A collection agency is a person or firm engaged in the business of collecting or receiving for payment all kinds of claims on behalf of others. Generally, a collection agency is considered an independent contractor and is liable to those whom it employs in the business of making collections[i].
A collection agency collects all kinds of claims, as well as notes, drafts, and other negotiable instruments on behalf of others and to render an account of the same. A collection agency guarantees that it will make its best effort to collect. If a suit is necessary, a collection agency will select a competent attorney. However, negligence, dishonesty, or unauthorized acts of the attorney will not affect creditor’s liability[ii].
It was observed in Commonwealth v. Allied Bond & Collection Agency, 394 Mass. 608 (Mass. 1985) that a collection agency must not share quarters or office space with an attorney actively engaged in the practice of law, constable, private detective, regular or special police officer or any other law enforcement officer. A collection agency engaged mainly in the collection of retail accounts against consumer debtors must maintain records and copies that disclose debts and amounts of payments from debtors and remittances made to creditors[iii].
Generally, the operation of a collection agency will not constitute the unauthorized practice of law. However, sometimes a collection agency attempts to enforce the claims of others by resort to legal proceedings and then the agency is extending its business to include legal representation of creditors. Therefore, a collection agency acts not only as an entity that collect amounts owed to creditors but also as an agent that renders legal services in order to recover debts. It sells its services as a representative in legal actions as part of its debt collection. However, such activities can come under the unauthorized practice of law[iv].
In Wacksman v. United States, 175 A.2d 789 (Mun. Ct. App. D.C. 1961), the defendant was convicted of using unlawful and misleading words and symbols for debt collection which were against the authorized statute. On review, the defendant contended that the evidence was insufficient to support the conviction. The court found that the defendant was not entitled to immunity from the statute because it regulated the business conducted by the defendant. Therefore, the court held that the evidence was sufficient and affirmed the judgment of the trial court.
Although a collection agency is generally considered an independent contractor, sometimes the relationship between creditor and collection agency is that of principal and agent. Under situations where a creditor retains control over the main details of the debt collector’s work, a debt collection agency hired by a creditor is considered as an agent of the creditor.
However, a creditor is not held responsible for the torts of a collection agency or its employees. In other words, a collection agency is an independent contractor for whose acts a creditor is not responsible[v]. The relationship between a collection agency and a judgment creditor is fiduciary in nature[vi]. However, in the absence of proof, a creditor will not be liable for a tort of the collection agency in the absence of proof that the creditor authorized or ratified the tort.
[i] Lynch Jewelry Co. v. Bass, 220 Ala. 96 (Ala. 1929)
[iii] Commonwealth v. Allied Bond & Collection Agency, 394 Mass. 608 (Mass. 1985)
[iv] State ex rel. Frieson v. Isner, 168 W. Va. 758 (W. Va. 1981)
[v] Fraser v. Morrison, 39 Haw. 370 (Haw. 1952)
[vi] Gilman v. Dalby, 176 Cal. App. 4th 606 (Cal. App. 3d Dist. 2009)