Junk Lawsuits Lead to Garbage Results

Jul 27, 2023

January 25, 2023 – Jonathon D. Nelson, General Counsel for Dedicated Financial GBC

The Consumer Financial Protection Bureau (CFPB) recently announced a settlement with a law firm accused of filing junk lawsuits. The NY-based law firm allegedly filed lawsuits with minimal attorney supervision, and without being in possession of documentation to support the claims contained in each lawsuit. CFPB Director Chopra called the lawsuits “sketchy” and the law firm was deemed to be a “lawsuit mill.”

Of course, the CFPB settlement calls for the law firm to pay a penalty ($100,000) and take other actions, including making a certification that an attorney has reviewed documentation supporting each debt underlying each lawsuit. The CFPB was only able to sink its teeth into this law firm because these lawsuits concerned consumer debts, but the main CFPB argument applies equally to lawsuits concerning commercial debts. That is, an attorney is essentially required to possess information and documentation supporting the claims raised in a lawsuit at the time the attorney signs the lawsuit.

The Federal Rules of Civil Procedure, which are applicable to every lawsuit filed in a federal court, require that an attorney sign documents prior to filing them with the court. Fed. R. Civ. P. 11(a). By signing a document, that attorney is representing to the court that the document contains facts supported by evidence and legal arguments supported by law. If an attorney’s representation is found to be false – no supporting evidence/law – the attorney and the attorney’s client may be subject to court sanctions.

Court sanctions typically take the form of the offending document being struck from the record, and the offending attorney/client being ordered to make a payment to the opposing attorney/client. While court sanctions are relatively rare, they can be quite severe because the purpose of a sanction is to impose a penalty sufficient to deter repetition of conduct. It should be noted that court sanctions are not limited to federal court, as many states have adopted rules of civil procedure that mirror the federal rules (e.g., Minn. R. Civ. P. 11.01).

Assuming, arguendo, the allegations levied by the CFPB against that NY law firm were true, it is possible that each consumer-defendant in a “sketchy” lawsuit would be able to successfully raise a Rule 11 argument resulting in a dismissal of that lawsuit. Since it is the CFPB’s job to protect consumers, their settlement with that law firm calls for adherence to Rule 11. Specifically, that law firm is required to dismiss a lawsuit if they are not in possession of documentation that supports the claims raised in the lawsuit. It is neither a novel concept, nor an unreasonable settlement term, to require that an attorney comply with the rules of civil procedure.

Without diminishing the importance of complying with court rules, the fatal blow to that law firm may come in the form of an investigation of possible ethics violations. The ABA Model Rules of Professional Conduct clearly state that attorneys cannot knowingly lie to a court or any other third-party. ABA Model R. Prof. Conduct 3.3, 4.1. If the CFPB is correctly stating that the law firm signed and filed lawsuits without being in possession of supporting documentation, then there is a real possibility that the lawyers signing the lawsuits will be publicly disciplined and potentially suspended from the practice of law. The partners of the law firm may also face discipline for allowing the lawsuits to be signed. ABA Model R. Prof. Conduct 5.1, 8.3.

It may seem like the law firm settling with the CFPB is bearing the entire burden, without consequences to its clients, but the reality is that the law firm’s clients – the named plaintiffs in the “sketchy” lawsuits – will also suffer. Some jurisdictions have a double-dismissal rule (e.g., MN), which means that any lawsuit dismissed twice is automatically dismissed with prejudice, and the plaintiff is forever barred from bringing that lawsuit again. In addition, each of those named plaintiffs have paid costs of litigation that are going to be wasted (unrecoverable) if the lawsuits are dismissed, effectively tossing the costs in the garbage; more than 99,000 lawsuits were filed (per the CFPB) and it costs roughly $210 to obtain an index number in a NY court, so we’re talking about a possible loss of costs in excess of $20M. Furthermore, those named plaintiffs will almost certainly enjoy enhanced CFPB scrutiny because they utilized a law firm that allegedly failed to comply with federal law, court rules, and ethics rules.

This recent CFPB settlement shines a light on the importance of working with attorneys that know the law, court rules, and ethics rules. Regulatory action, court sanctions, and attorney discipline can all be proactively avoided if attorneys and clients take the time to ensure that they are in possession of documentation that supports the factual allegations in a complaint. An attorney that asks a client to provide documents before commencing a lawsuit should be praised, not punished, as they are truly protecting their client’s interests by ensuring that their client’s costs won’t end up in the garbage due to a junk lawsuit.