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From Banking and Finance Law Daily, October 27, 2014

Suit demanding statutory interest could have violated debt collection act

By Richard A. Roth, J.D.

A debt collector that, in suing a consumer for a charged-off credit card balance, demanded interest at the default rate set by the Kentucky usury statute could have violated the Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Sixth Circuit has decided. Considering an issue that has not yet been addressed by the Kentucky Supreme Court, the U.S. appellate court determined that when the credit card company charged off the credit card balance it waived not only its right to collect interest at the 21.99-percent rate set by the agreement but also any claim for interest at the 8-percent statutory rate. As a result, the debt buyer’s interest demand could have violated several sections of the FDCPA (Stratton v. Portfolio Recovery Assoc., LLC, Oct. 24, 2014, Stranch, Circuit Judge).

Dueling suits. The facts set out by the appellate court were that the consumer defaulted on about $2,600 of credit card debt, which the credit card company charged off. After a year or so, the credit card company sold the charged-off account to a debt buyer, which, two years later, sued the consumer in state court. The collection suit demanded not only payment of the outstanding principal but also interest after the charge-off date at the 8-percent default rate set by Kentucky law.

The consumer retaliated by filing a federal court class action against the debt collector, claiming violations of the FDCPA. The consumer’s suit was premised on the assertion that once the debt was charged off the right to claim interest was waived. As a result, any demand for interest was:

a) an attempt to collect unauthorized interest;

b) a false characterization of the debt and amount owed; and

c) a threat to take an impermissible action.

The federal district judge dismissed the class action. According to the judge, Kentucky law gave the debt collector the right to claim prejudgment interest at the 8-percent default rate. Also, the judge said, the debt collector’s demand for interest was a request, not a false representation. Finally, since the state court suit was the right way to recover the debt, it did not constitute a threat.

The consumer appealed the dismissal.

Kentucky usury law. The Kentucky usury law has two relevant provisions, the appellate court began. First, the law says that the legal rate of interest for all loans is 8 percent. Second, it says that parties to a contract can agree on a different rate if they choose.

The open question was what happens if the creditor waives the right to collect interest at the contract rate. Is the creditor then able to collect interest at the 8-percent rate, or is it unable to collect interest at all?

Reviving the statutory rate. The Kentucky usury law makes clear that when contract parties agree to a specified interest rate, that contract rate displaces the statutory rate, the appellate court said. The statute says that the parties and their assignees “shall be bound for such rate of interest as is expressed in any such contract” and that “no law of this state prescribing or limiting interest rates shall apply …”

The credit card company bargained for the right to collect 21.99 percent interest and it, and the debt buyer, were bound by that bargain, the court said. The credit card company’s voluntary waiver of the benefits of that bargain did not reinstate the right to charge interest at the statutory rate. The court added that the debt collector could only acquire whatever rights the credit card company held.

As a result, the debt collector had no legal right to collect interest on the charged-off account, the court concluded.

FDCPA violations. The FDCPA is to be construed broadly in order to carry out its purpose of protecting consumers from abusive practices by debt collectors, the court then said. The district judge’s vision of the act was in conflict with that principal. In particular, his belief that the FDCPA did not apply to claims made in judicial proceedings was “untenable,” according to the appellate court.

The Supreme Court has said explicitly that the FDCPA applies to debt collection litigation, the appellate court said, and amendments to the act have made clear that there is but one exception—pleadings need not state they are from a debt collector.

Given that the FDCPA is to be interpreted broadly to protect consumers—in particular, the least sophisticated consumers—the debt collector’s demand for statutory interest could have been a violation, the court continued. The debt collector’s claim for interest to which it was not entitled could have been a false representation about the character or amount of the debt, as well as an attempt to collect an amount that was neither authorized by any agreement nor permitted by law. Also, the least sophisticated consumer could perceive the demand as a threat to take an impermissible action—to recover interest that was not owed.

The court noted that the interest demand was not made only in the part of the state court complaint that asked for relief; rather, it was included in the specific, numbered allegations of the complaint. “[E]ven a sophisticated consumer would read that numbered paragraph from the complaint to be a factual allegation,” the court said. The debt collector could have alleged the consumer owed the principal amount plus whatever interest the court saw fit to award, but it chose instead to claim that a specific rate was owed.

The court also warned that permitting a debt collector to specify an impermissible interest rate in its complaint would allow it to secure a default judgment for more than a consumer owed. The FDCPA did not permit that.

Dissenting opinion. A dissenting opinion by Circuit Judge Batchelder asserted that the majority opinion extended the reach of the FDCPA too far. No Kentucky court, and no other federal court, has previously decided that statutory interest could not be claimed in this situation, she said. Imposing liability on this debt collector for interpreting state law in a way that was reasonable, although different from the majority’s interpretation, was inappropriate, in her opinion.

Judge Batchelder characterized the majority conclusion that the demand for statutory interest constituted a threat to take impermissible action as “particularly pernicious.” Looking at the claim from a different point of view, she said the debt collector had made no threat to sue—it actually had sued.

Filing a complaint should not be deemed to be a threat, the dissenter warned. If that interpretation of the FDCPA were to be accepted, then a debt collector could be deemed to have threatened an illegal action whenever it sued and lost.

The case is No. 13-6574.

Attorneys: James H. Lawson (Lawson At Law, PLLC) for Dede Stratton. Joseph N. Tucker (Dinsmore & Shohl, LLP) for Portfolio Recovery Associates, LLC.

Companies: Portfolio Recovery Associates, LLC

MainStory: TopStory ConsumerCredit CreditDebitGiftCards DebtCollection InterestUsury KentuckyNews MichiganNews OhioNews TennesseeNews


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