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Suit: Debt Collector’s “Sewer Service” Was Racketeering

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A lawsuit against debt collectors accused of a massive racketeering scam will move forward thanks to a recent ruling by a Federal judge. The class-action suit, filed in New York, alleges that attorney Mel Harris and Leucadia National, a debt collection firm, deceived judges and debtors to win millions of dollars in legal judgments without giving debtors the chance to defend themselves in court.

One practice alleged by the suit is “sewer service,” in which a collections company falsely claims in court to have served legal documents to debtors. (The name comes from a joke – “Sure, your honor, we filed the papers. In the sewer.”)

“Sewer service was integral to this scheme,” according to the complaint, because Harris didn’t bother to buy the paperwork that would prove consumers’ original debts to the lenders. Instead, he simply purchased portfolios of delinquent debts for a fraction of what was originally owed, and collected whatever he could as cheaply as possible, the suit alleges.

Another alleged shady practice is robosigning, which has caused a major scandal in the mortgage industry. In this case, the eight original plaintiffs in the suit charge that Harris employed a custodian of records named Todd Fabacher, who personally signed 40,000 affidavits a year, attesting to the fact that each debt was well-researched and legitimate.

That means Fabacher signed one affidavit every three minutes for a year, prompting the plaintiffs to wonder how much research he possibly could have done into each one.

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After allegedly using such underhanded document work to win legal judgments against debtors, Harris and Leucadia would obtain wage garnishments, direct withdrawals from peoples’ bank accounts or seize debtors’ properties, making it difficult for the victims to obtain loans, get apartments or apply for jobs.

The suit is not the first time such practices have gained widespread attention. The Federal Trade Commission issued a report last summer finding that the debt collection is “broken” because of collectors’ regular failures “to properly notify consumers of suits they have filed, collectors filing suits based on insufficient evidence of indebtedness, [and] courts frequently granting default judgments against consumers who do not appear or defend themselves.”

Harris asked U.S District Judge Denny Chin to throw the suit out by claiming he isn’t a debt collector.  The judge didn’t go for it, especially since Harris filed 104,341 debt collection lawsuits between 2006 and 2008 in New York City alone.

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