By Nicholas D. Krawec, Esq., Partner
Naturally, when a creditor refers a claim to an attorney for collection, that creditor is going to be faced with payment of attorneys’ fees, often on a contingent fee basis. A vigilant creditor places an attorneys’ fee provision in his contract documents, which provides that if the debtor defaults, and the claim is placed with an attorney for collection, the debtor is responsible for payment of the creditor’s attorneys’ fees. This is part of the creditor’s efforts to be “made whole” if and when the debt is finally collected.
In consumer claims, referred to an attorney for collection on a contingent fee basis, there nevertheless can be a problem with including a claim for attorneys’ fees in the Complaint filed against the debtor. Section 1692f of the Fair Debt Collection Practices Act (FDCPA) prohibits as an unfair debt collection practice, “the 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.” In looking that this provision, a creditor or creditor’s attorney may say, “OK, so what’s the problem? My contract documents provide that the defaulting debtor is responsible for the payment of the creditor’s attorneys’ fees.”
The problem is articulated in the very recent (April 7, 2015) decision by the U.S. Court of Appeals for the Third Circuit, in the case of Kaymark vs. Bank of America, et a., The case involved a consumer’s law suit filed against Bank of America and the Bank’s attorney, after the Bank had filed a mortgage foreclosure in state court against Kaymark. In his lawsuit against the Bank and its attorney, the consumer, Kaymark, alleged that the Bank’s claim for attorneys’ fees in the foreclosure action violated the FDCPA and Pennsylvania’s Fair Credit Extension Uniformity Act. In reversing the District Court, which had dismissed the claims under state and federal fair debt collection laws, the Third Circuit held that the consumer sufficiently pled that the disputed fees (which had not yet been incurred by the Bank) constituted actionable misrepresentation under the FDCPA.
Although the contract in controversy had a provision that stated the bank may charge the borrower fees for services performed in connection with the borrower’s default, and that if the default is not cured, the bank shall be entitled to collect all expenses incurred in pursuing its remedies, including, but not limited to, attorneys’ fees. The problem for the creditor in this case is that the attorneys’ fees had not yet actually been incurred at the time of the demand and the foreclosure action, and the creditor and its attorney did not state that the attorneys’ fees were estimates or imprecise amounts. The Third Circuit therefore determined that when viewed from the perspective of the least sophisticated consumer (the standard under the FDCPA), demanding not yet incurred fees in the collection of debts in a way contrary to the underlying contract is actionable under the FDCPA.
So what is the practical impact of this decision on consumer debt collection? Collection claims are commonly referred to counsel on a contingent fee basis. By its nature, a contingent fee is not incurred until the debt is collected. Therefore, before cavalierly demanding attorneys fees in an amount that merely reflects the contingent fee percentage agreed upon between the creditor and the attorney, think about the Third Circuit decision in Kaymark. In such situations, ensure that you represent that the amount of attorneys’ fees is an estimate, or identify that upon payment of the debt, the debtor will also be responsible for a specified percentage of that amount as attorneys’ fees. In light of this recent decision, creditors should take a closer look at the language of the attorneys’ fee provision in your contract, or have your attorney review it. Avoid putting yourself in a position where you are subjected to an allegation that you are misrepresenting the amount of a consumer debt that you are trying to collect.