Complaint are assumed to be true for purposes of this motion and may be summarized as follows:

1. The Parties

Plaintiffs Monique Sykes, Ruby Colon, Rea Veerabadren, Fatima Graham, Kelvin Perez, Saudy Rivera, Paula Robinson, and Enid Roman (plaintiffs) are New York City residents who allege that defendants conspired to fraudulently secure default judgments against them. Each named plaintiff was sued by defendants in state debt collection actions commenced between 2006 and 2009. (Compl. ¶¶ 120–37, 142–59, 164–81, 194–212, 222–39, 254–73, 277–94, 298–315). Default judgments were obtained against them. ( Id.). All except Graham deny having received actual notice of the commencement of the actions against them. ( Id.). Plaintiffs propose a class action on behalf of all victims of this purported scheme.

The three sets of defendants are a debt-buying company, a law firm, and a process service company, and their respective affiliates and associates.

Defendants L–Credit, LLC, LR Credit, LLC, LR Credit 10, LLC, LR Credit 12, LLC, LR Credit 14, LLC, LR Credit 18, LLC, and LR Credit 19, LLC are wholly-owned subsidiaries of defendant Leucadia National Corporation (“LNC”). ( See id. ¶¶ 28–34). All eight entities are primarily engaged in the business of purchasing and collecting on defaulted debts. ( Id.). They, along with affiliated individuals, comprise the “Leucadia defendants.”

Defendant Mel S. Harris and Associates, LLC (Mel Harris, LLC) is a Manhattan

law firm primarily engaged in debt collection litigation on behalf of the Leucadia defendants and other debt-buyer clients. ( Id. ¶¶ 3, 18–25). Also named as defendants are its principals and affiliated individuals (together, the Mel Harris defendants). ( Id.).

Defendant Samserv, Inc. (“Samserv”) is a process serving agency located in Brooklyn, New York. ( Id. ¶¶ 36–44). Its chief executive officer, five individual process servers, and affiliated individuals are also named as defendants (together, the “Samserv defendants). ( Id.).

2. The Debt–Buying Business

Debt-buying companies typically purchase “portfolios” of defaulted debts for pennies on the dollar and then attempt to collect the full face value of the debts for themselves. ( Id. ¶ 46). The debts are priced based upon recency: debt-buyers must pay more for “freshly charged-off” debts than older debts, which often include debts that others have unsuccessfully tried to collect. ( Id. ¶ 47). An active market exists even for debts that are beyond the statute of limitations. ( Id.).

A debt portfolio customarily contains account information for each consumer, including her name, account number, Social Security number, last known address and telephone number, charge-off date, date and amount of last payment, and the alleged amount owed. ( Id. ¶ 48). When debt-buyers acquire these portfolios, however, they generally do not purchase documentation of the indebtedness between the original creditor and consumer, or they may purchase the documentation for only a small fraction of the accounts. ( Id. ¶¶ 48–49). Thus, many debt-buyers have limited proof of the validity of these debts. ( Id. ¶ 50).

3. The Alleged Scheme

Plaintiffs allege that the Leucadia and Mel Harris defendants entered into joint ventures to purchase debt portfolios, pursued debt collection litigation en masse against the alleged debtors, and sought to collect millions of dollars in fraudulently obtained default judgments. ( Id. ¶¶ 1, 3, 95, 97). In 2006, 2007, and 2008, they filed a total of 104,341 debt collection actions in New York City Civil Court. ( Id. ¶ 96).1 Assuming 260 business days a year, they filed an average of 133 debt collection actions per day.

The Leucadia and Mel Harris defendants regularly hired Samserv to serve process. ( Id. ¶¶ 4, 98). They paid Samserv only for service attempts that were reported as completed and paid nothing for service attempts that were not reported as completed. ( Id. ¶ 73). More than 90% of the individuals they sued did not appear in court; most defaulted because they were not actually served. ( Id. ¶¶ 3–4; see also id. ¶¶ 3–4 69, 107).

Sewer service was integral to this scheme. After a consumer failed to appear in court, the Leucadia and Mel Harris defendants applied for a default judgment 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. ( Id. ¶¶ 86–90, 108–10).

Leucadia had limited proof to substantiate its claims because it typically did not purchase documentation of the consumers' indebtedness to the original creditors. ( Id. ¶¶ 46–50). 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. ( Id. ¶¶ 110–17). Fabacher averred to having personal knowledge of the key facts establishing that the debt in each collection action was due and owing. ( Id. ¶ 113). 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.

After obtaining the default judgments, the Leucadia and Mel Harris defendants 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, making it difficult for plaintiffs to obtain housing, employment, and loans. ( Id. ¶¶ 7–8, 140, 162, 192, 212–17, 219, 240, 242, 244–46, 252, 275, 294–96, 315–17).

Government agencies have recognized that abusive debt collection practices are a public concern. In 2008, the New York City Department of Consumer Affairs held a public hearing on unethical debt-collector fee arrangements with process servers. ( Id. ¶¶ 70, 72). Last year, the Federal Trade Commission issued a report that identified and discussed, inter alia, industry-wide problems with debt-buyers failing to substantiate their claims against consumers. ( Id. ¶ 50).

B. Prior Proceedings

Sykes commenced this action on October 6, 2009 against some of the Leucadia, Mel Harris, and Samserv defendants, alleging only FDCPA and New York GBL claims. On December 28, 2009, Colon, Veerabadren, and Graham joined the action as plaintiffs, and class allegations and RICO claims were added. Plaintiffs filed the “Complaint” on March 31, 2010, adding Perez, Rivera, Robinson, and Roman as plaintiffs and a Judiciary Law claim.

These three motions to dismiss followed, on behalf of each set of defendants.


First, I address whether plaintiffs have sufficiently pled claims under the FDCPA, RICO, and state law. Second, I consider defendants' remaining arguments regarding the Rooker–Feldman doctrine, absolute privilege, the Noer–Pennington doctrine, and piercing the corporate veil.

A. Plaintiffs' Claims1. The FDCPA Claims

Defendants move to dismiss plaintiffs' FDCPA claims pursuant to Rule 12(b)(6) for failure to state a claim upon which relief may be granted. 2 The FDCPA forbids “debt collectors” from, inter alia: (1) engaging in “any conduct the natural consequence of which is to harass, oppress, or abuse any person,” 15 U.S.C. § 1692d, (2) making a “false, deceptive, or misleading representation,” 15 U.S.C. § 1692e, or (3) using “unfair or unconscionable means” to attempt to collect a debt, 15 U.S.C. § 1692f. Section 1692e specifically prohibits false representation of “the character, amount, or legal status of any debt”...

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