Judges: Debt Fees Must Be Disclosed on Front End
Eleventh Circuit sides with debtors on this issue but rules against them elsewhere
The Atlanta-based federal appeals court has ruled that creditors cannot tack on a collection fee based on a percentage of a debt without warning consumers up front.
Thursday's ruling by a panel of the U.S. Court of Appeals for the Eleventh Circuit follows the Eighth Circuit's 2000 pro-debtor interpretation of a federal debt collection law. The ruling does not prohibit imposing on debtors a collection charge tied to a percentage of the debt, but it requires creditors to let consumers know at the time a debt is incurred that such an add-on is a possibility.
The case that spurred the court's latest interpretation of the federal Fair Debt Collection Practices Act (FDCPA) was brought by Melvin Bradley over a $861.96 bill he incurred in 2009 at a urology practice, North Alabama Urology. As recounted in the Eleventh Circuit's opinion, when Bradley incurred that bill he signed a patient registration form that stated: "In the event of non-payment … I agree to pay all costs of collection, including a reasonable attorney's fee."
When Bradley didn't pay his bill, North Alabama Urology sent the account to Franklin Collection Services, a Tupelo, Miss.-based company. According to the circuit's opinion, the urology practice's contract with Franklin Collection said the medical practice would add 33 1/3 percent to a debt prior to transferring it. The contract also provided that Franklin Collection was entitled to 30 percent of the total collected from the debtor.
Pursuant to that agreement, Urology added a $293.06 collection fee to Bradley's balance before transferring the account to Franklin, meaning Bradley's new balance due was $1,155.02. According to the circuit opinion, evidence showed that Bradley paid the full amount to avoid being sued but reserved his right to recover any overcharges.
Along with Kevin Calma, whose medical debt also was referred to Franklin Collection, Bradley brought a class action against Franklin in 2010. Their complaint included claims under the FDCPA, a federal racketeering statute and Alabama state law.
Both sides moved for summary judgment. The claims of Bradley were taken up by his widow after he died in February 2012.
In March, U.S. District Judge Abdul Kallon of the Northern District of Alabama ruled for Franklin Collection on all but a small claim the plaintiffs would dismiss so they could appeal more important issues.
In an unsigned opinion, judges Frank Hull, Stanley Marcus and Charles Wilson affirmed much of Kallon's ruling. But the panel said Kallon was wrong to dismiss one of Bradley's claims under the FDCPA.
That claim was based on 15 U.S.C. §1692f, which prohibits unfair or unconscionable means of collection, including "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." Bradley argued that the fee he paid violated this provision because it didn't reflect the actual cost of collecting his debt.