KANSAS COMMENT, 2010

1. The U3C not only places limitations on the amount that a creditor may charge a consumer for credit at the time the agreement is entered into (parts 2 and 4 of article 2), but also on the amount that the creditor may charge a defaulting consumer for collecting the debt. See also K.S.A. 16a-3-402.

2. This section permits the payment by the debtor of the reasonable costs of collection, including attorneys' fees or collection agency fees. However, there are significant limits on the creditor's ability to recover such costs. First, fees paid to an in-house attorney or collection agent on a salary may not be recovered. Second, the creditor may not recover both attorneys' fees and collection agency fees. Finally, the costs of collection may not exceed 15% of the unpaid debt after default. Note that the 15% limit is based on the amount of the "debt" — not on the unpaid "principal" balance. Thus, the creditor should be allowed to include other items in the computation such as unpaid delinquency charges, unpaid insurance premiums and any amounts that the creditor has advanced under K.S.A. 16a-2-506.

3. It is important to note that K.S.A. 16a-2-507, like many of the other post- transaction provisions of the U3C providing for costs or fees, is not self-executing. The costs of collection (including court costs, attorneys' fees or collection agency fees) are recoverable from the consumer only if the underlying agreement so provides. In Credit Union One of Kansas v. Stamm, 254 Kan. 367, 867 P.2d 285 (1994), the court held that a contract provision in a consumer credit transaction authorizing the creditor to recover attorney fees to the extent authorized by law, did not violate the prohibition in K.S.A. 16a-2-507 (overruling Halloran v. North Plaza State Bank, 17 Kan.App.2d 840, 844 P.2d 764 (1993)). Compare the disclosure required after default under K.S.A. 16a-5-110.

Law Review and Bar Journal References:

Limitation of the effect of various clauses in consumer notes, Barkley Clark, 42 J.B.A.K. 147, 199 (1973).

"Lemon Aid for Kansas Consumers," Barkley Clark, 46 J.B.A.K. 143, 145 (1977).

"Summary Repossession, Replevin, and Foreclosure of Security Interests," Thomas V. Murray, 46 J.B.A.K. 93, 102 (1977).

"The U.C.C.C. and Real Estate Financing: A Square Peg in a Round Hole," Thomas L. Griswold, 28 K.L.R. 601, 613 (1980).

"Interest on Legal Fees," Calvin J. Karlin, 58 J.K.B.A. No. 5, 23, 24 (1989).

"Creditor Beware: From Default Through Deficiency Judgment," Wanda M. Temm, 60 J.K.B.A. No. 8, 17, 20 (1991).

"New Legislation Affects the Collection of Unpaid Debts," Wayne T. Stratton, 95 Kan.Med. No. 9, 182 (1994).

"Will Debtors Win the Battle as Creditors Win the War?: Retroactive Recovery of Attorney Fees in Consumer Credit Contracts in Kansas," Tamara Putnam and Jonathan Lautt, 34 W.L.J. 556, 559 (1995).

"History & Overview of the Uniform Consumer Credit Code," Ryan E. Hodge, J.K.T.L.A. Vol. XXVI, No. 3, 8 (2003).

Attorney General's Opinions:

Attorney fees; national direct student loans. 86-113.

CASE ANNOTATIONS

1. Prohibition on attorney fees apply to security agreement that authorizes attorney fees "if permitted." Halloran v. North Plaza State Bank, 17 Kan. App. 2d 840, 841, 842, 843, 844 P.2d 764 (1993).

2. Security agreement language providing for attorney fees under bankruptcy code does not violate section's attorney fee prohibition. Credit Union One of Kansas v. Stamm, 254 Kan. 367, 368, 867 P.2d 285 (1994).

3. Loan document general waiver of right of redemption on residence did not constitute per se violation of KUCCC (K.S.A. 16a-5-101 et seq.). Pilcher v. Direct Equity Lending, 189 F. Supp. 2d 1198, 1209 (2002).

4. Statute prohibiting attorney fees in debt instruments amended to allow parties to contract for attorney fees. Santa Rosa KM Assocs. v. Principal Life Ins. Co., 41 Kan. App. 2d 840, 206 P.3d 40 (2009).