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From Banking and Finance Law Daily, May 27, 2014

Service charge, as “disguised interest,” was usurious under Kentucky law

By Thomas G. Wolfe, J.D.

A medical provider’s service charge for a past-due amount, imposed upon a consumer as provided in an agreement for the consumer’s emergency medical treatment, constituted “disguised interest” under Kentucky’s interest-usury law. Since the 18 percent service charge was deemed usurious, the U.S. District Court for the Western District of Kentucky ruled that this state law violation advanced the consumer’s theory of recovery against a debt collector under the federal Fair Debt Collection Practices Act (Grace v. LVNV Funding, Inc., May 23, 2014, Heyburn, Senior Judge).

At the same time, however, since the factual record in the case was not sufficiently developed at the present stage of the litigation, the court denied the consumer’s request for summary judgment on her FDCPA claims against the collector. While, ultimately, the consumer may be entitled to relief, the court determined that the parties must address the timeliness of the consumer’s claims under the FDCPA’s one-year statute of limitations—and whether the discovery rule and/or tolling could be considered applicable under the facts of the case.

Background. In 2010, the consumer received emergency medical care at a Kentucky hospital. Upon being admitted, she signed an agreement accepting responsibility for the charges for the emergency services rendered by the medical provider. Among other things, the agreement contained a clause providing that a “service charge may be applied on all accounts which are 90 days or more past due at a rate of 1½ % per month.”

In February 2012, after the consumer failed to pay her medical bill, the medical provider engaged PSI Louisville, Inc., on a contingency basis, to collect the debt. In May 2012, PSI Louisville reported the consumer’s debt to various consumer reporting agencies. The debt collection company reported that the consumer was in arrears for $411, which consisted of the $292 for the original debt plus $119 for the accumulated 18 percent (per year) service charge.

In May 2013, the consumer obtained her credit report, and the credit report showed that PSI Louisville had reported the $411 debt for emergency medical services.

Complaint, motions. In September 2013, the consumer filed a lawsuit in Kentucky state court against LVNV Funding, Inc., and the debt collector, PSI Louisville. Later, the defendant companies successfully removed the action to federal court.

Among other things, the consumer claimed that since PSI Louisville reported a debt amount that was comprised of an interest rate that violated Kentucky state law, PSI Louisville violated the FDCPA by: (i) falsely representing the character, amount, or legal status of the consumer’s debt; (ii) communicating credit information that the collector knew or should have known to be false; and (iii) attempting to collect an amount—including any interest, fee, charge, or expense incidental to the principal obligation—not permitted by law.

While PSI Louisville asked the federal district court to dismiss the consumer’s FDCPA claims, the consumer filed a motion for summary judgment on those same claims. The federal trial court indicated that it would treat each of the motions “as one for summary judgment.”

Kentucky law. In addressing the respective motions of the litigants, the court was called upon to construe the Kentucky interest-usury provision for contracts in which the principal amount is $15,000 or less (Kentucky Revised Statutes §360.010). That section provides that the “legal rate of interest is eight percent (8%) per annum, but any party or parties may agree, in writing, for the payment of interest in excess of that rate as follows: (a) at a per annum rate not to exceed four percent (4%) in excess of the discount rate on ninety (90) day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District where the transaction is consummated or nineteen percent (19%), whichever is less.”

Court’s analysis. The court determined that since the Kentucky provision (§360.010) “is one of general applicability,” the interest cap encompassed the medical services agreement between the consumer and the medical provider. As framed by the court, the issue before it was whether the medical provider’s service charge on delinquent accounts was “a veritable service charge or disguised interest.”

PSI Louisville contended that the medical provider’s 18 percent service charge met the elements of a service charge, and that it did not constitute usurious interest under the Kentucky statute. The federal trial court disagreed. In rejecting the collector’s arguments, the court determined that since the service charge was actually disguised interest, it was a usurious charge under Kentucky law.

In reaching its decision, the federal trial court determined that, in keeping with Kentucky law: (i) courts must focus on the substance of the clause governing the service charge, not its form; (ii) while the medical provider was not a lender, it anticipated in its clause that it would become a creditor for an account receivable past due; (iii) the service charge actually functioned as “a penalty or delinquency” charge; (iv) the medical provider, and the debt collection company on its behalf, should not be able to collect “more interest than it would automatically be entitled under the statute simply because of its own craftily-worded contract”; (v) the clause governing the service charge did not specify what underlying services were implicated; (vi) no extra services were provided to the consumer in return for the service charge, as contemplated by Kentucky case law; and (vii) despite a lack of Kentucky case law directly on point, two Kentucky attorney general opinions supported its view.

Final disposition. In finding that the pertinent service charge was actually usurious interest, the court acknowledged that the typical penalty would be to deem the contract’s clause “void as against public policy” and the creditor would not be entitled to any interest. Given the nature and context of the consumer’s FDCPA claims, however, the court declared that, “for present purposes, the state law violation advances Plaintiff’s theory of recovery under the FDCPA.”

While the court denied the debt collector’s motion to dismiss the consumer’s claims, the court also ruled that the consumer was not yet entitled to summary judgment on her FDCPA claims because the factual record was not fully developed. The court maintained that it was “unclear from the record” whether PSI Louisville’s reporting to the consumer reporting agencies “occurred within the FDCPA’s one-year statute of limitations.” Further, the court noted that whether the discovery rule and/or tolling was applicable remained for consideration as well.

The case is No. 3:13-CV-1021-H.

Attorneys: James H. Lawson (Lawson at Law, PLLC) and James R. McKenzie (James R. McKenzie Attorney PLLC) for Tiffany Grace. Stephen A. Brooks (Stephen Brooks PSC) for LVNV Funding, LLC and PSI Louisville, Inc.

Companies: LVNV Funding, Inc.; PSI Louisville, Inc.

MainStory: TopStory ConsumerCredit DebtCollection InterestUsury KentuckyNews

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