Debt Collectors' Unfair Robo-Signing Settlement Nixed by 6th Cir.

Encore Capital Group, a major debt-collection company, will head back to the settlement table after the Sixth Circuit scuttled the prior arrangement. Calling the relief given to the unnamed plaintiffs ($17.38 per claimant) and the one year injunction prohibiting illegal practices "perfunctory at best," the Sixth Circuit found that the lower court abused its discretion in approving the $5.2 million settlement.

The case stemmed from Encore's Midland Funding LLC subdivision's shady debt-collection practices, which included using robo-signed affidavits to collect debt from more than a million individuals. According to the plaintiffs, the workers would process 300 to 400 affidavits per day, produced by the computer, all with no personal knowledge of the case.

As shifty as that sounds, the District Court found no evidence that any debt was miscalculated or misrepresented and no actual damage to the plaintiffs. Instead, the use of robo-signing tactics amounted to a violation of the Fair Debt Collection Practices Act.

Under the terms of the class action settlement, the four named plaintiffs were to receive $8,000 collectively, plus their debts would be forgiven. On the other hand, the unnamed plaintiffs were set to receive only $17.38. Their debts would also still be subject to collection.

All class members would also release Midland from any future lawsuits related to affidavits. As for the lawyers, they would have walked away with about $1.5 million.

There was also an injunction ordered that would have required Midland to "create and implement written procedures for the generation and use of affidavits in debt collection lawsuits in order to prevent the use of affidavits where the affiant lacks personal knowledge of the facts set forth in the affidavit."

When considering a proposed settlement, a district court should consider the seven UAW factors:

1. the risk of fraud or collusion;
2. the complexity, expense and likely duration of the litigation;
3. the amount of discovery engaged in by the parties;
4. the likelihood of success on the merits;
5. the opinions of class counsel and class representatives;
6. the reaction of absent class members; and
7. the public interest.

The court in this case did so, and found them all satisfied.

However, they also should have considered whether the settlement gives preferential treatment to the named plaintiffs while giving only perfunctory relief to the others. That is exactly what the Sixth Circuit found here, as the four named plaintiffs would split thousands of dollars and walk away debt-free while the unnamed plaintiffs would only get enough money for a few trips to Starbucks.

Related Resources:

• Vassalle, et al. v. Midland Funding, et al (Sixth Circuit Court of Appeals)
• Appeals Court Remands Encore Settlement for Further Proceedings (Wall Street Journal)
• Sixth Circuit: Condo Fees are a Debt Under the FDCPA (FindLaw's Sixth Circuit Blog)