Ninth Circuit Affirms Disqualification of Plaintiffs’ Counsel in FDCPA Class Action

San Francisco, California

Following a jury verdict for the defense, the 9th U.S. Circuit Court of Appeals affirmed a challenge filed by the defense in a federal class action that has been pending in California for more than a decade. The disqualifiction order disqualified and removed a group of attorneys who file class actions based upon alleged violations of the federal Fair Debt Collection Practices Act, suing the private corporations contracted by district attorneys to deliver check counseling classes, recordkeeping and mail support in statutory “diversion programs,” which offer writers of bad checks an alternative to criminal prosecution. The diversion programs are controversial because they tend to treat lawbreakers as paying customers rather than offenders.

California, like many states, has a bad check diversion statute, which authorizes district attorneys to offer offenders an alternative to criminal prosecution: take a day-long class (which typically costs about $100), cover the bad check, bank and administrative fees, and escape prosecution for a crime that could otherwise result in heavy fines and imprisonment. Bad check crimes are rampant enough that district attorneys require the help of private companies to keep up with the flood of incoming cases. California’s criminal code accounts for this need, and authorizes private companies to provide such services under contracts that are typically scrutinized and approved by county governments.

Several years ago, a group of lawyers from various states formed a private “referral group” and began rounding up bad check writers to serve as “lead plaintiffs” in a storm of class actions filed from coast to coast. The core argument raised in the lawsuits is that the physical addressing and mailing of letters signed electronically by district attorneys is misleading, in that it somehow implies that the “unidentified mailing service is the district attorney,” and that the mailing service “is acting as a civil debt collector “by mailing the letters for the district attorneys under the county service contracts.

The majority of FDCPA class actions have failed, and the federal statute was amended in 2006 to clarify that services of this kind, specifically authorized by law, are expressly exept from the FDCPA. As the final vestiges of the litigation which flared up before Congress amended the FDCPA are extinguished by statutes of limitation, district attorneys will once again have the ability to contract for relief from the administrative burden of epidemic check fraud in California and elsewhere. However, the amendment came too late to prevent the onslaught of litigation from bankrupting many of the service providers. One such company was American Corrective Counseling Services, but bankruptcy did not stop the class action lawyers from pursuing their claims against individual employees of the company who paid for their defense out of their own pockets.

Shortly before trial, the judge in the oldest of the California federal class actions entered summary judgment for the plaintiffs on the issue of liability, departing from the national trend of defense-favorable rulings. Sacked by court’s decision, the defendants were preparing to declare bankruptcy. Instead, just weeks before trial, they retained a Denver firm known as Godfrey-Johnson to rescue what was touted by the ringleader of the class action group as “the largest FDCPA class action case ever tried to an American jury.”

After scrambling for weeks to prepare for trial on the few remaining issues, the Godfrey firm not only won the case, but also convinced the court to reverse its earlier rulings in favor of the plaintiffs. The judge ordered a new trial, evidently persuaded that the plaintiffs had not been afforded a fair trial because they were relying on the earlier summary judgment and were not prepared for the full-blown defense mounted on short notice by Godfrey-Johnson.

The Denver firm then argued that the class attorneys should be disqualified on the basis of a conflict of interest arising from their concurrent representation of other, separate classes of plaintiffs who were competing for limited resources in the aftermath of the ACCS bankruptcy.

Eventually, two separate federal judges in California concurred, ordering the group of class action attorneys to withdraw and waive any claim for attorneys fees after a decade of litigating the case in pursuit of a contingency fee. An appeal of that order was filed (on a writ of mandamus) to the 9th Circuit. Oral argument was handled by the founder of the the Godfrey firm, who had tried the case to the jury and who had argued successully in the district court for disqualification of class counsel.

The order disqualifying the plaintiffs’ class action lawyers was affirmed in an unpublished decision.

“The ethical problem arose from the fact that class counsel was serving two masters with opposing interests,” says Brett Godfrey, lead counsel in the jury trial and the appeal. “They drove the service corporation bankrupt, turning down a huge settlement offer in the process, then depleted limited bankruptcy funds specifically earmarked for their clients by pursuing this parallel track of litigation on behalf of a separate group [of clients].”

The 9th Circuit agreed with the argument, finding that class counsel must perform to a higher standard.

A separate malpractice action was filed against the original class action lawyers.