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Award of Costs in FDCPA Cases Won by Debt Collectors

June 20, 2012

A pending U.S. Supreme Court decision could make debtors more reluctant to bring suits against debt collectors by imposing court costs against the plaintiffs if they lose.

The Issue: On May 29, the U.S. Supreme Court granted certiorari in Marx v. Gen. Revenue Corp. to address the issue of whether a prevailing defendant in a Fair Debt Collection Practices Act (FDCPA) case may be awarded its costs in a lawsuit that was not “brought in bad faith and for the purpose of harassment.”[1]

The Section 1692k(a)(3) of the FDCPA provides that “[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.”[2] Federal Rule of Civil Procedure 54(d), by contrast, provides that “[u]nless a federal statute, these rules, or a court order provides otherwise, costs—other than attorney’s fees—should be allowed to the prevailing party.”[3]

The Tenth Circuit affirmed an award of costs to the prevailing defendant in an FDCPA case in which there was no finding of harassment or bad faith.[4] The court explained that the subsequently-enacted FDCPA provision should not be interpreted to supersede Rule 54(d), which the court noted was a codification of long-standing American common law, in the absence of clear congressional intent to do so.[5] The court then concluded that neither the text of FDCPA Section 1692k(a)(3) nor the legislative history sufficiently indicated a congressional intent to displace the “long-standing” Rule 54(d) presumption that a prevailing party is entitled to an award of costs, and thus irrespective of the text of Section 1692k(a)(3), a prevailing defendant is entitled to an award of costs under Rule 54(d).[6]

The Tenth Circuit’s opinion directly conflicts with the conclusion the Ninth Circuit reached when faced with the same question.[7] The Ninth Circuit held that Section 1692k(a)(3)’s express provision governing a costs award controlled over Rule 54.[8] The Ninth Circuit rejected the district court’s reading of the statute, which linked the word “costs” with the phrase “reasonable in relation to work expended,” and interpreted the provision to mean that costs are a factor in determining the amount of attorney’s fees, not that an award of costs to the prevailing defendant was conditioned upon a finding of bad faith.[9] The Ninth Circuit elaborated that this construction linking costs to the calculation of reasonable attorneys’ fees produced an absurd result, as costs are “fixed by statute or local rule and bear no direct causal relationship to the reasonableness of attorneys’ fees.”[10] The court then concluded that costs may only be awarded in an FDCPA case when there has been a finding of bad faith.[11] Dicta in a Seventh Circuit decision suggests that that court agrees with the Ninth Circuit’s reading of the statute.[12]

Implication: A Supreme Court decision authorizing cost awards to prevailing defendants without a showing of bad faith could serve as a deterrent against debtors, and their attorneys, who would use frivolous FDCPA claims as a tactic to avoid repayment of credit obligations.

[1] Marx v. Gen. Revenue Corp., 668 F.3d 1174 (10th Cir. 2011) cert. granted in part, 11-1175, (U.S. May 29, 2012), docket available here.
[2] 15 U.S.C. §1692k(a)(3), available here.
[3] Fed. R. Civ. P. 54(d)(1), available here.
[4] Marx v. Gen. Revenue Corp., 668 F.3d at 1179, 10th Cir. opinion available here.
[5] Id. at 1179 (“A clear showing of legislative intent is needed before we find that Rule 54(d) is displaced by a statute.”).
[6] Id. at 1180.
[7] Rouse v. Law Offices of Rory Clark, 603 F.3d 699 (9th Cir. 2010), available here.
[8] Id. at 702.
[9] Id. at 702-703.
[10] Id. at 704
[11] Id. at 706.
[12] Horkey v. J.V.D.B. & Associates, Inc., 333 F.3d 769, 772 (7th Cir. 2003), available here (noting that Section 1692k(a)(3) “allows a defendant to recover sanctions for an action brought in bad faith and for the purpose of harassment.”).