Appeals court: Plaintiff snubbed settlement from debt collector, gets stuck with big legal bill

By Dan Churney | May 17, 2019

A Chicago federal appeals court has refused to upend a lower court that ordered a collection agency pay only $11,000 of a plaintiff's $190,000 legal tab in a credit report lawsuit, saying the plaintiff doesn't deserve more, because he snubbed a reasonable settlement offer, then went to trial and won less than he would have collected in the proposed settlement.

Circuit Judge Michael Scudder delivered the May 15 decision, with agreement from Circuit Judges David Hamilton and Amy Barrett, of the U.S. Seventh Circuit Court of Appeals. The ruling went against Illinois man Isaac Paz in his action in U.S. District Court for the Northern District of Illinois against Portfolio Recovery Associates. The collection company is based in Norfolk, Va., and does business in Illinois.

"Sometimes settling a case is the only course that makes sense. This case provides a good example," Scudder said.

Paz filed suit in June 2014, alleging Portfolio tried to collect on his $695 credit card debt, but did not report to credit reporting agencies he disputed the debt, as required by the U.S. Fair Debt Collection Practices Act. Portfolio settled the suit, agreeing to eliminate the debt, and pay him $1,001 and $4,500 in attorney fees.

Seventh Circuit Judge Michael Scudder  

However, Paz alleged Portfolio continued to circulate to credit reporting agencies Paz owed the debt, according to court papers. Paz then filed another suit against Portfolio, six months after the first. Portfolio replied the continued reporting was an oversight and made three settlement offers during the next three months of $1,500, then $2,500 and finally $3,501 in March 2015. Portfolio also offered to pay "reasonable" attorney fees.

Paz did not respond to the offers and proceeded to trial. One week before trial, Portfolio offered $25,000 to settle his claims and cover his legal tab. Paz rejected the proposal. After a two-day trial in 2016, the jury awarded $1,000 to Paz.

Paz next moved for Portfolio to pay his $187,410 attorney bill and $2,744 costs. 

District Judge Jorge Alonso awarded $10,875 for fees earned by Paz's attorneys through the time of the $3,501 settlement offer in March 2015, an offer more than three times the amount Paz won at trial. 

Alonso based his decision on Rule 68 of the Federal Rules of Civil Procedure. The rule penalizes a plaintiff, who refuses a reasonable settlement offered at least two weeks before trial and which turns out better than what plaintiff wins at trial, by making the plaintiff carry all legal costs incurred after he or she rejected the offer.

In light of the fact Paz prevailed at trial, Alonso allowed him $436 for his costs, but on the other hand ordered Paz to pay $3,064 to Portfolio for their expenses absorbed after the March 2015 offer.

On appeal, Judge Scudder agreed with Alonso, detecting an "air of unreality" to Paz's position.

"Paz disregarded the offer and proceeded to trial even after the district court’s summary judgment ruling massively downsized his case. And every indication from the record is that Paz had but the slimmest of chances of receiving any more than $1,000 in statutory damages at trial. He nonetheless proceeded to incur $187,410 in attorneys’ fees, only to walk away with $1,000 in statutory damages. Paz was free to make these choices," Scudder pointed out.

Scudder went on to note a party's "sound approach to litigation" will often lead to "dead ends," resulting in legal costs, saying, "Nothing about this appeal calls into question these common, practical realities of litigation."

In Scudder's view, "The vast majority of the fees Paz sought to recover were for time spent pursuing an unsuccessful and ill-advised effort to win a much bigger payoff than was even remotely possible."

Paz has been represented by Blaise & Nitschke and the Law Office of M. Kris Kasalo, both Chicago.

Portfolio Recovery Associates has been defended by the Chicago firm of Hinshaw & Culbertson.

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Organizations in this Story

Blaise & Nitschke PC Hinshaw Culbertson Portfolio Recovery Associates U.S. Court of Appeals for the Seventh Circuit U.S. District Court for the Northern District of Illinois

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