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From Banking and Finance Law Daily, January 3, 2014

Without debtor’s agreement, percentage-based collection fee violated FDCPA

By Lisa M. Goolik, J.D.

A collection agency that assessed a percentage-based collection fee to a debtor’s account prior to any attempt to collect the debt—without the debtor’s express agreement to pay the fee—violated the Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Eleventh Circuit has held. The debtor’s agreement with his service provider stated that he would pay “all costs of collection,” not a percentage-based collection fee unrelated to the collection agency’s actual costs (Bradley v. Franklin Collection Service, Inc., Jan. 2, 2014, per curiam).

Background. The debtors, Melvin Bradley and Kevin Calma, incurred charges at North Alabama Urology, P.C. (Urology) and University of Alabama at Birmingham Health System West (UAB West), respectively, for medical services. At the time of service, Bradley signed a patient agreement, which stated, “In the event of non-payment … I agree to pay all costs of collection, including a reasonable attorney’s fee …” Calma also signed a patient agreement, agreeing “to pay all costs of collection including reasonable interest, reasonable attorney’s fees (even if suit is filed) and reasonable collection agency fees.”

Both Urology and UAB West contracted with a collection agency, Franklin Collection Service, Inc. (Franklin), to collect unpaid medical bills. The collection contract between Urology and Franklin stated that Urology would add one third of the charges to the debt prior to transferring the account to Franklin, and Franklin was entitled to 30 percent of the total collected from each debt. UAB West’s agreement with Franklin provided that it add a 30 percent collection fee to all accounts UAB West referred for collection and gave Franklin the right to pursue collection lawsuits on UAB West’s behalf.

After the debtors failed to pay their accounts, Urology and UAB West referred their debts to Franklin. As part of the referral, Urology and UAB West added to the debtors’ accounts the charges for collection fees. As a result, Urology added a $293 collection fee to Bradley’s balance, and UAB West added a $187 collection fee to Calma’s account.

The debtors subsequently brought suit against Franklin, alleging violations of Alabama state law, the Fair Debt Collection Practices Act, and the Racketeer Influenced and Corrupt Organizations Act. Both parties moved for summary judgment. The district court denied the debtors’ motion on all claims except for Calma’s unjust enrichment claim and granted Franklin’s motion. After the case was dismissed with prejudice, the debtors appealed. On appeal, Bradley argued that the collection fee he paid violates the FDCPA because the fee was really liquidated damages rather than the actual cost of collection.

Costs of collection. The FDCPA provides that debt collectors may not use “any false, deceptive, or misleading representation or means in connection with the collection of any debt” and specifically prohibits “collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”

Guided by the reasoning of the U.S. Court of Appeals for the Eighth Circuit in Kojetin v. CU Recovery, Inc. (8th Cir. 2000), the court concluded that collection fee charged to Bradley violated the FDCPA. In Kojetin, the Eighth Circuit held that 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. In the instant case, whereas Calma’s patient agreement allowed for the assessment of “reasonable collection agency fees,” Bradley agreed only to pay “all costs of collection.” Franklin failed to provide any evidence that the $293 “collection fee”—assessed to Bradley’s account prior to any attempt by Franklin to collect the balance—correlated to the actual cost of Franklin’s collection effort, the court stated. Because there was no express agreement between Urology and Bradley allowing for collection of the fee, the court concluded that the fee violated the FDCPA. Accordingly, the court reversed the district court’s decision granting summary judgment in favor of Franklin on Bradley’s claim under the FDCPA.

The case number is No. 13-12276.

Attorneys: Aziz David Fawal (Butler Snow O'Mara Stevens & Cannada, PLLC) for Kevin A. Calma and Dianne Roden Bradley. Rik Stanford Tozzi (Burr & Forman, LLP) for Franklin Collection Service, Inc.

Companies: Franklin Collection Service, Inc.; North Alabama Urology, P.C.; University of Alabama at Birmingham Health System West

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