State Supreme Court Rules Against ARM Firm Owned by U.S. House Candidate

The Idaho Supreme Court in late March upheld a lower court decision to reduce the attorney’s fees paid to a collection law firm that won default judgments against three separate medical debtors. The unanimous decision noted that ARM firms may not ask for attorney’s fees that are greater than the amount of the original debt.

The case, Medical Recovery Services v. Strawn, Lewis, and Knight, was particularly tricky because the contract signed by the consumers at the time of service specifically allowed for the attorney fee sought by the collection agency.

The case involved three patients who were treated between December 2010 and April 2011 at an urgent and primary care clinic in Idaho. All failed to pay their modest remaining balances and the accounts were sent to Medical Recovery Services (MRS) for collection. MRS filed suits to recover the balances.

In its filings, MRS asked for $350 in attorney’s fees in addition to the principle amount owed, interest, and filing and service fees. The firm argued that it was entitled to the fees per the patient sign-in form signed by each patient at the time of treatment, which read:

I agree to pay my account in full at the time of services unless before services are performed Community Care agrees to other payment arrangements. I understand that Community Care will submit insurance benefits for payment only as a courtesy for me. I agree to pay 18% interest on the outstanding balance on my account with interest to commence 60 days after services even if payment from my insurance company is pending. I also agree to pay an additional service charge of 50 cents per month on my account. If Community Care assigns my account to a collection agency for collection [sic] all reasonable cost and attorney’s fees incurred to collect on my account. I agree that a $20.00 collection fee shall be added to my account as a reasonable cost if Community Care assigns my account to a collection agency. I agree to pay as a reasonable attorney’s fee $350 or 35% of the principal and interest on my account balance, whichever is greater, if my account is assigned to a collection agency and suit is filed to recover payment on my account.

A magistrate court awarded default judgments in favor of MRS in all three cases, since the defendants did not show up to defend. But the judge stripped out the $350 in attorney’s fees. MRS appealed that decision to district court, which upheld the move, and eventually appealed to the state’s Supreme Court. Cited in those decisions was a provision in state debt collection law which does not allow fees in amounts above the original debt.

MRS argued that state rules governing collection agencies should not apply in the cases at hand because the contracts mandating $350 in attorney’s fees were contracts between the patients and the clinic, not between the patients and Medical Recovery Services.

“That contention is wholly without merit,” wrote Justice Jim Jones. “MRS acknowledges that it is a licensee under (state collection agency laws). Indeed, MRS is a collection agency and in the business of collecting debts for other parties.”

MRS also argued that it should be awarded further fees for expenses appealing the case to the Idaho Supreme Court.

“Since MRS failed to prevail on appeal, it is not entitled to a fee award,” Jones wrote.“We affirm the decision of the district court. No costs are awarded.”

The default judgments against the consumers are still valid, however.

The case made the rounds yesterday in local Idaho news because the owner of MRS, as well as the law firm representing the collection agency in the appeal, is running for a seat in the U.S. House of Representatives.

Bryan Smith is challenging incumbent Rep. Mike Simpson in the Republican primary for Idaho’s 2^nd Congressional district. Smith is backed by Tea Party-aligned and Republican insurgent groups. The primary election is to be held May 20.