A nationwide settlement of three class actions involving claims that a creditor’s practice of using “robo-signed” affidavits in debt collection actions violated the Fair Debt Collection Practices Act (FDCPA) has been overturned by the U.S. Court of Appeals for the Sixth Circuit.
In Vassalle v. Midland Funding LLC, the Sixth Circuit held that the district court had abused its discretion in approving the settlement and certifying the nationwide settlement class and erred in finding that the notice to the class satisfied due process. The settlement required the defendant to pay $5.2 million into a common fund for the benefit of the class and, by way of injunctive relief, to create and implement procedures to prevent the use of robo-signing. A retired federal judge was to monitor the defendant’s compliance with the injunction, which was to last one year.
The Sixth Circuit found that the settlement should not have been approved because the disparity in the relief it provided to the named plaintiffs and to the unnamed class members was so great as to make the settlement unfair. While exonerating the named plaintiffs of their debts, the settlement would prevent the unnamed class members from using the allegedly robo-signed affidavits against the defendant in any other lawsuit. In the court’s view, this would “virtually assur[e] that [the defendant] will be able to collect on these debts.”
In addition, the court found the relief provided to the unnamed class members “perfunctory at best” because it would only pay them $17.38 each. The court also found that the one-year injunction was of little value for reasons that included leaving the defendant “free to resume its predatory practices” after the injunction expired.
The court next concluded that the settlement did not satisfy two of the requirements for class certification: adequacy of representation and superiority of a class action. According to the court, adequacy of representation was lacking because the settlement’s forgiveness of the class representatives’ debts gave them an interest that was antagonistic to that of unnamed class members. While the unnamed class members were interested in ensuring the settlement’s disapproval so they could retain the right to challenge the affidavits in court, the class representatives were interested in securing the settlement’s approval so their debts would be forgiven.
The court found that the superiority factor was not satisfied because the unnamed class members had an interest in individually challenging the affidavits in lawsuits seeking to vacate the defendant's state court judgments against them. In the court’s view, the likelihood was high that many class members would bring individual lawsuits.
The Sixth Circuit found the class notice to be deficient because it did not adequately notify class members that by not objecting, a class member would lose the right to raise the affidavits against the defendant in the collection actions.
To assist clients in responding proactively to the documentation-related challenges being faced by the debt collection industry and creditors attempting to collect their own debts, Ballard Spahr’s Consumer Financial Services Group has formed a Collection Documentation Task Force. The task force conducts extensive audits of collection procedures and counsels on best documentation practices. It brings together litigators in the group with experience defending mortgage lenders and other consumer lenders in documentation-related lawsuits nationwide and regulatory lawyers in the group with deep knowledge of the Office of the Comptroller of the Currency’s national bank foreclosure review process and federal and state debt collection laws.
Members of the Group regularly consult with their clients engaged in consumer debt collection on compliance with the FDCPA and state debt collection laws, and the Group has created a team of lawyers who are already helping debt collectors and debt buyers to prepare for their first examinations by the Consumer Financial Protection Bureau. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
For more information, please contact CFS Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Collection Documentation Task Force Chair Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or Martin C. Bryce, Jr., at 215.864.8238 or bryce@ballardspahr.com.
