3rd Circuit Upholds Sanctions for Lawyers Filing “Contrived” FDCPA Lawsuits

The U.S. Court of Appeals for the Third Circuit recently upheld sanctions against two attorneys who manufactured FDCPA violations in order to bring cases where they could recover statutory attorneys’ fees.

Under the FDCPA, a creditor who fails to notify credit bureaus that a debt is disputed can be liable for up to $1,000 in statutory damages plus attorneys’ fees and costs.  The sanctioned attorneys in this case instituted a scheme to create fake client letters disputing debts that were designed to increase the chances of the debt not being reported as disputed.  When a client retained the firm to dispute a debt, the firm would send the creditor a template letter which appeared to be handwritten and signed by the client, but which was in fact written and signed by law firm staff.  The letters used meandering and confusing language that obliquely referenced a debt and how it might be incorrect, but this was buried among other language which the court characterized as “gibberish” and “nonsense.”  This was intended to bypass or confuse debt collector software used to analyze these letters so that the software would not flag the letters as debt disputes.

The scheme was discovered after the attorneys filed two identical state complaints against the same defendant which attached almost identical handwritten letters.  The defendant removed the cases to federal court, which ordered an evidentiary hearing where the attorneys and their staff admitted to the relevant facts.  The district court ordered the attorneys to show cause why they should not be sanctioned and ultimately dismissed the cases with prejudice, awarded the defendant attorney’s fees and costs, and ordered the lawyers to write apology letters, and to attach the court’s sanction order to future debt-dispute cases they filed in the district.

The attorneys appealed and the Third Circuit affirmed.  The court rejected arguments from the attorneys that they should not be sanctioned since most of the conduct at issue occurred before the existence of any court proceeding.  The court found that the attorneys had filed these lawsuits based on misrepresentations and half-truths, and that the cases served to harass the defendant, increase its litigation costs, and gin up attorneys’ fees.  Where the attorneys intentionally engineered a scheme to mislead the defendant into violating the FDCPA and to mislead the courts into believing that the letters were legitimate attempts to dispute a debt, the sanctions were appropriate.