Michael Hassen of Jeffer, Mangels, Butler & Marmaro, who publishes the Class Action Defense Blog put up an interesting post last month about a case called Guevarra v. Progressive Financial. In it, the U.S. District Court ofr the Northern District of California denied class certification without prejudice, and ordered the putative class counsel to show cause why the case shouldn't be referred to the California State Bar. Ultimately, United States District Chief Judge Vaughn Walker did not refer the matter for discipline, but the fact that a District Court Judge pondered the idea is interesting, to say the least.
The plaintiff's counsel's "offense" was to agree to divide a putative class to separate the prosecution of claims under the Fair Debt Collection Practices Act (FDCPA) under circumstances where the putative class could seek more damages in multiple proceedings than in a single proceeding. The reason for this was a peculiarity in the FDCPA which capped damages in any class action at one percent of a company's net worth in . The District Court was outraged, and considered this a move done solely to increase attorney's fees. The court ignored the fact that the tactic also dramatically increased the potential recovery by the class because of the quirk in the FDCPA.
In response to the court’s order to show cause, counsel cites Mace v. Van Ru Credit Corp. (7th Cir 1997) 109 F.3d 338 as authorizing their tactics. But in Mace, the court declined to impose a duty on the plaintiff to bring suit 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.
Mace nevertheless highlights a troubling aspect of the FDCPA, 15 USC §§ 1692 et seq, which provides that:
(a) [A]ny debt collector who fails to comply with any provision of this subchapter with respect to any person is liable to such person in an amount equal to the sum of:
(1) any actual damage sustained by such person as a result of such failure;
(2) (A) in the case of any action by an individual, such additional damages as the court may allow, but not exceeding $ 1,000; or (B) in the case of a class action,
(i) such amount for each named plaintiff as could be recovered under subparagraph (A), and (ii) such amount as the court may allow for all other class members, without regard to a minimum individual recovery, not to exceed the lesser of $500,000 or 1 per centum of the net worth of the debt collector; and
(3) ... the costs of the action, together with a reasonable attorney fee....
(15 USC § 1692k)
The problem lies with the statutory limit on damages in § 1692k(a)(2)(b)(ii), which applies to each FDCPA class action, not to all FDCPA class actions involving a particular debt collector. This encourages the multiplication of proceedings. 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.
Maybe we're missing something, but it appears to us that the class counsel was entirely in the right here, and that a class action was appropriate, and it was a superior means of litigating these claims, but that, according to the best interests of the class, it was logical and appropriate to separate the classes into logically related smaller groups so that fewer class members would have their claims reduced by the recovery cap under the FDCPA. We can see why a defendant wouldn't like this, but that's how Congress designed the statute.
The case, incidentally, was dismissed with prejudice after the show cause hearing, pursuant to a stipulation filed three months earlier.