Several attorneys narrowly escaped sanctions despite their failure to follow court orders. After the district court entered Rule 11 sanctions on its own motion, a federal appellate court reversed because none of the conduct at issue was tied to a court filing and did not rise to the level of bad faith. ABA Litigation Section leaders advise that it is best to comply with court orders absent a compelling reason.
Ambiguous Debt Dispute Letter Leads to Lawsuit
In Tejero v. Portfolio Recovery Associates, LLP, the plaintiff’s attorneys drafted a letter to a debt collection agency on behalf of their client which stated, “I refuse to pay this debt” and “the amount you are reporting is not accurate.” The agency continued reporting the debt to credit bureaus without noting the dispute. The plaintiff alleged that violated the Fair Debt Collection Practices Act (FDCPA) and parallel state law, and sued the debt collector.
The district court ordered the parties to exchange settlement offers. The defendant offered more than the FDCPA’s maximum statutory damages, plaintiff’s reasonable attorney fees and costs, and debt forgiveness. The plaintiff did not make an offer.
Both parties moved for summary judgment. The district court denied both motions, identifying a triable issue on whether the letter “actually disputed the debt.” That prompted the parties to settle, but they left to the court the question of attorney fees and costs under 15 U.S.C. § 1692k(a)(3)—the FDCPA’s fee-shifting provision that awards fees to either defendants who successfully defend a bad-faith action or plaintiffs who bring a “successful” action to enforce FDCPA liability. The defendant also sought sanctions under 28 U.S.C. § 1927, which imposes fees and costs on attorneys who “vexatiously” increase litigation.
The district court held the plaintiff’s attorneys acted in bad faith by: (1) failing to comply with the order requiring a settlement offer; (2) continuing to litigate after receiving an offer which would have made their client whole; and (3) drafting the letter ambiguously so that the dispute would not be recognized, to “force settlements from debt collectors by abusing the FDCPA.” It then awarded the defendant its attorney fees and costs under Section 1692k(a)(3)—and under Rule 11, though the defendant only sought sanctions under Section 1927. The court denied the plaintiff his fees and costs.
No Bad Faith in the Pleadings, No Sanctions
The U.S. Court of Appeals for the Fifth Circuit reversed for abuse of discretion. It noted that had the plaintiff not waived the argument, the district court’s issuance of Rule 11 sanctions sua sponte would have been grounds for reversal because “[t]here must first be a Rule 11 motion, or an order to show cause under Rule 11(c)(3).”
Reaching the merits, the Fifth Circuit held that Rule “does not extend to ‘abusive tactics in litigation in respects other than the signing of papers.’” It also observed that courts cannot force parties to make settlement offers, and because settlement decisions relate to litigation tactics rather than a pleading, Rule 11 did not apply.
The appellate court further reasoned that the denial of summary judgment undermined any argument that the action was filed in bad faith or for an improper purpose. That the plaintiff lost on the Texas claim did not matter because “he had a non-frivolous basis to bring it.” Nor did the plaintiff’s decision to move for summary judgment justify sanctions because the settlement offer may not have made him whole under the Texas claim, the court explained. Finally, the appellate court concluded that Rule 11 could apply to the debt dispute letter because it was attached to the complaint, but that, too, was proper because the statement “the amount you are reporting is not correct” clearly conveyed a dispute.
Private Settlement Is Not a “Successful Action” that Permits Fee Recovery
The appellate court then remanded the matter for the district court to decide a matter of first impression within the Fifth Circuit: whether a private settlement permits an award of attorney fees under the FDCPA’s fee-shifting provision. The district court held that it does not.
The Fifth Circuit affirmed. It concluded that a formal adjudication is required to render a “successful action to enforce [FDCPA] liability,” and to hold otherwise would require it to rewrite the statute.
Why Counsel’s Conduct Did Not Support Sanctions
Litigation Section leaders agree that sanctions were not warranted under either section 1927 or Rule 11. “It does not appear to be unethical to continue to litigate issues that were not necessarily clear-cut,” opines P. Jack Brady, Kansas City, MO, cochair of the Section’s Trial Evidence Committee. “Each individual lawsuit provides oversight on the debt collection companies,” Brady adds.
“Where I have seen section 1927 applied, the conduct of the lawyer was much more egregious,” offers John M. Barkett, Miami, FL, cochair of the Section’s Ethics & Professionalism Committee. “Section 1927 is really designed for the lawyer who is a jerk every single day of the lawsuit, engaging in conduct that is duplicitous, doing everything he can to make life miserable for the judge and the other side,” explains Barkett.
However, the plaintiff’s counsel could have avoided sanctions, state Section leaders. “I think attorneys are always better off in the long run staying in the court’s good graces, if at all possible,” offers Robert E. Poundstone IV, Montgomery, AL, cochair of the Section’s Ethics & Professionalism Committee. “I suspect some of the issues the court had were the attorney’s failure to even make a settlement demand. While the court may not have been able to compel it, I do think the sanctioned attorney would have been better off making a settlement demand absent some compelling reason not to do so,” surmises Poundstone.
Hashtags: #FDCPA, #sanctions, #attorneyfees
- Michael Stefanilo Jr., “Rule 11 Sanctions Are Not Fit for Every Occasion,” Pretrial Prac. & Discovery (Apr. 30, 2020).
- Charles S. Fax, “Does the Proposed Congressional Amendment to Rule 11 Solve a Problem or Create One?” Litigation News (July 11, 2011).
Copyright © 2021, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Litigation Section, this committee, or the employer(s) of the author(s).