Lothian, E. H.

Law and Contemporary Problems : a Quarterly Published by the Duke University, School of Law

English

Duke Law Scholarship Repository

COLLECTION AGENCY ACTIVITIES: THE PROBLEMFROM THE STANDPOINT OF THE AGENCIESE. H. LOTHIAN*Some definitions are in order at the outset. What is the problem? Briefly, it maybe stated as the determination of what functions of a collection agency are properand do not constitute unauthorized practice of the law. What is a "collectionagency"? Perhaps it can be defined simply as an individual, a company, or an organ-ization that is engaged in the business of adjusting accounts for creditors. It is neces-sary, however, to outline the functions of a collection agency in order to see whatthe problem is. There are many kinds of collection agencies, some reputable andhonest and well financed-some quite the reverse. We shall attempt to describe theactual operation of a reputable collection agency as it is or ought to be. It will benecessary also to explain some of the weaknesses and actual acts of commission whichdeserve correction.In the course of this discussion, it would not be fair to refrain from mentioningsome reasons for the existence of collection agencies. Nor would it be right to failto mention some functions of collection agencies that grew out of a demand and thathave not been performed well by others. Neither would it be proper to omit somereferences to the position of the lawyer and his ethical viewpoint. In any approachto this subject, moreover, the reader should know that the reputable lawyers of thenation have for years wished to protect the profession and the public from evilsgrowing out of "unauthorized practice of the law." The activities of lawyers havegrown more intense in recent years. New laws have been introduced in state legis-latures. Injunction suits have been filed. Bar association committees have passedrules and regulations and have had hearings and conferences. Many states haveadopted the plan of the "integrated bar," which has implemented such activities.The operations of trust companies, automobile associations, insurance companies, col-lection agencies and many other organizations have been under review. Collectionagencies have not been singled out for attack, but have been merely among theorganizations attacked.Some of the things that collection agencies do that are permitted by statute orcourt decisions in some states are attacked in other states. Some of the ordinary func-dons performed generally by nearly all collection agencies are admitted to have beenimproper. Some other things are not considered wrong by either the creditor or theagency but have been considered so by certain lawyers and have been construed soby some courts. Courts have made little distinction between reputable agencies and*Director, Adjustment Bureau Department, National Association of Credit Men.LAW AND CONTEMPORARY PROBLEMSthose which are not reputable. There is much difference of opinion about exactlywhat constitutes unlawful or unauthorized practice of the law. There is much hazyand poorly-directed thinking among agencies, creditors, lawyers and courts. Prej-udice, self-interest, incomplete information and cupidity have had their places in thecontroversies.To outline the regular service performed by the ordinary reputable collectionagency for its employers, let us take a typical credit transaction and follow it throughto a conclusion. The illustration is simply to describe the usual steps in an aver-age wholesale collection and it is not to be considered in the light of any special statestatutes or supreme court decisions, although it must be understood that in actualpractice there are special conditions that now apply in certain states of the nation,by virtue either of statutes or judicial rulings.The creditor sells merchandise or performs a service for someone else on creditand thus a debt is created. If the debt is not adjusted according to terms the creditorproceeds to try to secure settlement and if he has difficulty he may decide to employa collection agency. Collection agencies have various terms for service but the chargesare generally contingent upon collection, and in the ordinary wholesale collectionthey have been approximately i5/ although special terms either higher or lower thanthis may be offered by the agency or arranged by it. We shall use this /5% as aconvenient and the customary figure.The creditor usually sends to the agency a simple statement of his account withthe debtor. The agency attempts by personal contact or other "lay" means to securesettlement. We use the term "lay" as distinguished from "legal" efforts. In somecases the creditor desires to preserve harmonious relations with his customer. Oftenit is only necessary for a third party to make the request for payment, whereupon thedebtor settles promptly. In other cases the creditor is primarily interested in securinghis money and is ready for drastic action, if it is necessary. If the agency obtainssettlement by its own efforts it usually remits the proceeds to the creditor afterdeducting the agreed service charge and the transaction is closed.The agency, however, may not be able to obtain collection by "lay" effort andmay believe that the item should be sent to a lawyer. It informs the creditor of thesituation and obtains instructions to place the claim with an attorney. By the customof many decades, such a claim placed with an attorney has been placed with him bythe agency acting as agent for the creditor and the piece of business has been offeredto him on the basis of two-thirds of the 15% fee contingent upon collection. Theagency normally retained the other one-third of the i5/ to reimburse it for workdone in its previous efforts plus correspondence, reporting, follow-up, and otherservices. If the attorney was able to secure payment without filing a suit he remittedto the agency, less the two-thirds of the i5%. The agency remitted to the creditor,less its one-third of the i5%, and the transaction was closed.If the lawyer found that legal proceedings were necessary he notified the creditoror the agency and usually requested that court costs or suit fees or both be advancedto him. The creditor usually advanced these to the agency, and the latter, in turn,COLLECTION AGENCY ACTMTIES FROM THE AGENCIES' STANDPOINTsent the money to the lawyer. The well-conducted, reputable agency did not attemptto secure any share of such fees. Its compensation came from the one-third of theoriginal collection commission agreed upon. If court costs were recovered they werereturned to the creditor intact.It has been the custom of the agency to select the lawyer from a "law list" and tosend him the item of business under the protective bond which is one of the purposesof law lists. The efficient law list company also undertakes to see to it that the law-yers on its list render prompt and efficient service. If a lawyer is careless or dilatoryor fails to account for funds collected, the law list company undertakes to get redressfor the creditor. Thus, the creditor has been able to send a claim to an agency andexpect the item to be serviced to a conclusion. He could close his file, relieve hismind of worry and forget the details. The majority of collection items have beenserviced by "lay" service to a conclusion even if, in some cases, a lawyer aided inthe work.Those who choose collection work as their means of earning a living, quitenaturally, and nearly always, enjoy the work. Many become unusually proficient.Many develop astonishing ingenuity and resourcefulness. They learn the necessaryfacts about industrial and economic conditions in various markets. They learn byexperience the efficiency of those to whom they "forward" collection items, whetherother agencies or attorneys. They become acquainted with the conditions surround-ing the chronic debtor. They learn how to help debtors to find the means of pay-ment. Frequently they may arrange a complete reorganization of a debtor's businessor methods. Thus they can work in the public interest. They know what papers arenecessary when their customer wants legal action taken and are of great help inassembling and securing them for the attorney.Of course, in the conduct of a business that may have io,ooo or more organizationsengaged in it, and that handles several hundred million dollars of accounts receivablein a year, evils can creep in and actually have crept in. Here are some practices thatcan not be defended; the reputable agency does not engage in:(a) Splitting legal fees with lawyers.(b) Using forms or papers that simulate court documents.(c) Giving legal advice.(d) Filing suits in courts of record on behalf of others.(e) Threatening legal proceedings.(f) Soliciting claims at the instigation of an attorney.There are other practices that have been used by some agencies to the discredit ofall who are engaged in the collection business.Until September 1937, Canon 34 of the American Bar Association permitted thesharing of a collection commission with a lawyer. The section authorizing such pro-cedure was repealed at the Bar Association's national convention in Kansas City andnow reads "No division of fees for legal services is proper except with another lawyerbased upon a division of service or responsibility." Some think that this makes itunethical for a lawyer to receive a collection item from a lay agency, when the agency32 LAw AND CONTEMPORARY PROBLEMSparticipates in the division of the collection commission. They maintain that thecollection commission is a legal fee.The reputable collection agency maintains stoutly that the collection commissionis not a legal fee. Unfortunately neither lawyers nor courts have been in agreementon this question. The more enlightened lawyers who have made an extensive study,however, believe that a collection agency of the reputable class can perform a usefulservice and they do not consider the collection service charge a legal fee. If theagency does some work with reference to a claim and gets one-third of the collectioncommission, and the lawyer does certain work and gets two-thirds of the collectioncommission-these facts do not have anything to do with such things as court costs,suit fees, retainers, or other legal fees.Out of the arguments, suits and controversies, have come a better understandingof the whole problem and the elimination of many abuses. These are some of thethings the lawyers wish to see done. They want the creditor to be free to have directrelations with his attorney, if he cares to. The creditor should be free to select hislawyer. The creditor should be told what was paid to the lawyer and what to theagency. If the agency suggests the lawyer's name, it should offer a choice wherepossible. The lawyers want the agencies to make changes in the wording of theirforms to show the above things very clearly. Reputable collection agencies do notobject to these things. They are perhaps more anxious than anyone else to let thecreditors know the steps in an ordinary collection. It is to the interest of all con-cerned to have creditors know who the attorneys are-what they do and what theycharge for doing it.Many court decisions of state supreme courts have attempted to point the way toproper and harmonious relations. In some cases, however, these decisions have notseemed to take into account the ordinary and practical relationships between creditor,debtor, creditors' agent and attorney.How can collection agencies operate in such a way that their useful functionscan be continued and also in a manner that will be acceptable to lawyers? One wayadopted by certain agencies is somewhat as follows. First, the agency has prohibitedthe acceptance of any share of any suit fee or legal fee. It has ceased to use any typeof advertisement that tends to intimate that it is competent or holding itself out asgiving legal advice. When a claim seems to be ready for any legal action it advisesthe creditor of the whole situation and secures the creditor's instructions. If thecreditor wants to have a suit started and if the creditor wants the agency to performwork toward this end, the agency gives to the creditor one or more names of lawyerswho have proved their competence in handling such matters. The creditor then selectsa lawyer and instructs the agency to proceed with the details. This procedure satisfiesthe lawyer that the selection of himself is the work of the creditor and the fact thatthe agency informs him that he may deal directly with the creditor at any stage ofthe proceedings gives him the direct relationship privilege that is his inherent right.Hardly any lawyer who is reasonable could object if a creditor selects him butwishes to appoint some one else (the agency) to handle the details, carry on thecorrespondence, and help in the securing of necessary proofs of a claim. In our ownCOLLECTION AGENCY AcTIvITIEs FROM THE AGENCIES' STANDPOINTopinion, the fact that some lawyers have objected is a reflection upon their knowledgeof the practical help the agency can and does perform. The fact that some agencieshave gone farther than their function necessitated, may, of course, have somethingto do with the attitude of certain lawyers.After all, when an agency has done a great deal of work, has made many per-sonal contacts with a debtor, has spent a considerable amount of time and moneyon a claim, it is reasonable that the work it has done should have in it much thatcan be helpful in the final stages of a difficult collection. Agencies do help lawyersvery materially. Why shouldn't they? They are like the lawyer in that their com-pensation for work done is dependent on collection of the account. If they do notcollect they do not receive compensation. Some are organized for service to memberswithout much regard to compensation.Many lawyers have told the writer that they prefer to have experienced collectionmen in the picture in order to get from the creditor the help needed in handling aclaim through one or more courts. It is to be remembered that many credit executivesare not familiar with all the steps in enforcing a collection. They are proverbiallycritical of the (to them) excessive costs involved, and are inexperienced in themechanics of collection. The intelligent explanations of experienced collection menhave done very much to make a creditor sympathetic to the problem of the lawyer.Of course, when the time comes for legal action, the claim could be returned tothe creditor and he could fend for himself from that time forward. But many ofthe benefits of preliminary work of the agency would be lost. The agency's intimateknowledge of the situation would be wasted. The creditor would not ordinarily beable by experience to know to which lawyer to send the business. Neither, very fre-quendy, would the creditor's own local lawyer. It seems proper to repeat that thecollection business is a highly specialized business and that it is no field for amateurs,whether they be lawyers or laymen. Under some of the conditions mentioned herein,it is obvious that the agency can be of inestimable help to both creditor and lawyer,being in a position, by experience, at least to suggest the names of competent lawyersfor the creditor's selection.Some have not known what can be and what is being done by reputable agenciesor organizations to insure the proper performance of their offices. We shall confineourselves to what is done in one very large cooperative organization with some 65affiliated collection offices. In the first place the affiliated organizations wish to renderservice to members but are under the necessity of at least paying the expenses of suchservice. This objective is important but is less important than high class, legitimate,ethical, helpful and constructive performance.Accordingly certain standards of operation are maintained for the protection ofeveryone. By that we mean that the final objective includes the purpose of seeing toit that any creditor anywhere may receive good service, honestly performed, at aminimum cost. This is the purpose of all legitimate and reputable collection agencies,whether they be individually or cooperatively owned, whether they operate as asingle office or as a large company with branches.34 LAW AND CONTEMPORARY PROBLEMSIndividuals handling money are adequately bonded and such bonds are inspectedand approved by those competent to know. Business and financial operations arestudied and supervised by trained management, and by a Board of Directors or, inthe case of cooperative organizations, a Committee of Control composed of actualusers. Accounts and records are audited by certified public accountants and, often,by "inside" or "supervisory" accountants also. Trust funds are separated from operat-ing funds. Files and interior office conditions are studied as to actual performanceand policies. Prompt remittances and scrupulous accounting for all trust funds arethe rule in any well conducted agency. All these activities are, of course, in additionto the ordinary mechanics of the handling of the very intimate relationship ofcreditor and debtor, which have been mentioned heretofore.There are very many reputable agencies operating in this manner, and it is hardlynecessary to point out that if all agencies did likewise, there would be no trouble.It is, we believe, fair to say also that in the actual practice of law by members of theprofession, ethical standards have been violated and the policing job has beendifficult. We are convinced that the American Bar Association and the reputablecollection agencies are both engaged in a sincere attempt to eliminate unethical anddangerous practices.The actual existence of collection agencies for so many years should indicate toeveryone that they grew out of a need and that they have had the acceptance of thebusiness public. Such a facility does not spring up-full grown-overnight. Wehave tried to show that it is a specialized business and it is hardly necessary toreiterate that natural aptitude and years of experience are requisites of successfulcollection men.The remuneration for collection work is not great. We can say without fear ofcontradiction that lawyers generally do not enter the profession just to become col-lection experts. The writer of this article has not met many lawyers who do notprefer other types of work to collection business. It is the personal history of thelawyers of the writer's acquaintance that they prefer to "graduate" from collectionwork, whenever they are able to do so.Someone has rightfully said that "evils tend to correct themselves." So it is atthis juncture in the collection business. Thoughtful individuals, looking at the"problem" as a whole, have not failed to visualize the ideal condition. We conceiveit to be the condition where both collection agencies and lawyers have their places inthe business field, complementing the work of each other without conflict, prejudice,fanaticism, misunderstanding or avarice. It is as inevitable that the collection manlearn much about law as it is that the lawyer will learn some of the ramifications ofcollection work. But, in spite of the breadth of knowledge of the law which may beacquired by any individual, no reputable collection agency representative wants topractice law. He is happy to leave this part of a collection transaction to those whoare licensed to take care of it in courts of record.Casual observers will readily admit that much remains to be done on both sides.Conferences and exchanges of views, without rancor or bitterness, continue, asalways, to sqlve such problems.

Collection Agency Activities: The Problem From the Standpoint of the Agencies

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Collection Agency Activities: The Problem From the Standpoint of the Agencies

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