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7th Cir. Rejects Plaintiff’s FDCPA Arguments Regarding ‘Consumer’ Debt

The U.S. Court of Appeals for the Seventh Circuit affirmed entry of judgment on the pleadings against a former condominium association board director’s claim that the association’s attorneys’ request for fees in a separate state court action filed by the association against the former director violated the federal Fair Debt Collection Practices Act (FDCPA).

In so ruling, the Court agreed that the former board director failed to state a cause of action under the FDCPA, 15 U.S.C. 1692, et seq., because the attorneys’ fees at issue and authorized under the association’s “Restated Declaration” agreement for violations of the board’s rules or obligations did not constitute a “debt” under the FDCPA’s limited, consumer-protection-focused definition.

A copy of the opinion in Spiegel v. Kim is available at:  Link to Opinion.

The board director of a condominium association was removed by the board in 2015 and sued by the association in Illinois state court for a slew of allegedly unauthorized actions taken leading to and following his removal, and seeking to enjoin him from interfering with board decisions or holding himself out as a director (the “state court action”).  The state court action complaint invoked the association’s “Restated Declaration” agreement which provided that owners who violated the board’s rules or obligation would be subject to payment of damages, costs and attorneys’ fees for misconduct. 

The former board director denied wrongdoing and filed a slew of lawsuits against the association, its lawyers and condominium residents in state court — 385 separate filings in total which were dismissed with prejudice and wherein the former board director was ordered to pay over $700,000 in fees and sanctions. 

While the state court action was pending, the former board director also filed suit in federal court against the association’s counsel, alleging that the attorney’s application for fees in the state court action violated the FDCPA.

The association’s counsel moved for judgment on the pleadings.  After initially staying the former board director’s federal proceedings under Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), the trial court held that the motion did not cause conflict with the state court action, and granted the association’s counsel’s motion for judgment on the pleadings.  In so ruling, the trial court concluded that the former board director failed to state a claim under the FDCPA because the requested attorneys’ fees were not a “debt” within the meaning of the FDCPA. After the former board director’s motions to vacate the judgment and request for leave to amend the complaint, the instant appeal ensued.  

On appeal, the Seventh Circuit sought to determine whether the attorneys’ fees sought by the association’s attorney in the state court action constituted a “debt” within the meaning of the FDCPA.

It was undisputed that the association’s state court action requested that the court impose a financial obligation on the former board director by requiring him to pay fees.  However, the Court noted that to determine whether the demand qualifies as a “debt” under the FDCPA “'[t]he crucial question is the legal source of the obligation.’” Franklin v. Parking Revenue Recovery Servs., Inc., 832 F.3d 741, 744–45 (7th Cir. 2016). 

The former board director argued that any obligation to pay the association’s counsel’s attorneys’ fees was a consumer debt because but for his condominium purchase he never would have served on the association board; but for his board service, he never would have become ensnared in the state court action; and but for the state court action, he never would have found himself on the receiving end of the association’s counsel’s legal demand to pay attorneys’ fees.  The former board director cited the Seventh Circuit’s ruling in Newman v. Boehm, Pearlstein & Bright, Ltd., to support his argument, in which the Court held that assessments imposed by a homeowners’ association on its members could create a “debt” under the FDCPA. See 119 F.3d 477, 481 (7th Cir. 1997).

Reviewing Congress’s limited definition of “debt” under the FDCPA to consumer debt, the Court determined that the attorneys’ fees at issue did not  “aris[e] out of” a consumer transaction as Congress employed that requirement in defining “debt” (15 U.S.C. § 1692a(5)) and therefore fell outside the scope of the statute. 

More specifically, the Seventh Circuit held, the obligation for the former board director arose out of his alleged wrongdoings as a board member, and not from a consensual consumer transaction within the meaning of the FDCPA, and the association’s counsel’s invocation of the Restated Declaration in the state court action did not change the analysis, nor could it be connected to the former board director’s condominium purchase to constitute a consumer transaction or an obligation qualifying as a consumer debt.

The Seventh Circuit further rejected the former board director’s argument under Newman, because the resident members’ obligations to pay assessments in that action arose directly from the association’s declaration and bylaws to which the members consented upon purchasing their condominiums, but here the former board director’s obligation to pay attorneys’ fees arose from his actions as a board member. 

The Seventh Circuit also concluded that the trial court did not err in denying the former board director’s request to amend his complaint because the proposed amendment would not result in stating a viable legal claim.  See Heng v. Heavner, Beyers & Mihlar, LLC, 849 F.3d 348, 354 (7th Cir. 2017).  Lastly, the Court denied the former board director’s motions to strike ruling and orders for him to pay fees and sanctions in the state court action that were attached as exhibits to the association’s counsel’s appellate brief, concluding that the Court was permitted to take judicial notice of these public records.  See Tobey v. Chibucos, 890 F.3d 634, 647–48 (7th Cir. 2018) (collecting cases).

Accordingly, judgment on the pleadings entered in the association’s counsel’s favor was affirmed.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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