By Jonathan Stempel
Feb 26 (Reuters) - A federal appeals court on Tuesday voided
a controversial $5.2 million settlement intended to resolve
allegations that Encore Capital Group Inc used false
affidavits and other illegal tactics to collect debts from 1.44
The 6th U.S. Circuit Court of Appeals in Cincinnati said
U.S. District Judge David Katz abused his discretion in August
2011 when he approved the settlement with Encore and its Midland
Funding and Midland Credit Management units as "fair, reasonable
and adequate," and certified a nationwide settlement class.
In afternoon trading, Encore shares were down $3.36, or 10.7
percent, at $27.99 on the Nasdaq.
The settlement was intended to resolve claims that Midland
employees relied on false or "robo-signed" affidavits to collect
consumer debt, including sums that were not owed or were already
Midland employees had been accused of signing 200 to 400
computer-generated affidavits a day without knowing their
contents. Robo-signing is more commonly associated with the
"LITTLE VALUE" FOUND
Writing for a three-judge 6th Circuit panel, Circuit Judge
R. Guy Cole said the settlement relief was "perfunctory at
He noted that typical class members could each recover just
$17.38, yet remain exposed to lawsuits by Midland to recover the
hundreds or thousands of dollars they may owe.
Cole also said a related injunction intended to improve
Midland's policies and oversight offered "little value."
He said this was because the injunction did not prohibit the
use of false affidavits; lasted only one year, after which
Midland was "free to resume its predatory practices should it
choose to do so"; and offered only future relief "that likely
does not benefit class members at all."
The court decertified the class for several reasons,
including that the named class representatives would have their
debts to Midland expunged, while others would not.
Thirty-eight state attorneys general led by New York's Eric
Schneiderman had opposed the settlement, calling the payout
"paltry" and saying the accord deprived consumers of their right
to defend against existing Midland lawsuits.
Also expressing opposition were some consumer groups and the
AARP, an influential nonprofit organization representing people
50 and older.
In court papers, the AARP said the settlement "rewards debt
collectors for business practices that rely upon rampant fraud
and abusive collection practices."
The 6th Circuit returned the case to Katz, who works in
Toledo, Ohio, for further proceedings.
OBLIGATION TO PAY REMAINS
"We're delighted with the opinion," Ian Lyngklip, who argued
the appeal on behalf of eight class members, said in a phone
"It signals that federal courts are not going to allow class
action settlements that sacrifice significant rights of class
members," he continued. "The 6th Circuit has opened the door to
all the victims of Midland's practice of filing false affidavits
to seek to throw out debt collection judgments against them."
Greg Call, Encore's general counsel, said in a statement
that the San Diego-based company will work with the trial court
to address issues raised the 6th Circuit.
"Throughout this process, the validity of the underlying
debt and the consumer's financial obligation to repay it have
never been called into question," he added.
Encore has said it changed its affidavit process in 2009 to
ensure that signers review underlying documentation.
More than 133,000 class members had filed claims under the
settlement, while 4,262 opted out and 61 objected.
Encore typically buys debt from credit card companies. Last
year, it invested $562.3 million to buy accounts with a face
value of $18.5 billion, equal to about 3 cents on the dollar.
The case is Vassalle et al v. Midland Funding LLC et al, 6th
U.S. Circuit Court of Appeals, Nos. 11-3814, 11-3961, 11-4016,
11-4019 and 11-4021.
(Additonal reporting by Karen Freifeld)
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