FDCPA
threat leads to sanctions
By
David Ziemer
Wisconsin Law Journal
July
27, 2005
A
law firm was properly sanctioned for responding to a client's dunning letter with
a frivolous threat to sue under the Fair Debt Collection Practices Act, the Seventh
Circuit held on July 18.
Judith
A. Kelly wrote a bad check to a riverboat casino in Illinois. Riddle & Associates,
a Utah law firm, was retained to collect the debt. Riddle sent a collection notice
to Kelly demanding payment of $125, which included the original debt and a $25
service charge.
Kelly
did not respond to the notice for 10 months, but instead retained the law firm
of Edelman, Combs & Latturner. Daniel Edelman of that firm sent a letter to
Riddle threatening to sue Riddle under sec. 1692g of the Fair Debt Collection
Practices Act. The letter claimed that Riddle's collection notice contradicted
and overshadowed
Kelly's
right to dispute the debt, and demanded that Riddle pay $3,000 ($1,000 to Kelly
for damages and $2,000 to Edelman for attorneys' fees) in order to avoid a lawsuit
Riddle's
attorney, David Hartsell, a member of the Ross & Hardies law firm, sent a
letter to Edelman, rejecting his demand for $3,000 and advising that "if
you file suit over this matter, we will most assuredly seek sanctions . . . on
the ground that such lawsuit was brought in bad faith and for purposes of harassment."
Hartsell also demanded $500 in attorneys' fees and costs and noted that if payment
was not received within one week, his client would "pursue [its] rights through
all legally available means."
Edelman
did not respond to Hartsell's letter, and Riddle brought an action in federal
court against Kelly under the Declaratory Judgment Act, asking the court to declare
that its collection letter did not violate the FDCPA.
Kelly
counterclaimed against Riddle, alleging that the $125 demand letter to her contained
a false threat of litigation in violation of sec. 1692e. In the counterclaim,
Riddle did not raise the sec. 1692g overshadowing issue.
Kelly
also counterclaimed against Ross & Hardies, claiming that the letter Hartsell
sent to Edelman was an attempt to collect money from Kelly and therefore violated
the FDCPA.
| What
the court held Case:
Riddle & Associates, P.C., v. Judith A. Kelly, Nos. 04-1509 & 04-1637. Issue:
Were sanctions appropriately awarded against a law firm that sent a frivolous
demand under the FDCPA and asserted a frivolous counterclaim under the Act? Were
sanctions appropriately denied, where a debtor's attorney filed a counterclaim
under the FDCPA, based on a letter directed to it, rather than its debtor client? Holding:
Yes. Where the debt collector's dunning letter was almost identical to the "safe
haven" in Bartlett v. Heibl, sanctions are appropriate. No.
Where the debt collector's letter was directed to the attorney, not the debtor,
the FDCPA does not apply, and it was an abuse of discretion not to sanction the
attorney for filing an FDCPA claim. |
The
district court granted summary judgment in favor of Riddle, finding that Riddle's
letter was "virtually identical" to the "safe haven" letter
that this court suggested in Bartlett v. Heibl, 128 F.3d 497, 501-02 (7th Cir.1997).
With
regard to the counterclaim against Ross & Hardies, the court granted the firm's
motion to dismiss because the letter was directed to Edelman, not Kelly, and was
therefore not within the scope of the FDCPA.
The
court also imposed sanctions against Eleman, finding that Edelman "was trying
to extort money from Riddle by saying it would go away for $3000, even though
it could not have believed that its overshadowing argument had any chance of success
in court." Further, the court found that Edelman's "actions in threatening
to file a baseless suit and opposing the motion for summary judgment as to the
overshadowing claim were objectively and subjectively egregious and multiplied
the proceedings unreasonably and vexatiously." The court awarded over $18,000
in attorney's fees and costs.
However,
the court declined to sanction Edelman for filing a frivolous counterclaim against
Ross & Hardies, reasoning that although the FDCPA counterclaim against Ross
& Hardies was not a winner, it was not comparable to the "extortion attempt"
against the Riddle firm.
Both
the Edelman firm and Ross & Hardies appealed. In a decision by Judge Michael
S. Kanne, the Seventh Circuit affirmed the sanctions imposed for the crossclaim
against Riddle, but reversed the denial of sanctions for the conduct involving
Ross & Hardies.
The
court found that the initial letter from Riddle to Kelly was, as the district
court found, "virtually identical" to the "safe haven" from
language set forth in Bartlett.
The
court wrote, "Edelman apparently did not believe what we said in Bartlett
— we do. There was no conceivable basis for a sec. 1692g claim."
The
court rejected Edelman's argument that sanctions should not be imposed because
he did not initiate the litigation — Riddle did, when it sought declaratory
judgment.
The
court reasoned, "Edelman insists that Kelly never litigated the overshadowing
issue and thus she cannot be responsible for fees relating to it. We find that
Edelman is responsible for causing the suit to be filed and for allowing the litigation
to continue when it knew that Kelly could not win. When Edelman demanded $3000
to release a blatantly frivolous claim, the firm pursued a path that it should
have known was improper."
The
court also noted that Edelman could have moved to dismiss the action as moot,
but instead "multiplied the proceedings by filing counterclaims and contesting
summary judgment."
Accordingly,
the court affirmed the award of $18,000 in sanctions based on the claims against
Riddle & Associates.
Turning
to the counterclaim against Ross & Hardie, however, the court found the district
court abused its discretion in not awarding additional sanctions.
Rejecting
Edelman's argument that Ross & Hardie's letter demanding $500 in attorney's
fees was really directed to Kelly, rather than Edelman, the court noted that the
letter stated that, as an "experienced FDCPA practitioner," Edelman
must be familiar with the save haven language in Bartlett.
The court
also noted that the letter rejected Edelman's claim for $2,000 in attorney fees
for "at most, reviewing a one-page collection letter and then writing a three-paragraph
demand letter." Finally, the letter explicitly stated, "We believe that
your letter to Riddle is what gives rise to a cause of action…"
The
court wrote, "Because the letter from Hartsell was not directed to the consumer,
Kelly, and was distinct from any debt, the FDCPA is not implicated."
The
court also found that Edelman should have known that the counterclaim against
Ross & Hardies was without merit: "So clear is it that Edelman filed
a frivolous counterclaim in order to complicate this already far too complicated
and absurdly protracted litigation, to the cost of Riddle and its counsel, that
the district judge committed an abuse of discretion in refusing to sanction Edelman
under sec. 1927 (cites omitted)."
Accordingly,
on this issue, the court reversed, and remanded for the district court to impose
appropriate additional sanctions.
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here for Case Analysis.
David
Ziemer can be reached by email.
