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FDCPA Class Action Defense Cases-Guevarra v. Progressive Financial: California Federal Court Holds Congress Must Address “Ethically Questionable” Conduct of Plaintiff’s Counsel In Multiplying Class Action Litigation

Class Action Plaintiff Lawyer’s Collusion with Plaintiff’s Counsel in Separate Fair Debt Collection Practices Act (FDCPA) Class Action Against Same Defendant is not Condoned but Remedy lies with Congress not with Disciplinary Bodies California Federal Court Holds

Plaintiff filed a putative class action against a debt collection agency and one of its employees alleging that letters sent to debtors violated the federal Fair Debt Collection Practices Act (FDCPA) and California’s state law equivalent, the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act). Guevarra v. Progressive Fin. Servs., Inc., 497 F.Supp.2d 1090, 1090-91 (N.D. Cal. 2007). The class action complaint originally sought “class-wide relief on behalf of all debtors who received the letter at issue here”; however, plaintiff’s counsel subsequently amended the class action allegations to seek relief solely on behalf of debtors of a single creditor. IKEA. Id., at 1091. Plaintiff’s counsel then asked the district court to certify the litigation as a class action, and admitted at oral argument that counsel was “coordinating with plaintiff’s counsel in a separate [class action] pending in the Central District of California concerning the same letter as the one at issue here.” Id. As the district court explained at page 1091, “Apparently, plaintiff’s counsel agreed with counsel in the [other class action] to divide up the class between the IDEA and non-IKEA creditors.” The district court refused to certify the litigation as a class action and issued an Order to Show Cause why plaintiff’s counsel should not be referred to the State Bar for disciplinary action. Id.

The district court denied the class certification motion “citing plaintiff’s arbitrary distinction between IKEA and non-IKEA creditors and concluding that plaintiff’s proposed definition is not ‘superior’ to other means available under FRCP 23(b)(3).” Guevarra, at 1091. The federal court explained at page 1091, “Because plaintiff’s counsel appeared to have divided up the class in order to maximize attorney fees without significant benefit to their clients, the court ordered plaintiff’s counsel to show cause why the court should not refer this matter to the State Bar of California and the Northern District’s Standing Committee on Professional Conduct” (citations omitted). The court also concluded that the case relied upon by plaintiff’s counsel, Mace v. Van Ru Credit Corp., 109 F.3d 338 (7th Cir.1997), was in applicable because the Mace court merely refused to impose on counsel a duty to bring a class action “on behalf of the broadest possible class”; “Mace does not, however, condone post-suit collusion between counsel in separate actions in order to cut a class in two.” Id., at 1091.

The district court ultimately decided not to refer plaintiff’s counsel to the State Bar because of “a troubling aspect of the FDCPA”; specifically, that the statute limits a defendant’s liability exposure in class action cases to “the lesser of $500,000 or 1 per centum of the net worth of the debt collector.” Guevarra, at 1091 (citing 15 U.S.C. § 1692k). The district court believed that this statutory limit “applies to each FDCPA class action, not to all FDCPA class actions involving a particular debt collector.” Id. Accordingly, Congress “encourages the multiplication of proceedings.” Id. The court reasoned at pages 1091 and 1092, “If the debt collector has a net worth of less than $50 million, then the class may recover only 1 percent of that amount. Accordingly plaintiffs might divide into 100 classes which each take 1 percent. If the debt collector is worth more than $50 million, then each class may recover only $500,000, and plaintiffs might divide into an increasing number of classes, each taking a bite at the golden apple until the company is broke.”

This conflict led the federal court to reconsider its original opinion that disciplinary action was warranted. As the court explained at page 1092, “The mis-incentives created by the FDCPA stand in direct conflict with 28 U.S.C. § 1927, which proscribes an attorney’s multiplication of proceedings. This provision creates another mis-incentive. The limit on liability encourages debt-collecting entities to restrict their net worth and hence their potential liability. [¶] Nowhere are the ill effects of this legal regime more evident than in the present suit, in which counsel engaged in ethically questionable behavior while purportedly serving the interest of their clients.” (Italics added.) The district court concluded that “any remedy to this situation lies with Congress” and so decided not to refer counsel to the State Bar or the Northern District’s Standing Committee on Professional Conduct. Id., at 1092-93.

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