7th Cir. Holds Collecting ‘Fees on Fees’ Did Not Violate the FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently
affirmed judgment in a debt collector’s favor against claims that its efforts
to collect attorney’s fees incurred to collect a debt — including the fees
incurred in collecting the attorney’s fees — violated the federal Fair Debt
Collection Practices Act.

In
so ruling, the Seventh Circuit concluded that dismissal of a related state
court action brought by the debt collector to collect attorney’s fees for lack
of prosecution did not have preclusive effect, and no violation of the FDCPA,
15 U.S.C. § 1692 et seq., occurred because the plain language of the underlying
agreement required the consumer to pay all collection costs including
attorney’s fees.

A
copy of the opinion in Robbins v. Med-1 Solutions, LLC is
available at:  Link to Opinion.

A
consumer incurred medical expenses for treatment provided to her minor children
through a hospital system.  The written agreement signed by the consumer
at the time services were rendered provided that she agreed to pay the charges
the hospital billed to her, along with “costs of collection, including attorney[‘s]
fees and interest,” if she failed to timely make payment.  After the
consumer defaulted on the debt, the provider hired a company to collect the
debt who filed a collection lawsuit.

After
initially disputing the debt, the consumer agreed that she owed the $1,499 in
medical charges and paid that amount in full, but refused to pay the debt
collector’s attorney’s fees.  The debt collector offered to accept $375 to
resolve the fee dispute, which the consumer rejected over warnings from the
debt collector’s attorneys that prolonged litigation over the outstanding fees
would result in her being liable for additional legal fees
(“fees-on-fees”). 

The
court in the collection action eventually entered judgment in the debt
collector’s favor, ordering the consumer to pay the debt collector $1,725 for
its incurred attorney’s fees.  The consumer appealed the ruling. 
Under then-existing state law, the appeal initiated a de novo proceeding, and
the debt collector filed a new complaint to recover the fee award.

Meanwhile,
prior to the small claims judgment, the consumer separately sued the debt
collector in federal court alleging that the debt collector’s attempts to
collect attorney’s fees and fees-on-fees that were not contractually owed
violated the FDCPA’s prohibitions against using “any false, deceptive, or
misleading representation or means in connection with the collection of any
debt” (§1692e) and the use of “unfair or unconscionable means to collect or
attempt to collect any debt” (§1692f). 

The
federal trial court stayed the case to await the outcome of the state
proceedings which remained dormant for nearly two years, perhaps due to the
small amount at stake, and was eventually dismissed with prejudice for failure
to prosecute.

After
the stay was lifted in the federal case, the parties filed cross-motions for
summary judgment.  The consumer advanced two arguments that would provide
a basis for her FDCPA claim: (i) that res judicata effectively bars the debt
collector from arguing that the agreement required the consumer to pay
fees-on-fees as a result of the dismissal of the debt collector’s re-filed
state court action, and; (ii) that the costs-of-collection provision in the
agreement did not contractually obligate the consumer to pay
fees-on-fees. 

The
federal trial court rejected these arguments and entered judgment in the debt
collector’s favor.  The consumer timely appealed. 

On
appeal, the Seventh Circuit first reviewed the consumer’s res judicata
argument, which is governed by Indiana’s preclusion rules under the Full Faith
and Credit Act (28 U.S.C. § 1738).  Under Indiana law, res judicata, or
claim preclusion “acts as complete bar to subsequent litigation on the same
claim between identical parties.”  Edwards v. Edwards, 132
N.E.3d 391, 396 (Ind. Ct. App. 2019).  However, claim preclusion is
invoked defensively “to prevent a plaintiff from asserting a claim that the
plaintiff has previously litigated and lost” (Thrasher, Buschmann & Voelkel,
P.C. v. Adpoint Inc., 24 N.E.3d 487, 494 (Ind. Ct. App. 2015)) —
and is not an available remedy for a plaintiff to reassert a claim it has
already won.

Re-framing
the consumer’s argument under issue preclusion, or collateral estoppel, which
can be used ‘offensively’ when the “plaintiff seeks to foreclose the defendant
from litigating an issue the defendant ha[d] previously litigated
unsuccessfully in an action with another party” (Tofany v. NBS Imaging Sys., Inc.,
616 N.E.2d 1034, 1037 (Ind. 1993)) offered no different result. 

Primarily,
the Indiana Supreme Court has held that a dismissal for failure to prosecute
does not have issue-preclusive effect because “no issue was actually
litigated.” Afolabi, 849 N.E.2d at 1176.  Although
this was independently sufficient to defeat the consumer’s claim, the Seventh
Circuit also noted that relevant state law also considers certain factors,
including the “incentive to litigate the prior action” to consider the fairness
of the offensive use of issue preclusion.  Tofany at
1038.  The Seventh Circuit found that this factor also defeated any issue
preclusion claim, concluding that the debt collector had little incentive to
prosecute the dispute over attorney’s fees given the small amount of damages at
stake.

For
these reasons, the Seventh Circuit held that the preclusion doctrine does not apply,
and the Seventh Circuit rejected the consumer’s res judicata argument.

Next,
the Seventh Circuit addressed the consumer’s claim that the agreement did not
authorize the debt collector to collect fees-on-fees, and the debt collector’s
collection attempts was a false statement in violation of § 1692e and an unfair
debt collection practice in violation of § 1692f. 

Specifically,
in executing the agreement the consumer agreed that “[i]n the event I do not
pay such charges when due, I agree to pay costs of collection, including
attorney[’s] fees and interest.” The consumer argued that “costs of collection”
should be limited only to the cost of collecting unpaid medical bills and
attorney’s fees related to collection of the bills, while the debt collector argued
for the language to be interpreted more broadly, to include all costs
associated with collection, including the cost of collecting attorney’s fees.

The
Seventh Circuit concluded that the phrase is comprehensive, and that reading
“costs of collection” to exclude fees-on-fees would “not fully compensate [the
hospital] for enforcing its rights” and run contrary to Indiana law’s
interpretation of standard fee-shifting provisions.  Walton
v. Claybridge Homeowners Ass’n, Inc., 825 N.E.2d 818, 825 (Ind. Ct.
App. 2005) (Indiana law recognizes that the “purpose of a fee-shifting
provision is to make the prevailing party to a contract whole.”). 

Because
the contractual language permitted the collection of fees-on-fees, the
consumer’s collection attempts did not violate the FDCPA.

For
these reasons, judgment in the debt collector’s favor was affirmed.