A person or a firm engaged in the business of collecting payment on all kinds of claims on behalf of others is called a collection agency. A collection agency has the duty to collect the debt from the debtor for the creditor. An agency should exert its best efforts to collect the debt.
An agency has certain rights on, duties to, and liabilities to the creditor. When a claim is entrusted upon an agency, every reasonable and lawful step should be taken by the agency to collect the claim[i]. The amount collected should be handed over to the creditor. If an agency fails in making the collection, the agency should inform the creditor about it at the earliest possible time. All valuable documents relating to the claim should be returned to the creditor. An agency will have to face civil action or criminal prosecution if it is negligent in performing its duty and if the agency commits fraud or makes misrepresentation in matters relating to collection.
In Gibbs v. Giering, 183 So. 2d 459 (La.App. 3 Cir. 1966), the court observed that an agency should be diligent in collecting a claim entrusted upon the agency. If failure occurs on the agency’s part, it will be liable for the loss incurred by the creditor.
However, while performing the duties entrusted upon the agency by the creditor, an agency has certain duties and liabilities to the debtors also. An agency is entitled to use its best efforts to collect a claim but it should do so in an illegal as to cause harm to the debtor. An agency can exert pressure on the debtor to pay the amount by making calls and sending letters warning of the possibility of taking legal action against him/her. However, an agency will be liable to the debtor if the agency sends rude letters to the debtor in its attempt to collect a claim and subjects the debtor to emotional/mental pain[ii]. An agency should use proper collection techniques in the collection of a debt.
Additionally, a collection agency will be liable for the unlawful acts committed by an employee of the agency while collecting the debt. A collection agency may be prosecuted for the acts committed by its employee on behalf of the agency or the creditor. A debtor will be entitled to damages for mental anguish from the creditor. An agency which adopts improper or coercive methods for collection will be liable for harassment as it can be considered offensive to the privacy of a debtor[iii]. Sometimes an agency may also be liable to a third party for mental distress caused to a friend or relative of the debtor in an attempt to collect a debt. The agency’s action have to be very outrageous and this action should be the reason for the emotional distress suffered by the person[iv].
Most states have statutes restraining collection agencies from using abusive threats and coercive methods while collecting a debt. Improper methods should not be adopted by the agencies[v]. Agencies as well as individuals are liable according to these statutes. But filing suit is not considered an improper method in collection of debt. A debtor who is put to emotional distress and consequential physical injury can sue under the tort of intentional infliction of emotional distress. An agency will be liable for damages if it is proved that the injury was due to unreasonable or improper collection methods adopted by the agency[vi]. However, there are cases in which it is observed that a creditor has right to take steps to force the debtor to pay off debt, although it may lead to invasion of debtor’s privacy to an extent[vii].
An agency has the right to obtain compensation from a creditor if a creditor withdraws the claim after the agency had started taking diligent steps in collecting the debt[viii]. A debtor cannot raise the defense that the claim was allotted to the agency temporarily. But if a creditor discharges an agency due to the unlawful actions of the agency, there is no liability incurred to the creditor on the commissions of uncollected debts. A creditor can incorporate a condition in the contract that states that full commission to an agency on the claims returned back to the creditor will be paid only on the realization of the amount from the debtor[ix].
There are various remedies and actions available against a collection agency. The license to carry out the business can be revoked for violation of law. The proceeding to be initiated against such an agency is a Quo warranto proceeding. A remedy of injunction is available against an agency which accepts statutorily prohibited assignments[x].
Some states provide compensatory damages and not punitive damages[xi] in an action by a debtor against a creditor, while some other states grant punitive damages[xii].
A collection agency may be liable under various criminal laws under the federal and state statutes for using improper collection techniques.
[i] Poile v. Stockton Merchants Asso., 176 Cal. App. 2d 100 (Cal. App. 3d Dist. 1959).
[ii] Curnutt v. Wolf, 244 Iowa 683 (Iowa 1953).
[iii] Beaumont v. Basham, 205 S.W.3d 608 (Tex. App. Waco 2006).
[iv] Howell v. Enter. Publ’g Co., LLC, 455 Mass. 641 (Mass. 2010).
[v] Cook v. Blazer Financial Services, Inc., 332 So. 2d 677 (Fla. Dist. Ct. App. 1st Dist. 1976).
[vi] Clark v. Celeb Pub., Inc., 530 F. Supp. 979 (S.D.N.Y. 1981).
[vii] Turner v. Government Employees Financial Corp., 351 F. Supp. 181 (W.D. Pa. 1972).
[viii] United Mercantile Agencies, Inc. v. Slotsky, 107 Pa. Super. 467 (Pa. Super. Ct. 1932).
[ix] Gibbs v. Giering, 183 So. 2d 459 (La.App. 3 Cir. 1966).
[x] Gellens v. 11 West 42nd Street, Inc., 259 A.D. 435 (N.Y. App. Div. 1940).
[xi] Spencer v. Hendersen-Webb, Inc., 81 F. Supp. 2d 582 (D. Md. 1999).
[xii] Steak & Ale of Tex., Inc. v. Borneman, 62 S.W.3d 898 (Tex. App. Fort Worth 2001).