Wednesday, March 17, 2010

How To Combat Frivolous FDCPA Lawsuits: Tapping Into Section 1927 And The Court's Inherent Powers

[Note: this post is adapted from an article authored by Tomio Narita and originally published in the March 2010 MAP Bulletin]

Debt collectors have witnessed an incredible increase in the number of FDCPA cases filed in federal courts across the country. Let’s face it: some of these cases have merit, and they are a natural result of increasing collection volume. It would be irresponsible to conclude that just because the number of new FDCPA cases has skyrocketed, all of the new cases must be nuisance lawsuits.

But many of the FDCPA suits that are filed are frivolous, and many have been filed by consumer law firms that appear to specialize in a high-volume, cookie-cutter approach to litigation. What can collectors do about the cases that are so clearly without merit that they should never have been filed? How can a defendant fight back when a consumer attorney has refused to abandon a case long past the point where a reasonable attorney would have simply dismissed it? In situations where a plaintiff’s counsel has needlessly increased the cost of litigation, do debt collectors have any recourse?

Your first thought might be to file a motion for sanctions against an attorney under Rule 11 of the Federal Rules of Civil Procedure. Although Rule 11 can be an important way to combat frivolous action, the rule has limitations on its scope and it includes a “safe harbor” mechanism that can make a fee motion cumbersome to pursue. You might also consider section 1692k(a)(3) of the FDCPA, which allows a defendant to recover its reasonable costs and attorney’s fees where an action was filed “in bad faith and for the purpose of harassment,” but last year the Ninth Circuit clarified that counsel for a debtor cannot be held liable under that section. See Hyde v. Midland Credit Management, Inc., 567 F.3d 1137 (9th Cir. 2009). Where, then, can a collector turn when a frivolous FDCPA case has been recklessly pursued by an attorney who refuses to dismiss it?

Collectors should remember that a federal court has two important tools for sanctioning attorneys who pursue frivolous cases or who engage in bad faith litigation tactics: namely, 28 U.S.C. § 1927 and the court’s “inherent authority.” In the right circumstances, motions filed under section 1927 and the court’s inherent authority can be an effective way for collectors to fight back.

Sanctions under section 1927 are proper when an attorney has recklessly and knowingly abused the judicial process. Any attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct. 28 U.S.C. § 1927. As the Supreme Court has explained, section 1927

"does not distinguish between winners and losers, or between plaintiffs and defendants. The statute is indifferent to the equities of a dispute and to the values advanced by the substantive law. It is concerned only with limiting the abuse of court processes."

Roadway Express, Inc. v. Piper, 447 U.S. 752, 762 (1980).

In extreme cases, the record may show that a consumer attorney has engaged in bad faith conduct while pursuing an FDCPA action. But the Ninth Circuit has confirmed that a bad faith finding is not required to support a sanctions award under section 1927. See B.K.B. v. Maui Police Dep’t, 276 F.3d 1091, 1107 (9th Cir. 2002). Sanctions may be imposed under section 1927 against an attorney who merely acts recklessly. See also Gomez v. Vernon, 255 F.3d 1118, 1134 (9th Cir. 2001) (“Section 1927 requires a finding of recklessness or bad faith.”).

A motion under section 1927 can also be combined with a motion for sanctions under the court’s “inherent power.” Every district court has certain “inherent” powers, including the power to “levy sanctions in response to abusive litigation practices.” See Roadway Express, 447 U.S. at 765. This inherent power to sanction parties or attorneys is not displaced by other statutes or rules that allow a court to impose sanctions, such as section 1927 or Rule 11. See Chambers v. NASCO, Inc., 501 U.S. 32, 42-43 (1991). “The inherent powers of federal courts are those that ‘are necessary to the exercise of all others.’ Primus Auto. Fin. Servs., Inc. v. Batarse, 115 F.3d 644, 648 (9th Cir. 1997), quoting Roadway Express, 447 U.S. at 764.

The inherent powers of a court include the power to sanction an attorney for “bad faith” conduct by directing the attorney to pay the fees incurred by the opposing party. See Roadway Express, 447 U.S. at 765-66 (“If a court may tax counsel fees against a party who has litigated in bad faith, it certainly may assess those expenses against counsel who willfully abuse judicial processes.”). Bad faith conduct, however, is not required: conduct that is “‘tantamount to bad faith’ is sanctionable,” as well. B.K.B., 276 F.3d at 1108; accord Fink v. Gomez, 239 F.3d 989, 993-94 (9th Cir. 2001); Gomez v. Vernon, 255 F.3d at 1134 (no clear error “in finding conduct tantamount to bad faith” and imposing sanctions under inherent authority where attorney knowingly disregarded advice of state bar counsel regarding receipt of privileged materials).

Reckless conduct, combined with an improper purpose or knowing misconduct, is sanctionable under the court’s inherent powers. See B.K.B., 276 F.3d at 1107-08; see also Fink, 239 F.3d at 994 (sanctions permitted where attorney acts with “recklessness when combined with an additional factor such as frivolousness, harassment, or an improper purpose”); In Re Itel Secs. Litig., 791 F.2d 672, 675 (9th Cir. 1986) (sanctions proper where counsel “willfully abused judicial process or otherwise conducted litigation in bad faith.”).

An attorney may act in “bad faith” even when pursuing a colorable claim. In circumstances where the entire action was not “filed” in bad faith, an award of fees may be based upon counsel’s bad faith conduct during the litigation. See Roadway Express, 447 U.S. at 766. The Ninth Circuit has held that a finding of bad faith “does not require that the legal and factual basis for the action prove totally frivolous; where a litigant is substantially motivated by vindictiveness, obduracy, or mala fides, the assertion of a colorable claim will not bar the assessment of attorney’s fees. (Citation).” In Re Itel Secs. Litig., 791 F.2d at 675; see also Fink, 239 F.3d at 992 (“Itel teaches that sanctions are justified when a party acts for an improper purpose – even if the act consists of making a truthful statement or a non-frivolous argument or objection.”).

When exercising it inherent authority, a district court is also free to consider an attorney’s conduct in other litigation. See Artese v. Academy Collection Serv., Inc., 2000 WL 133733, at *4 (D. Conn. Jan. 18, 2000); see also Johnson v. Commissioner of Internal Revenue, 289 F.3d 452, 456-57 (7th Cir. 2002) (“The Tax Court was not required to ignore Izen’s bad conduct in other cases; indeed it would have been remiss not to consider it.”). In Itel, although the objections filed by counsel were not frivolous, the Ninth Circuit affirmed the district court’s conclusion that they were asserted in bad faith and solely to gain an advantage in other pending litigation. See Itel, 791 F.2d at 675-76. Similarly, in Fink, the Ninth Circuit held that an attorney’s reckless misstatements of fact and law in the case before the district court could amount to bad faith if the statements were made for the purpose of gaining a tactical advantage in a separate action. See Fink, 239 F.3d at 994.

Collectors are understandably frustrated by the onslaught of FDCPA litigation they are facing, and by the tactics employed by certain consumer attorneys. Keep in mind that consumer lawyers, like defense lawyers, are entitled to be vigorous advocates for their clients, and that motions for sanctions are not appropriate for every case. But for those extreme cases where a collector can demonstrate that a consumer attorney has engaged in bad faith or reckless litigation tactics, collectors should consider fighting back by filing motions under section 1927 or the court’s inherent powers.

Is Donohue The Death Knell For Technical FDCPA Violations?

[Note: this post has previously appeared as an article authored by Tomio Narita published in the February 2010 MAP Bulliten]

In its recent opinion, Donohue v. Quick Collect, Inc., 592 F.3d 1027 (9th Cir. 2010), the Ninth Circuit joined the Seventh Circuit and the Sixth Circuit, holding that a false and misleading statement does not violate sections 1692e or 1692f of the FDCPA unless the statement is “material.” See Donohue, 592 F.3d at 1033-34. Does Donohue mark the end of the era of hyper-technical FDCPA violations? While it is probably too early for collection professionals to celebrate, the Donohue case provides strong additional support for notion that technical FDCPA violations are on their way out.

The plaintiff in Donohue asserted a highly-technical alleged violation of the FDCPA. She claimed the collector violated the Act by serving her with a state court complaint which sought the “sum of $270.99, together with interest thereon of 12% per annum . . . in the amount of $32.89.” The collector was entitled to collect the $32.89, but that figure did not actually reflect 12% interest on the principal balance due. Rather, the $32.89 figure was comprised of $24.07 in pre-assignment finance charges (properly assessed by the original creditor) and $8.82 in post-assignment interest calculated at the 12% annual rate. Thus, the statement in the collection complaint was technically false. Id. at 1032.

Despite this, the Ninth Circuit ruled that the collection complaint did not violate the FDCPA. The complaint “sought recovery of sums to which Quick Collect was clearly and lawfully entitled” even though it incorrectly labeled the $32.89 amount sought as 12% interest on principal, instead of finance charges imposed by the creditor and post-assignment interest. Id. at 1033. Following the Seventh Circuit’s decisions in Hahn v. Triumph Partnerships LLC, 557 F.3d 755 (7th Cir. 2009), and Wahl v. Midland Credit Mgmt., Inc., 556 F.3d 643, 646 (7th Cir. 2009), as well as the Sixth Circuit’s decision in Miller v. Javitch, Block & Rathbone, 561 F.3d 588, 596 (6th Cir. 2009), the Ninth Circuit held that a false and misleading statement is not actionable under the FDCPA unless it is “material.” The Court stated: “We now conclude that false but non-material representations are not likely to mislead the least sophisticated consumer and therefore are not actionable under §§ 1692e or 1692f.” See Donohue, 592 F.3d at 1033.

The Ninth Circuit’s holding that only material misstatements violate the FDCPA is consistent with the remedial nature of the Act, because “immaterial statements, by definition, do not affect a consumer’s ability to make intelligent decisions.” Id. The Court noted that:

"In assessing FDCPA liability, we are not concerned with mere technical falsehoods that mislead no one, but instead with genuinely misleading statements that may frustrate a consumer’s ability to intelligently choose his or her response. Here, the statement in the Complaint did not undermine Donohue’s ability to intelligently choose her action concerning her debt."

Id. at 1034. As the Ninth Circuit observed: “Even if the Complaint had separated $32.89 into interest and finance charges, we can conceive of no action Donohue could have taken that was not already available to her on the basis of the information in the Complaint—nor has Donohue articulated any different action she might have chosen.” Id.

Under Donohue, a consumer must demonstrate “materiality” by showing how an allegedly false or misleading statement could have impacted the least sophisticated debtor’s ability to make intelligent choices. Although the court stopped short of adding a “reasonable reliance” requirement, similar to common law fraud, Donohue does require plaintiffs to explain how the least sophisticated consumer might have changed their position as a result of the allegedly false and misleading statement. Highly-technical violations of the FDCPA will rarely qualify as “material” under Donohue because the language used by the collector will not “frustrate a consumer’s ability to intelligently chose a response” to the collector’s communication. Donohue, 592 F.3d at 1034.

The FDCPA was passed to prevent truly “abusive, deceptive and unfair debt collection practices” (see 15 U.S.C. § 1692(a)), not as method for consumers and their attorneys to seize upon meaningless misstatements contained in letters and collection complaints. Circuit courts across the country, including the Ninth Circuit, are recognizing this by holding that technically false statements do not violate the FDCPA unless they are “material” to the collection process. Collectors facing highly-technical FDCPA claims have a powerful new ally in Donohue.