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Barbara Reid Alexander    (207)289-3731

SUPERINTENDENT   

Offices located at:

Harry W. Giddinge    Central Building

DEPUTY SUPERINTENDENT    Hallowell Annex

    Hallowell, Maine

Maine State Seal

 

DEPARTMENT OF BUSINESS REGULATION

BUREAU OF CONSUMER PROTECTION

STATE HOUSE STATION 35

AUGUSTA, MAINE 04333

 

 

ADVISORY RULING #43

OCTOBER 9, 1979

 

(Repealed - See AR #52)

 

Definition of "Collection Costs"

  The Bureau has received a number of request concerning the definition of the term "Collection costs" in Section 2-507 of the Maine Consumer Credit Code.  Title 9-A M.R.S.A.  Section 2-507 prohibits the creditor in a consumer credit transaction from contracting for the payment of "any other collection cost" by the consumer.  Advisory Rulings #27 and 29 clarified certain aspects of Section 2-507 with respect to the limitations placed on the collection of attorney's fees.  Advisory Ruling #41 held that the costs incurred in repossessing collateral in a consumer credit transaction are within the scope of "collection costs" prohibited by Section 2-507.  The Bureau has been requested to reconsider and reverse the decision of Ruling #41.  The Bureau has also been requested to distinguish between the costs of repossession itself and post-repossession costs (preparing for sale, etc.) in determining the scope of the 2-507 prohibition.  In addition, the Bureau has been asked to rule whether the certain expenses otherwise allowed in 14 M.R.S.A. are also prohibited in those transactions in which the Code applies.  Therefore, this Advisory Ruling Will attempt to define the scope and limits of the prohibition on collection costs.

A.  Definition of Collection Costs.

  The term "collection costs" is not defined in the Code.  Its insertion into Section 2-507 was non-uniform amendment to the Uniform Consumer Credit Code (1974).  The additional phrase first


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OCTOBER 9, 1979

 

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appeared in L.D. 1803 introduced by Rep. Smith of Dover-Foxcroft in the 106th Legislature (H.P. 1229, Mar. 26, 1973).  No legislative history exists to guide the definitional task.

  First, "costs of collection" must be distinguished from “court costs".  Court costs are the costs of suit established by statute and taxed in favor of the prevailing party at the time of judgment in a civil suit.  Court costs are not encompassed by the term "collection costs".  Cox v. Hagan, 125 VA. 656, 100 S.E. 666 (1919); Nussenfield v. Smith, 110 Conn. 438, 148 A. 388 (1930).  In Maine, court costs are established by 4 M.R.S.A. Sections 174, 175 for the District Court and Section 114 for the Superior Court.  See also Rule 54A of the Maine District Court Civil Rules (1979).  Court costs were distinguished from other statutory or contractual cost provisions in Sprague v. Ticonic Nat. Bank, 307 U.S. 161, 59 S. Ct. 777 (1939).  Court costs described as "ordinary taxable costs" arising from party vs. party litigation, were distinguished from expenses of litigation, described as expenses arising from the relationship of the litigant and attorneys, supra, at 165, 779.

  Secondly, early cases were required to determine if the provisions for assessing collection costs against the defaulting debtor included attorney's fees.  Most courts so held.  McClain v. Continental Supply Co., 66 Okl. 225, 168 P. 815 (1917).  However, collection costs are often described as encompassing a broader term than a contractual provision seeking merely to impose attorney's fees:

[It is] "a provision to reimburse the payee of the note for such necessary expenditures which he may incur in endeavoring to collect same..".  McClain v. Continental Supply Co., supra, at 818.

also:

"Nor does the reference to the costs of collection by foreclosure depart from the terms of the statute [defining negotiability of a promissory note], for, where a note is secured by a mortgage, foreclosure is but a means of collecting the indebtedness represented by the note."  Nussenfield v. Smith, supra at 390.


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OCTOBER 9, 1979

 

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  More recent cases have reaffirmed this broad view of collection costs as encompassing not only expenses incurred with respect to the note itself, but all reasonable expenses incurred in collection, including foreclosure, and other proceedings incidental to the note.  Levanthal v. Krinsky, 325 Mass. 339, 90 N.E. 2d 545 (1950) (foreclosure proceedings); Tobler v. Yoder and Frey Auctioneers, Inc., 462 F. Supp. 788 (S.D. Ga. 1978) (bankruptcy proceedings).

B.  Statutory Construction Rules.

  The imposition of costs, however defined, is not a right known at common law and depends entirely on statutory authorization.  20 C.J.S. costs § 2:  Porteous, Mitchell & Braun Co. v. Miller, 107 Me. 155, 77 A. 710 (1910).  Such statutes are strictly construed.  20 C.J.S. Costs §3.  The more specific statute concerning costs controls over any general rule allowing costs.  Estes v. White, 61 Me. 22 (1873).

  In contrast, the Maine Consumer Credit Code "...shall be liberally construed and applied to promote its underlying purposes and policies."  9-A M.R.S.A. Section 1-102(1).  Unless displaced by particular provisions, the Uniform Commercial Code is held to supplement the M3C.  Section 1-103.  And, "this Act being a general act intended as a unified coverage of its subject matter, no part of it shall be deemed to be impliedly repealed by subsequent legislation if such construction can reasonably be avoided."  Section 1-104.

C.  The Scope of Collection Costs in Section 2-507.

1. Repossession Expenses.  Section 3-402 of the Code states:

"Except for reasonable expenses incurred in realizing on a security interest, the agreement with respect to a consumer credit transaction may not provide for any charges as a result of default by the consumer other than those authorized by this Act.  A provision in violation of this section is unenforceable.”  Emphasis added.

 

  The language in Section 3-402 of the Code which refers to the allowance of the expenses of realizing on the collateral is drawn from the Uniform Commercial Code, Section 9-504 (11 M.R.S.A. Section 9-504).  Section 3-402 of the M3C is identical to Section 3-402 of the Uniform Consumer


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OCTOBER 9, 1979

 

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Credit Code (1974).  The Official Comment to this section in the U3C makes it clear that at the default stage the creditor may impose no collection or default charges on a consumer except those authorized by the Code.  Three such charges are mentioned:  delinquency charges of Section 2-502; attorney's fees in those transactions authorized by Section 2-507 (if any); and the expenses arising from realizing on the collateral of Section 3-402.

  In Advisory Ruling #41 the Bureau ruled that the prohibition of Section 2-507 of "any other collection costs", a deliberately non-uniform addition to the Code, superceded the uniform language of Section 3-402.  The Bureau finds no grounds to change this ruling.  To rule otherwise gives a narrower meaning of the term "collection costs" than either logic or case law compels.  The Bureau finds that, like the imposition of attorney's fees, the legislature made a policy determination that the costs of collection would not be borne by the defaulting debtor, but incorporated by the creditor as a cost of doing business.  The Bureau realizes that the implication of this policy determination is that all consumers bear the costs of defaulting debtors, but this policy determination is one for the Legislature to make.

  The term "collection costs" must also include all expenses surrounding the repossession and the realization on the collateral, i.e., all those expenses set forth in 11 M.R.S.A. Section 9-504.  To make a distinction between the costs of the repossession and post-repossession expenses, as one creditor has suggested, would not make sense, either logically or in terms of policy considerations.  Post-repossession expenses are also designed to impose the expenses of collecting the debt on the defaulting debtor; these expenses, if allowed to be imposed on the debtor's account, result in a larger deficiency owed by the debtor than otherwise would be the case if the expenses surrounding the realization of the collateral are prohibited.  The term "collection costs" encompasses all the


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expenses, direct and indirect, incurred by the creditor in seeking payment of the unpaid balance of the debt owed.

  A contrary reading of Section 2-507 and 3-402 of the M3C would result in the allowance of attorney's fees charged to the debtor in direct contrast to their prohibition in a consumer credit sale in Section 2-507.  Advisory Ruling #29 considered this issue and ruled that Section 2-507 supersedes other statutory authority allowing attorney's fees.  To argue that the specific prohibitions of Section 2-507 can be over-turned by statutes extrinsic to the Code (i.e., reading Section 3-402 as referencing 11 M.R.S.A. 9-504 expenses which include attorney's fees) would nullify many basic consumer protections contained in the Code.

  2. Title 14 Expenses.

  In addition to court costs (Chapter 311), Title 14 contains numerous provisions in which certain expenses incurred by a creditor or judgment creditor can be imposed upon a debtor.  Chapter 403 (Title to Real Estate by Levy of Execution); Chapter 502 (Enforcement of Money Judgements); Chapter 509 (Executions); and Chapter 713 (Foreclosure of Real Property Mortgages).  These expenses are usually associated with proceedings (sale of goods or real property) designed to make the creditor whole or satisfy a judgment on a debt.  These provisions of course are not limited to consumer credit transactions.  The expenses are, however, exactly analogous to the expenses incurred in realizing on a security interest set forth in 11 M.R.S.A. Section 9-504. Indeed, the Official Comments to 11 M.R.S.A. Section 9-504 of the Commercial Code make clear the connection between the old form of a chattel mortgage and a real estate mortgage foreclosure proceeding.

  In light of the broad definition of collection costs in the case law noted in Part A, above, and the strict statutory construction rules to disallow costs, as well as the liberal statutory construction rules of the Code itself, see part B, above, the Bureau concludes that the costs of collection enumerated in Title 14 are not allowed to be imposed on the defaulting debtor in a consumer credit


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transaction.  The same reasoning outlined in Advisory Ruling #29 is applicable here.  The Code must be read to supersede inconsistent statutory rules found outside the Code, Sections 1-102(1) and 1-104, or its policies can easily be defeated.  Therefore, the expenses and attorney's fees otherwise allowable in Title 14 (except for court costs) are prohibited in a consumer credit transaction.

D.  Conclusion.

  To rule otherwise in either situation (costs of realizing on a security interest or expenses set forth in Title 14) would leave the prohibition on collection costs of Section 2-507 of the Code with a hollow meaning.  Furthermore, there are no logical or policy grounds on which to distinguish the expenses of a private self-help procedure from the court ordered levy or foreclosure proceeding.  If collection costs are somehow read to exclude one or both types of expenses, the only expenses remaining are those costs borne by the creditor himself or his agent, a collection agency, prior to seeking relief from the defaulting debtor by legal or quasi-legal means.  The historical definition of the term collection costs flies in the face of this option.  Absent clearer legislative guidance, the Bureau is compelled to adopt the liberal construction of "collection costs" outlined here.

  Therefore, with respect to consumer credit transactions (i.e., excluding first lien mortgages granted by supervised financial institutions), the term "collection costs" in Section 2-507 of the Code will be interpreted by the Bureau to prohibit all expenses, directly or indirectly, incurred by the creditor in seeking to collect payment of the debt, with the exception of court costs as set forth in Sections 114, and 174-175 of Title 14.

 

 

 

/s/ Barbara Reid Alexander

Barbara Reid Alexander

Superintendent