Thursday, September 23, 2021

FYI: 7th Cir Holds Collecting "Fees on Fees" Did Not Violate the FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently affirmed judgment in a debt collector's favor against claims that its efforts to collect attorneys' fees incurred to collect a debt— including the fees incurred in collecting the attorney's fees — violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. ("FDCPA").


In so ruling, the Seventh Circuit concluded that dismissal of a related state court action brought by the debt collector to collect attorneys' fees for lack of prosecution did not have preclusive effect, and no FDCPA violation occurred because the plain language of the underlying agreement required the consumer to pay all collection costs including attorney's fee.


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


A consumer ("Consumer") incurred medical expenses for treatment provided to her minor children through a hospital system.  The written agreement signed by the Consumer at the time services were rendered (the "Agreement") provided that she agreed to pay the charges the hospital billed to her, along with "costs of collection, including attorney['s] fees and interest," if she failed to timely make payment.  After the consumer defaulted on the debt, the provider hired a company to collect the debt (the "Debt Collector") who filed a collection lawsuit.


After initially disputing the debt, the Consumer agreed that she owed the $1,499 in medical charges and paid that amount in full, but refused to pay the Debt Collectors' attorneys' fees.  The Debt Collector offered to accept $375 to resolve the fee dispute, which the Consumer rejected over warnings from the Debt Collector's attorneys' that prolonged litigation over the outstanding fees would result in her being liable for additional legal fees ("fees-on-fees"). 


The court in the collection action eventually entered judgment in the Debt Collector's favor, ordering the Consumer to pay the Debt Collector $1,725 for its incurred attorneys' fees.  The Consumer appealed the ruling.  Under then-existing state law, the appeal initiated a de novo proceeding, and the Debt Collector filed a new complaint to recover the fee award.


Meanwhile, prior to the small claims judgment, the Consumer separately sued the Debt Collector in federal court alleging that the Debt Collector's attempts to collect attorney's fees and fees-on-fees that were not contractually owed violated the FDCPA's prohibitions against using "any false, deceptive, or misleading representation or means in connection with the collection of any debt" (§1692e) and the use of "unfair or unconscionable means to collect or attempt to collect any debt" (§1692f). 


The federal trial court stayed the case to await the outcome of the state proceedings which remained dormant for nearly two years, perhaps due to the small amount at stake, and was eventually dismissed with prejudice for failure to prosecute.


After the stay was lifted in the federal case, the parties filed cross-motions for summary judgment.  The Consumer advanced two arguments that would provide a basis for her FDCPA claim: (i) that res judicata effectively bars the Debt Collector from arguing that the Agreement required the Consumer to pay fees-on-fees as a result of the dismissal of the Debt Collector's re-filed state court action, and; (ii) that the costs-of-collection provision in the Agreement did not contractually obligate the Consumer to pay fees-on-fees. 


The federal trial court rejected these arguments and entered judgment in the Debt Collector's favor.  The Consumer timely appealed. 


On appeal, the Seventh Circuit first reviewed the Consumer's res judicata argument, which is governed by Indiana's preclusion rules under the Full Faith and Credit Act (28 U.S.C. § 1738).  Under Indiana law, res judicata, or claim preclusion "acts as complete bar to subsequent litigation on the same claim between identical parties."  Edwards v. Edwards, 132 N.E.3d 391, 396 (Ind. Ct. App. 2019).  However, claim preclusion applies is invoked defensively "to prevent a plaintiff from asserting a claim that the plaintiff has previously litigated and lost" (Thrasher, Buschmann & Voelkel, P.C. v. Adpoint Inc., 24 N.E.3d 487, 494 (Ind. Ct. App. 2015))—and is not an available remedy for a plaintiff to reassert a claim it has already won.


Re-framing the Consumer's argument under issue preclusion, or collateral estoppel, which can be used 'offensively' when the "plaintiff seeks to foreclose the defendant from litigating an issue the defendant ha[d] previously litigated unsuccessfully in an action with another party" (Tofany v. NBS Imaging Sys., Inc., 616 N.E.2d 1034, 1037 (Ind. 1993)) offered no different result. 


Primarily, the Indiana Supreme Court has held that a dismissal for failure to prosecute does not have issue-preclusive effect because "no issue was actually litigated." Afolabi, 849 N.E.2d at 1176.  Although this was independently sufficient to defeat the Consumer's claim, the Seventh Circuit also noted that relevant state law also considers certain factors, including the "incentive to litigate the prior action" to consider the fairness of the offensive use of issue preclusion.   Tofany at 1038.  The Seventh Circuit found that this factor also defeated any issue preclusion claim, concluding that the Debt Collector had little incentive to prosecute the dispute over attorney's fees given the small amount of damages at stake.


For these reasons, the Seventh Circuit held that the preclusion doctrine does not apply, and the Seventh Circuit rejected the Consumer's res judicata argument.


Next, the Seventh Circuit addressed the Consumer's claim that the Agreement did not authorize the Debt Collector to collect fees-on-fees, and the Debt Collector's collection attempts was a false statement in violation of § 1692e and an unfair debt collection practice in violation of § 1692f. 


Specifically, in executing the Agreement the Consumer agreed that "[i]n the event I do not pay such charges when due, I agree to pay costs of collection, including attorney['s] fees and interest." The Consumer argued that "costs of collection" should be limited only to the cost of collecting unpaid medical bills and attorneys' fees related to collection of the bills, while the Debt Collector argued for the language to be interpreted more broadly, to include all costs associated with collection, including the cost of collecting attorneys' fees.


The Seventh Circuit concluded that the phrase is comprehensive, and that reading "costs of collection" to exclude fees-on-fees would "not fully compensate [the hospital] for enforcing its rights" and run contrary to Indiana law's interpretation of standard fee-shifting provisions.  Walton v. Claybridge Homeowners Ass'n, Inc., 825 N.E.2d 818, 825 (Ind. Ct. App. 2005) (Indiana law recognizes that the "purpose of a fee-shifting provision is to make the prevailing party to a contract whole."). 


Because the contractual language permitted the collection of fees-on-fees, the Consumer's collection attempts did not violate the FDCPA.


For these reasons, judgment in the Debt Collector's favor was affirmed.




Ralph T. Wutscher
Maurice Wutscher LLP
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