Lundsted v. JRV Holdings, LLC et al

Filing 65

ORDER Directing Payment. Signed by District Judge Thomas L. Ludington. (KWin)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
NORTHERN DIVISION
CRAIG LUNDSTED,
Plaintiff,

Case No. 14-cv-13981

v.

Honorable Thomas L. Ludington

JRV HOLDINGS, LLC, et al.,
Defendants.
_______________________________________/
ORDER DIRECTING PAYMENT
A consent judgment was entered in this case on August 31, 2015. ECF No. 26. Postjudgment proceedings continue. The unnecessarily complex and protracted proceedings are
primarily assignable to Defendants’ bad faith practice. Plaintiff’s motion for sanctions has
already been granted. The monetary amount of the award will be finalized in this order.
Additional punitive sanctions will also be levied against Defendants and Defendants’ counsel for
the reasons stated below. The factual predicate to the motion for sanctions will be summarized
here.
I.
On October 15, 2014, Plaintiff Craig Lundsted filed this action against Defendants JRV
Holdings, LLC, (“JRV”) and Roosen Varchetti & Olivier, PLLC (“Roosen”). ECF No 1. In his
complaint, Lundsted alleged that JRV Holdings, LLC, purchased the debt Lundsted originally
owed to U.S. Bank and ultimately obtained a judgment against Lundsted in Michigan’s 81st
District Court for $11,548.68 on January 29, 2014. See Request and Order to Seize Property,
ECF No. 48, Ex. A. Lundsted further alleged that Defendants violated the Fair Debt Collection

Practices Act (“FDPCA”) and the Truth in Lending Act (“TILA”) by misrepresenting the
“character, status, or legal amount of the Debt.” Compl. at 4. On April 24, 2015, Lundsted filed a
notice that he had accepted Defendants’ offer of judgment in this case. ECF No. 22. The parties
agreed that Lundsted was entitled to a judgment of $1,000.00 in statutory damages, exclusive of
reasonable attorney fees and costs. Id. Defendants’ offer of judgment provided for “judgment to
be entered against [the Defendants] and in favor of Plaintiff in the amount of $1000, plus a
reasonable attorney fee, costs and interests, if any, to be determined by the court. This offer is
made without regard to and does not impact JRV’s rights to set-off the judgment it holds against
Plaintiff.” Id. On April 24, 2015, Lundsted filed a notice of acceptance of Defendants’ offer of
judgment in the FDCPA case. ECF No. 24. On August 31, 2015, the Court entered a consent
judgment of $1,000.00 in favor of Lundsted, not including attorney fees, interpreting the setoff
language as providing that the judgment was not meant to enlarge or diminish JRV’s right to set
off under existing law and thus unnecessary to the judgment. ECF No. 26. That consent
judgment provided that a motion for attorney fees and a bill of costs was to be furnished by
Plaintiff within twenty-one days of judgment, but did not include the set off language quoted
above.
On September 1, 2015, Defendants filed a motion to vacate the consent judgment,
arguing that because the consent judgment did not include the language extending the right of
setoff to the prospective recovery of attorney fees in addition to the judgment, Defendants had
not agreed to its terms. ECF No. 27. On November 30, 2015, the parties attended a status
conference with the Court. ECF No. 35. At the conference, the parties agreed that the right of
setoff applied to the amount of the $1,000 judgment but disputed whether the attorney fees that
Plaintiff was entitled to recover under the FDCPA could be set off against Defendants’ state

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court judgment. Accordingly, the parties furnished briefing on that issue. On April 27, 2016, the
Court issued an opinion which confirmed that the state court judgment could be set off against
the $1,000.00 statutory judgment, but not against the attorney fees awarded in the FDCPA case.
ECF No. 47. The Court further found that Defendants should “compensate Plaintiff Craig
Lundsted $11,663.63 for costs and fees incurred” in the case. Id. at 15.
In concluding that Lundsted’s award of reasonable attorney fees was not subject to set off
against Defendants’ state court judgment, the Court mentioned several factors. The Court noted
that “[u]nlike set off of the statutory penalty, allowing set off of attorney fees would chill future
FDCPA actions and discourage attorneys from taking FDCPA cases.” Id. at 7. In support, the
Court discussed the hypothetical scenario where “the setoff would swallow the FDCPA award
and leave the FDCPA plaintiff’s attorney without any compensation for reaching a successful
result.” The Court further emphasized that, under Michigan law, attorneys obtain a lien against
the proceeds of a judgment when the attorney is retained, and that the attorney lien in this case
would have priority over the offset claim. Id. at 8. Finally, the Court discussed the relevance of
the fact that Lundsted and his attorney had a contingency fee arrangement:
A contingency fee agreement does to some degree favor setoff because a portion
of the attorney’s fees obtained (perhaps a good majority) will remain with
Lundsted. But this alone is insufficient to overcome the other three factors that do
not favor offset. Further, to the extent Lundsted retains any portion of the fee
award, it is money in his possession that he will apply to his expenses, including
debt expenses. While this result does border on the very problem that setoff seeks
to avoid (A paying B for B to pay A), setoff remains an equitable remedy and the
equities favor not allowing setoff to apply to attorney’s fees.
Id.
A.
On August 11, 2016, Lundsted filed a motion for sanctions alleging that Defendants had
purposefully disregarded the Court’s order prohibiting set off of the attorney fees. ECF No. 47.

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On October 19, 2016, the Court held a hearing on the motion for sanctions. That hearing was
continued on November 9, 2016. On October 19, 2016, Mr. and Mrs. Lundsted both testified
about the events in question. Oct. 19 Hearing Tr., ECF No. 53. Apparently, the day after the
order determining setoff rights and granting attorney fees was issued, Defendant Roosen secured
an Order to Seize Property (writ of execution) from the 81st District Court. Defendant Roosen
also secured a cashiers check made payable to Lundsted for $11,663.63, the amount of the
attorney fees which this Court ordered to be paid. Then Defendant Roosen arranged for two court
officers from Scott Hope’s business to travel to Lundsted’s home on May 19, 2016. Mrs.
Lundsted testified that a court officer rang her doorbell on the morning in question. Id. at 32. The
man, later identified as Scott Hope, told Mrs. Lundsted that he had a court order to seize
property. Id. Mrs. Lundsted told the officers that her husband was golfing and would be home
later in the day. Id. at 33.
Mr. Lundsted testified that his wife called him while he was golfing and informed him of
Mr. Hope’s visit. Id. at 13. After Mr. Lundsted finished his round of golf, he returned home.
Several hours later, Mr. Hope arrived. Id. at 14. Another individual, later identified as Chris
Lackney, was also present, but Mr. Lundsted testified that he never interacted with Mr. Lackney.
Id. at 15. Mr. Lundsted testified that Mr. Hope informed him that he was entitled to the check for
$11,663.63, which Mr. Lundsted was unaware of. Id. Mr. Hope also told Mr. Lundsted that if he
endorsed the check over in satisfaction of the state court judgment, the debt would be canceled.
Id. at 16. Mr. Lundsted testified that Mr. Hope represented that, if Mr. Lundsted did not sign
over the check, Mr. Hope would seize Mr. Lundsted’s property, including his vehicles. Id. at 15–
17. Mr. Lundsted endorsed the check. Plaintiff’s counsel learned of the events when he emailed
Roosen explaining that “the deadline for an appeal has come and gone, so please let us know

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when we can expect payment or if you need any logistical information from us to wrap this
matter up.” Email Correspondence, ECF No. 48, Ex. C. He was informed the next day that “[a]s
per the court order, your client was paid the amount ordered directly.” Id.
Mr. Lundsted repeatedly asserted at the hearing that he was “scared senseless” by the
encounter and did not understand the significance of the check. Id. at 18–19; 23–25. Mr.
Lundsted also testified that Mr. Hope was wearing an outfit that resembled a uniform, including
a state of Michigan patch. Id. at 20. Mrs. Lundsted’s account substantially corroborates her
husband’s version of events.
On November 9, 2016, Mr. Hope testified about the events in question. He explained that
the encounter with Mr. and Mrs. Lundsted seemed friendly and non-confrontational for the most
part. Mr. Hope acknowledged that he mentioned the check as a way for Mr. Lundsted to avoid
seizure of any other property. He also acknowledged that he told Mr. Lundsted that he would
seize property to collect the judgment if he did not endorse the check.
B.
The Court granted Lundsted’s motion for sanctions and directed Lundsted’s counsel to
file an affidavit listing the costs incurred in bringing the motion. Lundsted’s counsel filed that
affidavit.
Defendants argued that no fees should be awarded. Defendants’ arguments were frivolous and
rejected by the Court. ECF No. 58. But the Court sua sponte determined that review of the fee
agreement was necessary to determine “the amount of funds counsel was deprived of.” Id. at 9.
In the order, the Court concluded that the total amount of funds properly sought by Plaintiff
came to $20,376.63, but declined to enter an order directing payment of that amount until after
the fee agreement was provided.

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On May 17, 2017, Plaintiff’s counsel submitted the fee agreement. ECF No. 62. The
agreement includes two relevant provisions:
3. We will not charge you for Attorneys’ Fees. Attorneys will prosecute Client’s
claim under statutory and/or common law theories that may allow Client to
recover Attorneys’ fees from the defendant if the claim is successful. For each
settlement, arbitration award or verdict, Attorneys shall receive compensation
calculated according to the number of hours spent on the case at the attorney and
paralegal rates set forth below (the “traditional lodestar method”). The firm’s
billing rates are as listed in “Exhibit A,” attached hereto.
4. As an alternative, Attorneys may elect compensation based upon forty percent
of the Gross Fund obtained from any one defendant. “Gross Fund” shall mean the
total amount of money that is recovered from any one defendant, including
damages, fees, costs and the amount of any waiver (or partial waiver) of any
alleged financial obligation underlying Client’s claims.
Fee Agreement at 1, ECF No. 62.
The Court’s order did not direct Defendants to file a response to the fee agreement, but
Defendants elected to do so anyway. As explained below, the arguments raised in that response
brief are also frivolous.
II.
A.
In its most recent (and unsolicited) brief, Defendants contend that the fee agreement is
unenforceable because it violates the Michigan Rules of Professional Conduct, specifically
MRPC 1.5, 1.7(b), and 1.8(j). Defendants have not advanced any good faith argument that any of
those provisions are violated by the agreement.
Michigan Rule of Professional Conduct 1.5(a) prohibits “clearly excessive” fees, while
Rule 1.5(c) requires “contingent-fee agreement[s]” to be in writing. Neither provision is violated
here. Suits alleging violations of the Fair Debt Collection Practices Act, like this one, almost
always involve small judgments and comparatively large attorney fee recoveries. That dynamic

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is accepted (and even intended): “A rule of proportionality would make it difficult, if not
impossible, for individuals with meritorious . . . claims but relatively small potential damages to
obtain redress from the courts.” County of Riverside v. Rivera, 477 U.S. 561, 578 (1986). See
also Mann v. Acclaim Financial Services, Inc., 348 F. Supp. 2d 923, 927 (S.D. Ohio 2004) (“A
reasonable fee is one that is adequate to attract competent counsel, but which does not produce a
windfall to the attorney.”). The Court has already rejected Defendant’s argument that the fees
which Plaintiff’s counsel seeks are unreasonable. See April 12, 2017, Op. & Order at 10, ECF
No. 58.
Likewise, the fee agreement clearly provides, in writing, the means by which the fee is
calculated. The fee agreement does provide an alternative means of calculating attorney fees, but
the method to be used will almost always be easily discernable at the time the agreement is
entered into. If the cause of action is premised on a statute that limits damages (like the Fair Debt
Collection Practices Act), then the contingent fee will be based on the traditional lodestar
method. If the amount of recovery is not limited (or lodestar recovery is inapplicable), then the
40% contingency arrangement would govern. And, most importantly, the State Bar of Michigan
has issued a formal opinion which confirms that arrangements like the one here are not per se
improper.

See

RI-6

Formal

Opinion,

http://www.michbar.org/opinions/ethics/

numbered_opinions?OpinionID=876&Type=6&Index=.
Michigan Rule of Professional Conduct 1.7(b) provides that “[a] lawyer shall not
represent a client if the representation of that client may be materially limited . . . by the lawyer’s
own interests.” Rule 1.8(j) prohibits a lawyer from acquiring “a proprietary interest in the cause
of action” except the lawyer may “contract with a client for a reasonable contingent fee in a civil
case.” Id. at Rule 1.8(j)(2). Defendants argue that the fee arrangement creates a conflict of

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interest because the “lawyer’s ‘own interest’ is that it collects the full award under ¶3, but the
client’s interest clearly lies in collecting at least some of the fee award.” Def. Resp. Br. at 2, ECF
No. 63. This argument is nonsensical. A client will always have an interest in obtaining more
money than less, but an attorney does not cheat his or her client by recovering an attorney fee
payment and not providing a portion to the client. The fee arrangement here clearly sets out, at
the beginning of the representation, how the attorney’s fees will be paid. The Michigan Rules of
Professional Conduct expressly permit contingent fees in civil cases, and the State Bar of
Michigan has specifically approved simultaneous “settlement of the merits and the attorney fee.”
See

C-235

Formal

Opinion,

http://www.michbar.org/opinions/ethics/numbered_opinions?OpinionID=26&Type=6&Index=F.
The Rules of Professional Conduct and the State Bar’s Formal Opinions establish the
unremarkable fact that a lawyer does not have a conflict of interest with his or her client simply
because the lawyer is seeking an award of attorney fees or is proceeding on a contingency fee
arrangement.
Finally, Defendants argue that “virtually all of the litigation was incurred in order to
increase counsel’s proprietary interest in the case, without regard to any benefit or . . . cost to Mr.
Lundsted.” Def. Resp. Br. at 2. That statement is manifestly incorrect. Judgment in this case was
entered on August 31, 2015, (nearly two years ago) and payment of attorney fees was ordered on
December 4, 2015. Plaintiff’s counsel has been deprived of the fees to which they are entitled for
over a year and a half because Defendants have sought at every step to delay and frustrate their
collection of those fees. Defendants’ assertion that Plaintiff’s counsel is at fault for attempting to
recover his rightful fees despite Defendants’ attempts to avoid payment of those fees is without
merit.

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In short, Defendants have not identified any authority to support the argument that the fee
agreement is invalid and unenforceable. Under the provision whereby Plaintiff’s counsel has
sought attorney fees, he is entitled to 100% of the lodestar amount. The Court has already
determined that amount and found that Plaintiff counsel’s request is reasonable. Accordingly,
Defendants will be directed to pay $20,376.63 directly to Plaintiff’s counsel.
B.
Given the background of this case, however, compensatory sanctions alone are
insufficient. District courts have the inherent power to award sanctions when parties act in bad
faith. Chambers v. NASCO, Inc., 501 U.S. 32, 45 (1991). That power is derived from the court’s
“equitable power to control the litigants before it and to guarantee the integrity of the court and
its proceedings.” First Bank of Marietta v. Hartford Underwriters Ins. Co., 307 F.3d 501, 512
(6th Cir. 2002). Specifically, federal courts are justified in imposing sanctions when a party
attempts to avoid satisfying a binding judgment in bad faith. In re John Richards Homes Bldg.
Co., L.L.C., 404 B.R. 220, 227 (E.D. Mich. 2009). See also John Akridge Co. v. Travelers
Companies, 944 F. Supp. 33, 34 (D.D.C. 1996) (sanctioning plaintiffs because they filed the suit
in bad faith and in an attempt to “improperly circumvent the Court’s ruling in their previous
case”). Bad faith is established when an attorney delays or disrupts litigation or hampers
enforcement of a court order. Hutto v. Finney, 437 U.S. 678, 689 n.14 (1978). The district court’s
inherent power to sanction can be directed against both attorneys and parties. Stalley v. Methodist
Healthcare, 517 F.3d 911, 920 (6th Cir. 2008).
Viewed as a whole, Defendants’ actions demonstrate a pattern of obstructive, bad faith
behavior. This is a case that began almost three years ago, with allegations that Defendants
engaged in unlawful debt collection practices. A consent judgment was reached, but Defendants

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attempted to premise the consent judgment on a right to set off the attorney fees award against a
separate state court judgment that Defendants held against Plaintiff. The Court rejected that
argument, finding that “allowing set off of attorneys’ fees would chill future FDCPA actions and
discourage attorneys from taking FDCPA cases.” April 27, 2016, Op. & Order at 7. More
specifically, “‘offset is . . . patently unfair where it would effectively force attorneys to satisfy
the debts of their clients.’” Id. (quoting Brown v. Mandarich Law Grp., LLP, No. 13-CV-04703,
2014 WL 2860631 at *3 (N.D. Cal. June 23, 2014)). Finally, the Court explained that Plaintiff’s
attorneys had a prioritized attorney lien against the attorney fees award. Id. at 8.
Despite that clear language, Defendants contrived a scenario where their agent presented
Lundsted with the check for attorney fees but pressured him to sign over that check back to
Defendants, purposefully avoiding any communication with Plaintiff’s counsel. For all intents
and purposes, Defendants achieved exactly what the Court concluded they should not: they
convinced Lundsted to use the attorney fees award, meant for counsel, to pay off the JRV
judgment against Lundsted personally.
Having been entirely deprived of their fees, Plaintiff’s counsel brought a motion for
sanctions, which the Court granted. December 2, 2016, Op. & Order. The Court directed
Plaintiff’s counsel to file an affidavit explaining the costs and fees incurred in bringing the
motion. After Plaintiff’s counsel did so, Defendants filed a brief opposing their request for fees.
Defendants argued that Plaintiff’s counsel should not receive recompense for time spent briefing
issues which the Court did not expressly base its order granting sanctions on. Supreme Court
precedent makes that argument untenable. See Hensley v. Eckerhart, 461 U.S. 424, 434–35
(1983); April 12, 2017, Op. & Order at 6–7. Defendants also argued that, because the
contingency fee agreement had not been disclosed, sanctions should not be imposed. The Court

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rejected Defendants’ argument, finding that Plaintiff’s counsel did not need to strictly comply
with Michigan procedures for collecting on an attorney lien, but directed Plaintiff’s counsel to
submit the fee agreement for a separate reason: to ensure that the amount of sanctions imposed
would not produce a windfall for Plaintiff’s counsel. When that fee agreement was filed,
Defendants filed yet another unsolicited brief arguing that the agreement could not be enforced.
As explained above, the fee agreement clearly complies with Plaintiff’s counsel’s ethical
obligations. Given the plain text of the Michigan Rules of Professional Conduct and the
clarifying formal opinions by the Michigan State Bar, Defendants’ arguments to the contrary
were frivolous.
Considered in context, Defendants’ counsel has exceeded the bounds of zealous
advocacy. Rather, Defendants’ conduct constituted a transparent effort to circumvent the plain
language of the Court’s April 27, 2016, opinion and order. Even after being sanctioned for their
disregard of the Court’s order, Defendants’ briefing and arguments seem more designed to
“cause unnecessary delay” and “needlessly increase the cost of litigation” rather than to advance
nonfrivolous legal arguments. Fed. R. Civ. Pro. 11(b)(1).1 As the Court explained in the April 27,
2016, opinion and order, allowing offset of attorney fees in the FDCPA context would
discourage competent attorneys from accepting those cases. That disincentive exists both when
attorneys are compelled to satisfy their client’s debts and when attorneys must engage in
contentious, protracted litigation to obtain their fees. Were defendants in FDCPA cases permitted
to delay payment of attorney fees awards by a year and a half, as occurred in this case, without
consequence, “future FDCPA actions” would be chilled. April 27, 2016, Op. & Order at 7.

1

Although Defendants’ briefing has likely violated Rule 11, Defendants have not been specifically directed to show
cause why Rule 11 has not been violated. See Rule 11(c)(3). For that reason, the sanctions will be premised on the
Court’s inherent, equitable power to impose sanctions, described above. Given the lengthy litigation in this case
regarding whether sanctions pursuant to that power are appropriate, no further notice is necessary.

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The Court’s previous orders which found that Plaintiff’s counsel was entitled to
compensatory sanctions for the time spent collecting the attorney fees award have proved
insufficient to deter Defendants’ bad faith behavior. Punitive sanctions are thus necessary.2
Because the bad faith behavior is equally traceable to Defendants and Defendants’ counsel, they
will be jointly and severally responsible for paying Plaintiff’s counsel an additional $3,000 in
punitive sanctions.
III
Accordingly, it is ORDERED that Defendants are DIRECTED to pay $20,376.63
directly to Plaintiff’s counsel on or before July 28, 2017.
It is further ORDERED that Defendants and Defendants’ counsel are DIRECTED to
jointly and severally pay $3,000 directly to Plaintiff’s counsel on or before July 28, 2017.

Dated: July 19, 2017

s/Thomas L. Ludington
THOMAS L. LUDINGTON
United States District Judge

PROOF OF SERVICE
The undersigned certifies that a copy of the foregoing order was served
upon each attorney or party of record herein by electronic means or first
class U.S. mail on July 19, 2017.
s/Kelly Winslow
KELLY WINSLOW, Case Manager

2

Further, additional sanctions are necessary because Plaintiff’s counsel was forced to file another brief defending its
fee agreement. Plaintiff’s counsel would be entitled to compensation for the time spent preparing that brief. Rather
than directing Plaintiff’s counsel to disclose the amount of time spent (and thus likely triggering another round of
frivolous challenges by Defendant), punitive sanctions will be imposed.

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