Another Subprime Class Action Dismissal: Plantiffs in for a Tough Road Ahead?

Last week Los Angeles federal district court judge John Walter dismissed a class action against the three top officials of the now defunct Downey Savings and Loan Association. In a concise 17-page ruling, Judge Walter found that the plaintiffs, represented by lead counsel Coughlin Stoia Geller Rudman & Robbins, failed to show that the defendants had made materially false or deceptive statements; failed adequately to plead scienter (despite evidence from 13 confidential informants and indications that the defendants had violated accounting standards); and failed to show loss causation. Two of the individual defendants were represented by Morrison & Foerster; the third by O'Melveny & Myers.

The important question is whether a pattern is beginning to emerge. Two huge subprime class actions--against Countrywide and New Century--survived motions to dismiss last fall. But they are beginning to seem like outliers. There was a dismissal of a Delaware derivative case against Citi board members and the dismissal of a securities class action against Impac Mortgage Holdings.

Judges in all three of the recent dismissals seemed strongly disinclined to hold defendants responsible for stock slides that could be attributed to an industry-wide collapse, absent clear evidence of fraud or intent to deceive. If that thinking turns out to be pervasive in the judiciary, plaintiffs are in for a tough road ahead.

Collection Lawsuits on the Rise

With the economy down, lawsuits against collection agencies in the Northern District of Alabama almost quadrupled, reports The Birmingham News. This past year, 158 lawsuits were filed against collection agencies and credit bureaus for violations of the Fair Debt Collection Practices Act, up from a scant 40 suits filed the year before. Moreover, the lawsuits aren't for technicalities such as giving a few days less notice than required by law. A large percentage of the disputes involve cases of mistaken identity or consumers who paid the debt but can't prove it.

But bill collecting seems to be a growth industry these days, with the collection division of Encore Capital reporting a 12 percent increase in collections for last year as well as a 26 percent increase in profits, according to the story. And as collection agencies thrive, so too do the lawyers who sue them, collecting attorney fees and costs when they prove FDCPA violations.

In spite of the increase in debt lawsuits, they account for just a tiny fraction of the 1 billion collection matters handled annually, the story says. Is that because collection agencies are getting it right -- or are consumers simply not aware of their rights against a collection agency that overreaches?