Bradley vs. Franklin Collection Service, Inc.
Bradley vs. Franklin Collection Service, Inc., __ F.3d __, 2014 Westlaw 23738 (11th Cir. 2014). The Eleventh Circuit Court of appeals held that an attempt by a collection agency to collect a 33% “collection fee” violates the Federal Debt Collection Practices Act, unless the consumer has agreed in advance to pay “reasonable collection agency fees.”
Facts: Two patients incurred medical expenses. One of the patients signed an agreement stating that he would pay “all costs of collection including … reasonable collection agency fees.” The other patient’s agreement stated that he would pay “all costs of collection,” but that agreement did not contain any reference to collection agency fees. Both accounts were unpaid; the healthcare provider referred the accounts to a collection agency, which tacked on a fee of roughly 33%.
After the collection agency contacted each patient, each patient brought suit under the Federal Debt Collection Practices Act (“FDCPA”), claiming that the extra fee had violated the statute. The District Court dismissed both suits.
Reasoning: The appellate court affirmed the dismissal of one of the claims but reversed as to the other. Noting that this was a question of first impression in the Eleventh Circuit, the court held that in the case of the patient who had not specifically agreed to pay “collection agency fees,” the collection agency had no right to impose the fee, since the fee bore no relation to the actual cost of the collection effort. However, the court noted that “a percentage-based fee can be appropriate if the contracting parties agreed to it.”
Comment: Law Professor Dan Schechter, of Loyola Law School, who wrote this analysis, says: This ruling may be significant far beyond the arena of consumer debt collection. First, it provides some drafting guidance: whenever an agreement contains a “costs and fees” clause, it may be advisable to include specific language referring to “reasonable collection agency fees.” Second, the court’s decision seems to mean that even if those fees exceed the actual costs of collection, those fees can still be collected.
I am not sure, however, whether that second point would be valid in all jurisdictions. For example, in California, the courts frequently strike down collection costs (such as late fees) that are in excess of the creditor’s actual administrative costs, on the theory that those extra charges are really disguised liquidated damages, even if the debtor has agreed in writing to pay those charges.
For discussions of earlier decisions dealing with the relationship between liquidated damages and the prevailing party’s actual costs, see:
– 2012 Comm. Fin. News. 78, 2012 Liquidated Damages Provision in Commercial Lease Is Unenforceable Because It Bore No Relationship to Actual Damages Suffered by Tenant Due to Landlord’s Failure to Complete Redevelopment Project.
– 2008 Comm. Fin. News. 68, Prepayment Premium in Commercial Promissory Note Is Not Invalid as Liquidated Damages Provision Because It Reflects Lender’s Actual Loss Resulting from Prepayment.
– 2007 Comm. Fin. News. 52, Creditor May Not Collect Late Charge As a Percentage of Final Balloon Payment Because Late Charge Does Not Represent Actual Administrative Costs and Is Therefore Unlawful Penalty.
This case report appeared in the CA State Bar Insolvency Committee e-newsletter of 2/4/14