Take Back Control through Rule 11 of the Federal Rules of Civil Procedure

Take Action on Direction Sign - Green Arrow on a Grey Background.

In an attempt to reorganize my personal library, I stumbled upon some sociology textbooks dating back to my college years. While reading through a chapter on learned helplessness[i], I couldn’t help but anecdotally ponder the question as to whether members of the Credit and Accounts Receivable Management Industry are experiencing some form of organizational learned helplessness. The industry is in a twilight zone of sorts, finding itself up against inflexible and powerful bureaucratic forces that are demanding monies and unrealistic obedience to cure-findings that haven’t actually been found, while also combatting metastasizing myths that are not rooted in empirical reality. With that being said, there is an established method for unlearning helplessness, which is to change perception by taking back control.

An on-point application of this technique is to maintain a firm stance against helplessness by fighting frivolous claims and attempted exploitation. Even though this idea or ideal might sound like superficial and clichéd motivational dogma, it is actually consistent with findings by courts around the country that are beginning to see the light. It should come as no surprise that these positive court findings are undoubtedly connected with individual members of the industry taking a principled stance against helplessness by fighting frivolous claims. Point being, while a basic cost-benefit analysis may consistently lead to the conclusion that it’s simply less expensive to pay nuisance value for an entirely manufactured action, this analysis might be shortsighted, because it does not take into account all potential variables, for example the effect on the industry at large and the possibility for a positive shift in perception by refusing to give credence to the surreal. To further this point, just recently, the federal court with quite possibly the highest number of consumer lawsuits in the country, noted the following:

“In this Court…and I suspect in many others, the use of the [FDCPA] has evolved into something quite different than its original purpose would suggest….Frequently, these cases are brought on behalf of the same debtor-plaintiffs, who seize on the most technical alleged defects in collection notices or telephone communications, often raising claims of ‘confusion’ or ‘deception’ regarding practices as to which no one, not even the least sophisticated consumer, could reasonably be confused or misled. These cases are often brought for the non-salutary purpose of squeezing a nuisance settlement and a pittance of attorneys’ fees out of a collection company, which it will often find cheaper to pay than to litigate….The collection company in this case did everything by the book, and yet has still found itself a defendant in an FDCPA action.”[ii]

 Just in the last year, there have been some interesting case developments with companies affirmatively and successfully using Rule 11 of the Federal Rules of Civil Procedure,[iii] which stands as the ne plus ultra of deterrent sanctions. To better understand this possible shift in perception, I reviewed a random sample of 15 FDCPA cases containing Rule 11 filings by respective defendants within the last year.[iv] This does not account for effectively using a Rule 11 letter to compel a voluntary dismissal of an objectively frivolous lawsuit, nor does it account for other sanctions powers, such as vexatious litigation,[v] discovery sanctions,[vi] pretrial conference sanctions[vii] and the Inherent Power of the Court to issue applicable sanctions.

However, this article would not be complete without mentioning the recent victory out of the Northern District of Texas, in which the defendant went all the way to trial and beyond to expose what amounted to a shakedown by a massive multi-state “consumer attorney” operation.[viii] While the defendant strictly requested discovery sanctions[ix] and sanctions for vexatious conduct,[x] the court found that “[plaintiff’s attorneys] effected a fraud on the Court through evasion, prevarication and outright lies, in an attempt to avoid negative legal consequences against them and their firm…,” and used the Inherent Power of the Court to deliver three-year suspensions to the plaintiff’s attorneys. Once again, it goes without saying that this result would not be possible without the defendant’s decision to decisively defend against frivolous allegations and attempted exploitation.

In reviewing the random sample of cases, I was surprised to see that Rule 11 sanctions were actually granted in 6 out of the 15 cases, and I was even more surprised as to the considerate and at times sympathetic tone of the courts throughout the country in cases where sanctions were denied for mostly technical reasons.

In cases where sanctions were granted, courts found various abuses by plaintiffs and their attorneys in reaching a determination that Rule 11 was a proper deterrent to prevent against future misconduct. See:

  • Shetiwy v. Midland Credit Mgmt., a finding that plaintiffs’ attorney has brought numerous meritless claims;[xi]
  • Duncan v. CitiMortgage, Inc., the11th circuit upholding a finding of Rule 11 sanctions, due to a lack of factual basis in the complaint and the plaintiff’s failure to address why individual defendants were included, despite having multiple opportunities to do so;[xii]
  • Farley v. Bank of Am., N.A., a holding that courts have the authority to protect defendants from the harassment of frivolous and vexatious lawsuits, and to protect themselves from having to process frivolous and repetitive papers;[xiii]
  • Tacoronte v. Cohen, entering an order for Rule 11 sanctions, as the plaintiff’s claims were frivolous, presented for the improper purpose of harassment, and asserted without evidentiary support);[xiv] and
  • Diaz v. First Marblehead Corp, finding bad faith where the plaintiff’s attorney knew his client’s claim was frivolous and still chose to pursue it.[xv]

In conclusion, in arrogating to themselves the power to determine guilt without perceived consequence, some attorneys and regulators claiming to represent consumers have done everything possible to usurp the role of the court as the fundamental arbiter of justice. To this point, I’m not advocating for expending gratuitous monies on every case or for a letter threatening litigation, but if a matter is unequivocally objectively frivolous, I do advocate that we Take Back Control.

by Scott E. Wortman, Partner Warshaw Burstein, LLP

555 Fifth Avenue, New York, NY 10017

www.wbcsk.com,  attorney profile

E-Mail: SWORTMAN@wbcsk.com

Direct Telephone:  212-984-7723 , Cell phone: 646-709-6408, Facsimile: 212-972-9150

Notes:

[i] By way of example, see http://www.britannica.com/topic/learned-helplessness

[ii] Huebner v. Midland Credit Mgmt., 2015 U.S. Dist. LEXIS 16677 (E.D.N.Y. Feb. 11, 2015)

[iii] Rule 11(b): By presenting to the court a pleading, written motion, or other paper—whether by signing, filing, submitting, or later advocating it—an attorney or unrepresented party certifies that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances: (1) it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation; (2) the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law; (3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and (4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or a lack of information.

[iv] Hopkins v. Capital One Bank, USA, N.A., 2015 U.S. Dist. LEXIS 8346 (W.D. Wis. Jan. 26, 2015); Bernard v. MGC Mortg., Inc., 2015 U.S. Dist. LEXIS 47818 (W.D. Tex. Apr. 10, 2015); Justice v. Gemini Capital Group, LLC, 2015 U.S. Dist. LEXIS 60623 (D. Colo. May 8, 2015); Kniley v. Citibank, N.A., 2015 U.S. Dist. LEXIS 53021 (N.D. Cal. Apr. 22, 2015); Wood v. Citibank, N.A., 2015 U.S. Dist. LEXIS 73067 (M.D. Fla. June 4, 2015); Mulato v. Wells Fargo Bank, N.A., 2014 U.S. Dist. LEXIS 176404 (N.D. Cal. Dec. 19, 2014); Dicion v. Mann Mortg., LLC, 2014 U.S. Dist. LEXIS 159675 (D. Haw. Nov. 10, 2014); Schwantes v. Monco Law Offices, 2014 U.S. Dist. LEXIS 116532 (D. Minn. Aug. 21, 2014); Rojas v. Forster & Garbus LLP, 2014 U.S. Dist. LEXIS 105780, 2014 WL 3810124 (E.D.N.Y. July 31, 2014); Shetiwy v. Midland Credit Mgmt., 2014 U.S. Dist. LEXIS 104244, 2014 WL 3739512 (S.D.N.Y. July 28, 2014); Huebner v. Midland Credit Mgmt., 2015 U.S. Dist. LEXIS 16677 (E.D.N.Y. Feb. 11, 2015); Duncan v. CitiMortgage, Inc., 2015 U.S. App. LEXIS 10111 (11th Cir. Ga. June 16, 2015); Farley v. Bank of Am., N.A., 2015 U.S. Dist. LEXIS 75972 (E.D. Va. June 11, 2015); Tacoronte v. Cohen, 594 Fed. Appx. 605, 2015 U.S. App. LEXIS 2622 (11th Cir. Fla. 2015); Diaz v. First Marblehead Corp., 2014 U.S. Dist. LEXIS 174853 (M.D. Fla. Nov. 3, 2014)

[v] 28 U.S.C. § 1927

[vi] Federal Rules of Civil Procedure §§ 26(g), 30(d), 37(c) and (d)

[vii] Federal Rules of Civil Procedure § 16(f)(1)

[viii] White v. Regional Adjustment Bureau, Inc. 11-cv-01817-B, Northern District of Texas (Dallas)

[ix] Fed. R. Civ. P. 37

[x] 28 U.S.C. § 1927

[xi] 2014 U.S. Dist. LEXIS 104244, 2014 WL 3739512 (S.D.N.Y. July 28, 2014)

[xii] 2015 U.S. App. LEXIS 10111 (11th Cir. Ga. June 16, 2015)

[xiii] 2015 U.S. Dist. LEXIS 75972 (E.D. Va. June 11, 2015)

[xiv] 594 Fed. Appx. 605, 2015 U.S. App. LEXIS 2622 (11th Cir. Fla. 2015)

[xv] 2014 U.S. Dist. LEXIS 174853 (M.D. Fla. Nov. 3, 2014)

To Moot or Not to Moot

iStock_000019098577Small-CharlieThe Second Circuit Court of Appeals has released its much-anticipated decision in Tanasi v. New Alliance Bank.[i]

The decision addresses whether the United States District Court[ii] properly denied the defendants’ motion to dismiss on the ground that plaintiff’s putative class action claims remained justiciable, even though the plaintiff’s claims were rendered moot by an unaccepted Offer of Judgment for complete relief made pursuant to Rule 68 of the Federal Rules of Civil Procedure (“Rule 68”).[iii]

Background

Rule 68 is a cost-shifting rule designed to encourage settlements without the burdens of additional and unnecessary protracted litigation. Under Article III of the U.S. Constitution, “[w]hen a case becomes moot, the federal courts lack subject matter jurisdiction over the action.”[iv] Under Rule 68 of the Federal Rules of Civil Procedure, a defendant can settle a case by offering complete relief of the plaintiff’s claims until up to two weeks before trial.

In the Tanasi v. New Alliance Bank case, Plaintiff filed a putative nationwide class action against the defendants, First Niagara Financial Group, Inc. and its predecessor in interest New Alliance Bank, seeking money damages arising from the purportedly improper assessment of overdraft fees on his account and the accounts of others similarly situated. Nine days later, the defendants made a Rule 68 offer of judgment to Plaintiff “on his individual claims” for $10,000 plus interest, reasonable attorneys’ fees, costs, and any “other damages he seeks on his individual claims.”

Subsequently, defendants filed a motion to dismiss, arguing that their pre-certification Rule 68 offer of judgment to the named plaintiff in this case rendered the case moot. The District Court found that the putative class remained viable, and issued a decision denying Defendants’ motion to dismiss.

On Appeal, the Second Circuit affirmed the District Court’s decision that it maintained Article III subject matter jurisdiction on the ground that Plaintiff’s individual claims were not moot at the time the District Court denied defendant’s motion to dismiss.[v]

What It Means

Generally, this means that where a district court does not enter judgment against a defendant for an unaccepted Rule 68 Offer of Judgment for full individual relief, the claims of the plaintiff are not automatically mooted by the unaccepted Rule 68 offer.

However, the Second Circuit expressly declined to rule on the certified question as to whether the plaintiff’s putative class action claims, brought pursuant to Rule 23 of the Federal Rules of Civil Procedure, provided an independent basis for Article III justiciability. Notably, the Second Circuit expressly acknowledged a split in the Circuits, stating:

“The federal courts of appeals are split on this question. The Third, Fourth, Fifth, Seventh, Tenth, and Federal Circuits have all concluded that a Rule 68 offer of complete relief to an individual renders his case moot for purposes of Article III, regardless of whether judgment is entered against the defendant. On the other hand, the Ninth and Eleventh Circuits, the two courts of appeals that have considered this question most recently, have reached the opposite conclusion.”

Thus, this decision leaves open the question of whether putative class action claims under Rule 23 generally provide an independent basis for justiciability after a plaintiff’s individual claims are rendered moot. 

Takeaways

Despite the Second Circuit’s instant holding, there is some reason for optimism. In the case of Lary v. Rexall Sundown, Inc.,[vi] a Federal District Court dismissed a putative class action commenced pursuant to the Telephone Consumer Protection Act (“TCPA”), finding that an individual offer of judgment under Rule 68 in the sum of $3,500.00 mooted the case under Article III of the U.S. Constitution. To provide context for this determination, the District Court looked to the procedural history of Rule 68, stating that:

“… in 1984, the Advisory Committee on the Rules of Practice and Procedure of the Judicial Conference of the United States proposed a revision to Rule 68 that ‘expressly precluded offers of judgment in class or derivative actions,’ which was rejected by Congress….Thus, although district courts in this circuit have held that Rule 68 does not apply to class actions, Rule 68 is actually designed to insulate defendants willing to consent to judgment against incurring the costs of further litigation, and there appears no indication that protection should be denied defendants in class actions.”[vii]

Plaintiff Lary is appealing the decision, and as it stands, this matter is currently pending before the Second Circuit Court of Appeals.[viii] To that end, while the Tanasi court carefully avoided ruling on whether putative class action claims under Rule 23 generally provide an independent basis for justiciability after a plaintiff’s individual claims are rendered moot, time will tell where the Second Circuit and possibly the Supreme Court stand on this issue.

What’s more, applying the holding enunciated by the U.S. Supreme Court in Genesis Healthcare Corp. v. Symczyk,[ix], it’s still unclear whether the “fundamental differences” between Rule 23 class actions and collective actions as noted in the Court’s decision relate exclusively to the certification process and not the pre-certification context.

Therefore, notwithstanding the Second Circuit’s ruling in Tanasi, it’s still an open question of law as to whether putative class action claims under Rule 23 provide an independent basis for justiciability after a plaintiff’s individual claims are rendered moot.

The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. Being general in nature, the information and materials provided may not apply to any specific factual and/or legal set of circumstances.  No attorney-client relationship is formed, nor should any such relationship be implied. Nothing in this blog is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.

Scott E. Wortman, Partner Warshaw Burstein, LLP

555 Fifth Avenue, New York, NY 10017

www.wbcsk.com,  attorney profile

E-Mail: SWORTMAN@wbcsk.com

Direct Telephone:  212-984-7723 , Cell phone: 646-709-6408, Facsimile: 212-972-9150

Notes:

[i] 2015 U.S. App. LEXIS 7932 (2d Cir. N.Y. May 14, 2015)

[ii] Tanasi v. New Alliance Bank, 2013 U.S. Dist. LEXIS 177035 (W.D.N.Y. Dec. 17, 2013)

[iii] Federal Rule of Civil Procedure 68(a) provides that at least fourteen (14) days before trial, a “party defending against a claim may serve on the opposing party an offer to allow judgment on specified terms, with costs then accrued. If, within fourteen (14) days after being served, the opposing party serves written notice accepting the offer, either party may then file the offer and notice of acceptance . . . . The clerk must then enter judgment.” Although, [a]n unaccepted offer is considered withdrawn . . . [i]f the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay costs incurred after the offer was made.” Fed. R. Civ. P. 68(b) and (d).

[iv] Fox v. Bd. of Trs. of State Univ. of N.Y., 42 F.3d 135, 140 (2d Cir. 1994).” Doyle v. Midland Credit Mgmt., 2013 U.S. App. LEXIS 13291 at *5, 722 F.3d 78 (2d Cir. 2013).

[v] “…because the district court had not yet entered judgment against the defendants when it reached its decision on the motion to dismiss, the court maintained Article III subject matter jurisdiction over the case regardless of Tansi’s putative class action claims.” Tanasi, 2015 U.S. App. LEXIS 7932 *12 (2d Cir. N.Y. May 14, 2015)

[vi] 2015 U.S. Dist. LEXIS 16733 (E.D.N.Y. Feb. 10, 2015)

[vii] Id. at 37 – 38.

[viii] Court of Appeals Docket #: 15-601

[ix] 133 S. Ct. 1523, 185 L. Ed. 2d 636 (U.S. 2013).