A federal judge in Newark has denied a fee request from a law firm that was sued for representing a litigation funder in a collection battle with a customer.

The suit stemmed from a $15,000 litigation funding deal that went off course when the consumer, a Kentucky resident, refused to repay his debt. A multitude of suits followed.

Callagy Law of Paramus was hit with a suit in 2018 over its representation of Prospect Funding Holdings. The suit by a Kentucky attorney, Michael Breen, accused Callagy and its attorney, Michael Smikun, of violating the Fair Debt Collection Practices Act in its attempts to recoup the $15,000.

The suit claimed Callagy used false, deceptive and misleading representations to collect a debt and failed to make certain disclosures required by the FDCPA. But U.S. District Judge Madeline Cox Arleo of the District of New Jersey dismissed the suit in June 2019, finding the debt in question fell outside the scope of the FDCPA. In July 2019, Callagy Law and Smikun filed a motion for attorney fees, citing a provision of the FDCPA concerning actions filed to harass and retaliate.

On Wednesday, Arleo said she found no evidence of bad faith or an intent to harass. She said the only support the Callagy firm provided to support its theory is a letter it sent to Breen before he filed the suit, advising him that the FDCPA claim suffered from several fatal deficiencies, including that no debt was incurred under the FDCPA.

"Because defendants have failed to produce evidence showing that plaintiff filed this action in bad faith and for the purpose of harassment, their motion for attorney's fees under the FDCPA is denied," Arleo said. For the same reason, Arleo denied the Callagy firm's request for attorney fees under Rule 54, which permits awarding such fees to a prevailing party if a suit was brought or maintained in bad faith.

It is no surprise that the Callagy firm disputed and opposed the theory underlying Breen's FDCPA claim, Arleo said. A plaintiff's filing of a complaint over an adversary's objection does not alone warrant attorney fees under Section 1692k(a)(3) of the FDCPA, Arleo said. In addition, the court's dismissal of the FDCPA claim based on the commercial nature of the alleged debt is not evidence that the complaint was filed in bad faith, she said.

Arleo also rejected the Callagy firm's argument that Breen filed the suit in retaliation against it for a years-long action in Kentucky. Accepting that argument on its face would ignore the drawn-out procedural history giving rise to Breen's claim, Arleo said.

Breen filed a suit in the Western District of Kentucky on behalf of Christopher Boling in 2009. Boling sought damages for injuries suffered when a gasoline storage container exploded. While that case was pending, Boling received $15,000 from Cambridge Management Group, secured by prospective proceeds from the personal injury case. Cambridge later transferred its rights to Prospect Funding Holdings. When the case was favorably resolved, Breen placed the funds in his co-counsel's trust account without notifying Prospect.

Boling filed a separate suit in 2014 in the Western District of Kentucky, seeking a declaratory judgment that the litigation funding agreement was void under Kentucky law. The court granted summary judgment in March 2017, saying the funding agreements were void for violating Kentucky's champerty statute, and that the interest rates were usurious.

And in May 2017, Prospect filed its own suit against Boling in state court in New Jersey, which was removed to the U.S. District Court for the District of New Jersey, then consolidated with Boling's case in Kentucky.

Prospect then filed another case in the Superior Court of New Jersey, against Breen, demanding an accounting of all monies received and disbursed in the personal injury case. That case, referred to by Arleo as Breen I, was removed to federal court and dismissed by the parties without prejudice.

In March 2017, the Western District of Kentucky held that the litigation funding agreement was unenforceable under Kentucky usury law. And in May 2017, Prospect filed another suit against Breen and his firm in federal court in New Jersey, seeking damages for breach of contract and breach of fiduciary duty. That case was dismissed in 2018 on the basis of issue preclusion.

Smikun and Robert Solomon of Callagy Law, who represented their firm in the case, did not respond to requests for comment.

Philip Stern of Stern Thomasson in Springfield, representing Breen, said he was "pleased that the judge found the suit was not filed in bad faith." Stern added that the judge "did not question that the kind of things we alleged were harassing and abusive to our client, even if other facts made it that he could not pursue that under the FDCPA."