When an FDCPA complaint comes across my desk, one of the first questions I ask is whether my client is a “debt collector.”  A “debt collector” under the FDCPA (15 U.S.C. § 1692a(6)F)(iii)) cannot be “any person collecting or attempting to collect a debt . . . which was not in default at the time it was obtained by such person.”  The Eleventh Circuit recently held that question should also be the first one asked by a plaintiff’s attorney.  In Diaz v. First Marblehead Corp., the Court affirmed the award of the creditor’s attorney fees as a Rule 11 sanction against the plaintiff’s attorney.  The Court, however, refused to impute the attorney’s knowledge that the claim was frivolous on the client and reversed the joint award under § 1692k(a)(3).

The defendant in Diaz began servicing the student loan debt shortly after origination.  When the debtor failed to make payments, the servicer allegedly made daily phone calls and sent repeated correspondence to the debtor.  The debtor retained counsel who filed an action alleging violations of the FDCPA.  The servicer moved to dismiss based on the allegations which established that it was not a statutory “debt collector.”  The plaintiff voluntarily dismissed the complaint but the servicer sought sanctions.  Plaintiff’s counsel argued that the 11th Circuit had not decided the definitional issue so sanctions were unwarranted, but this was the second case that he had brought against a servicer that did not meet the definition.  The 11th Circuit pointed out that “a simple reading of the statute underlying Diaz’s claim reveals that the amended complaint employed an objectively frivolous legal theory.”  But the Court was unwilling to find that the client knew it was a meritless claim and would not impose attorney fees for the harassment.

It is difficult to see a case in which a creditor would be able to satisfy § 1692k(a)(3) against a plaintiff.  This section limits the award to reasonable attorney fees.  In order to prove its case, a creditor would have to delve into the motive underlying the filing of the baseless complaint and would run into the attorney-client privilege.  From the standpoint of collectability of a judgment, the creditor already knows the difficulty in getting paid by the debtor so counsel may be a better source for payment.  Since I often see FDCPA claims as counterclaims to a foreclosure action, establishing the definitional defense works because the debtor claims that the foreclosure is wrong because the debt is not in default and the creditor used unfair practices in violation of the FDCPA.  I’m just not allowed to refer to this as a Schrödinger’s cat problem in my motion to dismiss.