Appeals Court Rules Against ARM Firm in Collection Fee FDCPA Suit

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.