Shares of Encore Capital Group Inc. fell the most in more than three months after a U.S. appeals court scuttled its settlement of national litigation related to the “robo-signing” of court documents.

The Cincinnati-based court Tuesday rejected as unfair a 2011 agreement that would have resolved potential claims against the debt collector of an estimated 1.4 million class members for as little as $10 a person while allocating $8,000 to the four lead, named plaintiffs and expunging any debts two Encore units sought to collect from them.

Unnamed class members were also barred by the agreement from defending themselves in collection cases by claiming Encore’s Midland Capital Management Inc. was creating, and its Midland Funding LLC was using, affidavits signed by people without personal knowledge of their accuracy, a practice known as robo-signing.

“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,” the unanimous three-judge appeals panel said in its ruling.

Encore shares fell $2.26, or 7.2 percent, to $29.08 in Nasdaq Stock Market trading, the biggest one-day drop since Nov. 2. The shares have declined 5 percent this year.

‘Perfunctory’ Relief

The appeals panel described the final payout of $17.38 a claimant and a year of injunctive relief during which the Encore units were required to change their policies as “perfunctory at best.” It reversed the settlement approval by U.S. District Judge David Katz in Toledo and returned the case to him for further proceedings.

Tuesday’s ruling will allow pending class actions frozen by the settlement to go forward while allowing individual litigants to raise the robo-signing issue in their own cases, said Charles Delbaum of the National Consumer Law Center in Boston, who argued the case for the settlement objectors.

“The decision doesn’t bar the parties from attempting to work out a nationwide settlement,” Delbaum said in a phone interview. “It just points out all the ways in which this one was deficient.”

Dennis Murray Sr. of Sandusky, Ohio, who argued for the settling plaintiffs, said the ability to craft a new accord depends on the defendants and the courts.

Plaintiff Conflict

“The conflict between the named plaintiffs and the class as to the paucity of benefits to the class, that’s still going to stand, even if you resolve the $8,000 and resolve doing nothing with regard to their debts,” he said.

The court must still decide whether the planned payment of $10 a class member, which increased to $17.38 after their claims were tallied, is adequate relief, Murray said.

More difficult to determine is whether Midland will settle without the assurance the robo-signing issue won’t be raised elsewhere, he 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 appeals court, Gregory Call, general counsel for San Diego-based Encore Capital, said in an e-mailed statement.

The decision left in place lower-court rulings that Midland affidavits “accurately stated the class members’ obligations and that no class members incurred actual damages,” he said.

The case is Vassalle v. Midland Funding LLC, 11-3814, U.S. Court of Appeals for the Sixth Circuit (Cincinnati).