Collection 'Fees' or 'Costs'? Contractual Language Nails Debt Collector - U.S. Eleventh Circuit
U.S. Eleventh Circuit - The FindLaw 11th Circuit Court of Appeals Opinion Summaries Blog

Collection 'Fees' or 'Costs'? Contractual Language Nails Debt Collector

This is an important case to check out if you work in the debt collection industry, or you work against the debt collection industry.

Two plaintiffs, with nearly identical back-stories, had outstanding medical bills. Neither paid their bills. Both accounts were referred to Franklin Collection Service, Inc., after the original healthcare providers tacked on a "collection fee" of 30 to 33.3 percent. Franklin had agreements with both providers that awarded it 30 percent of whatever it collected.

The difference? One plaintiff, Calma, signed an agreement that allowed for "all costs of collection including reasonable interest, reasonable attorney's fees (if suit is filed) and reasonable collection agency fees," while the other, Bradley, signed an agreement that agreed that he would be responsible for the "costs of collection."

Liquidated Damages or Actual Cost of Collection?

The Fair Debt Collection Practices Act (FDCPA), specifically 15 U.S.C. §§ 1692e and 1692f, prohibit debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt" as well as the use of "unfair or unconscionable" means of collection. The latter section explicitly mentions the collection of additional fees or charges "unless such amount is expressly authorized by the agreement creating the debt or permitted by law."

Calma did not appeal the FDCPA rulings in Franklin Collections' favor, for obvious reasons: the language in his agreement is broad enough to cover such a fee.

Bradley, however, did appeal, and his $861.96 bill could end up making him money, after the court ruled in his favor. (FDCPA violations result in actual and statutory damages, costs, and attorneys' fees.) He argued, on appeal, that the amount assessed by Franklin Collections was liquidated damages rather than the "costs of collection" that he agreed to pay in the initial agreement. The Eleventh Circuit agreed.

Contractual Language, As Always, Controls

The circumstances here make it quite obvious that the 33-and-1/3 percent "collection fee" that was assessed before Franklin attempted to collect the debt, reflected the actual cost of collection. The Eleventh Circuit emphasized the timing and the narrow language of the original agreement in finding that the fee violated the FDCPA.

The court also noted that percentage-based fees aren't always an FDCPA violation (see co-plaintiff Calma's agreement, for example), but where the original contract merely provided for "costs," a percentage-based fee assessed in advance of collections was inappropriate.

Takeaways

Lesson to debt collectors: read the original contracts' language closely before undertaking collections. After all, the healthcare provider wrote the original agreements, and tacked on the percentage fee, yet Franklin, as the debt collector, is the defendant.

Left unsaid is the possibility that a slightly lesser fee might've complied with the contractual language. Bradley was charged 33-and-1/3 percent. Franklin charged 30 percent of whatever was recovered. Perhaps, had the percentages matched, there would've been a more credible argument that the percentage-based fee was the actual cost, rather than a liquidated damages fee tacked-on beforehand.

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