Thursday, April 23, 2020

FYI: 5th Cir Reverses Sanctions Against Consumer's Counsel for Failure to Promptly Settle

The U.S. Court of Appeals for the Fifth Circuit recently reversed a trial court's order sanctioning a consumer's counsel for failure to promptly settle a lawsuit, but affirmed the trial court's order denying a motion to recuse because the trial court was not biased against the consumer.


A copy of the decision is available at:  Link to Opinion


In January 2016, a consumer disputed a debt by sending a facsimile to a debt collector. Despite this alleged fax transmission, the debt collector continued to report the debt to a consumer reporting agency without noting that the consumer disputed the debt. 


In June 2016, the consumer sued the debt collector for allegedly violating the federal Fair Debt Collection Practices Act ("FDCPA") and the Texas Debt Collection Act ("Texas Act"). The consumer alleged that the debt collector violated these statutes by communicating "credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed." 15 U.S.C. § 1692e(8); §§ 392.202(a), 392.301(a)(3).


In a September 2016 order, the trial court required the parties to exchange settlement offers by October 19, 2016. In compliance with this order, the debt collector offered to settle for $1,101, plus reasonable attorneys' fees and costs. The consumer's lawyer never responded to the debt collector's offer and did not issue a written settlement demand. Subsequently at his deposition, the consumer testified that the offer would "make him whole and conclude the case."


The parties filed cross-motions for summary judgment.  The trial court granted the debt collector's motion under the Texas Act because the borrower had no competent evidence to establish the required actual damage element of this claim, but denied the parties' cross-motions on the FDCPA claim finding that a triable issue of material fact existed over whether the consumer's January 2016 fax "actually disputed the debt."


After this, the parties settled the case. The debt collector agreed to pay the consumer $1,000 and to forgive the debt.  The parties agreed to allow the trial court to resolve the dispute over attorneys' fees and costs.


The consumer moved for attorneys' fees and costs totaling. $14,731.80.  The debt collector moved to sanction the consumer's lawyers (the "Attorney-Appellants") under 28 U.S.C. § 1927 and 15 U.S.C. § 1692k(a)(3), and sought attorneys' fees and costs totaling $13,950.38.


Before ruling, trial court wrote to the disciplinary committee for the U.S. District Court for the Western trial of Texas accusing the Attorney-Appellants of participating in "a scheme to force settlements from debt collectors by abusing the FDCPA." In support of this alleged ethical violation, the trial court provided a list of FDCPA cases in which consumer's attorneys had participated.


In April 2018, the trial court ruled on the cross motions for fees and costs. The trial court denied the consumer's motion for attorneys' fees and costs. Moreover, the trial court sanctioned the Attorney-Appellants under 15 U.S.C. § 1692k(a)(3) and Federal Rule of Civil Procedure 11(c), and ordered that them to pay the debt collector's attorneys' fees and costs.


In so ruling the trial court found that the Attorney-Appellants "acted in bad faith when they: (1) failed to comply with the September 2016 settlement-offer order; (2) continued to litigate the case even after receiving an offer that would make [the consumer] whole; and (3) drafted the January 2016 debt letter in a manner that would cause the debt collector not to realize that the debt was disputed, so that counsel could engage in a "scheme" to "force settlements from debt collectors by abusing the FDCPA."


After the sanctions order, the consumer filed a motion to recuse the trial court judge under 28 U.S.C. §§ 144 and 455, which was assigned to a different judge. In May 2018, the new judge issued an order denying the motion to recuse because there was no evidence that the trial court judge possessed any extrajudicial knowledge and the "rulings did not show sufficient antagonism for a reasonable person to harbor doubts about the judge's impartiality."


This appeal by the consumer and his lawyers followed.


The Fifth Circuit began by noting that a trial court may not award attorneys' fees under Rule 11 sua sponte.  Ordinarily, this alone ordinarily would warrant reversal.  However, the consumer and his attorneys waived this argument requiring the Fifth Circuit to examine the merits of the trial court's sanctions orders.


As you may recall, Rule 11 requires that "[e]very pleading, written motion, and other paper must be signed by at least one attorney of record in the attorney's name." FED. R. CIV. P. 11(a). The Rule 11(a) required signature "certifies that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances," the filing is not sanctionable under Rule 11(b). Thus, Rule 11's plan text makes it clear that it only applies "where a person files a paper."  Rule 11 does not apply to "abusive tactics in litigation in respects other than the signing of papers." This is why a trial court deciding a Rule 11 motion evaluates an attorney's conduct when they file "a pleading, motion, or other paper."


The trial court provided three justification for sanctioning the Attorney Appellants under Rule 11: (1) they did not "make or respond to a settlement offer," contrary to the scheduling order; (2) they continued litigating after the consumer testified at his deposition that the debt collector's offer would have made him whole, and (3) the January 2016 letter disputing the debt "was part of a fraudulent scheme to abuse the FDCPA." 


The Fifth Circuit found all three reasons meritless because none of them were "tied to a filing," as required.


Initially, the failure to discuss settlement concerns an attorney's litigation tactics, not "a filing subject to Rule 11." The Fifth Circuit emphasized that it and its and sister circuits "have held that courts do not have the power to compel parties to make settlement offers, and that the failure to make an offer is not sanctionable." See Dawson v. United States, 68 F.3d 886, 897 (5th Cir. 1995) (collecting cases from other circuits).


The Fifth Circuit observed that contrary to its holding in Dawson, it has become a common practice in the "Western trial of Texas for judges to require parties to exchange settlement offers." The Fifth Circuit addressed this by reiterating that "if a party is forced to make a settlement offer because of the threat of sanctions, and the offer is accepted, a settlement has been achieved through coercion."


The Fifth Circuit made it clear that it will not tolerate this result, holding that the trial court erred when it sanctioned the Attorney Appellants because the consumer did not engage in settlement discussions.  The trial court "lacked the power" to order the consumer "to make a settlement offer." 


The Fifth Circuit next reviewed the trial court's justification for sanctioning the Attorney Appellants for continuing to litigate after receiving a settlement offer. The Fifth Circuit concluded that "the decision to reject a settlement offer is not a court filing subject to Rule 11(b). Thus, this rationale did not support sanctioning the Attorney Appellants.


The Fifth Circuit also examined the trial court's final reason for sanctioning the Attorney Appellants under Rule 11 that the debt dispute letter was intentionally vague and sent in bad faith to create FDCPA liability. The letter itself was "not a filing or other paper subject to Rule 11," but the consumer attached it to his complaint bringing it within the scope of conduct that Rule 11 was intended to govern. 


Nevertheless, the Fifth Circuit found that there is no evidence that the consumer acted in "bad faith" when he filed his complaint.  As such, it was reversible error for the trial court to "ignore the language of the letter and instead infer subjective bad faith based on its view of the attorneys' intent."


Additionally, Rule 11 does not include the phrase "bad faith" and the trial court did not specify which part of Rule 11 the Attorney Appellants supposedly violated.  The trial court might have considered that the letter did not did not "have evidentiary support" under Rule 11(b)(3), but it found that a material fact dispute "exist[ed] on whether Plaintiff actually disputed the Debt" so the "lack of evidentiary foundation cannot be the problem here." Moreover, a "claim that survives summary judgment" is not frivolous. See FED. R. CIV. P. 11(b)(2).  Thus, the Fifth Circuit reversed the sanction award against the Attorney Appellants.


The Fifth Circuit next examined the trial court's fee award to the debt collector under 15 U.S.C. § 1692k(a)(3), which allows a court to "award to the defendant attorney's fees" "[o]n a finding . . . that an action under this section was brought in bad faith and for the purpose of harassment." As the Fifth Circuit already rejected the trial court's bad faith finding, it also reversed this award.


The Fifth Circuit also reversed this fee award because the trial court improperly ordered the Attorney Appellants to pay it when section "1692k(a)(3) does not stretch that far."  Courts must strictly construe statutes awarding attorneys' fees given the long-standing American Rule "against awarding costs and fees to the prevailing party." Specifically, the Fifth Circuit held, courts must read statutes that depart from the American Rule "with a presumption favoring the retention of long established and familiar legal principles."  With these principals in mind, "when a statute awards fees to one party, but does not identify from whom they may be collected," the Fifth Circuit declined to allow "recovery from the other party's counsel."


Section 1692k(a)(3) permits a court to "award to the defendant attorney's fees," but it "is silent as to whether a plaintiff's attorney may be ordered to pay them." This section does not explicitly authorize the court to sanction lawyers and require them to pay a fee award in derogation of the common law prohibition against this practice. 


Although the Fifth Circuit reversed the sanction award against the Attorney Appellants, it was not ready to order the debt collector to pay the consumer's fees and costs.  Such an order would require the consumer to prove that his action to enforce FDCPA liability was successful. 15 U.S.C. § 1692k(a)(3).  The Fifth Circuit has not yet "decided whether a private settlement renders the action "successful" under § 1692k(a)(3)" and the trial court did not consider this issue.  Thus, the Fifth Circuit remanded this issue to the trial court to decide whether the consumer may recover attorneys' fees under the FDCPA.


Finally, the Fifth Circuit analyzed the consumer's claim that the trial court erroneously denied his recusal motion under 28 U.S.C. §§ 144 and 455. Recusal is required under these sections when the court "has a personal bias" against a party, 28 U.S.C. §§ 144, 455(b)(1), if the court's "impartiality might reasonably be questioned," id. § 455(a), or if the court has "personal knowledge of disputed evidentiary facts concerning the proceeding," id. § 455(b)(1). The key here is that the bias must be against a "party," not their counsel. Bias against a non-party attorney alone does not require disqualification.


Another ground for disqualification would be if the court's views are "extrajudicial." A courts views are not extrajudicial when the court formed its opinion "on the basis of facts introduced or events occurring in the course of the current proceedings, or of prior proceedings." Here the trial court's supposed bias was not derived from extrajudicial knowledge because the court presided over this case and three of the other cases referenced in the sanctions order.


Further, the other cases cited in the sanctions order came from a record created by the ECF system for the Western District of Texas which listed other cases involving the Attorney Appellants. Given that the Attorney-Appellants asked the trial court in their fee petition to look at these cases to justify their experience and claimed billing rate they "have only themselves to blame," and if they do not like what the trial court found it does not give them grounds to claim bias.


Finally, when a court applies section 455(a), a court must determine "whether a reasonable and objective person, knowing all of the facts, would harbor doubts concerning the judge's impartiality."  Here the trial court did not have any extrajudicial knowledge about the consumer or his counsel so the consumer had the burden to demonstrate that the trial court "displayed a deep-seated favoritism or antagonism that would make fair judgment impossible."


The Fifth Circuit found that trial court's anger was directed at the Attorney Appellants based on their conduct, not at the consumer. This ire did not rise to the level of "a continuing and personal nature," sufficient to require recusal.


The Fifth Circuit also found that there was no evidence that the trial court harbored "a deep-seated antagonism" against the consumer "that would make fair judgment impossible." Rather, the trial court was concerned that the Attorney Appellants did not properly inform the consumer about the settlement offer.  Thus, the Fifth Circuit affirmed the trial court's denial of the motion to recuse.


Therefore, the Fifth Circuit reversed the trial court order sanctioning the Attorney Appellants and remanded for further proceedings consistent with its opinion.




Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
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