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7th Cir. Rejects Plaintiff’s Effort to Run Up Attorney’s Fees After Rejecting Reasonable Offer

The U.S. Court of Appeals for the Seventh Circuit recently held that the trial court did not abuse its discretion when it reduced the plaintiff’s counsel’s $187,410 fee claim to $10,875 after the debtor recovered only a $1,000 statutory damages award on his federal Fair Debt Collection Practices Act claim at trial and the debt collector had issued a Rule 68 offer of judgment early in the case that exceeded the amount the debtor recovered.

A copy of the opinion in Paz v. Portfolio Recovery Associates, LLC is available at:  Link to Opinion.

After a debt collector purchased a debtor’s credit card debt, the debtor sued the debt collector alleging a violation of the FDCPA.

The debt collector quickly issued an offer of judgment pursuant to Federal Rule of Civil Procedure 68.  The debt collector offered to eliminate the debt, to pay the debtor $1,001 plus reasonable attorney’s fees and costs through the date of the plaintiff’s acceptance of this offer, in an amount agreed upon by the parties, and if no agreement can be made, to be determined by the Court.  The offer terms disclaimed any liability. The debtor accepted the offer and the parties agreed to $4,500 in reasonable attorney’s fees.

Subsequently, the debt collector engaged in further conduct that caused the debtor to file a second suit against the debt collector alleging several violations of the FDCPA and the federal Fair Credit Reporting Act (FCRA).

The debt collector once again responded by trying to promptly resolve the case.  The debt collector issued successive Rule 68 offers of judgment in the amounts of $1,500, $2,500, and $3,501, with additional terms that mirrored the accepted offer in the first case, but this time the debtor did not accept.

After cross-motions for summary judgment, the Court only allowed the debtor to proceed to trial on one of his alleged FDCPA and FCRA claims, and precluded the debtor from recovering any punitive damages.  This left the debtor with the ability to recover up to $1,000 in statutory damages on his FDCPA claim and $21,000 in actual damages for his emotional distress claim.

One week before trial, the debt collector again tried to resolve the matter by offering the debtor $25,000 to resolve all remaining claims and to cover his attorney’s fees and costs. The debtor rejected the offer, hired two more attorneys to assist with prosecuting his remaining claims, and proceeded to trial.  The jury found the debtor had no actual damages and awarded him $1,000 in FDCPA statutory damages.

The debtor’s counsel then sought $187,410 in attorney’s fees, and $2,744 in costs under the FDCPA.

As you may recall, a Rule 68 offer of judgment limits the plaintiff’s ability to recoup costs incurred after the offer date and may limit any attorney’s fee award too, but section 1692k(a)(3) of the FDCPA creates an exception because it defines attorney’s fees separately from costs, allowing the prevailing debtor to recover reasonable attorney’s fees despite any offer of judgment.

However, the trial court noted, the attorney’s fees must still be reasonable.  The trial court held that it must consider that the debtor rejected the debt collector’s Rule 68 offer of $3,501 and instead proceeded to trial.  In so ruling, the court also held that it should consider substantial settlement offers when deciding the reasonable attorney’s fees amount to award.

Here, because the debtor obtained only limited success at trial, and rejected a settlement proposal more than three times the amount of his ultimate recovery, the trial court reduced the attorney’s fees award to the $10,875 that had been incurred when the debt collector made the third offer of judgment given that the debtor did not establish any new principles of law or suffer any ongoing harm.

The trial court awarded the debtor $436 in costs as the prevailing party and also awarded the debt collector $3,064 for the costs it incurred after issuing the third offer of judgment.

This appeal followed.

The Seventh Circuit began its analysis by acknowledging that section 1692k(a)(3) of the FDCPA entitles the prevailing party to a reasonable attorney’s fee award. To determine a reasonable fee award, courts usually employ the lodestar method multiplying the attorney’s reasonable hourly rate by the reasonable hours expended and then adjusting the amount to account for the degree of success and the public interest advanced.

The Seventh Circuit rejected the debtor’s argument that he did not understand what the offer of $3,501 plus reasonable attorney’s fees and costs offer meant because he accepted an offer with the same terms in the first lawsuit and managed to negotiate and receive a reasonable amount to cover legal fees.  Here, the Court noted, the debtor’s counsel only had to request a fee award that would cover the time necessary to finalize the settlement.  The Seventh Circuit characterized this next step as easy given the relative simplicity of the claims.

The debtor next argued that the trial court abused its discretion in lowering the fee award to $10,875 because the terms of the offer disclaimed liability. The Seventh Circuit had little trouble concluding that this argument missed the mark because the debtor’s acceptance of the offer, by operation of Rule 68, would have resulted in a judgment being entered against the debt collector. As such, when the judgment hit the trial court’s docket, the prior disclaimer of liability would have been a dead letter.

The Seventh Circuit concluded by noting that the debt collector offered the debtor a substantial settlement offer at the beginning of the case that was more than three times the statutory damages available to the debtor and included reasonable attorney’s fees and costs.

Despite this, the Court noted, the debtor proceeded to incur $187,410 in attorney’s fees, only to walk away with $1,000 in statutory damages.  The Seventh Circuit held that the attorney’s fees incurred did not reflect the reasonable attorney work that is often inevitable as part of traveling a diligent litigation course. Instead, the Court noted, the vast majority of the attorney’s fees the debtor incurred were for time spent pursuing an unsuccessful and ill-advised effort to win a much bigger payout than was even remotely possible in the circumstances giving rise to his claims.

As such, the trial court did not abuse its discretion, and the Seventh Circuit affirmed the trial court’s ruling.

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