In the
United States Court of Appeals
For the Seventh Circuit

No. 99-1673

Michelle Sanders, individually and on behalf
of all others similarly situated,

Plaintiff-Appellant,

v.

John Lee Jackson and Universal Fidelity
Corporation, a Texas Corporation,

Defendant-Appellees.



Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 98 C 0209--Morton Denlow, Magistrate Judge.


Argued November 30, 1999--Decided April 20, 2000



  Before Manion, Kanne, and Rovner, Circuit Judges.

  Manion, Circuit Judge. When Michelle Sanders
failed to pay a small debt she received a
collection letter from Universal Fidelity
Corporation. She claims that as an
"unsophisticated debtor" she found the letter
confusing and misleading. Despite her
unsophistication, she quickly contacted a lawyer
and initiated a class action lawsuit under the
Fair Debt Collection Practices Act (FDCPA or the
Act). The parties eventually settled, but they
did so without agreeing on a specific sum of
compensation. Rather, they merely agreed that
Universal Fidelity would pay the class the
maximum damages to which it would be entitled
under the Act. The FDCPA makes class action
damages dependent upon the "net worth" of the
defendant. The parties disagreed as to the
meaning of this term, but the district court held
on summary judgment that net worth means book
value net worth, as opposed to fair market net
worth. We affirm.

I.

  The Fair Debt Collection Practices Act provides
that "in the case of a class action the total
recovery shall not exceed the lesser of $500,000
or 1 per centum of net worth of the debt
collector . . . ." 15 U.S.C. sec. 1692k(a)(2)(B)
(emphasis added). Since the parties have settled
the liability phase of the litigation, the
remaining issue involves the calculation of
damages. This appeal arises out of the parties’
dispute over the meaning of the term "net worth"
which is not defined by the Act. The district
court agreed with Universal Fidelity’s argument
that net worth means the book value of the
company, that is, assets listed on the company’s
balance sheet minus liabilities, which is also
sometimes called "balance sheet net worth." See
Sanders v. Jackson, 33 F. Supp.2d 693 (N.D. Ill.
1998). But another district court in a nearly
identical case reached a different conclusion.
See Scott v. Universal Fidelity Corp., 42 F.
Supp.2d 837 (N.D. Ill. 1999). Scott held, as
Sanders argues, that net worth includes Universal
Fidelity’s goodwill, i.e., the value of the
company beyond the book value of its net tangible
assets./1 In other words, the court believed
that net worth means "fair market net worth." In
this case the different interpretations result in
substantially different recoveries because the
book value of Universal Fidelity is about
$100,000, while Sanders alleges that its fair
market value is around $1,800,000. Therefore we
must decide whether the FDCPA uses the term net
worth to denote fair market net worth, which
includes goodwill, or balance sheet net worth,
which does not.

  The FDCPA does not define net worth and so we
must address this question using our rules of
statutory interpretation. The cardinal rule is
that words used in statutes must be given their
ordinary and plain meaning. United States v.
Wilson, 159 F.3d 280, 291 (7th Cir. 1998). We
frequently look to dictionaries to determine the
plain meaning of words, and in particular we look
at how a phrase was defined at the time the
statute was drafted and enacted. See Molzof v.
United States, 502 U.S. 301, 307 (1992); Newsom
v. Friedman, 76 F.3d 813, 817 (7th Cir. 1996).
But in this case we see that the dictionary
simply confirms the root problem: the term net
worth has more than one meaning. The fourth
edition of Black’s Law Dictionary, which was the
current edition in 1977 when the FDCPA was
enacted, defines net worth as simply the
difference between assets and liabilities.
Black’s Law Dictionary 1192 (4th ed., 1968).
Assets are defined as anything available for the
payment of debts, which in the case of an ongoing
business does not include goodwill. Id. at 151.
Thus the edition of Black’s that was current when
the Act became law generally supports Fidelity’s
position. The latest edition, the seventh,
similarly defines net worth as assets minus
liabilities. Its primary definition of "asset" is
an "item that is owned and has value." Black’s
Law Dictionary 112 (7th ed., 1999). Assuming the
term "item" denotes tangibility and specific
identity, two attributes not usually ascribed to
goodwill, this definition suggests that goodwill
should not be a factor in the calculation of net
worth. Thus, this first definition supports
Universal Fidelity’s position. Predictably,
Sanders advises us to ignore the first definition
and suggests instead that we look to the second
definition, which specifically includes goodwill
among several examples of assets./2 But aside
from the fact that there is no cogent reason for
adopting the second definition over the first,
all that the second definition demonstrates is
that in some contexts goodwill should be
considered an asset. This proposition is of
course true, but when interpreting this statute
our task is to find the ordinary and usual
meaning of the term net worth, not the broadest
possible meaning of the term asset. Neither party
provides us with a dispositive reason for
adopting one dictionary definition over another.
Thus we find that these varying definitions are
not particularly helpful.

  Another guide to interpretation is found in the
construction of similar terms in other statutes.
United States v. Bates, 96 F.3d 964, 968 (7th
Cir. 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 term
net worth. Some, like the FDCPA, limit class
recoveries to a certain percentage of a
defendant’s net worth. See, e.g., Real Estate
Settlement Procedure Act, 12 U.S.C. sec.
2605(f)(2)(B)(ii); Expedited Funds Availability
Act, 12 U.S.C. sec. 4010(a)(2)(B)(ii); Truth in
Savings 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 Funds
Transfer Act, 15 U.S.C. sec. 1693m(a)(2)(B)(ii).
Others limit recovery to plaintiffs whose net
worth 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 statutes
use the term net worth in the same sense and are
therefore instructive in the present case.

  One of these latter types of statutes is the
Equal Access to Justice Act, which permits
parties that prevail against the government to
obtain the costs of litigation, but only if the
individual’s "net worth does not exceed
$2,000,000." 5 U.S.C. sec. 504(b)(1)(B). In
Continental Webb Press Inc. v. N.L.R.B., we
examined the term "net worth" in the context of
this EAJA provision. 767 F.2d 321, 323 (7th Cir.
1985). There the NLRB argued that in calculating
net worth, Continental’s assets should be valued
at cost rather than cost minus depreciation. We
held that the proper valuation entails a
depreciation of the assets because that is the
procedure prescribed by generally accepted
accounting principles.

Congress did not define the statutory term "net
worth." It seems a fair guess that if it had
thought about the question, it would have wanted
the courts to refer to generally accepted
accounting principles. What other guideline could
there be? Congress would not have wanted us to
create a whole new set of accounting principles
just for use in cases under the Equal Access to
Justice Act.

Id. This holding is consistent with our prior
holding in Telegraph Savings and Loan Association
v. Schilling that GAAP should also be used to
determine a bank’s net worth as that term is
defined by federal banking statutes. 703 F.2d
1019, 1027-28 (7th Cir. 1983). Not surprisingly,
when the Ninth Circuit was asked to define net
worth for purposes of the EAJA, it also held that
GAAP should govern. American Pac. Concrete Pipe
Co., Inc. v. N.L.R.B., 788 F.2d 586, 591 (9th
Cir. 1986) (adopting this reasoning and holding
of Continental Webb Press).

  Implicit in these holdings is the conclusion
that the statutory term net worth means book net
worth or balance sheet net worth, because GAAP
has meaning only in the context of financial
statement reporting--GAAP dictate the standards
for reporting and disclosing information on an
entity’s financial statements./3 While those
cases involved different statutes, we believe
their reasoning applies equally to the FDCPA.
Accordingly, because there is no indication in
the FDCPA that the term net worth should be used
in anything but its normal sense, we also look to
book net worth or balance sheet net worth as
reported consistently with GAAP.

  Universal Fidelity’s 1997 balance sheet includes
assets 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 report
goodwill. While Sanders contends that we should
increase Universal Fidelity’s listed assets by
the value of its goodwill, which at this point is
unknown, that would be inconsistent with GAAP.
GAAP provides that internally developed goodwill
is not reported on a company’s financial
statements; rather, goodwill is only reported at
the time a business is sold for more than its
book value net worth. Thus, applying GAAP, as we
believe Congress would have wanted, c.f.,
Continental Webb Press Inc., Universal Fidelity’s
balance sheet valuation should not include
goodwill.

  The rationale underlying the GAAP treatment of
goodwill also supports our conclusion that the
statutory term net worth means balance sheet net
worth. As the Accounting Principles Board has
explained, goodwill is not reported absent a
business combination because "its lack of
physical qualities makes evidence of its
existence elusive, [and] its value . . . often
difficult to estimate, and its useful life . . .
indeterminable." Accounting Principles Board,
Opinion. No. 17, para. 17.02 (1970). The Board
also recognizes that the value of goodwill often
fluctuates widely for innumerable reasons and
that estimates of its value are often unreliable.
Based in part on these concerns, the Accounting
Principles Board has adopted its rule concerning
goodwill--absent a business combination, it is
not reported as an asset of the company.

  We also must consider whether this definition of
net worth is consistent with the purposes of the
FDCPA’s net worth provision, because a statute
must be interpreted in accordance with its object
and 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, the
net worth clause is designed to address a problem
often associated with fixed monetary penalties:
they sometimes penalize smaller companies too
harshly but are also insufficiently punitive for
larger businesses. See Kemezy v. Peters, 79 F.3d
33, 35 (7th Cir. 1996). Thus, by making the
extent of the penalty directly proportional to a
percentage of the defendant’s net worth, Congress
hoped that punishment might be meted out
according to a business’s ability to absorb the
penalty. See id.; Zaz Designs v. L’Oral, S.A.,
979 F.2d 499, 508 (7th Cir. 1992) (discussing the
rationale behind fixing monetary penalties
according to the defendant’s wealth or lack
thereof). The key aspect of this net worth
provision is not its punitive nature, as Sanders
argues, but a recognition that an award of
statutory punitive damages may exceed a company’s
ability to pay and thereby force it into
bankruptcy. Kemezy, 79 F.3d at 35. Thus, we agree
with the Fifth Circuit that the primary purpose
of the net worth provision is a protective one.
It ensures that defendants are not forced to
liquidate their companies in order to satisfy an
award of punitive damages. Boggs v. Alto Trailer
Sales, Inc., 511 F.2d 114, 118 (5th Cir. 1975)
(identical provision in TILA was designed to
protect businesses from catastrophic damage
awards).

  With this purpose in mind, we see that Universal
Fidelity’s interpretation of net worth makes more
sense than Sanders’s does. Since the 1% of net
worth limitation was designed to identify that
portion of a company’s assets which safely could
be liquidated to satisfy an award of damages
without forcing the breakup of that company,
factoring goodwill into the calculation of net
worth defeats the purpose of the provision
because ordinarily goodwill "cannot be disposed
of apart from the enterprise as a whole." ABP Op.
No. 17, para. 17.32. Since goodwill cannot be
severed from the company, and thus is not readily
available for the payment of judgments, it should
not influence the calculation of net worth. A
contrary holding would contradict the key purpose
of the net worth provision. The text of the FDCPA
and cases interpreting it clearly indicate that
de minimis violations should not be punished with
such severity that the companies are deprived of
existence. Furthermore, there is no provision
that limits defendants being exposed to more than
one FDCPA class action lawsuit, which is exactly
what happened to the defendant in this case. See
also Mace v. Van Ru Credit Corp., 109 F.3d 338,
344 (7th Cir. 1997) (discussing the possibility
of serial FDCPA suits). When this possibility is
factored in, Sanders’s interpretation of "net
worth" proves even more onerous and thus, highly
implausible.

  Another probable purpose of the provision is to
make the damage calculation easy for the parties
and trial judges. Examining the balance sheet of
a company and subtracting the liabilities from
the assets is a simple and accurate calculation.
Sanders argues that factoring goodwill into the
equation would not be so difficult, but as
mentioned above, due to its transitory nature,
goodwill is extremely difficult to quantify and
value with any certainty. APB Op. No. 17, para.
17.02. Goodwill can fluctuate significantly in
the marketplace. It has no value as a security
interest. Until there is a fair market value
sale, goodwill is speculative at best. In short,
the calculation of statutory damages should not
result in a mini trial; the statute seeks to
avoid a separate contest over damages by using
the term net worth to denote a company’s book
value net worth. As with the EAJA, this statute
does not contemplate the layer of complexity
which Sanders’s interpretation would require. See
United States v. 88.88 Acres of Land, 907 F.2d
106, 108 (9th Cir. 1990) (the determination of
net worth under the EAJA should not result in a
second major litigation).

  Sanders also contends that a failure to include
goodwill in the equation will diminish
plaintiffs’ recoveries and thereby destroy any
incentive for FDCPA class action litigation. But
from the plaintiffs’ point of view, the primary
motivation for these suits is not and should not
be the plaintiffs’ belief that the suit will
result in a substantial windfall. Plaintiffs in
FDCPA class actions who are not claiming actual
damages cannot reasonably expect large awards for
what are technical and de minimis violations of
the Act. Mace, 109 F.3d at 344. Moreover, the
"policy at the very core of the class action
mechanism is to overcome the problem that small
recoveries do not provide the incentive for any
individual to bring a solo action prosecuting his
or her rights. A class action solves this problem
by aggregating the relatively paltry potential
recoveries into something worth someone’s
(usually an attorney’s) labor." Id. Thus, it is
the plaintiffs’ recognition that their claims are
relatively insignificant which induces them to
sue as one body. "Because the class action device
lowers plaintiffs’ litigation costs below the
level that would be incurred by bringing
individual suits, the class action reduces the
level of damages necessary to produce
litigation." John C. Coffee, Jr., Understanding
the Plaintiff’s Attorney: The Implications of
Economic Theory for Private Enforcement of Law
Through Class and Derivative Actions, 86 Colum.
L. Rev. 669, 684 (1986). While an increased
recovery might provide slightly greater incentive
for plaintiffs to sue and to monitor their
lawsuits, see Greisz v. Household Bank
(Illinois), N.A., 176 F.3d 1012, 1013 (7th Cir.
1999), monetary gain for the class members is
obviously not the main impetus for these class
actions.

  Rather, the driving force behind these cases is
the class action attorneys. They have a strong
incentive to litigate these cases--oftentimes
despite their marginal impact--in the form of
attorneys’ fees and costs they hope to recover.
The award of such fees is mandatory in FDCPA
cases. See Zagorski v. Midwest Billing Servs.,
Inc., 128 F.3d 1164, 1166 (7th Cir. 1997) (per
curiam); Tolentino v. Friedman, 46 F.3d 645, 651
(7th Cir. 1995). Not surprisingly, then, "FDCPA
litigation is a breeding ground for class
actions." Lawrence Young & Jeffrey Coulter, Class
Action Strategies in FDCPA Litigation, 52
Consumer Fin. L.Q. Rep. 61, 70 (1998). As this
court noted in Mace, it is these attorneys’ fees
which are a significant inducement for FDCPA
class action lawsuits. 109 F.3d at 344; see
Goldberger 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 for
bringing such actions is ’the quest for
attorney’s fees.’")./4 Unfortunately, as Judge
Winter of the Second Circuit has noted, these
attorney fees strongly encourage class actions,
many of which are frivolous. See Ralph K. Winter,
Paying Lawyers, Empowering Prosecutors, and
Protecting Managers: Raising the Cost of Capital
in America, 42 Duke L. J. 945, 949 (1993). The
history of FDCPA litigation shows that most cases
have resulted in limited recoveries for
plaintiffs and hefty fees for their attorneys.
Consider the recent case of Crawford v. Equifax
Payment Servs., Inc., where a negotiated
settlement provided $2,000 to the class
representative, $78,000 to the plaintiff’s
attorneys, and nothing for the rest of the class.
201 F.3d 877, 880 (7th Cir. 2000) (reversing the
approval of the settlement). The impetus of that
suit clearly was not the plaintiffs’ share of the
award. See Winter, supra, at 949 (in derivative
class action settlements, plaintiffs recover only
50% of the time while their attorneys receive
fees in 90% of the cases). Crawford and similar
cases illustrate "the all-too-common abuse of the
class action as a device for forcing the
settlement of meritless claims and is thus a
mirror image of the abusive tactics of debt
collectors at which the statute is aimed." White
v. Goodman, 200 F.3d 1016, 1019 (7th Cir. 2000).
Assuming that Crawford is somewhat typical of
other FDCPA cases in this respect, our holding
today will not, as Sanders suggests, stem the
tide of FDCPA cases flooding this circuit. And if
the definition of net worth advocated by Sanders
were applied to the numerous statutes that use
that term as a measure of damages, the incentive
for more litigation would be explosive and
destructive. Most defendant corporations would be
valued well beyond their ability to pay short of
bankruptcy or liquidation.

  Finally, Sanders and her class argue that our
interpretation of net worth will not result in
sufficient punishment of defendants. Again,
Sanders overlooks the fact that the FDCPA suits
usually entail significant awards of attorneys’
fees, above and beyond any damages awarded.
Although the attorneys’ fees provision of the Act
may or may not have been designed to be punitive
per se, we have noted that attorneys’ fees are
punitive in the broad sense of the term in that
they deprive the defendant of capital and thereby
provide a strong incentive not to violate the law
in the future. Mace, 109 F.3d at 344 (the
attorney’s fee provision punishes by "helping to
deter 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 noting
that, on top of the damages awarded, the costs
and attorneys’ fees provisions in the FDCPA
provide a substantial punishment which
undoubtedly 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 forget
that any egregious debt collection practices
which cause actual losses to debtors are fully
compensable according to the actual damages
provision of the FDCPA. 15 U.S.C. sec.
1692k(a)(1). Our interpretation of the net worth
provision has no effect on such suits by
individuals, and thus Sanders’s suggestion that
our holding will result in insufficient
punishment of egregious conduct has no reasonable
foundation.

  In sum, the words of the statute, an
understanding of its purposes, and cases
interpreting the term net worth indicate that
this term means balance sheet or book value net
worth. As such, goodwill should not be factored
into the calculation of the defendant’s net
worth. Accordingly, we affirm the decision of the
district court and disapprove the contrary
position adopted by another district court in
Scott v. Universal Fidelity Corporation.

Affirmed.



/1 We have previously defined "goodwill" as "an
intangible asset that represents the ability of a
company to generate earnings over and above the
operating value of the company’s other tangible
and intangible assets. It often includes the
company’s name recognition, consumer brand
loyalty, or special relationships with suppliers
or customers." In re Prince, 85 F.3d 314, 322
(7th Cir. 1996).

/2 Without giving a reason, Sanders also asks us to
ignore the third definition of asset found in
Black’s latest edition. The third definition
tends to support Universal Fidelity’s
interpretation by defining "asset" as any
property which a person can use to pay a debt. As
we discuss below, goodwill cannot be used to pay
a company’s debts.

/3 The term "’generally accepted accounting
principles’ is a technical accounting term that
encompasses the conventions, rules, and
procedures necessary to define accepted
accounting practices at a particular time. It
includes not only broad guidelines of general
application, but also detailed practices and
procedures. Those conventions, rules, and
procedures provide a standard by which to measure
financial presentations." American Institute of
Certified Public Accountants, Statement of
Auditing Standards No. 69, para. 69.02 (1992)
(emphasis added and citation omitted).

/4 In 1999, there were 417 class action lawsuits
pending in the district courts of the Seventh
Circuit. Of these, 311 were pending in the
Northern District of Illinois. Administrative
Office of the United States Courts, Judicial
Business of the United States Courts Table X-4
(2000).
