One question that our clients frequently ask when claims are placed for collection is whether they can recover the attorney fees when a lawsuit is filed and a judgment is collected. The answer, as is so often the case, is “sometimes.”

The majority rule is that attorney fees are not recoverable unless expressly authorized by either a statute or a court rule. There are several statutes on the books that do permit the attorney fees to be awarded, but most of them deal with special situations outside the scope of the typical collection lawsuit, i.e., civil rights actions, paternity suits, certain environmental actions, etc.

A creditor’s best weapon for recovering attorney fees is to have an agreement with the debtor (a contract) to the effect that reasonable attorney fees may be collected if the debtor does not pay as agreed and a lawsuit becomes necessary. This can usually be included in the credit application or contract and it (in most states) must be signed by the debtor. Contract provisions calling for payment of reasonable attorney fees in the event of a breach are often valid and judicially enforceable under law; nonetheless, many judges still “pass.”

The key word is “reasonable.” It does not mean “actual” attorney fees, because fees must be measured by the fair value of the services rendered. For example, most collection cases are handled on a contingency fee basis. These are “actual” attorney fees. Although the court may consider that such a contingency fee arrangement exists, it cannot use the contingent fee agreement as the sole method for determining the amount to be awarded as “reasonable” attorney fees. There is no precise formula for computing the reasonableness of attorney fees. Some factors which courts have taken into account include the following: the skill, time and labor involved, the amount in question and the results achieved, the difficulty of the case, the expenses incurred, and the nature and length of the attorney’s professional relationship with the client.

Many contractual “agreements” to pay attorney fees contain language similar to the following: “In the event that services of outside agencies are required to effect collection, attorney fees equal to 15% of the outstanding balance will be charged and added to the balance collectible.” However, this example is often a bad idea. Creditors should know that in Michigan (for example), an agreement to pay a stipulated attorney fee such as this is invalid as contrary to public policy. That is because fixed sums for attorney fees are not necessarily related to the reasonable services performed and, thus, are unenforceable because it constitutes a penalty. Furthermore, such an agreement may be construed as a liquidated damages provision and under the Uniform Commercial Code, any term fixing unreasonably large liquidated damages is void as a penalty.

How then can a creditor recover its attorney fees in the typical commercial collection case? Again, as a general rule, ordinarily such fees are not recoverable. However, the parties may sign an agreement stating that reasonable (not actual and not a fixed amount) attorney fees may be collected by the creditor in the event of the debtor’s default in payment and subsequent lawsuit. The court must then determine a reasonable figure and that sum may be awarded as part of the damages and judgment.

VML Commitment: If you would like to obtain some suggested language for fee collection provisions, please contact our office and examples can be provided. Also, creditors are encouraged to watch for states’ attempts to enact “lossee-pays” type legislation. Interest and support for such legislation is seemingly on the upswing.

Authored by and with appreciation to” Muller, Muller, Richmond, Harms, Myers & Sgroi, Attorneys at Law, Birmingham, Michigan.