Appeals Court Voids $5.2 million Class Action Settlement with Encore Capital

The Sixth Circuit Court of Appeals Tuesday overturned a controversial $5.2 million settlement resolving a class action lawsuit alleging that Midland Funding — a subsidiary of Encore Capital Group, Inc. (NASDAQ: ECPG) — “robo-signed” debt collection affidavits used against consumer in court.

The case was remanded to a lower district court for further proceedings.

The appellate panel noted in its ruling that “The disparity of the relief afforded under the settlement to the named plaintiffs, on the one hand, and the unnamed class members on the other hand, made the settlement unfair.”

Under a 2011 settlement agreement, four named class members were to receive $8,000 and have their debts expunged while the rest of the class, estimated at more than 1 million potential members, would get much smaller amounts.

When announced, the proposed settlement was highly contentious as many third parties – including 38 state attorneys general and the Federal Trade Commission – filed briefs with the court to block final approval of the deal.

In a statement Tuesday, Encore noted that the Sixth Circuit left in place the repeated holdings of the U.S. District Court that Midland’s affidavits accurately stated the class members’ obligations and that no class members incurred actual damages as a result.

Greg Call, senior vice president and general counsel of Encore Capital, said, “We are confident in the work that has been done to date to resolve this case fairly, and will continue to work with the trial court to address the issues raised by the Sixth Circuit.  It’s important to note that throughout this process, the validity of the underlying debt and the consumer’s financial obligation to repay it have never been called into question.”