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 proceedin
gs 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.
Click here for Case Analysis.
David Ziemer can be reached by email.