The U.S. Court of Appeals for the Eleventh Circuit recently affirmed a district court’s order requiring borrower’s counsel to pay a servicer’s attorney’s fees under Federal Rule of Civil Procedure 11, but reversed that part of the order that imposed sanctions jointly against both borrower and her attorney under the fee-shifting provision of the federal Fair Debt Collection Practices Act, holding only the attorney was liable.

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

A student loan borrower in default sued her loan servicer, alleging that the servicer violated the FDCPA by using “false, deceptive, or misleading representation[s]” and engaging in conduct the natural consequence of which was to harass, oppress, or abuse her.

The loan servicer moved to dismiss, arguing that it was not a “debt collector” under the FDCPA because the debt “was not in default at the time it was obtained by [the servicer].” The servicer also cited case law holding that “creditors and loan servicers are not ‘debt collectors’ for purposes of the FDCPA if they acquired or began servicing a loan prior to the debtor defaulting.”

In response, the borrower moved to dismiss the case voluntarily, which was granted.  The servicer then moved for an award of attorney’s fees under subsection 1692k(a)(3) of the FDCPA, which “permits a court to shift the defendant’s attorney’s fees to the plaintiff ‘[o]n a finding by the court that an action under this section was brought in bad faith and for the purpose of harassment…’”

The magistrate judge recommended that the servicer’s motion be granted and that sanctions be imposed on the attorney under Rule 11 because the same attorney – one N. James Turner -- had filed a previous case in the same court based on the same FDCPA claims, only to seek a voluntary dismissal when the defendant moved to dismiss on the same grounds. The magistrate judge found that this reflected that the attorney knew the claims were frivolous, but filed the case anyway in bad faith for purposes of harassment or other improper purpose. The magistrate judge recommended that attorney’s fees be assessed against the borrower as well based on “[t]he general rule … that clients are responsible for the acts and omissions of the attorneys they select to represent them.”

The borrower objected to the magistrate judge’s recommendation, arguing that although the Eleventh Circuit had not interpreted the FDCPA fee-shifting provision, other courts have set a high bar, requiring that “the movant point to evidence that a plaintiff both knew that his or her claim was meritless and pursued it with the purpose of harassing the defendant” and that her conduct did not rise to that level.  In addition, she argued that her attorney’s conduct should not be imputed to her.

The district court adopted the magistrate judge’s findings and ordered the borrower to pay $5,068 for the defendant’s attorney’s fees, and directed her attorney to show cause why he should not be sanctioned under Rule 11. The district court then entered an order ruling that the borrower and her attorney were jointly and severally liable for the fee award. The borrower and her attorney appealed.

On appeal, the Eleventh Circuit first addressed whether it had jurisdiction over the attorney’s appeal of the Rule 11 sanctions because the notice of appeal did not reflect that he intended to participate as a party, but only as counsel for the borrower, and an appellate court generally lacks jurisdiction “over an appeal of a district court’s award of sanctions against counsel where the notice of appeal fails to make clear that counsel intends to participate as an appellant rather than as an appellant’s attorney.”

The Court nevertheless held it had jurisdiction over the attorney’s appeal based on a prior case where it decided that when “the award of fees was joint and several against the [client] and its counsel … it would be unjust to refuse to hear counsel’s appeal simply because the attorney did not file the notice of appeal in his name as well as the client’s.” In addition “because the civil appeal statement filed in this Court prior to briefing made clear that the Rule 11 sanctions were an issue on the appeal, there is no surprise or undue prejudice to [the servicer] in permitting [borrower’s counsel] to appeal as a participant, rather than only as an attorney.”

Turning to the Rule 11 sanctions imposed against borrower’s attorney, the Eleventh Circuit explained that sanctions are called for “(1) when a party files a pleading that has no reasonable factual basis; (2) when the party files a pleading that is based on a legal theory that has no reasonable chance of success and that cannot be advanced as a reasonable argument to change existing law; or (3) when the party files a pleading in bad faith for an improper purpose.”

The Eleventh Circuit further explained that “[t]he standard for gauging whether a claim is frivolous or meritless is an objective one, ‘[h]ence courts determine whether a reasonable attorney in like circumstances could believe his actions were factually and legally justified.’”

When deciding to impose sanctions, the trial court must engage in a two-step inquiry, “asking ‘(1) whether the party’s claims are objectively frivolous; and (2) whether the person who signed the pleadings should have been aware that they were frivolous.’ … ‘[I]f, after dismissing a party’s claim as baseless, the court finds that the party’s attorney failed to conduct a reasonable inquiry into the matter, then the court is obligated to impose sanctions even if the attorney had a good faith belief that the claim was sound.’”

The Eleventh Circuit found that because the borrower’s attorney had pursued, then abandoned the same legal theory in an earlier case, he knew or should have known that the legal basis for borrower’s claims were meritless because “the text of § 1692a(6) does not support the extension of liability to a loan servicer … [and that] even though our Circuit has not addressed the question, the jurisprudence of other circuits has so held.”

Although it affirmed the district court’s imposition of Rule 11 sanctions, the Court explained that it did so “cautiously” because “the fact that other courts have rejected the argument that loan servicers are debt collectors under these general circumstances is not sufficient, by itself, to mandate a conclusion that [the borrower’s] claims were objectively frivolous.”

However, the Court reasoned that in the case at bar, “a simple reading of the statute underlying [the borrower’s] claims reveals that the amended complaint employed an objectively frivolous legal theory.”  This is because subsection 1692a(6) “excludes from ‘debt collector’ ‘any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity … concerns a debt which was not in default at the time it was obtained by such person.’”  Based on the facts alleged in the amended complaint, the debt was not in default when the servicer began servicing it, such that the defendant could not be a “debt collector” under the FDCPA.

Because the borrower’s attorney had no legitimate reason to file the complaint against the servicer, especially given his prior litigation experience with the same legal issue and the facts as pled, the allegations were “objectively frivolous” and the Eleventh Circuit found that the district court did not abuse its discretion by imposing Rule 11 sanctions against the attorney “for filing a bad faith, frivolous suit.”

Turning to the district court’s award of fees against the borrower, the Court concluded that the district court “erred in assessing attorney’s fees against [the borrower]” because although there is no Eleventh Circuit “precedent interpreting the meaning of ‘in bad faith and for purposes of harassment’ in the context of § 1692k(a)(3), we have previously held that Rule 11 sanctions could not be imposed on a plaintiff-client based solely on the misconduct of her attorney.”

Because the Eleventh Circuit found there was no evidence that the borrower “had knowledge of the legal strategy being pursued and its faults, rather than just the facts of her case,” the Court held that the district court abused its discretion by imposing fees against the borrower under § 1692k(a)(3).