McLaughlin v. Phelan Hallinan & Schmieg, LLP

• Decision Date: 26 June 2014
• Docket Number: Nos. 13–2015,13–3679,13–3712.,s. 13–2015
• Court: U.S. Court of Appeals — Third Circuit
• Parties: Timothy McLAUGHLIN, on behalf of himself and all others similarly situated, v. PHELAN HALLINAN & SCHMIEG, LLP; Lawrence T. Phelan; Francis S. Hallinan; Daniel G. Schmieg; Rosemarie Diamond Timothy McLaughlin, Appellant in 13–2015 & 13–3712 Phelan Hallinan & Schmieg, LLP; Lawrence T. Phelan; Francis S. Hallinan; Daniel G. Shmieg; Rosemarie Diamond, Appellants in 13–3679.

756 F.3d 240

Timothy McLAUGHLIN, on behalf of himself and all others similarly situated,

v.PHELAN HALLINAN & SCHMIEG, LLP; Lawrence T. Phelan; Francis S. Hallinan; Daniel G. Schmieg; Rosemarie Diamond Timothy McLaughlin, Appellant in 13–2015 & 13–3712

Phelan Hallinan & Schmieg, LLP; Lawrence T. Phelan; Francis S. Hallinan; Daniel G. Shmieg; Rosemarie Diamond, Appellants in 13–3679.

Nos. 13–2015, 13–3679, 13–3712.

United States Court of Appeals,Third Circuit.

Argued May 14, 2014.

Filed: June 26, 2014.

Trent A. Echard, Esq., [argued], Harry F. Kunselman, Esq., Strassburger, McKenna, Gutnick & Gefsky, Pittsburgh, PA, for Appellant/Cross–Appellee.

Jonathan J. Bart, Esq., [argued], Daniel S. Bernheim, III, Esq., Wilentz, Goldman & Spitzer, Philadelphia, PA, for Appellees/Cross–Appellants.

Before: SMITH, VANASKIE, and SHWARTZ, Circuit Judges.

OPINION OF THE COURT

SHWARTZ, Circuit Judge.

Timothy McLaughlin had a mortgage. As a result of an error, the mortgage company believed that he was in default and referred the matter to the law firm Phelan Hallinan & Shmieg, LLP, whose lawyers include Lawrence T. Phelan, Francis S. Hallinan, Daniel G. Schmieg, and Rosemarie Diamond (collectively “PHS”). PHS sent McLaughlin a letter about the debt that he claims violated the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692 et seq. The District Court dismissed certain claims because McLaughlin did not ask PHS to validate the debt before he filed suit. Because we conclude that he is not required to do so, we will reverse. We will, however, affirm the District Court's imposition of sanctions against PHS for its failure to produce certain documents during discovery.

I. BACKGROUND

A. McLaughlin's Appeal ¹

In October 2005, Timothy McLaughlin executed a $325,000 adjustable rate note in favor of CitiMortgage, secured by a mortgage on his home. McLaughlin fell behind on his mortgage payments due to an error on CitiMortgage's part. In 2010, CitiMortgage referred McLaughlin's account to PHS. PHS sent him a letter (the “Letter”) dated June 7, 2010, that stated that “[t]he amount of the debt as of 05/18/2010” was $365,488.40. App. 73. This included two line items relevant here: $650 in “Attorney's Fees” and $550 for “Costs of Suit and Title Search.” App. 54–55, 73–74. McLaughlin asserts, among other things, that these fees and costs had not actually been incurred as of the date stated in the Letter.

Rather than seek verification of the debt from PHS, McLaughlin filed a putative class action complaint alleging that PHS violated several sections of the FDCPA by, among other things,² falsely representing that PHS had performed legal services on or before May 18, 2010. The District Court dismissed the complaint without prejudice, holding that McLaughlin could not bring suit challenging the information contained in the Letter without having first disputed the validity of the debt pursuant to the FDCPA's validation procedure.³

After McLaughlin filed an amended complaint, the District Court issued another opinion, again stating that McLaughlin was required “to follow the debt validation procedure required by section 1692g” and that “the amended complaint fail[ed] to allege that” he had done so. App. 152–53. The District Court also found that the fees in the Letter were estimates and held that “estimating the amount of attorneys' fees in an itemized debt collection notice does not violate the FDCPA.” App. 152–53. For these reasons, the District Court dismissed McLaughlin's claims under 15 U.S.C. § 1692e(2) and (10)⁴,⁵ that alleged misrepresentations concerning the amount of the debt and the fees for services associated with its collection. McLaughlin appeals this ruling.

B. PHS's Cross–Appeal

One claim survived dismissal, namely McLaughlin's claim that PHS violated the FDCPA by creating the false impression that attorneys were involved in the debt collection activity in violation of § 1692e(3).⁶ Discovery proceeded on this claim. Before the motion had been decided, McLaughlin had served a document demand upon PHS seeking “ ‘[a]ll invoices for professional services rendered by [PHS] in relation to the loan of Timothy McLaughlin.’ ” App. 186 (alterations in original). PHS objected, claiming that the information was not likely to lead to the discovery of admissible evidence. In response, McLaughlin filed a motion to strike this objection and a motion to compel, arguing that the invoices were “clearly relevant” to his claim “that Defendants sought attorney's fees and costs from him that had not been incurred and were not authorized by the underlying loan documents.” Pl.'s Mot. to Strike Objections & Compel Disc. at 10, McLaughlin v. Phelan Hallinan & Schmieg, LLP, No. 10–1406 (W.D.Pa. Nov. 9, 2011), ECF. No. 66. The District Court orally granted McLaughlin's motion. Despite this order, PHS did not produce the invoices during discovery. Instead, they withheld them until they attached them to their summary judgment reply brief.

The District Court found that these invoices “contain[ed] ... material facts” showing that PHS had in fact misstated the attorney's fees and costs of suit. App. 161. Specifically, the District Court noted that the invoices showed that PHS had incurred only $440 in total costs and $625 in fees, and not the $550 and $650, respectively, set forth in the Letter. As a result, the District Court invited McLaughlin to file a motion seeking relief from its orders dismissing his § 1692e(2) claim.

McLaughlin thereafter moved for reconsideration of the District Court's dismissal order, but the motion was denied. The District Court did not say that the Letter was accurate but rather held that it contained “reasonable estimates” of the itemized costs, and therefore did not violate the FDCPA. App. 182–84.

The District Court, however, did find that PHS's failure to produce the invoices during discovery was sanctionable under Fed.R.Civ.P. 37(b)(2)(A) and sua sponte ordered PHS to pay all expenses, including attorney's fees, that McLaughlin had incurred in connection with his motion for reconsideration, reasoning that PHS's action prevented full and timely investigation of the facts and led to additional briefing on the summary judgment motion.

The parties thereafter submitted briefs concerning the amount of the award. PHS argued that the District Court raised the issue of sanctions sua sponte, and hence did not provide PHS with notice that sanctions were being contemplated, and asked the District Court ⁷ to “reevaluat[e] ... the imposition of sanctions” in light of its view that the invoices were irrelevant to the lack of attorney involvement claim under § 1692e(3), which was the only claim pending at the time discovery occurred, and to find that its noncompliance with the discovery order was therefore neither in bad faith nor willful. Mem. of Law in Opp'n to Pl.'s Appl. for Att'ys Fees & Expenses at 1–2, Apr. 8, 2013, ECF No. 111 [“ECF No. 111”]. The District Court considered this request, found that PHS had ample opportunity to address the sanctions issue, adopted the finding that the conduct was sanctionable, and ordered sanctions in the amount of $15,050.50. PHS appeals the sanctions order.

II. DISCUSSION ⁸

A. FDCPA Claim

We will first address McLaughlin's appeal of the order dismissing his claims under § 1692e(2) and (10). We exercise plenary review of a district court's order granting a motion to dismiss. Burtch v. Milberg Factors, Inc., 662 F.3d 212, 220 (3d Cir.2011).⁹

1. Debt Collection Activity

McLaughlin contends that PHS's Letter “knowingly misrepresented that, as of May 18, 2010, $650 in attorney's fees and $550 in ‘costs of suit and title search’ were due and owing,” and hence that the Letter violates the FDCPA. Appellant Br. 6. PHS contends that the Letter does not constitute “debt collection activity” subject to the FDCPA because it “made no demand for payment, contained no suggestion that [McLaughlin] settle the underlying debt, nor enter into a payment plan.” Appellee Br. 31 (emphasis omitted).

The FDCPA “regulates ‘debt collection’ ” but does not define the term. Simon v. FIA Card Servs., N.A., 732 F.3d 259, 265 (3d Cir.2013). The statute's substantive provisions, however, make clear that it covers conduct “taken in connection with the collection of any debt.” Id. (internal quotation marks and citations omitted). Put differently, activity undertaken for the general purpose of inducing payment constitutes debt collection activity. Id.; see also Gburek v. Litton Loan Servicing LP, 614 F.3d 380, 385 (7th Cir.2010) (describing “the commonsense inquiry of whether a communication from a debt collector is made in connection with the collection of any debt”). Thus, a communication need not contain an explicit demand for payment to constitute debt collection activity. Simon, 732 F.3d at 266. Indeed, communications that include discussions of the status of payment, offers of alternativesto default, and requests for financial information may be part of a dialogue to facilitate satisfaction of the debt and hence can constitute debt collection activity. Id.

PHS's Letter is plainly part of such a dialogue. The Letter states that PHS is a “debt collector attempting to collect a debt” and that information PHS obtains “may be used for that purpose,” namely to collect a debt. App. 73. It then provides an invoice-like presentation of the amount due. The Letter also informs the recipient how to obtain “updated ... payoff quotes,” meaning how to obtain current information about the amount that would have to be paid to satisfy the debt. Id.

It is reasonable to infer that an entity that identifies itself as a debt collector, lays out the amount of the debt, and explains how to obtain current payoff quotes has engaged in a communication related to collecting a debt. Thus, the Letter constitutes debt collection activity under the FDCPA and misrepresentations contained therein may provide a basis for relief.

2. Estimates

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