Appeals Court Rules Against ARM Firm in Collection Fee FDCPA Suit

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The Eleventh Circuit Court of Appeals Thursday reversed a lower court ruling and found that a collection agency violated the Fair Debt Collection Practices Act (FDCPA) when it charged a consumer a collection fee that was based on a percentage of the debt balance rather than actual costs.

A unanimous three-judge panel in Atlanta sided with one of the plaintiffs in Bradley v. Franklin Collection Service. Although the circuit judges agreed with the lower court’s ruling in favor of the collection agency on all but one matter, the opinion on collection costs will be published and is considered precedential.

Two plaintiffs brought a suit against Franklin Collection claiming violations of the FDCPA, Alabama state debt collection laws, and the Racketeer Influenced and Corrupt Organizations Act (RICO). The two consumers had unpaid bills of less than $1,000 from separate medical centers in Alabama. When the healthcare providers contracted with Franklin Collection to recover the debt, the collection agency added a 33 percent collection fee to the total amount owed.

In one case, an agreement that the consumer signed allowed for “reasonable collection agency fees.” As such, that plaintiff did not appeal the lower court’s ruling. But plaintiff Bradley’s agreement was worded differently:

“In the event of non-payment…I agree to pay all costs of collection, including a reasonable attorney’s fee…”

That difference in wording is what tipped the panel to favor Bradley. Using reasoning from a previous case in the Eighth Circuit that held “the debt collector violated the FDCPA when it charged the debtor a collection fee based on a percentage of the principal balance of the debt due rather than the actual cost of collection.”

The Eleventh Circuit panel noted that “When Bradley signed…patient registration form, he only agreed to pay ‘all costs of collection.’ That is, Bradley agreed to pay the actual costs of collection; his contractual agreement …did not require him to pay a collection agency’s percentage-based fee where that fee did not correlate to the costs of collection.”

The court noted that Franklin Collection failed to produce evidence that the percentage-based fee correlated to the actual collection costs. But the judges did write that a percentage-based fee would be allowed under the FDCPA in certain circumstances.

The example of the first plaintiff, named Calma, was used to support this point. Calma’s agreement was worded:

I agree that if this account is not paid when due, and the hospital should retain an attorney or collection agency for collection, I agree to pay all costs of collection including reasonable interest, reasonable attorney’s fees (even if suit is filed) and reasonable collection agency fees.”

The judges seemed to indicate that if Calma had pursued the appeal along with Bradley, that claim would have been denied due to the language of the agreement.

Bradley and Calma’s other claims on appeal were denied, with the judges ruling only that Franklin Collection had violated § 1692(f) of the FDCPA in Bradley’s case.


Continuing the Discussion

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  • avatar Raymond says:

    Amazing. Charging up front a contingency fee!!! If the agency failed to collect then an added 33% to the unpaid balance, account subsequently sold and or assigned to another agency then the balance increased, and possibly the debt buyer and/or agency would tack on another 33%. Also, wonder what balance amount is reported to credit reporting agencies. Maybe I missed something over the past several years but never heard of charging the contingency fee up front.

  • avatar ryon gambill says:

    Very common method of passing costs on to the debtor. Since they agreed to cover “costs” the whole amount including fees should be on Their credit report. If debtors don’t like that idea, they might just want to try paying their bill…right?

  • avatar julie-repa says:

    Did I understand this correctly? The debtor won the case because a percentage was charged instead of the “actual cost of collection” and because the wording was slightly different. This is a big problem in the collection industry because no laws are cut and dry. It comes down to the actual judge and his personal feelings of the case. That is unfair to us agency owners/managers. Our E&O insurance is so extremely high and went up on average 35-45% this year due to lawsuits like this. I know there are some agencies out there that should be sued but a smaller agency like mine is penalized for these kinds of frivilous lawsuits. I think it is wrong that debtors profit on a past due bill, don’t have to pay the bill and it can’t go on their credit if they win a lawsuit.

  • avatar Raymond says:

    First, distribution of payments received should be applied to actual costs incurred. In the case, as I understand, the agency added the contingency fee to the balance. Then, when and if the debtor repays is the agency entitled to another contingency fee. For example, unpaid balance is $1000. Add the contingency rate of 30% so the balance is $1300. If the debtor makes partial payment of $50, the agency gets another 30% on the amount paid. No doubt a debtor should be obligated to repay a legal debt but adding a contingency fee which I believe is the fee owed to the agency based on the amount collected, then adding the fee up front seems to also show income not earned by the agency unless the client paid the contingency fee directly to the agency which I believe does not happen. Also, by adding contingency fee up front would also inflate the balance if a debt buyer purchases the account, or the account files for bankruptcy and a proof of claim is filed listing $1300 as owed versus $1000. If this is a general practice by collection agencies or debt buyers today(which I believe is not the case), trouble is coming in my opinion to those doing this creative accounting method.

  • avatar Commercial Guy says:

    Raymond, I don’t think you grasp the actual concept. An account such as you mentioned, $1000.00 with a 30% contingent collection fee, the amount owed by the debtor is $1300.00 If he pays the $1300.00, the creditor gets $1000.00 and the agency gets $300.00. If he pays less than the $1300.00, the creditor gets the amount paid less the agency’s 30% fee. The purpose of the fees being added to the balance are to make the creditor whole.

    While I can’t speak for every agency out there, I am reasonably certain that when a proof of claim is filed it is filed for the principal balance, excluding collection fees. Also, if the creditor decides to sell the account at some point, the account balance is almost certainly the actual balance, excluding any collection fees.

  • avatar tfarley1 says:

    I’m no Judge or attorney, and I actually understand the logic behind the decision, but I think it was looked at from the wrong frame of reference. The costs of collection should NOT have been looked at from the collection agency side, it should have been from the creditor side because the creditor is the one paying the collection costs. It’s irrelevant to the creditor what it actually cost the agency to collect the bill, the creditor’s cost of collection IS the contingency fee. period. If my agency collects $100 for Dr. Abc and our fee is 35%….the $35 is Dr. Abc’s cost of collection to get that $100.

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