A proposed settlement in a Fair Debt Collection Practices Act class action that has been marred by accusations of attorney misconduct hit a road block last week when a federal judge ruled that the class notice was inadequate and the defendant’s attorney had to withdraw because of a conflict of interest.

Eastern District Judge Arthur Spatt (See Profile) on Jan. 24 refused to grant preliminary approval of an $87,900 settlement in Corpac v. Rubin & Rothman, 2:10-cv-04165, and ordered a defense attorney, solo practitioner Robert Arleo, to withdraw from the case, finding he was barred by a conflict of interest because he worked with plaintiff’s attorney William Horn in other cases.

Though Horn and attorney Brian Bromberg, who represented a class member objecting to the settlement, had traded accusations of misconduct, Spatt declined to refer them for possible disciplinary proceedings.

The case, filed in 2010, accuses law firm Rubin & Rothman of violating the Fair Debt Collection Practices Act by sending communications to purported debtors falsely suggesting that the lawyers had meaningfully reviewed their accounts. According to court papers, there may be more than 300,000 potential class members.

In 2011, the parties told the court that they had settled the case. Under the settlement, the lead plaintiff, John Corpac, would get $3,500; the rest of the settlement class would get a total of $9,400; and the plaintiff’s counsel, Horn, would get $75,000. After the parties had already agreed to the settlement, Rubin & Rothman hired Arleo as outside counsel to advise it about procedural issues related to class actions, according to Spatt’s decision.

In June 2012, Patrick Sejour, a potential class member, objected to the settlement. Sejour, who is represented by Bromberg and by Matthew Schedler of the nonprofit CAMBA Legal Services, argued that the class notice, which consisted of a single ad in the New York Post, was inadequate; that the attorney fees were excessive; and that there was a conflict of interest in having Arleo represent the defendant because Arleo and Horn were co-counsel on more than 25 other debt collection class actions.

At a fairness hearing, Arleo countered the charge by claiming that Bromberg and Schedler were trying to “bust up this settlement” and “create havoc” so they could file their own “micro class actions,” representing narrower classes, and collect more fees.

Horn, for his part, wrote a letter in which he accused Bromberg of paying Schedler kickbacks to refer clients of CAMBA Legal Services to him. Bromberg and Schedler denied that allegation and said it was without any basis.

Spatt, siting in Central Islip, said he was concerned about both the allegations against Bromberg and Schedler and by the possibility that Horn may have made such an allegation with no support. He ordered the three lawyers to show cause why they should not be referred for disciplinary proceedings.

Horn said that his remark about kickbacks had been “extrapolated” from his belief that CAMBA and other non-profits refer many of their cases to Bromberg. He apologized for the comment, and asked that he not be referred for discipline.

Bromberg and Schedler denied that they had any kickback arrangement, and asked that Horn be referred for discipline for suggesting that they did.

Spatt last week declined to refer anyone for discipline.

“It is this Court’s policy to err on the side of caution when considering a referral for disciplinary proceedings that could affect an attorney’s ability to practice law,” he wrote. “There is no such showing here as to any of the lawyers in the case. It is true that lawyers should not make unfair or derogatory comments with regard to opposing counsel. Offensive tactics by lawyers interfere with the orderly administration of justice and have no proper place in our legal system. Such an unfair and derogatory comment was made by Horn regarding Bromberg. However, Horn has apparently realized his error and has withdrawn the comment and apologized to counsel and to the Court, which apology was accepted by the Court.”

The judge did rule in favor of Bromberg and Schedler on other issues, however.

He ruled that in light of the decision by the U.S. Court of Appeals for the Second Circuit last August in Hecht v. United Collection Bureau, 691 F.3d 18, which held that a single ad in USA Today was not an adequate class notice, the class notice in the case before him was also invalid.

He also ruled that Arleo must leave the case. Although Arleo had not been involved in negotiating the settlement, the judge said, he could not be involved going forward because a new class notice meant there would be more legal work in the case.

“The result of such a more publicized notice is unknown,” he said. “However, with reasonable certainty, a more publicized notice may bring in additional prospective class members and objectors. The potential class is large. Whether this new and much more publicized procedure will result in a settlement approved by the Court is also unknown.”

Horn and Arleo “have an extraordinary business relationship handling a particular type of case together,” Spatt continued. “It is reasonable to conclude that Arleo possesses confidential relevant information about Horn’s likes, dislikes, strengths and weaknesses and his techniques and procedures. Arleo is in a position to use privileged information in support of his client, and against the interests of the plaintiff class.”

“We are pleased that the Court ordered Robert Arleo to withdraw from the case because of his conflict of interest with class counsel, William Horn,” Bromberg said in an email. “Even if proper notice is given to the class, we believe that the proposed settlement is so unfair that it cannot be salvaged.”

Arleo and Schedler declined to comment. Horn could not be reached.