9/4/2013 12:38:00 PM,
Philip A. Janquart
SAN FRANCISCO (CN) - A federal judge approved a preliminary $3.2 million settlement of a class action accusing a private debt collector of posing as district attorneys to extort more than $20 million in fees from scared debtors.
U.S. District Judge Jeffrey White signed off on the early settlement between Corrective Solutions and about 500,000 people who say they were threatened and intimidated by the debt-collection agency in violation of anti-racketeering law.
Consumers in California and Pennsylvania filed federal lawsuits in 2010, claiming Corrective Solutions (formerly National Corrective Group Inc.) ran a "fraudulent and exortionate check-recovery enterprise" from 2004 until 2009.
Corrective Solutions contracted with more than two dozen district attorneys to collect bounced checks, "often for small amounts for groceries and household items," according to the California lawsuit
Consumers said they received letters on phony district attorney letterheads threatening them with prosecution and jail time if they didn't pay exorbitant fees of more than $200 per check.
The debt-collection company even stated that it harnessed "the power of the district attorney's brand" to collect more money than traditional collection agencies, consumers said. Debtors were allegedly tricked into believing the letters were part of an official, outsourced "bad check diversion program."
"Local district attorneys who allow the enterprise to use their names receive cash commissions from the collections obtained by the enterprise," consumers in California claimed.
Corrective Solutions has been at the center of several other lawsuits making similar allegations.
Washington, D.C., attorney Paul Arons, who represented the plaintiffs in the early stages of the case, confirmed that National Corrective Group Inc. filed for Chapter 11 bankruptcy in 2009 to avoid four class actions involving more than a million consumers.
Through a process of investor transactions, the company was reborn as Corrective Solutions.
A four-month investigation
by the Boston Globe earlier this year revealed that six district attorneys were involved in the same scheme in Massachusetts. The Globe discovered that the district attorney offices had agreed to outsource bad-check cases to Corrective Solutions and BounceBack, a smaller, Idaho-based company, to save taxpayer money and to free attorneys up for more pressing cases.
The district attorneys who used Corrective Solutions terminated their relationships with the company following the Globe's investigation.
But the arrangement is profitable for debt-collection agencies like Corrective Solutions, which allegedly raked in more than $20 million in illegal fees in California between November 2004 and April 2009.
Corrective Solutions and its operators "vigorously deny" all allegations of wrongdoing and liability in the settlement documents
. They claim that National Corrective Group is not a debt collector, that the collection letters were neither false nor misleading, and that all fees were collected legally.
"I think it is morally reprehensible for elected public officials to go into business with debt collectors to do what other debt collectors can't do, and get a piece of the action," Arons said in an interview. "They also invent fees that have no basis in law. On top of that, from a technically ethical point of view, the prosecutors are all lawyers and they are allowing non-lawyers to use their letterhead."
That could be interpreted as aiding and abetting, according to Aron, who noted that Oregon recently passed a law barring attorneys from letting debt collectors use their letterhead and from receiving commissions or kickbacks.
The program is not specifically authorized by state law, although Aron said recent legislation in Massachusetts aims to change that.
"There is a bill (in Massachusetts) that was filed that, in my opinion, is a terrible bill that would let prosecutors and private companies do, basically, whatever they want," Arons said. "The bill was just filed and it's currently just sitting there."
The class action in California alleges almost $40 million in damages covering about 500,000 individuals.
A settlement was first proposed in 2012, but two class members raised objections, forcing Judge White to reject it. On Aug. 27, he preliminarily approved the amended settlement, which awards class members more than $3.2 million. Out of that, about $700,000 will be used to pay attorneys' fees and other costs associated with the litigation.
A hearing for final approval is set for Jan. 31, 2014.