Court Opinion

ID: 9797437
Source: CourtListenerOpinion
Date Created: 2023-08-31 04:20:38.199875+00
Date Added: 2024-06-11T08:55:12.212910
License: Public Domain

MEMORANDUM DECISION
DAVIS, Judge:
11 Express Recovery Services, Inc. (Express) appeals the trial court's default judgment, contending that the court erred when it concluded that Express could not recover both attorney fees and a 50% collection commission pursuant to a contractual provision, in addition to interest and the full amount of the debt. Specifically, Express asserts that the trial court erred (1) by "in-vad[ing] the province of the legislature" when, pursuant to the policy of some local trial judges, the court required Express to file an affidavit setting forth certain facts and details in order to recover both collection costs and attorney fees; (2) by "unilaterally modiffying] a written contract" into which both parties entered voluntarily; and (8) by not following the policy of the bad check statute and of other jurisdictions allowing recovery of collection costs, attorney fees, and damages.1 Because Express challenges the trial court's legal determinations and its interpretation of the law, our review is for correctness. See MacKay v. Hardy, 973 P.2d 941, 944 (Utah 1998) ("[An appellate court] will review the lower court's ... conclusions of law under a correctness stan*453dard."); Ledfors v. Emery County Sch. Dist., 849 P.2d 1162, 1162-63 (Utah 1993) ("We review the trial court's interpretation of law for correctness.").
12 Rule 55(b)(2) of the Utah Rules of Civil Procedure provides:
If, in order to enable the court to enter [a default] judgment or to carry it into effect, it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence or to make an investigation of any other matter, the court may conduct such hearings or order such references as it deems necessary and proper.
Utah R. Civ. P. 55(b)(2). Thus, each individual trial court has discretion to order parties to submit evidence or other materials necessary for it to reach an appropriate and fair resolution in granting a default judgment. As discussed below, such additional evidence was necessary for the trial court here to determine whether the collection commission sought by Express was reasonable. The trial court had broad authority to require Express to provide an affidavit clarifying certain facts or details regarding the collection commission.2 See id.
{3 We disagree with Express's argument that the trial court erred when it allegedly unilaterally modified the contract that Adam Shewell and his dentists voluntarily entered into, the collection of which was assigned to Express. The trial court properly decided that it could not enforce the collection commission provision for public policy reasons unless the parties presented evidence regarding the reasonableness of the percentage charged. In reaching its conclusion, the trial court reasoned that "[sleeking a percentage of the prineip[al]l amount owing as collection costs is akin to seeking liquidated damages," which "must have some reasonable relationship to the actual damages." Furthermore, the trial court stated that "a debtor should not suffer a 'penalty' beyond what is owed plus the legitimate factors of interest, attorney fees and justifiable and justified collection costs." Finally, the trial court stated that "(collection] costs are not to be part of the attorney fees that are allowed and awarded either under Rule 783 [of the Utah Rules of Civil Procedure] or by Affidavit."
14 Utah has a "'policy disfavoring contractual penalties." Woodhaven Apartments v. Washington, 942 P.2d 918, 921 (Utah 1997) (quoting Reid v. Mutual of Omaha Ins. Co., 776 P.2d 896, 905 (Utah 1989). We agree with the trial court that a contractual provision seeking a percentage as a collection commission might amount to a penalty for breaching a contract in any given case, particularly when the contract purports to award both the collection commission and attorney fees. In Utah, issues regarding contractual penalties generally have arisen in cases deciding whether liquidated damages provisions should be enforced. The Utah Supreme Court has declared that "parties to a contract may agree to liquidated damages in the case of a breach, and such agreements are enforceable if the amount ... agreed to is not disproportionate to the possible compensatory damages and does not constitute a forfeiture or a penalty." Young Elec. Sign Co. v. United Standard W., Inc., 755 P.2d 162, 164 (Utah 1988); see also Woodhaven Apartments, 942 P.2d at 921 (discussing that liquidated damages provisions are " 'generally enforceable," but that they will not be enforced when "'the amount of liquidated damages bears no reasonable relationship to the actual damage 'or is so grossly excessive as to be entirely disproportionate to any possible loss that might have been contemplated that it shocks the conscience'" (quoting Allen v. Kingdon, 723 P.2d 394, 397 (Utah 1986))).
15 We conclude that a similar analysis is applicable to collection cost provisions in contracts. Parties may freely and voluntarily enter into contracts requiring upon breach the payment of reasonable collection costs, attorney fees, and damages. If, however, a contract seeks to bind a party to pay both a percentage of the damages as a collec*454tion commission in addition to attorney fees, the collection commission (1) must bear a reasonable relationship to the actual cost-not including attorney fees-incurred by the creditor when trying to enforce the contract, and (2) must not be so disproportionate to the actual damages that it is an excessive or exorbitant estimate of collection costs. Otherwise, the collection commission will constitute a contractual penalty and will not be enforceable. See Woodhaven Apartments, 942 P.2d at 921; see also Finkle v. Gulf & W. Mfg. Co., 744 F.2d 1015, 1021 (3d Cir.1984) ("[A] provision that calls for payment of a sum on non-performance or on default that is disproportionate to the value of the performance promised or the injury that has actually occurred will be deemed a penalty."); 11 Joseph M. Perillo, Corbin on Contracts § 58.11, at 456-57 (rev. ed. 2005) ("If the court believes that, in light of the cireum-stances existing when the contract was made, the amount agreed upon is 'unconscionable' or is disproportionate to the value of the performance promised and the consideration paid, the sum fixed will be called a penalty and the agreement to pay it will not be enforced.... [The justice and equity of enforcement depend also upon the amount of injury that has actually occurred." (footnote omitted)). Furthermore, it is appropriate for courts to evaluate the reasonableness of a collection commission in light of the other fees that the debtor will be required to pay to reimburse the creditor for the costs it incurred.
T6 In this case, the contract provided that Shewell would "pay all costs of collection including a 50% collection agency commission, reasonable attorney fees, and interest at a rate of 21% per annum." Express asserts that the collection commission represents "an actual cost" to the dentists who must pay this commission, but absent the affidavit required by the trial court, no evidence supports this contention. And the trial court was entitled to call for such evidence. See Utah R. Civ. P. 55(b)(2). Moreover, even if the commission may have some reasonable relationship to the costs incurred by the creditor in enforcing the contract, this alone does not mean that requiring Shewell to pay both a 50% collection commission and attorney fees does not constitute a penalty for his breaching the contract. Attorney fees, generally, are the main part of the overall collection expense incurred by a creditor seeking to collect a debt. We agree with the trial court that collection costs awarded to a creditor cannot duplicate attorney fees accrued by the creditor when attorney fees are awarded separately. Such costs, to the extent reasonable and not duplicative of attorney fees, are basically the cost to file and serve the complaint. Thus, the 50% collection commission might very well have been excessively disproportionate to the actual collection costs incurred. Even though Express argues that the collection commission was not unconscionable or unreasonable, without having filed an affidavit detailing the collection costs incurred, we cannot conduct a meaningful review to determine whether or not the collection commission was indeed a penalty.
17 Affirmed.
T8 I CONCUR: RUSSELL W. BENCH, Presiding Judge.

. This third argument is without merit. The trial court did not err in not relying on title 7, chapter 15 of the Utah Code-which specifically deals with dishonored instruments, or bad checks-when rendering its decision. See generally Utah Code Ann. §§ 7-15-1 to -3 (2006 & Supp.2007).

. We note that Express had an opportunity to submit such an affidavit when it filed a motion to reconsider on January 20, 2006, but did not do so. In that motion, Express referenced the affidavit requirement but argued, in essence, that compliance with the requirement was not necessary in this case.