A federal appeals court on Tuesday voided a $5.2 million settlement intended to resolve allegations that debt buyer Encore Capital Group Inc. used false affidavits and other illegal tactics to collect debts from 1.44 million consumers.

The 6th Circuit returned the case to the district court for further proceedings. 

The August 2011 settlement was intended to resolve claims that employees with San Diego-based Encore's subsidiaries - Midland Funding and Midland Credit Management - relied on false or "robo-signed" affidavits to collect consumer debt that was not owed or already was paid off. Midland's employees had been accused of signing 200 to 400 computer-generated affidavits a day without knowing the contents.

But the 6th U.S. Circuit Court of Appeals in Cincinnati ruled U.S. District Judge David Katz abused his discretion in approving the settlement and certifying a national class action. More than 133,000 class members had filed claims under the settlement, while 4,262 opted out and 61 objected.

The settlement had drawn opposition from 38 state attorneys general, consumer groups and the AARP, a nonprofit organization representing people 50 and older, in part because Midland kept the right to pursue many collection cases. Led by New York Attorney General Eric Schneiderman, the opposition called the payout "paltry" and said the accord deprived consumers of their right to defend against existing Midland lawsuits.

Writing for a three-judge panel, Circuit Judge R. Guy Cole agreed the settlement relief was "perfunctory at best," with typical payments of $17.38 to class members believed to owe hundreds or thousands of dollars each. Cole also said a related injunction intended to improve Midland's policies and oversight offered little value because it 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.

Encore officials issued a statement regarding the decision: "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."

Greg Call, senior vice president and general counsel at Encore Capital, added, "Midland took steps to correct the underlying issue years ago, and has continued to build on its commitment to operating with integrity and treating consumers with the respect they deserve. This is reflected in Midland's industry-leading Consumer Bill of Rights, which clearly outlines the company's commitment to conduct business ethically, engage in respectful dialogue with consumers, and play a positive role in their financial recovery."

The company changed its affidavit process in 2009 to ensure that signers review underlying documentation. Last year, Encore invested $562.3 million to buy delinquent accounts with a face value of $18.5 billion, equal to about 3 cents on the dollar.

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