Austin-based collection company faces legal challenge to its business practices
SupportKids says lawsuit relies on a misunderstanding

Austin American-Statesman
By Simmi Aujla
AMERICAN-STATESMAN STAFF

Sunday, August 17, 2008

A lawsuit by the State of Virginia is challenging the business practices of an Austin-based company that collects money from parents who are behind in child support payments.

SupportKids Inc. executives said their company's business model is still viable, despite the lawsuit and potential action by at least one other state.

On Monday, a circuit court in Virginia is scheduled to hear the company's request to dismiss the case.

SupportKids charges a $475 application fee and takes a 34 percent commission on overdue child support payments. When it accepts a case, it requires that the parent who is behind on the payments send the money to the company, which takes its cut and forwards the balance to the parent who is caring for the child or children.

According to the suit, that violates Virginia law, which requires support checks be routed through the state's child support enforcement division. The suit also says custodial parents cannot use support check money to pay a private company for collection services.

SupportKids' system makes it more difficult for the state's Division of Child Support Enforcement to keep track of who is sending money to whom, said the division's director, Nick Young.

SupportKids executives called the Virginia case an anomaly, and Chief Compliance Officer Eric Rosenkoetter said the outcome should not affect the company's operations elsewhere because the lawsuit relies on a misunderstanding of the company's practices.

The company does business in 47 states and has 40,000 open cases.

SupportKids uses its 175 employees in its Austin headquarters and a network of lawyers across the country to pursue noncustodial parents who have fallen behind on child support payments.

The company, which collected $45 million for parents last year, has received backing from Austin Ventures and Boston-based private equity firm Capital Resource Partners.

Bryon Sehlke, chief executive officer of SupportKids, said SupportKids distinguishes itself by cracking the tough cases state agencies can't handle - ones that could involve out-of-state noncustodial parents and thousands of dollars of uncollected child support.

"Our expertise is working those hard cases," he said. "That's our experience, that's our knowledge base and that's what we do on a daily basis."

As far as Texas is concerned, the company is operating within the law.

Janece Rolfe, a spokeswoman for Texas Attorney General Greg Abbott, said the office has been willing to work with private companies, including SupportKids, because Texans have the right to choose who collects their support checks.

Sehlke said Texas' system of disbursing support checks is ideal.

All support checks must be sent to the state's disbursement unit, which is run by the attorney general's office. Parents can authorize that unit to send the checks to a private company instead of directly to them.

Even as Texas and other states continue to use SupportKids' services, other states are watching the Virginia case, said Brad LaMorgese, an attorney at Dallas-based family law firm McCurley Orsinger McCurley Nelson & Downing LLP.

If SupportKids loses the lawsuit and must change its practices or leave Virginia, then "you may well get the AGs from other states saying, 'Hey, they've got a good position,' " LaMorgese said.

Florida has been tracking the Virginia lawsuit. In June, the state's attorney general's office began reviewing the company under Florida's Deceptive and Unfair Trade Practices Act.

The Florida attorney general's office had been trying to determine whether SupportKids' marketing practices violate state law, said Sandi Copes, spokeswoman for Florida Attorney General Bill McCollum.

The practice of deducting 34 percent as fees could violate state law, she said. If the review shows that the company is breaking Florida law, the attorney general might pursue a settlement, consumer restitution or a civil lawsuit, Copes said.

Other state and city governments have already addressed issues connected with the Austin company's way of doing business.

In 2006, consumer protection legislation passed in California included provisions drafted by SupportKids, Rosenkoetter said.

That legislation mandated that child support enforcement companies be more transparent in their contracts with clients. But unlike earlier legislation that was introduced in the state, it didn't place a cap on how much a company could take from a child support check.

New York City wasn't as accommodating. In 2003, its City Council passed an ordinance that restricted how much money companies could take from a child support check to 15 percent.

As a result, SupportKids stopped taking cases from New York.

The company has turned away nearly 30,000 customers from New York through the end of 2007, Rosenkoetter said.

If the company had continued to accept clients from the city, he added, "every case would have been accepted at a loss."

The same result would occur in Virginia if the state's case continues past Monday and ultimately is successful, Sehlke said.

But he said that most governments have grown more willing to work with private companies since he joined SupportKids eight years ago.

Virginia has been less willing to cooperate with private companies, Sehlke said.

Young said the state is open to working with private companies.

For example, his division contracts with a private company to handle some cases. Policy Studies Inc. runs two offices in the state that collect checks for parents. The company does not take fees from support checks, but gets from the state 10 percent of the dollars it collects.

Copyright 2008 The Austin American-Statesman