Court Opinion

ID: 2997981
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:40:06.873341+00
Date Added: 2024-06-11T09:19:11.078742
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

Nos. 04-1509 & 04-1637
RIDDLE & ASSOCIATES, P.C.,
                                               Plaintiff-Appellee,
                                v.
JUDITH A. KELLY,
                                                        Defendant.
APPEALS OF:
EDELMAN, COMBS & LATTURNER,
                                     Appellant, Cross-Appellee,
                               and

DAVID L. HARTSELL and ROSS & HARDIES,
                                                Cross-Appellants.
                         ____________
        Appeals from the United States District Court for
        the Northern District of Illinois, Eastern Division.
         No. 00 C 6435—Blanche M. Manning, Judge.
                         ____________
     ARGUED APRIL 14, 2005—DECIDED JULY 18, 2005
                    ____________

 Before COFFEY, RIPPLE, and KANNE, Circuit Judges.
  KANNE, Circuit Judge. This case involves cross-appeals
by two law firms over the imposition of—and failure to
2                                   Nos. 04-1509 & 04-1637

impose—sanctions under 28 U.S.C. § 1927. Edelman,
Combs & Latturner (“Edelman”) was sanctioned by the
district court and ordered to pay the plaintiff, Riddle &
Associates (“Riddle”), the attorneys’ fees and costs arising
out of the underlying declaratory judgment action. In a
counterclaim in the same lawsuit, the district court declined
the request by David L. Hartsell and Ross & Hardies
(collectively, “Ross & Hardies”) to impose sanctions against
Edelman. Thus, although the firm prevailed in its defense
of the counterclaim against it, it was unsuccessful in its
pursuit of sanctions against Edelman. In this appeal, the
original parties are virtual bystanders while Edelman and
Ross & Hardies battle over the issue of whether attorneys’
fees and costs were properly awarded or denied.
  By way of background, Judith A. Kelly wrote a bad check
to a riverboat casino in Aurora, Illinois. Because Kelly
failed to cover the $100 check, Riddle, a Utah law firm, was
retained to collect the debt. Riddle sent a collection notice
to Kelly and demanded payment of $125, which included
the original debt and a $25 service charge. Kelly did not
respond to the notice for 10 months. In the meantime,
rather than pay or dispute the debt, she availed herself of
the services of Edelman. Then, on August 17, 2000, Daniel
Edelman of that law firm sent a letter to Riddle threatening
to sue Riddle under § 1692g of the Fair Debt Collection
Practices Act (“FDCPA”), 15 U.S.C. §§ 1962 et seq. The
Edelman letter claimed that Riddle’s collection notice
contradicted and overshadowed Kelly’s right to dispute the
debt. Edelman’s letter demanded that Riddle pay $3000
($1000 to Kelly for damages and $2000 to Edelman for at-
torneys’ fees) in order to avoid a lawsuit.
  Riddle’s attorney, David Hartsell, a member of the Ross
& Hardies law firm, sent a letter to Daniel Edelman on
October 4, 2000, rejecting his demand for $3000 and
advising that “if you file suit over this matter, we will most
assuredly seek sanctions . . . on the ground that such law-
suit was brought in bad faith and for purposes of harass-
ment.” Hartsell also demanded $500 in attorneys’ fees and
Nos. 04-1509 & 04-1637                                          3

costs and noted that if payment was not received within one
week, his client would “pursue [its] rights through all
legally available means.”
  Edelman did not respond to Hartsell’s letter, and on
October 17, 2000, Riddle brought an action against Kelly
under the Declaratory Judgment Act, 28 U.S.C. § 2201.
Riddle asked the court to declare that its collection letter
did not violate § 1692g of the FDCPA by “overshadowing or
contradicting” Kelly’s right to dispute the debt.
  On the next day, Kelly filed an answer in the declaratory
judgment action. In addition, she asserted a counterclaim
against Riddle, alleging that the $125 demand letter to
Kelly contained a false threat of litigation in violation of
§ 1692e. In the counterclaim Riddle did not raise the
§ 1692g overshadowing issue. Kelly also asserted an addi-
tional counterclaim against Ross & Hardies, claiming that
the letter Hartsell sent to Edelman on October 4 was an
attempt to collect money from Kelly and therefore violated
the FDCPA.
  On September 28, 2001, the district court granted
summary judgment in favor of Riddle on its declaratory
judgment claim, finding that Riddle’s letter was “virtually
identical” to the “safe haven” letter that this court sug-
gested in Bartlett v. Heibl, 128 F.3d 497, 501-02 (7th Cir.
1997).
  With regard to the FDCPA counterclaim against Ross &
Hardies, the court granted its motion to dismiss because the
October 4 letter was directed to Edelman, not Kelly;
therefore, the letter did not come within the scope of the
FDCPA.1

1
  As to the FDCPA counterclaim against Riddle alleging a false
threat of litigation, the court denied Riddle’s motion for summary
judgment. That remaining counterclaim went to trial and Riddle
won a jury verdict in its favor.
4                                   Nos. 04-1509 & 04-1637

   On October 11, 2001, pursuant to a motion filed by Riddle,
the district court imposed sanctions against Edelman,
finding that Edelman “was trying to extort money from
Riddle by saying it would go away for $3000, even though
it could not have believed that its overshadowing argument
had any chance of success in court.” Further, the court
found that Edelman’s “actions in threatening to file a
baseless suit and opposing the motion for summary judg-
ment as to the overshadowing claim were objectively and
subjectively egregious and multiplied the proceedings
unreasonably and vexatiously.”
  The court denied the petition for sanctions against
Edelman that was filed by Ross & Hardies, reasoning that
although the FDCPA counterclaim against Ross & Hardies
was not a winner, it was “not in the same league as what
the court can only characterize as an extortion attempt
by [Edelman] based on the frivolous but hotly litigated
overshadowing argument”; thus, fees and costs were not
awarded to Ross & Hardies in connection with its successful
defense of the FDCPA claim against the firm.
  Subsequent to the resolution of all other claims, Kelly’s
motion for reconsideration was denied, and on February 20,
2004, the court ruled that Riddle’s fee petition was reason-
able and Edelman was ordered to pay Riddle $18,037.22 in
attorneys’ fees and costs.

            Riddle’s Request for Sanctions
  The district court sanctioned Edelman pursuant to 28
U.S.C. § 1927. We review this order under the deferential
abuse of discretion standard. See Kapco Mfg. Co. v. C & O
Enters., Inc., 886 F.2d 1485, 1491 (7th Cir. 1989). “This
court need only inquire whether any reasonable person
could agree with the district court’s sanction award.” Id.
  The purpose of § 1927 “is to deter frivolous litigation and
abusive practices by attorneys and to ensure that those who
Nos. 04-1509 & 04-1637                                       5

create unnecessary costs also bear them.” Id. (citations
omitted). The statute reads as follows: “Any attorney . . .
who so multiplies the proceedings in any case unreasonably
and vexatiously may be required by the court to satisfy
personally the excess costs, expenses, and attorneys’ fees
reasonably incurred because of such conduct.” 28 U.S.C. §
1927. “If a lawyer pursues a path that a reasonably careful
attorney would have known, after appropriate inquiry, to be
unsound, the conduct is objectively unreasonable and
vexatious.” Kapco, 886 F.2d at 1491 (quotation omitted).
   The initial letter from Edelman accused Riddle of viola-
ting a section of the FDCPA which requires that the debt
collector provide the consumer with a “validation notice”
explaining the right to dispute the debt or to demand veri-
fication of the debt. See 15 U.S.C. § 1692g(a). In relaying
this information, the debt collector has an “implied duty to
avoid confusing the unsophisticated consumer [that] can be
violated by contradicting or ‘overshadowing’ the required
notice.” Bartlett, 128 F.3d at 500.
  Because the words “contradicting or overshadowing” do
not provide much guidance to debt collectors, we set forth
in Bartlett a sample form of explicit language that would
provide a proper validation notice. Id. at 501-02. Then we
instructed that “[d]ebt collectors who want to avoid suits by
disgruntled debtors standing on their statutory rights
would be well advised to stick close to the form that we
have drafted. It will be a safe haven for them, at least in the
Seventh Circuit.” Id. at 502.
  It bears repeating that the district court found that the
collection notice Riddle sent to Kelly was “virtually identi-
cal” to the Bartlett safe haven letter. We certainly agree.
Edelman apparently did not believe what we said in
Bartlett—we do. There was no conceivable basis for a
§ 1692g claim.
6                                   Nos. 04-1509 & 04-1637

  In light of Edelman’s letter, and with no resolution in
sight, Riddle filed a declaratory judgment action asking for
a judicial determination that its collection letter was
protected by the Bartlett safe haven. Edelman now claims
that by the time Riddle filed its declaratory judgment
action, Kelly had decided not to bring suit against Riddle,
and that “we would not be here today had Riddle decided to
leave well enough alone.” The district court aptly noted that
this argument is “analogous to a matador waving a red cape
at a bull and then professing to be surprised when the bull
charges him.”
  Edelman further argues that Riddle should not have been
permitted to file the declaratory judgment action because it
should have waited for Kelly to file suit and then used its
arguments as a defense to the claim. Edelman cites
Buntrock v. SEC, 347 F.3d 995, 997 (7th Cir. 2003), for the
proposition that “defendants must not be allowed to turn
every case in which there is a defense into two cases.”
Buntrock’s situation, however, was not the same as
Riddle’s. Buntrock filed a preemptive suit, asking the court
to stay a lawsuit that the SEC was preparing to file against
him. Id. at 996. We found that there was no subject matter
jurisdiction for such a claim. Id. In contrast, Riddle did
have a legally cognizable basis on which to file the declara-
tory judgment action. See 28 U.S.C. § 2201 (stating that
“any court . . . may declare the rights and other legal
relations of any interested party seeking such declaration”).
  Although Edelman alleges otherwise, Kelly did not ever
“clearly abandon” her overshadowing claim. It is true that
Edelman did not affirmatively raise the issue in Kelly’s
counterclaim, but he did nothing to make it clear to the dis-
trict court or Riddle that Kelly was not contesting summary
judgment on the issue of overshadowing. In fact, Edelman
argued in Kelly’s memorandum in opposition to Riddle’s
motion for summary judgment on the overshadowing claim
that Riddle’s motion was “without merit.” Edelman could
Nos. 04-1509 & 04-1637                                       7

have easily moved to dismiss the summary judgment action
as moot. Instead, Edelman multiplied the proceedings by
filing counterclaims and contesting summary judgment.
  Edelman insists that Kelly never litigated the over-
shadowing issue and thus she cannot be responsible for fees
relating to it. We find that Edelman is responsible for
causing the suit to be filed and for allowing the litigation to
continue when it knew that Kelly could not win. When
Edelman demanded $3000 to release a blatantly frivolous
claim, the firm pursued a path that it should have known
was improper; therefore, its conduct was “objectively unrea-
sonable and vexatious.” Kapco, 886 F.2d at 1491 (quotation
omitted). Because we find that a reasonable person could
agree with the district court’s decision to order Edelman to
pay fees and costs relating to the overshadowing issue, the
district court’s decision was proper and we will affirm the
sanction award.

       Ross & Hardies’s Request for Sanctions
  We now address the request for fees relating to the coun-
terclaim against Ross & Hardies. As explained previously,
Kelly’s counterclaim alleged that Hartsell’s October 4 letter
to Edelman requesting $500 in attorneys’ fees made a
“claim for money” against Kelly that violated the FDCPA.
The district court dismissed this claim with little discussion
because the demand was made “on Kelly’s lawyer
[Edelman], not on Kelly herself,” and therefore provided no
basis for an FDCPA claim.
  Edelman argues that although the letter was addressed
to Daniel Edelman, it was in reference to Kelly’s case and
so the demand for money was directed to her. A close read
of the letter, however, makes it clear that Ross & Hardies
was demanding $500 in attorneys’ fees from Edelman, not
from Kelly.
8                                     Nos. 04-1509 & 04-1637

   The letter points out that Edelman surely must be famil-
iar with the Bartlett safe haven letter, and that if Edelman
had read Riddle’s letter with any care, he would have seen
“that it is virtually identical to Judge Posner’s ‘safe harbor’
letter.” The Hartsell letter further states: “We find it dif-
ficult to believe that this is an honest mistake, coming from
such an experienced FDCPA practitioner as yourself. We
also reject your claim that you have incurred $2000 in
attorneys’ fees for, at most, reviewing a one-page collection
letter and then writing a three-paragraph demand letter.”
Edelman, not Kelly, was the “experienced FDCPA practitio-
ner.” There is no doubt that Edelman’s conduct produced
the demand from Ross & Hardies, for as the letter stated,
“[w]e believe that your letter to Riddle is what gives rise to
a cause of action . . . .”
  The FDCPA was created to protect consumers from abus-
ive practices by debt collectors. See 15 U.S.C. § 1692(e).
“The term ‘consumer’ means any natural person obligated
or allegedly obligated to pay any debt.” 15 U.S.C.
§ 1692a(3). Because the letter from Hartsell was not di-
rected to the consumer, Kelly, and was distinct from any
debt, the FDCPA is not implicated.
  Again, we find that a reasonably careful attorney should
have known that the counterclaim against Ross & Hardies
was without merit. See Kapco, 886 F.2d at 1491 (quotation
omitted). The claim multiplied the proceedings unreason-
ably and vexatiously, and “those who create unnecessary
costs [must] also bear them.” Id. In fact, “[s]o clear is it that
[Edelman] filed a frivolous [counterclaim] . . . in order to
complicate this already far too complicated and absurdly
protracted litigation, to the cost of [Riddle and its counsel],
that the district judge committed an abuse of discretion in
refusing to sanction” Edelman under § 1927. IDS Life Ins.
Co. v. Royal Alliance Assocs., Inc., 266 F.3d 645, 654 (7th
Cir. 2001). Thus, contrary to the decision of the district
court, Ross & Hardies is entitled to fees and costs relating
Nos. 04-1509 & 04-1637                                      9

to its successful defense of the counterclaim against the
firm. Edelman’s conduct regarding Ross & Hardies was in
the same vein as its conduct with regard to Riddle. The
district court correctly awarded sanctions against Edelman
and in favor of Riddle; however, the district court abused its
discretion in arriving at a different conclusion with regard
to the award of sanctions in favor of Ross & Hardies.

                        Conclusion
  For the reasons set forth in this opinion, we AFFIRM the
district court’s decision to grant Riddle’s motion and
sanction Edelman. We find that $18,037.22 is a reasonable
and appropriate award for attorneys’ fees and costs relating
to the declaratory judgment claim. We also find that
Edelman should have been sanctioned and required to pay
the fees and costs relating to the counterclaim against Ross
& Hardies; we REVERSE the denial of Ross & Hardies’s
request for fees and costs and REMAND this matter to the
district court for a determination, consistent with this opin-
ion, of what sanctions are appropriate.
10                             Nos. 04-1509 & 04-1637

A true Copy:
      Teste:

                    ________________________________
                    Clerk of the United States Court of
                      Appeals for the Seventh Circuit

               USCA-02-C-0072—7-18-05