Debt collection
Debt collection (John Disney/Daily Report)

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.

The judges noted the circuit had not addressed previously the issue raised by Bradley’s claim under §1692f. The court sided with Bradley on that claim, saying on his patient registration form Bradley had agreed to pay only the actual costs of collection.

“Franklin failed to direct this Court to any evidence that the 33-and-1/3% ‘collection fee’—which was assessed before Franklin attempted to collect the balance due—bears any correlation to the actual cost of Franklin’s collection effort,” the judges wrote. “As such, the 33-and-1/3% fee breaches the agreement between Bradley and Urology, since, contractually, Bradley was only obligated to pay the ‘costs of collection.’

“Urology and Franklin cannot alter Bradley’s obligations by the terms of their subsequent agreement,” the opinion continued. “Because there was no express agreement between Urology and Bradley allowing for collection of the 33-and-1/3% fee, that fee violates the FDCPA.”

The panel said it was following a 2000 decision by the Eighth Circuit. Franklin Collection had argued that that decision did not demand a ruling against it in Bradley’s case, arguing that the Eighth Circuit said a percentage-based collection fee violated the FCDPA only where the fee is not supported by the language of the agreement between the creditor and debtor. But the Eleventh Circuit panel said that was “exactly what we have here.”

The panel suggested it would not have been difficult for the urology practice to have drafted a patient agreement under which the percentage-based collection fee would have been allowed. It noted that the Seventh Circuit had indicated that a contract in which a consumer agreed to reimburse “the fees of any collection agency, which may be based on a percentage at a maximum of 33% of the debt, and all costs and expenses, including reasonable attorneys’ fees, we incur in such collection efforts” might allow the imposition of a percentage-based collection fee.

The Eleventh Circuit even hinted that the agreement Bradley’s coplaintiff signed with a Birmingham hospital could support a percentage-based fee. In that agreement, Calma agreed to pay “all costs of collection including … reasonable collection agency fees.” The Eleventh Circuit said that “based on this contractual language, Calma declined to argue that the agreement that he had with [the hospital] did not cover Franklin’s percentage-based collection fee.”

Contrary to the panel’s account, A. David Fawal of Butler Snow in Birmingham, who represents the plaintiffs, said Calma never raised that claim. For strategic reasons, Calma hadn’t included a FCDPA claim in a previous attempt to sue the collection agency, Fawal said. The lawyer added that by the time Calma and Bradley filed their suit together, the statute of limitations on that claim had run.

Fawal expressed disappointment that the Eleventh Circuit had rejected all of the claims except Bradley’s claim under §1692f. “We’re considering our options,” he said.

He added that the plaintiffs had taken the position that, regardless of what the agreement between the creditor and the debtor says, adding on a percentage-based fee is unreasonable as a matter of law under the FDCPA and Alabama common law.

Fawal said that while in a “traditional” arrangement a collection agency receives a percentage of a debt that it collects, Franklin Collection had entered into a less-common arrangement of adding on to the debt so that its share did not come out of the debt itself. Noting an agency’s collection process doesn’t vary based on the amount of the debt, Fawal said courts have found that unfair because money that’s not tied to the costs of collection comes out of the debtor’s pocket.

But Fawal said he was pleased the circuit had reversed the grant of summary judgment on one of Bradley’s claims. Under the court’s ruling, he said, a percentage upcharge for collections can’t be imposed on the debtor unless that’s made clear in his contract with the creditor.

“They’re not saying percentage collection charges are impermissible per se,” he explained. “[But] that has to be spelled out to the debtor.”

Fawal said the plaintiffs were “puzzled” by a footnote in the Eleventh Circuit opinion that said the plaintiffs had waived the issue of class certification because they hadn’t briefed it on appeal. Fawal said the district judge simply had found the plaintiffs’ motion for class certification moot given that he was granting summary judgment to Franklin.

“We really didn’t have anything to appeal,” said Fawal, adding that he thought the issue of class certification could be raised again in the district court on the surviving FDCPA claim.

Franklin’s lawyer, Stephen Bumgarner of Burr & Forman in Birmingham, couldn’t be reached for comment.

The case is Bradley v. Franklin Collection Service, No. 13-12276.