Seventh Circuit Affirms Slashing of Prevailing Plaintiff's $187k Attorney Fee Award to Under $11k for Rejecting Meaningful Settlement Offers

Last week, the Seventh Circuit Court of Appeals issued an opinion where it affirmed a district court’s decision to cut plaintiff’s attorneys fees to $10,875 from the originally requested $187,410. The decision in question is Paz v. Portfolio Recovery Assocs., LLC, No.  17-3259 (7^th Cir. May 15, 2019).

The factual and procedural background of this case revolves around two Fair Debt Collection Practices (FDCPA) lawsuits against Portfolio Recovery Associates, LLC (PRA).

The First FDCPA Suit

PRA purchased and attempted to collect on plaintiff-appellant’s defaulted credit card account. Plaintiff filed an FDCPA lawsuit against PRA, alleging that PRA failed to credit report his account as disputed. PRA promptly issued an Offer of Judgment (OOJ) pursuant to Federal Rule of Civil Procedure 68.  

Editor’s Note: A Rule 68 Offer of Judgment is a litigation tool that caps a plaintiff’s fee recovery at the time the offer was made if the plaintiff refuses the OOJ and fails to obtain a judgment that is better than what was offered. The policy is to not allow plaintiff or his counsel to unreasonably continue litigation for the sole purpose of drumming up legal fees if plaintiff would have fared better accepting a settlement offer earlier in the litigation rather than from succeeding at trial.

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Plaintiff accepted the Rule 68 OOJ, which excluded an admission of fault. This resulted in a judgment entered against defendant and resolved the suit.

The Second FDCPA Suit

After this, defendant continued to credit report the account without marking it as disputed, so plaintiff sued again. Like with the prior suit, defendant again issued a Rule 68 OOJ for $3,501 plus attorney fees, disclaiming any admission of fault. Plaintiff never responded.

Prior to trial, defendant issued a regular offer to settle the matter for $25,000 plus fees, which plaintiff rejected. Plaintiff succeeded at trial, but since he was unable to show actual damages, he only recovered $1,000 in statutory damages.

When attorney fees came up, plaintiff requested $187,410 to cover all defense fees through trial. The district court, however, slashed this amount to just over $10,000. According to the district court, plaintiff rejected reasonable offers to settle and, since he recovered less in damages than the Rule 68 OOJ offered, the court only allowed him to recover attorney fees up until the Rule 68 OOJ was presented.

Seventh Circuit Decision

The Seventh Circuit affirmed the district court’s decision and found that the court did not abuse its discretion. In its decision, the Seventh Circuit held the plaintiff and his counsel to task on two points.

First, plaintiff attempted to argue that he did not fully understand what a Rule 68 OOJ meant and that the terms were so ambiguous, specifically as to attorney fees, that the offer was rendered worthless and rejecting it was reasonable. The court disagreed, finding:

Paz’s position inheres with an air of unreality. He suggests he had little idea what the offer meant, yet his counsel—in this case and others—had previously accepted offers with identical terms and, in doing so, managed to negotiate and receive a reasonable amount to cover legal fees. All Paz’s counsel had to do was request a fee award that would cover the time necessary to finalize the settlement. This would not have been difficult given the relative simplicity of the claims. By no means was this a scenario where a defendant conveyed an incomprehensible offer or acted in bad faith by setting a trap to preclude a plaintiff from recovering a reasonable amount in attorneys’ fees as part of a settlement.

Second, plaintiff attempted to argue that he received a better result through trial—despite recovering a lower damages amount—because the Rule 68 OOJ specifically disclaimed defendant’s liability. A judgment on the merits for the maximum statutory damages is “much better,” according to plaintiff. The court again disagreed, finding:

Settlement offers regularly disclaim liability, and PRA’s having done so here was in no way out of the ordinary. What Paz overlooks is that his acceptance of the offer, by operation of Rule 68, would have resulted in a judgment being entered against PRA. The moment such a judgment hit the district court’s docket, the prior disclaimer of liability would have been a dead letter. Furthermore, by the very terms of PRA’s offer, the ensuing judgment would have been for $3,501 plus reasonable attorneys’ fees and costs. Paz’s counsel had to know—from his prior experience in this case alone—that PRA’s disclaimer of liability in its Rule 68 offer would not preclude an award of attorneys’ fees.

The Seventh Circuit sums up this situation poignantly:

The time associated with the $187,410 in attorneys’ fees did not reflect the sort of reasonable attorney work that is often inevitable as part of traveling a diligent litigation course. To the contrary, the vast majority of the fees Paz sought to recover were for time spent pursuing an unsuccessful and ill-advised effort to win a much bigger payoff than was even remotely possible in the circumstances giving rise to his claims. This observation is precisely what led the district court to conclude that $10,875 was a reasonable fee award. Paz and his counsel cannot now force PRA to pay the legal expenses for their failure, so the reduced fee award in this case was appropriate and far from an abuse of discretion.

insideARM Perspective

With the litigation dilemma faced by the ARM industry, it is important for debt collectors to utilize any tool that is available to minimize defense costs. The Rule 68 OOJ is a tool that should be considered whenever an FDCPA suit is filed. Unless a debt collector wants to pursue the case on the merits to result in a positive judgment on the merits for the industry, the OOJ can help cap the plaintiffs’ bar’s efforts to drum up attorney fees.

A Rule 68 OOJ and the FDCPA do not address a defendant recovering its own defense fees, but a situation like the above—where the plaintiff fights through trial after rejecting an OOJ that covers at least the statutory damages—will likely not happen frequently. Plaintiffs’ counsel earn revenue by recovering attorney fees; if they have no reason to believe they will recover more than the statutory damages, then they risk wasting their time by continuing to fight a case in which their fees will be capped.