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Court Links "Ethically Questionable" Conduct to FDCPA

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Judge Vaughn Walker of the Northern District of California, in the recent case of Guevarra v. Progressive Financial Services, Inc., case no. C 05-3466 VRW (N.D.Cal. 7/31/07), took a negative view of plaintiff’s counsel for amending the class definition of a putative class action, narrowing the class definition from a statewide class to a creditor class.  The judge characterized the plaintiff’s attorneys’ actions as ‘ethically questionable behavior,” but linked it to language contained in the Fair Debt Collection Practices Act prescribing statutory damages.

In this case, Carol P. Guevarra alleged that Progressive Financial Services Inc. violated the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq., by including the phrase “in writing” in an initial collection letter.  Progressive was also being sued by a different plaintiff in the U.S. District Court, Central District of California for the same alleged violation.  (Hurtado v. Progressive Financial Services, No. EDCV-05-635-GAP (SGLx) (C.D. Cal.).)

Both plaintiffs had alleged a class action, with a statewide class defined as California residents who had been sent the allegedly offending letter.  In other words, the two alleged class actions contained nearly identical class definitions, and almost all putative class members were putative class members in both lawsuits.  Progressive offered to settle one of the putative class actions – either one – on a classwide basis and the other lawsuit on an individual basis.

NARROWING THE CLASS

Progressive’s settlement offers were made simultaneously to both plaintiffs’ counsel in both cases.  In Guevarra, plaintiffs’ counsel Irving L. Berg in Corte Madeira, Calif., and O. Randolph Bragg of Horwitz Horwitz & Associates in Chicago, amended the complaint to narrow the class definition to California residents who were sent the allegedly offensive letter and who were debtors of a certain creditor.  In Hurtado, plaintiff’s counsel, Mr. Douglas Campion and Hyde & Swigart, both in San Diego, sought leave to amend the Hurtado complaint to also narrow the class definition to a different creditor class. 

Thus, using these new class definitions, the putative classes would not overlap.  If these litigation tactics had been successful, defendant’s maximum statutory damages (for both classes) would have doubled and both sets of plaintiff’s counsel could ostensibly recover attorneys’ fees for managing a class action if liability was established.

It is quite typical in consumer protection cases for the plaintiff to include in his or her lawsuit a class action claim.  The plaintiff’s putative class action is often defined in terms of consumers residing in a specific state.  Additionally, many consumer protection cases under the FDCPA do not allege any actual damages, but rather seek to recoup only statutory damages for the plaintiff and the class. 

Ostensibly, the sections prescribing statutory damages under the FDCPA at 15 U.S.C. § 1692k(a) and under the Truth in Lending Act at 15 U.S.C. § 1640(2)(B), set forth class statutory damages based on a maximum of 1 percent of the defendant’s net worth.    The state counterpart to the federal FDCPA in California, the Rosenthal Fair Debt Collection Practices Act (Cal. Civ. Code § 1788, et seq.) arguably doubles the maximum statutory damages to two percent of net worth. 

If the plaintiff’s counsel does not believe that the statutory damages for the class will be substantial, it is quite common for the plaintiff’s counsel to amend the class definition to make the class smaller, increasing the individual recovery for class members.  By way of example, if the net worth of a defendant is $1,000,000, class statutory damages would be no greater than $10,000.  If a statewide class would have 10,000 members, the maximum statutory damages recovery for each individual class member would be $1.  However, if the class is narrowed by other characteristics and reduced to 1,000 members, the individual statutory damages recovery for each class member would increase tenfold to $10.00.

ARBITRARY NARROWING OF THE CLASS WIDENS LIABILITY

Unfortunately, when the potentially violative conduct applies to a larger group of people, narrowing the class by arbitrary characteristics leaves the defendant open to potential liability from members of the larger group of people who are not within the narrow class definition.  Thus, the defendant can be exposed to multiple lawsuits, and the legislative statutory damages cap becomes a nullity.  And of course, the major component of liability - the attorneys’ fees component - also expands geometrically when two (or more) cases are prosecuted.  Judge Walker, in the Guevarra opinion, recognized that this litigation tactic employed by the plaintiff’s attorneys. 

The judge noted that the narrowing of the class seemed to be the result of an agreement between Bragg and Berg, on the one hand, and the Hurtado plaintiff’s counsel on the other hand.  The Court found that this narrowing of the class contravened one of the main purposes of class action litigation:  the avoidance of multiplicity of litigation.  Thus, the Court denied class certification because the creditor class was not superior to other methods of litigating this issue, such as a statewide class action. (See Crown Cork & Seal Co. v. Parker 462 U.S. 345. (S. Ct. 1983).) 

Furthermore, the District Court explained that a narrowed class definition also created a one-way intervention problem.  Thus, the defendant would be bound by an adverse ruling in the narrowed class action with respect to nonclass members who received the same allegedly offensive letter through offensive, nonmutual issue preclusion.  However, favorable rulings for defendants would not bind nonclass members.  (See Schwarschild v. Tse, 69 F.3d 293 (9th Cir. 1995).)  The Court concluded its analysis by recognizing that the narrower class definition did not advance fairness or efficiency. 

DISCIPLINARY CONSIDERATIONS

Judge Walker went one step further and stated that the tactics of plaintiff’s attorneys in Guevarra appeared to be for the benefit of counsel only to increase attorneys’ fees without any significant benefit to their client. Thus, in a rare move, Judge Walker issued an order to show cause why Bragg and Berg should not be reported to the California State Bar and the Northern District of California’s Standing Committee on Professional Conduct.

Bragg, responding to the order, explained that he had not conferred with the Hurtado plaintiff’s counsel prior to the preparation of the first amended complaint, wherein the class definition was narrowed. The amended Guevarra complaint, with the narrowed class definition, was filed on June 2, 2006.

However, the billing records of the Hurtado plaintiff’s counsel indicated that they spoke or otherwise corresponded with Bragg on June 1 and June 2. Of course, the Guevarra amended complaint could have been finalized prior to June 1, and held for two days before filing. However, these facts appear to present at least circumstantial evidence that Bragg conferred with the Hurtado plaintiff’s counsel prior to finalizing the Guevarra amended complaint.

While awaiting the District Court’s ruling on the order to show cause, Progressive agreed to settle the Hurtado case on a classwide basis with a statewide class. Berg, counsel for Guevarra, approached Progressive’s counsel about settling on an individual basis. Berg attempted to negotiate a separate settlement with Progressive despite the fact that Guevarra had not opted out of the Hurtado case. When defense counsel raised this issue, plaintiff’s counsel offered to dismiss the Guevarra case with prejudice.

Notably, Bragg did not participate in the settlement discussions, nor did he seek reimbursement of any fees.

FDCPA CREATES 'MIS-INCENTIVES'

Before the apparent contradiction found in the attorneys’ fees invoices and discussed above could be presented to the court, however, Judge Walker issued his order in which he declined to report Bragg and Berg to the California State Bar and the Northern District of California’s Standing Committee on Professional Conduct.  Rather, Judge Walker commented in the Guevarra opinion on how the structure of statutory damages under the FDCPA incentivizes such ethically questionable conduct. 

“The mis-incentives created by the FDCPA stand in direct conflict with 28 USC § 1927, which proscribes an attorney’s multiplication of proceedings,”  Judge Walker wrote.  “This provision creates another mis-incentive. The limit on liability encourages debt-collecting entities to restrict their net worth and hence their potential liability. Nowhere are the ill effects of this legal regime more evident than in the present suit, in which counsel engaged in ethically questionable behavior while purportedly serving the interest of their clients,” Judge Walker added.

Thus, with a 1 percent cap on statutory damages per case, the plaintiff’s bar has an incentive to bring numerous smaller lawsuits – each capped at 1 percent statutory damages.  Bring 100 lawsuits, and presumably “each tak[es] a bite at the golden apple until the company is broke,” as Judge Walker put it in Guevarra.  This, of course, contravenes the purpose of the statutory cap.

Judge Walker concluded that any remedy to this situation law with Congress.  Given that legislative correction seems improbable, or at least significantly far in the future, this is an important consideration in the defense of class action litigation where statutory damages are capped.

The above article and all articles in this website are not intended to be legal advice. Readers should consult an attorney to determine how the law applies to their particular circumstances. Also, please understand that the law constantly evolves and changes. Certain of the decisions and legal propositions quoted in the above article may be out of date or superseded.

 

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