Written By: Hallie R. Goins
Mortgage servicers are often involved in frivolous lawsuits which include a long laundry list of alleged wrongs, including alleged violations of the Fair Debt Collections Practices Act (“FDCPA”). Although we are nearly always successful in defeating these claims, the defense is often very costly. On February 26, 2013, the U.S. Supreme Court gave mortgage servicers and debt collectors a welcomed tool to better fight these frivolous claims. In a 7 to 2 decision, the Supreme Court held that the successful defense of an alleged fair debt claim entitles the defendant debt collector to the recovery of costs (including witness fees, witness travel expenses, deposition transcript fees and other court and litigation costs) from the unsuccessful plaintiff, even if the case was not brought in bad faith.
After Olivea Marx defaulted on her student loan obligations and her lender tried to collect, Marx sued claiming she was harassed and threatened by the collection company. The District Court found that Marx had failed to prove a violation of the FDCPA, but made no finding that Marx had acted in bad faith for the purpose of harassment in pursuing the Fair Debt claim. Normally, without such a bad faith finding, a debt collector could not recover any fees or costs for the defense of the Fair Debt action because the FDCPA provides for such recovery only as follows:
[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 court may award to the defendant attorney’s fees reasonable in relation to the work expended and costs. (15 U.S.C. § 1692k(a)(3)).
Nonetheless, the District Court awarded over $4,500 in costs to the debt collection company, basing its action not on § 1692k(a)(3)) but rather, and quite distinctly, under Federal Rule of Civil Procedure §54(d)(1) (“FRCP”) which permits a district court to award costs to the prevailing party, unless there is a statue that “provides otherwise.”
The central question before the Supreme Court was whether the language in § 1692k(a)(3) “provides otherwise” and thus precludes recovery under FRCP §54(d)(1). The Supreme Court, tasked with interpreting the interplay between the two statutes, disagreed with Marx, and ruled that the FDCPA “does not displace the background rule that a court has discretion to award costs.” (Marx v. General Revenue Corporation, No. 11–1175 at pp. 4-16). The Court stated that the FRCP inherently includes a presumption that the prevailing party is entitled to be awarded costs unless a statute explicitly states otherwise. Here, the FDCPA simply lists another situation in which costs may be awarded to the prevailing party, and the statute in no way explicitly contradicts the FRCP, nor “provides otherwise.”
Essentially, the Court’s decision creates a downside risk to pursuing frivolous FDCPA claims that previously did not exist. Under prior law, there was little risk in bringing a frivolous Fair Debt claim because even if the servicer was successful in its defense, it was the rare case where bad faith could be proven, and thus the rare case where attorney’s fees or costs could be recovered by the servicer. By affirming the Tenth Circuit’s decision, debtors are now aware that if they lose the Fair Debt action, the servicer can recover the costs of the suit without the need to prove bad faith.