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The full case caption appears at the end of this opinion. When Michelle Sandersfailed to pay a small debt she received acollection letter from Universal FidelityCorporation. She claims that as an”unsophisticated debtor” she found the letterconfusing and misleading. Despite herunsophistication, she quickly contacted a lawyerand initiated a class action lawsuit under theFair Debt Collection Practices Act (FDCPA or theAct). The parties eventually settled, but theydid so without agreeing on a specific sum ofcompensation. Rather, they merely agreed thatUniversal Fidelity would pay the class themaximum damages to which it would be entitledunder the Act. The FDCPA makes class actiondamages dependent upon the “net worth” of thedefendant. The parties disagreed as to themeaning of this term, but the district court heldon summary judgment that net worth means bookvalue net worth, as opposed to fair market networth. We affirm. I. The Fair Debt Collection Practices Act providesthat “in the case of a class action the totalrecovery shall not exceed the lesser of $500,000or 1 per centum of net worth of the debtcollector . . . .” 15 U.S.C. sec. 1692k(a)(2)(B)(emphasis added). Since the parties have settledthe liability phase of the litigation, theremaining issue involves the calculation ofdamages. This appeal arises out of the parties’dispute over the meaning of the term “net worth”which is not defined by the Act. The districtcourt agreed with Universal Fidelity’s argumentthat net worth means the book value of thecompany, that is, assets listed on the company’sbalance sheet minus liabilities, which is alsosometimes called “balance sheet net worth.” See Sanders v. Jackson, 33 F. Supp.2d 693 (N.D. Ill.1998). But another district court in a nearlyidentical case reached a different conclusion.See Scott v. Universal Fidelity Corp., 42 F.Supp.2d 837 (N.D. Ill. 1999). Scott held, asSanders argues, that net worth includes UniversalFidelity’s goodwill, i.e., the value of thecompany beyond the book value of its net tangibleassets. [FOOTNOTE 1] In other words, the court believedthat net worth means “fair market net worth.” Inthis case the different interpretations result insubstantially different recoveries because thebook value of Universal Fidelity is about$100,000, while Sanders alleges that its fairmarket value is around $1,800,000. Therefore wemust decide whether the FDCPA uses the term networth to denote fair market net worth, whichincludes goodwill, or balance sheet net worth,which does not. The FDCPA does not define net worth and so wemust address this question using our rules ofstatutory interpretation. The cardinal rule isthat words used in statutes must be given theirordinary and plain meaning. United States v.Wilson, 159 F.3d 280, 291 (7th Cir. 1998). Wefrequently look to dictionaries to determine theplain meaning of words, and in particular we lookat how a phrase was defined at the time thestatute was drafted and enacted. See Molzof v.United States, 502 U.S. 301, 307 (1992); Newsomv. Friedman, 76 F.3d 813, 817 (7th Cir. 1996).But in this case we see that the dictionarysimply confirms the root problem: the term networth has more than one meaning. The fourthedition of Black’s Law Dictionary, which was thecurrent edition in 1977 when the FDCPA wasenacted, defines net worth as simply thedifference between assets and liabilities.Black’s Law Dictionary 1192 (4th ed., 1968).Assets are defined as anything available for thepayment of debts, which in the case of an ongoingbusiness does not include goodwill. Id. at 151.Thus the edition of Black’s that was current whenthe Act became law generally supports Fidelity’sposition. The latest edition, the seventh,similarly defines net worth as assets minusliabilities. Its primary definition of “asset” isan “item that is owned and has value.” Black’sLaw Dictionary 112 (7th ed., 1999). Assuming theterm “item” denotes tangibility and specificidentity, two attributes not usually ascribed togoodwill, this definition suggests that goodwillshould not be a factor in the calculation of networth. Thus, this first definition supportsUniversal Fidelity’s position. Predictably,Sanders advises us to ignore the first definitionand suggests instead that we look to the seconddefinition, which specifically includes goodwillamong several examples of assets. [FOOTNOTE 2] But asidefrom the fact that there is no cogent reason foradopting the second definition over the first,all that the second definition demonstrates isthat in some contexts goodwill should beconsidered an asset. This proposition is ofcourse true, but when interpreting this statuteour task is to find the ordinary and usualmeaning of the term net worth, not the broadestpossible meaning of the term asset. Neither partyprovides us with a dispositive reason foradopting one dictionary definition over another.Thus we find that these varying definitions arenot particularly helpful. Another guide to interpretation is found in theconstruction of similar terms in other statutes.United States v. Bates, 96 F.3d 964, 968 (7thCir. 1996); see Liberty Lincoln-Mercury, Inc. v.Ford Motor Co., 171 F.3d 818, 823 (3d Cir. 1999); Veiga v. McGee, 26 F.3d 1206, 1211 (1st Cir.1994). There are many statutes which use the termnet worth. Some, like the FDCPA, limit classrecoveries to a certain percentage of adefendant’s net worth. See, e.g., Real EstateSettlement Procedure Act, 12 U.S.C. sec.2605(f)(2)(B)(ii); Expedited Funds AvailabilityAct, 12 U.S.C. sec. 4010(a)(2)(B)(ii); Truth inSavings Act, 12 U.S.C. sec. 4310(a)(2)(B)(ii);Homeowners Protection Act, 12 U.S.C. sec.4907(a)(2)(B)(i); Truth in Lending Act, 15 U.S.C.sec. 1640(a)(2)(B); Equal Credit Opportunity Act,15 U.S.C. sec. 1691e(b); Electronic FundsTransfer Act, 15 U.S.C. sec. 1693m(a)(2)(B)(ii).Others limit recovery to plaintiffs whose networth is below a certain threshold amount. See,e.g., Securities and Exchange Act, 15 U.S.C. sec.78u-4(g)(4)(A)(i)(II); Y2K Act, 15 U.S.C. sec.6605(d)(1)(A)(i)(II). But both types of statutesuse the term net worth in the same sense and aretherefore instructive in the present case. One of these latter types of statutes is theEqual Access to Justice Act, which permitsparties that prevail against the government toobtain the costs of litigation, but only if theindividual’s “net worth does not exceed$2,000,000.” 5 U.S.C. sec. 504(b)(1)(B). InContinental Webb Press Inc. v. N.L.R.B., weexamined the term “net worth” in the context ofthis EAJA provision. 767 F.2d 321, 323 (7th Cir.1985). There the NLRB argued that in calculatingnet worth, Continental’s assets should be valuedat cost rather than cost minus depreciation. Weheld that the proper valuation entails adepreciation of the assets because that is theprocedure prescribed by generally acceptedaccounting principles. Congress did not define the statutory term “networth.” It seems a fair guess that if it hadthought about the question, it would have wantedthe courts to refer to generally acceptedaccounting principles. What other guideline couldthere be? Congress would not have wanted us tocreate a whole new set of accounting principlesjust for use in cases under the Equal Access toJustice Act. Id. This holding is consistent with our priorholding in Telegraph Savings and Loan Associationv. Schilling that GAAP should also be used todetermine a bank’s net worth as that term isdefined by federal banking statutes. 703 F.2d1019, 1027-28 (7th Cir. 1983). Not surprisingly,when the Ninth Circuit was asked to define networth for purposes of the EAJA, it also held thatGAAP should govern. American Pac. Concrete PipeCo., Inc. v. N.L.R.B., 788 F.2d 586, 591 (9thCir. 1986) (adopting this reasoning and holdingof Continental Webb Press). Implicit in these holdings is the conclusionthat the statutory term net worth means book networth or balance sheet net worth, because GAAPhas meaning only in the context of financialstatement reporting–GAAP dictate the standardsfor reporting and disclosing information on anentity’s financial statements. [FOOTNOTE 3] While thosecases involved different statutes, we believetheir reasoning applies equally to the FDCPA.Accordingly, because there is no indication inthe FDCPA that the term net worth should be usedin anything but its normal sense, we also look tobook net worth or balance sheet net worth asreported consistently with GAAP. Universal Fidelity’s 1997 balance sheet includesassets of $1,729,802.00 and liabilities of$1,628,449.00, for a book net worth of$101,353.00. The balance sheet does not reportgoodwill. While Sanders contends that we shouldincrease Universal Fidelity’s listed assets bythe value of its goodwill, which at this point isunknown, that would be inconsistent with GAAP.GAAP provides that internally developed goodwillis not reported on a company’s financialstatements; rather, goodwill is only reported atthe time a business is sold for more than itsbook value net worth. Thus, applying GAAP, as webelieve Congress would have wanted, c.f.,Continental Webb Press Inc., Universal Fidelity’sbalance sheet valuation should not includegoodwill. The rationale underlying the GAAP treatment ofgoodwill also supports our conclusion that thestatutory term net worth means balance sheet networth. As the Accounting Principles Board hasexplained, goodwill is not reported absent abusiness combination because “its lack ofphysical qualities makes evidence of itsexistence elusive, [and] its value . . . oftendifficult to estimate, and its useful life . . .indeterminable.” Accounting Principles Board,Opinion. No. 17, para. 17.02 (1970). The Boardalso recognizes that the value of goodwill oftenfluctuates widely for innumerable reasons andthat estimates of its value are often unreliable.Based in part on these concerns, the AccountingPrinciples Board has adopted its rule concerninggoodwill–absent a business combination, it isnot reported as an asset of the company. We also must consider whether this definition ofnet worth is consistent with the purposes of theFDCPA’s net worth provision, because a statutemust be interpreted in accordance with its objectand policy. See Holloway v. United States, 119 S.Ct. 966, 969 (1999); Grammatico v. United States,109 F.3d 1198, 1204 (7th Cir. 1997). Here, thenet worth clause is designed to address a problemoften associated with fixed monetary penalties:they sometimes penalize smaller companies tooharshly but are also insufficiently punitive forlarger businesses. See Kemezy v. Peters, 79 F.3d33, 35 (7th Cir. 1996). Thus, by making theextent of the penalty directly proportional to apercentage of the defendant’s net worth, Congresshoped that punishment might be meted outaccording to a business’s ability to absorb thepenalty. See id.; Zaz� Designs v. L’Or�al, S.A.,979 F.2d 499, 508 (7th Cir. 1992) (discussing therationale behind fixing monetary penaltiesaccording to the defendant’s wealth or lackthereof). The key aspect of this net worthprovision is not its punitive nature, as Sandersargues, but a recognition that an award ofstatutory punitive damages may exceed a company’sability to pay and thereby force it intobankruptcy. Kemezy, 79 F.3d at 35. Thus, we agreewith the Fifth Circuit that the primary purposeof the net worth provision is a protective one.It ensures that defendants are not forced toliquidate their companies in order to satisfy anaward of punitive damages. Boggs v. Alto TrailerSales, Inc., 511 F.2d 114, 118 (5th Cir. 1975)(identical provision in TILA was designed toprotect businesses from catastrophic damageawards). With this purpose in mind, we see that UniversalFidelity’s interpretation of net worth makes moresense than Sanders’s does. Since the 1% of networth limitation was designed to identify thatportion of a company’s assets which safely couldbe liquidated to satisfy an award of damageswithout forcing the breakup of that company,factoring goodwill into the calculation of networth defeats the purpose of the provisionbecause ordinarily goodwill “cannot be disposedof apart from the enterprise as a whole.” ABP Op.No. 17, para. 17.32. Since goodwill cannot besevered from the company, and thus is not readilyavailable for the payment of judgments, it shouldnot influence the calculation of net worth. Acontrary holding would contradict the key purposeof the net worth provision. The text of the FDCPAand cases interpreting it clearly indicate thatde minimis violations should not be punished withsuch severity that the companies are deprived ofexistence. Furthermore, there is no provisionthat limits defendants being exposed to more thanone FDCPA class action lawsuit, which is exactlywhat happened to the defendant in this case. Seealso Mace v. Van Ru Credit Corp., 109 F.3d 338,344 (7th Cir. 1997) (discussing the possibilityof serial FDCPA suits). When this possibility isfactored in, Sanders’s interpretation of “networth” proves even more onerous and thus, highlyimplausible. Another probable purpose of the provision is tomake the damage calculation easy for the partiesand trial judges. Examining the balance sheet ofa company and subtracting the liabilities fromthe assets is a simple and accurate calculation.Sanders argues that factoring goodwill into theequation would not be so difficult, but asmentioned above, due to its transitory nature,goodwill is extremely difficult to quantify andvalue with any certainty. APB Op. No. 17, para.17.02. Goodwill can fluctuate significantly inthe marketplace. It has no value as a securityinterest. Until there is a fair market valuesale, goodwill is speculative at best. In short,the calculation of statutory damages should notresult in a mini trial; the statute seeks toavoid a separate contest over damages by usingthe term net worth to denote a company’s bookvalue net worth. As with the EAJA, this statutedoes not contemplate the layer of complexitywhich Sanders’s interpretation would require. SeeUnited States v. 88.88 Acres of Land, 907 F.2d106, 108 (9th Cir. 1990) (the determination ofnet worth under the EAJA should not result in asecond major litigation). Sanders also contends that a failure to includegoodwill in the equation will diminishplaintiffs’ recoveries and thereby destroy anyincentive for FDCPA class action litigation. Butfrom the plaintiffs’ point of view, the primarymotivation for these suits is not and should notbe the plaintiffs’ belief that the suit willresult in a substantial windfall. Plaintiffs inFDCPA class actions who are not claiming actualdamages cannot reasonably expect large awards forwhat are technical and de minimis violations ofthe Act. Mace, 109 F.3d at 344. Moreover, the”policy at the very core of the class actionmechanism is to overcome the problem that smallrecoveries do not provide the incentive for anyindividual to bring a solo action prosecuting hisor her rights. A class action solves this problemby aggregating the relatively paltry potentialrecoveries into something worth someone’s(usually an attorney’s) labor.” Id. Thus, it isthe plaintiffs’ recognition that their claims arerelatively insignificant which induces them tosue as one body. “Because the class action devicelowers plaintiffs’ litigation costs below thelevel that would be incurred by bringingindividual suits, the class action reduces thelevel of damages necessary to producelitigation.” John C. Coffee, Jr., Understandingthe Plaintiff’s Attorney: The Implications ofEconomic Theory for Private Enforcement of LawThrough Class and Derivative Actions, 86 Colum.L. Rev. 669, 684 (1986). While an increasedrecovery might provide slightly greater incentivefor plaintiffs to sue and to monitor theirlawsuits, see Greisz v. Household Bank(Illinois), N.A., 176 F.3d 1012, 1013 (7th Cir.1999), monetary gain for the class members isobviously not the main impetus for these classactions. Rather, the driving force behind these cases isthe class action attorneys. They have a strongincentive to litigate these cases–oftentimesdespite their marginal impact–in the form ofattorneys’ fees and costs they hope to recover.The award of such fees is mandatory in FDCPAcases. See Zagorski v. Midwest Billing Servs.,Inc., 128 F.3d 1164, 1166 (7th Cir. 1997) (percuriam); Tolentino v. Friedman, 46 F.3d 645, 651(7th Cir. 1995). Not surprisingly, then, “FDCPAlitigation is a breeding ground for classactions.” Lawrence Young & Jeffrey Coulter, ClassAction Strategies in FDCPA Litigation, 52Consumer Fin. L.Q. Rep. 61, 70 (1998). As thiscourt noted in Mace, it is these attorneys’ feeswhich are a significant inducement for FDCPAclass action lawsuits. 109 F.3d at 344; seeGoldberger v. Integrated Solutions, Inc., No. 99-7198, 2000 WL 320447, at *10 (2d Cir. Mar. 28,2000) (in many class action cases the plaintiffs”are mere ‘figureheads’ and the real reason forbringing such actions is ‘the quest forattorney’s fees.’”). [FOOTNOTE 4] Unfortunately, as JudgeWinter of the Second Circuit has noted, theseattorney fees strongly encourage class actions,many of which are frivolous. See Ralph K. Winter,Paying Lawyers, Empowering Prosecutors, andProtecting Managers: Raising the Cost of Capitalin America, 42 Duke L. J. 945, 949 (1993). Thehistory of FDCPA litigation shows that most caseshave resulted in limited recoveries forplaintiffs and hefty fees for their attorneys.Consider the recent case of Crawford v. EquifaxPayment Servs., Inc., where a negotiatedsettlement provided $2,000 to the classrepresentative, $78,000 to the plaintiff’sattorneys, and nothing for the rest of the class.201 F.3d 877, 880 (7th Cir. 2000) (reversing theapproval of the settlement). The impetus of thatsuit clearly was not the plaintiffs’ share of theaward. See Winter, supra, at 949 (in derivativeclass action settlements, plaintiffs recover only50% of the time while their attorneys receivefees in 90% of the cases). Crawford and similarcases illustrate “the all-too-common abuse of theclass action as a device for forcing thesettlement of meritless claims and is thus amirror image of the abusive tactics of debtcollectors at which the statute is aimed.” Whitev. Goodman, 200 F.3d 1016, 1019 (7th Cir. 2000).Assuming that Crawford is somewhat typical ofother FDCPA cases in this respect, our holdingtoday will not, as Sanders suggests, stem thetide of FDCPA cases flooding this circuit. And ifthe definition of net worth advocated by Sanderswere applied to the numerous statutes that usethat term as a measure of damages, the incentivefor more litigation would be explosive anddestructive. Most defendant corporations would bevalued well beyond their ability to pay short ofbankruptcy or liquidation. Finally, Sanders and her class argue that ourinterpretation of net worth will not result insufficient punishment of defendants. Again,Sanders overlooks the fact that the FDCPA suitsusually entail significant awards of attorneys’fees, above and beyond any damages awarded.Although the attorneys’ fees provision of the Actmay or may not have been designed to be punitiveper se, we have noted that attorneys’ fees arepunitive in the broad sense of the term in thatthey deprive the defendant of capital and therebyprovide a strong incentive not to violate the lawin the future. Mace, 109 F.3d at 344 (theattorney’s fee provision punishes by “helping todeter future violations” by the defendant); Marquart v. Lodge 837, Int’l Ass’n of Machinists& Aerospace Workers, 26 F.3d 842, 848 (8th Cir.1994). The Sixth Circuit is correct in notingthat, on top of the damages awarded, the costsand attorneys’ fees provisions in the FDCPAprovide a substantial punishment whichundoubtedly deters similar conduct. See Wright v.Finance Serv. of Norwalk, Inc., 22 F.3d 647, 651(6th Cir. 1994) (en banc). And let us not forgetthat any egregious debt collection practiceswhich cause actual losses to debtors are fullycompensable according to the actual damagesprovision of the FDCPA. 15 U.S.C. sec.1692k(a)(1). Our interpretation of the net worthprovision has no effect on such suits byindividuals, and thus Sanders’s suggestion thatour holding will result in insufficientpunishment of egregious conduct has no reasonablefoundation. In sum, the words of the statute, anunderstanding of its purposes, and casesinterpreting the term net worth indicate thatthis term means balance sheet or book value networth. As such, goodwill should not be factoredinto the calculation of the defendant’s networth. Accordingly, we affirm the decision of thedistrict court and disapprove the contraryposition adopted by another district court inScott v. Universal Fidelity Corporation. Affirmed. :::FOOTNOTES::: FN1 We have previously defined “goodwill” as “anintangible asset that represents the ability of acompany to generate earnings over and above theoperating value of the company’s other tangibleand intangible assets. It often includes thecompany’s name recognition, consumer brandloyalty, or special relationships with suppliersor customers.” In re Prince, 85 F.3d 314, 322(7th Cir. 1996). FN2 Without giving a reason, Sanders also asks us toignore the third definition of asset found inBlack’s latest edition. The third definitiontends to support Universal Fidelity’sinterpretation by defining “asset” as anyproperty which a person can use to pay a debt. Aswe discuss below, goodwill cannot be used to paya company’s debts. FN3 The term “‘generally accepted accountingprinciples’ is a technical accounting term thatencompasses the conventions, rules, andprocedures necessary to define acceptedaccounting practices at a particular time. Itincludes not only broad guidelines of generalapplication, but also detailed practices andprocedures. Those conventions, rules, andprocedures provide a standard by which to measurefinancial presentations.” American Institute ofCertified Public Accountants, Statement ofAuditing Standards No. 69, para. 69.02 (1992)(emphasis added and citation omitted). FN4 In 1999, there were 417 class action lawsuitspending in the district courts of the SeventhCircuit. Of these, 311 were pending in theNorthern District of Illinois. AdministrativeOffice of the United States Courts, JudicialBusiness of the United States Courts Table X-4(2000).
Sanders v. Universal Fidelity Corp., United States Court of Appeals For the Seventh CircuitNo. 99-1673 Michelle Sanders, individually and on behalfof all others similarly situated, Plaintiff-Appellant, v. John Lee Jackson and Universal FidelityCorporation, a Texas Corporation, Defendant-Appellees. Appeal From: United States District Court for the Northern District of Illinois, Eastern Division. Argued: November 30, 1999 Decided: April 20, 2000 Before: Manion, Kanne, and Rovner, Circuit Judges.
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