Seventh Circuit Breaks From Two Other Courts, Rules Percentage-Based Fees Covered as ‘Costs’ Under FDCPA

The Court of Appeals for the Seventh Circuit has upheld a lower court’s ruling that said a collection agency did not violate the Fair Debt Collection Practices Act by charging a fee to an individual under the language of the original agreement between the creditor and the individual.

A copy of the ruling in Bernal v. National Recovery Agency can be accessed by clicking here.

The plaintiff stopped making payments on a monthly pass to Six Flags amusement parks. The account was assigned to the defendant for collection. The defendant sent a collection letter to the plaintiff, seeking the $267.31 that the plaintiff owed to Six Flags, plus $43.28 in collection costs. Under the original agreement, Six Flags allowed for a 5% management fee to be charged, “plus an additional amount based on the number of days the debt was delinquent (in this case, an additional 20%),” according to the ruling.

Rather than pay the debt, the plaintiff decided that a charge of $43.28 for sending one collection letter was excessive, so he filed a class-action lawsuit against the defendant, alleging the defendant violated Section 1692f(1) of the FDCPA by charging a fee “not expressly authorized by the agreement creating the debt.”

A District Court judge ruled in favor for the defendant, looking at this language from the original agreement between Six Flags and the plaintiff:

If your account is in arrears for more than 30 days (after you miss two payments) and … the Minimum Term has expired, then your account will be permanently cancelled and you will be billed for any amounts that are due and owing plus any costs (including reasonable attorney’s fees) incurred by us in attempting to collect amounts due or otherwise enforcing this agreement.

In reaching the same conclusion as the lower court, the Seventh Circuit admitted it was going against similar rulings from two other Appeals Courts — the Eleventh and the Eighth Circuits — which have both held that adding percentage-based fees when a contract uses the word “costs” does, in fact, violate the FDCPA. Wrote Judge Diane Sykes of the Seventh Circuit, who authored the ruling in this case:

For our purposes, the language at issue in those cases was materially indistinguishable from the contract at issue here. We nonetheless disagree with those holdings. First, those decisions relied on a pair of assumptions we find questionable: that the contracts at issue authorized only “actual costs,” and that “actual costs” necessarily do not include collection fees. As we’ve seen, the contractual language never mentions “actual costs,” and even if it did, it’s not obvious why that limitation excludes the fee at issue. The contract allows for “any costs,” and the most reasonable reading of that term is to include fees paid in attempting to collect.

Second, the contract at issue in Bradley, like the one at issue here, explicitly provided that the term “costs” includes attorney’s fees. And attorney’s fees are not “actual” costs as the Eleventh Circuit used that term. We decline to hold that the term “costs” bears such a narrow meaning when the contract explicitly tells us that the term is broad enough to include more.

The plaintiff also attempted to make an end-around, arguing that the collection fee violated the FDCPA because the fee isn’t owed until the debt is paid, and only when the debt is paid.

Following a quick grammar lesson on the use of past participles, Judge Sykes gets to the issue at hand.

The district judge gave one more reason to think that the word “incurred” lacks a specific temporal restriction. Let’s imagine Bernal is correct. In that scenario NRA must first send the debtor a letter demanding payment of the debt. Then, after the debtor writes a check, Six Flags can pay NRA the collection fee. At that point NRA can finally send the debtor a second letter demanding collection costs. But in this scenario, the first letter would mislead the debtor about how much he needs to pay in total, so this could itself violate the FDCPA. Cf. Fields v. Wilber Law Firm, P.C., 383 F.3d 562, 565 (7th Cir. 2004) (“[W]hen a debtor has contractually agreed to pay attorneys’ fees and collection costs, a debt collector may … state those fees and costs and include that amount in the dunning letter. … Indeed, refusing to quantify an amount that the debt collector is trying to collect could be construed as falsely stating the amount of debt.”). Bernal claims that NRA violated the statute, but his alternative could be just as problematic.

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