A Salt Lake law firm made false statements and demanded excessive fees while trying to collect payment on bad checks, according to a federal judge.
In a 36-page ruling involving the debt collection practices of Check-Rite Ltd. and DeLoney & Associates, U.S. District Judge Tena Campbell said state law sets a $15 limit on bad check collection fees.The issue was raised two years ago by Rebecca H. and Bryan J. Ditty and others who were hit with fees ranging from $73 to $83 on top of the standard $15 service charge for dishonored checks.
Under an agreement negotiated by officers of both firms in 1994, bad checks that could not be collected by CheckRite were automatically turned over to attorney Richard DeLoney and his agents. Whenever DeLoney settled an account, CheckRite received the face amount of the check plus $20 and DeLoney got whatever was left of the settlement proceeds.
Between July 1, 1994, and May 9, 1995, CheckRite referred about 9,025 bad checks written by Utah residents to DeLoney. The law firm also handles CheckRite's collections in Arizona and Washington.
The plaintiffs alleged that CheckRite and DeLoney violated the Fair Debt Collection Practices Act and the Fair Credit Reporting Act by attempting to collect excessive fees and employing threats and misleading statements.
They also alleged improper use of CheckRite's check verification system, which gives subscribers access to a data base listing bad check writers. And they invoked a law that bars ongoing debt collection efforts if the debt is disputed within 30 days.
According to court documents, DeLoney sent the Dittys a letter saying the debt could be settled out of court for the amount of the check plus the service charge and a fee listed as "legal consideration for covenant not to sue."
The letter also warned the Dittys that other actions, "including fraud in the inducement, negligent misrepresentation, civil shoplifting, or theft by check may also be considered."
DeLoney argued that the additional fee was permitted under a Utah law that says someone who writes a bad check may be liable for a sum exceeding the $15 service charge if a civil lawsuit is filed. The firm said since it could have sued - and did so at least 24 times - the provision allowed higher liability.
But Campbell said the excessive fees were "neither expressly authorized by the plaintiffs nor permitted by Utah law."
She did, however, reject the Dittys' assertion that the 30-day "validation period" applied in their case. The collection effort began when CheckRite sent the Dittys the first notice, not when DeLoney took up the cause, the judge ruled.
As for the collection letters, Campbell said CheckRite's initial communication did not contain any false, misleading or deceptive statements. It simply informed the debtor of the amount due, including the $15 service charge, and warned of additional legal costs if the dishonored check was turned over to its attorney for litigation.
"The letters sent by DeLoney & Associates were not equally benign" Campbell said, citing the settlement offer that included "legal consideration for covenant not to sue."
DeLoney & Associates defended its letter, contending it was simply an offer to settle a legal dispute and that public policy in fact favors the resolution of such disputes short of litigation.
Campbell, however, said the letters failed to advise debtors of the $15 limit unless a lawsuit was actually filed.
"Given this omission and defendants' effort to collect excessive fees under the guise of a covenant not to sue, the court finds that no reasonable juror could conclude that defendants' mailings did not falsely represent the amounts defendants could lawfully collect," the judge said.
She also said that "by its acquiescence," CheckRite had authorized the collection practices of Deloney & Associates and was therefore liable for any violations of the law.
Campbell said there was insufficient evidence to rule on the Dittys claim regarding the improper use of CheckRite's check validation system and other issues. Those matters could be settled if the matter goes to trial.
Also, a federal magistrate is considering a request to give the lawsuit class action status, which could make thousands of bad check writers eligible to claim refunds for any excessive fees they paid.