Since the 11th Circuit ruled in Bradley v. Franklin Collection Service in 2014, the issue of collecting a debt collector’s costs of recovery has been a highly litigated topic with varying results. Some courts sided with collectors while other sided with the consumers. The underlying consistency is that the detailed language in contracts matters a great deal.
Is it a violation of the Fair Debt Collection Practices Act for a debt collector to collect a fee that is not authorized by law or contract?
On Nov. 30, 2017, the District Court of New Jersey ruled in a debt collector’s favor in Robertson v. Enhanced Recovery Company LLC. The defendant was attempting to collect a principal balance of $202.03 and a collection fee of $36.36. This collection fee represents 18% of the principal balance. Plaintiff contended that this amount is “substantially greater than costs actually incurred by Defendant or [the creditor, Verizon] in their attempts to collect the account.”
In defending the case, the collector relied upon the language in Plaintiff’s contract with Verizon, which stated in pertinent part:
"If you fail to pay on time and Verizon Wireless refers your account(s) to a third party for collection, Verizon Wireless will charge a collection fee at the maximum percentage permitted by applicable law, but not to exceed 18% , to cover collection-related expenses."
The court cited to a 2015 opinion from the 3rd Circuit in Kaymark v. Bank of America and quoted relevant portions of the collections fee provision from that contract including:
"Lender may charge Borrower fees for services performed in connection with Borrower’s default…"
"Lender shall be entitled to collect all expenses incurred in pursuing the remedies provided in this Section…"
In distinguishing the two collection provisions, the judge in Robertson observed the difference in grammatical phrasing. The collections fee clause in Kaymark assessed fees for services “performed” or costs that were “incurred”; a past participle usage implying that the collector’s work has already been incurred. Whereas, the clause in Robertson used an infinitive form: “to cover collection-related costs.” Therefore, there was no temporal restriction for assessing costs.
The judge then went on an exercise of distinguishing Verizon’s collection cost provision from other cases:
Verizon’s provision did not require that the collector first charge the fee to Verizon
Verizon’s provision did not include language that limited the recoverable costs to those that were actually incurred
Verizon’s provision explicitly permitted the collector to assess a percentage-based fee
How to construct contractual language?
While this opinion may not be cited to defend other suits, the analysis is helpful to understand that the contractual language must be carefully crafted to ensure that collection cost provisions may withstand judicial scrutiny. In doing so, the details such as grammar, phrasing, and word selection matter a great deal. Also, these provisions are not one-size-fits-all, so it is important to consult with your professional advisers to ensure that your contracts include a collection cost provision that meets your needs.
Author: Jonathan L. Endman, Esq., serves as ACT’s attorney at law and leader of the firm’s Compliance Department, providing legal guidance and oversight to ensure all facets of the organization operate ethically, lawfully and within the company’s high standards.
About ACT: Since 1990, Account Control Technology, Inc. (ACT) has provided outstanding recovery solutions for financial, government and educational institutions. A consistent top-performer, ACT offers innovative technology, top-tier data security, multi-level compliance and a consultative approach that helps members recover their financial futures. For more information contact firstname.lastname@example.org.