Consumer protection laws are in place to ensure that collectors do not cross the line with unreasonable harassment or humiliation tactics. If the creditor violates these laws, the debtor may file a separate lawsuit against the creditor. Unfortunately, some debtors abuse this process by filing frivolous claims against creditors just to thwart collection efforts.
In the past, if the debtor lost the consumer protection suit, the creditor had to pay its own legal costs unless the court found that the debtor sued in bad faith to avoid payment. But the U.S. Supreme Court soon will be deciding a case that could force the debtor to pay the creditor’s court costs even when the debtor acts in good faith by raising a valid claim but nevertheless loses the case on other grounds.
In his practice Rustin Smith, an associate attorney with Stewart, Melvin, & Frost, frequently assists businesses in their debt-collection efforts.
Question: Who will this pending Supreme Court decision impact and why is it noteworthy?
Rustin: This case is being closely watched by the Federal Trade Commission, the Consumer Financial Protection Board and numerous private consumer advocacy groups, who have all filed legal briefs with the Supreme Court.
The issue under review by the Supreme Court is whether a debtor who loses a consumer-protection lawsuit can be required to pay the creditor’s legal costs -even when the debtor raised a good faith claim and did nothing wrong by filing it.
In most lawsuits, each party pays his or her own legal costs unless the court finds that one of the parties acted in bad faith in bringing or defending the action. However, the Supreme Court could make an exception for consumer-protection suits and require losing debtors to pay the creditors’ expenses despite the debtor’s good reasons for bringing the action.
Question: Why might the Supreme Court treat consumer protection cases differently in the reimbursement of court costs?
Rustin: Many European countries require the losing party to pay the winning party’s court costs in every case. The United States court system believes this rule deters citizens from using courts due to the potential financial risk. Most states, however, do allow parties to recover court costs when the other side brings a frivolous action with no legal merit.
In the past few years, U.S. courts have seen a sharp rise in cases filed against debt collectors under the Fair Debt Collection Practices Act, which regulates collectors. These lawsuits are usually based on claims of mistaken identity, inaccurate debt amounts, or unfair and overzealous collection practices. However, some of these suits have no legal basis and are frivolous.
The Supreme Court will base its pending decision on a technical interpretation of a federal statute rather than the public policy debate over whether debtors should pay court costs. Given the recent increase in the number of suits filed, debt collectors hope the Supreme Court’s holding will provide more chances to recover the cost of defending these actions from the debtors who bring them.
Question: What happened in the debt-collection case that is being reviewed by the Supreme Court?
Rustin: The case is known as Marx vs. General Revenue Corp. It involves a single mom from Colorado, Olivea Marx, who was unable to pay back some student loans. She eventually was contacted by a debt collector. Later, she claimed that the collector’s methods were overly harsh and that the collector embarrassed her by improperly contacting her employer. So she filed a lawsuit.
The court, however, disagreed with the allegations and ruled against Ms. Marx. She was ordered to pay a little over $4,500 in court costs – which basically compensated the debt collector’s legal-related expenses.
The ruling is unusual because the judge did not find that Ms. Marx’s action was frivolous from the outset; it simply did not rule in her favor. For that reason, the ruling has been challenged by consumer advocates all the way to the Supreme Court.
Question: What has been the public reaction to this case so far?
Rustin: The case has not received a lot of publicity – at least for now, since the case is just now being heard by the Supreme Court.
But as you might expect, the consumer advocacy groups are very much aware of this case and stand opposed to it. They claim that if the Supreme Court lets this case stand that fewer financially stressed consumers will risk filing a lawsuit over bad debt-collection practices for fear that they could go deeper in debt if they lose.
On the other side, the trade group representing the collections industry says that their industry should not be burdened with the costs of successfully defending the increasing number of consumer protection suits, even when the claims are not objectively frivolous.
The impact of this case is potentially even greater in light of the recent slow economy and the increased amount of debt that has been accumulated by Americans. So, this case may have been overlooked for now, but I assure you that it will definitely receive more and more attention if the Supreme Court sides with the debt collector.