Major Advantages of Debt Settlement Like Paying Less Than 50%

(October 11, 2002, Consumer Financial Services Law Report)

By Walter E Zalenski and Joseph D. Looney*

The 3rd U.S. Circuit Court of Appeals held that a plaintiff's claim becomes moot and federal jurisdiction is lost when a defendant offers the named plaintiff the maximum relief. (Colbert v. Dymacol Inc., No. 01-4397 (3rd Cir. 08/28/02)). The decision appears to permit a debt collector in certain circumstances to "pick off" a named plaintiff in an effort to avoid a class action before the plaintiff moves for class certification.

Brent Colbert filed a class action complaint against Dymacol Inc. with the U.S. District Court, Eastern District of Pennsylvania alleging violations of, inter alia, the Fair Debt Collection Practices Act. Colbert sought to represent a class of persons in Pennsylvania who, in the preceding two years, had received dunning letters from the
defendants.

Prior to Colbert's filing of the motion for class certification, Dymacol made an offer of judgment under Fed. R. Civ. Pr. 68 in the amount of 1,100, plus reasonable costs and attorneys' fees, which is the maximum amount of liability under the FDCPA absent actual damages. Colbert then moved to certify the class and to strike Dymacol's offer of judgment. Dymacol opposed both motions arguing that the offer of judgment mooted the litigation. Colbert argued that because this case was filed as a class action, the normal mootness rules did not apply and he should be permitted to continue as the named representative of the putative class.

The District Court accepted Colbert's argument and held that "because Rule 68 would bypass court approval of settlement, plaintiff has filed this suit as a class action, and this Court has not determined that plaintiffs class action is improper, Rule 68 is not applicable here, and the Court will strike defendants' offer of judgment." Dymacol appealed the District Court's decision to the 3rd Circuit.

On appeal, the 3rd Circuit noted that federal judicial power extends only to "cases" or "controversies." A case becomes moot and there is no federal jurisdiction when there is no longer a dispute or when a party loses a personal interest in the outcome of the litigation. This requirement applies not just when a case is first filed but throughout the entire litigation.

Before addressing the substantive issues, the 3rd Circuit noted that although Dymacol made its offer of maximum relief by use of an offer of judgment under Rule 68, Rule 68 is irrelevant as it is merely a fee-shifting device. Rather, the significant factor is that Dymacol offered Colbert the maximum relief under the FDCPA. The main issue confronting the 3rd Circuit was whether the offer of maximum relief deprived Colbert of a stake in the case and deprived the District Court of jurisdiction.

Colbert argued that Rule 23(e) requires court approval of class action dismissals and settlements. Because there was no court approval of Dymacol's offer of maximum relief, the case could not be dismissed or settled. The 3rd Circuit disagreed and concluded that Rule 23(e) applies only to actions certified as class actions. Because Dymacol's offer of maximum relief came before Colbert's motion for class certification, Rule 23(e) did not apply. Colbert also argued that even if an action "has not been certified as a class action, an action filed as a class action should be treated as if certification has been granted for the purposes of settlement until certification is denied." The 3rd Circuit acknowledged this general principle but concluded that it applies only when a motion for class certification is pending.

The 3rd Circuit noted that, while special mootness rules apply once a class has been certified, dismissal of the action is required when claims of the named representative become moot before class certification. There are, however, two exceptions to this class action mootness precept. First, a named representative who no longer has a personal stake can continue "to argue a certification motion that was filed before his claims expired and which the district court did not have a reasonable opportunity to decide." Second, a named representative whose individual claim has expired can appeal a denial of a class certification motion filed when her claims were alive. Because Colbert's individual claim expired before he filed a motion for class certification, neither exception applied.

'Picking off' claims

Colbert also argued that as a matter of public policy defendants should not be permitted to moot class actions by "picking off" claims of putative class representatives. The 3rd Circuit, however, rejected this argument as well, noting that while the "argument has superficial appeal, it lacks real substance." For example, in this case, the 3rd Circuit thought it highly unlikely that Dymacol was attempting "pick off" putative class representatives in order to frustrate the class action device. The FDCPA limited Dymacol's liability to class members to the lesser of 500,000 or 1 percent of its net worth. Dymacol admitted that more than 42,000 dunning letters ofthe type at issue had been sent to Pennsylvania consumers. Thus, it would cost the defendants more to continue to "pick off" putative representatives than it would to go to trial. Therefore, at least in this case, the 3rd Circuit concluded that the "picking "off" argument was unconvincing.