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Collection Actions: 2.8.5 The Trial

Sometimes it is best for only the consumer’s attorney and not the consumer to appear at trial. When a debt collector has insufficient evidence to prove its case, it is common for them to call the consumer to the stand and to try to prove its case using the consumer’s own testimony. For example, it can ask the consumer to authenticate various documents when it has not brought its own witness to trial.

Collection Actions: 2.9.1 The Court’s Order for the Consumer

Consumers who assert that they never owed the debt—for example, because of identity theft, because the wrong consumer has been sued, or because of a valid dispute on the debt—should seek more than just dismissal of the case with prejudice. Prevailing consumers ultimately will want to clean up their credit report so that it contains no evidence of the debt. It will not be enough to show that the current balance is zero. The report should delete all historical record of the debt being overdue.98

Collection Actions: 2.9.2.1 Generally

Care must be taken in any settlement to properly address the consumer’s counterclaims. If the settlement dismisses the consumer’s counterclaims with prejudice along with the collector’s claims, then the consumer has forfeited the right to raise those counterclaims in a subsequent action.

Collection Actions: 2.9.2.4 New York State Regulation of Collection Lawsuit Settlements

New York State’s Department of Financial Services rules regulate consumer debt settlements with debt collectors and debt buyers.107 The debt collector or debt buyer, within five days of a settlement, must provide a written confirmation of the debt payment schedule or other agreement to settle the debt, including all material terms and conditions relating to the payments and schedule.108

Collection Actions: 6.1 Overview

When a debtor fails to make timely payment of a debt, the common law strictly limits the damages a creditor may recover to the unpaid principal and interest provided in the contract or by statute.1 This general rule of damages law is justified by two considerations. Creditors set interest rates at levels that take into account that a certain portion of debtors necessarily default.

Collection Actions: 6.2.1 American Rule Denies Fees

The “American rule” is that attorney fees are not recoverable as damages, and attorney fees will not be awarded in the absence of a statutory or contractual authorization, except for vexatious, frivolous litigation.8 The common justification for the rule is that it discourages litigation.

Collection Actions: 6.2.3 Is There a Contract with the Consumer?

When the creditor claims a right to attorney fees based on a contract, a key initial question—assuming that such a clause is valid under state law—is whether the creditor in its collection action has proven that the consumer has entered into a specific contract with the creditor. For example, the creditor may be asserting a claim based on account stated, on account, or quantum meruit that is not based on the existence of a contract or does not require proof of a contract.

Collection Actions: 6.2.4.1 Strict Construction of Attorney Fee Clauses

Because contractual attorney fee clauses are an exception to the generally applicable American rule, and are harsh in effect, most courts construe them strictly.56 In addition, as a general rule, any ambiguity in a contract is construed against the drafter, and it is strictly construed against the drafter if a contract of adhesion is involved.57 Even courts that reject a general rule of strict construction require attorney fee clauses to be unambiguous and to clearly identify the matter in w

Collection Actions: 6.2.4.2 Interpreting the Scope of an Attorney Fee Clause

Questions may also arise as to the scope of an attorney fee clause. A clause allowing fees for “any litigation” between the parties may be given a broad scope.60 A clause allowing fees for any litigation “arising out of,” “relating to,” “in connection with,” or “under” the contract is somewhat narrower but may still apply to tort61 and other62 claims that relate to the contract.

Collection Actions: 6.2.4.4 References to “Costs” or “Expenses”

Many courts refuse to award attorney fees when the contract only allows “costs and expenses” or “costs of collection” and does not specifically mention attorney fees.84 This position is consistent with the general rule that attorney fee clauses must be entirely unambiguous and that they must be strictly construed.85

Collection Actions: 6.3.1 Construction of State Fee-Shifting Statutes

Several states permit recovery of collection attorney fees in certain circumstances, even when such fees are not authorized by the consumer credit contract. Some of these states provide that the debtor may avoid fees by paying the amount demanded in a pre-suit notice within a certain number of days. Because these statutes do not depend on the existence of a fee-shifting clause in the contract, their requirements may be inapplicable to contractual fees.88

Collection Actions: 6.3.5 Other State Fee-Shifting Statutes

Some states also have statutes or court rules allowing attorney fee awards for enforcement of liens,151 or other particular types of actions or transactions.152 State laws regarding fee-shifting when a creditor seeks a deficiency judgment after repossessing collateral are discussed in NCLC’s Repossessions.153 In some states, statutes similar to Federal Rule of Civil Procedure 68 allow fee-shifting when a party rejects a settlement of

Collection Actions: 6.4 Is the Creditor the Prevailing Party?

Whether allowed by statute or by contract, attorney fees are generally available only to the prevailing party.157 Courts hold that fees can only be awarded to a prevailing party, even if a contract clause does not include such a restriction.158 However, some courts allow the parties’ contract to define “prevailing party.”159 A decision for the plaintiff on liability may be insufficient if no damages are awarded

Collection Actions: 6.5.1 Statutory Caps on Fees

In cases in which the creditor is entitled to recover attorney fees, the next question is the amount the creditor may recover. Some states cap the amount of a fee award by statute. Hawaii, for example, forbids collection agencies from recovering any collection expenses, except for attorney fees after filing suit, and it caps those fees at 25% of the debt.183

Collection Actions: 6.5.2 Requirement That Contractual Fees Be Reasonable in Amount

If there is no statutory guidance, some courts, taking a rigid freedom of contract approach, enforce attorney fee clauses that set a particular amount or formula for fees without regard to the reasonableness of the fees.196 However, some of these courts, though enforcing the clause in the particular case, qualify their opinions by indicating that a different result may be reached if there is proof that the clause is oppressive, unconscionable, or so disproportionate to foreseeable expenses as to be penal (violating the general contract law

Collection Actions: 6.5.3 Percentage-Based Fees

An important issue underlying the indemnification approach is whether a fee must be reasonable in relation to the efforts expended to collect the particular debt, or whether the fee is reasonable if it is set as a percentage of the debt.

Collection Actions: 6.6 Collection Agency Fees

While there is a fair amount of case law on the limitations applicable to the recovery of attorney fees for collection, there is less case law regarding collection agency fees. The traditional rule is that collection agencies are compensated by their contingent or flat-fee arrangements with creditors. Creditors, in turn, are compensated for losses due to a debtor’s default by state laws that allow them to charge interest, and sometimes late charges as well, on overdue debts.

Collection Actions: 6.7.1 Introduction

Creditors often seek both prejudgment and postjudgment interest when they sue on debts. Prejudgment interest is discussed in § 5.4, supra. This section discusses postjudgment interest.