In Grace v. LVNV Funding, Inc., 2014 WL 2167487 (W.D.Ky. 2014), Judge Heyburn found that an 18% “service charge” charged for late payments in a medical services contract was disguised “interest” that violated Kentucky’s usury laws and the FDCPA.  Judge Heyburn denied summary judgment to the Plaintiff, however, because it was not clear that the misconduct occurred during the FDCPA’s 1-year statute of limitations. The facts were as follows:

On June 5, 2010, Grace received medical services from Physicians in Emergency Medicine (“PEM”), the emergency care group at Jewish Hospital, Louisville, Kentucky.   Upon admission, Grace signed an agreement accepting responsibility for charges for services rendered by PEM, including “any balance due in excess of amounts paid by other persons or agencies.” The agreement contained the following clause: A service charge may be applied on all accounts which are 90 days or more past due at a rate of 1 1/2 % per month. Grace did not pay her medical bill. In February 2012, PEM engaged PSI to collect the debt. PSI is not an assignee; rather, after a certain period of time has passed, PEM engages PSI to take over collection activity on its behalf on a contingency fee basis. In May 2012, PSI reported Grace’s debt and the accumulated 18% per annum “service charge” to various credit agencies. The original debt was for $292, but with the accumulated service charge, the total amount PSI reported in arrears was $411.

Judge Heyburn found that this transaction and the service charge was actually disguised interest that violated Kentucky’s usury laws and, therefore, the FDPCA.

Looking through to the substance of the transaction between PEM and Grace, the Court is persuaded that what PEM’s contract nominally calls a “service charge” is actually interest: compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use.” PEM is not a “lender” in the traditional sense of the term, but it anticipates from the outset of its relationship with patients the contingency that an account receivable may become past due, a situation in which it is an unwilling creditor.  PEM plans for this event by reserving the right to charge 1.5% per month against accounts that become 90 days or more past due.  Unless one turns words and circum-stances on their heads, this charge appears to be disguised interest. ¶  The Court is further persuaded by observing how PEM’s charge operates. It functions as a penalty or delinquency charge. It is assessed only in the event that a patient allows their debt to become 90 days or more past due. Unfortunately, penalties fit within the ordinary legal meaning of “interest,”  thus, PEM’s charge, whatever its name, would fall within the pur-view of KRS § 360.010. . . . In view of these considerations and the broad scope of KRS § 360.010, the Court finds that PEM should not be allowed to evade Kentucky’s general usury statute and collect more interest than it would automatically be entitled under the statute simply because of its own craftily-worded contract. ¶  In sum, the Court finds that PEM’s “service charge” is actually disguised interest. While PEM is certainly entitled to collect interest on a delinquent account, assuming it is liquidated, it is not entitled to the usurious amount specified in its intake contract. PEM’s charge is well above the legal rate of interest on consumer contracts where the principal debt is below $15,000. See KRS § 360.010. The normal penalty in this situation is that the provision is considered void as against public policy and the creditor is not entitled to any interest. See Whitaker v. Smith, 73 S.W.2d 1105, 1109 (Ky.1934). For present purposes, the state law violation advances Plaintiff’s theory of recovery under the FDCPA.Because PEM was not entitled to charge 18% per annum interest under Kentucky law, PSI was not entitled to collect or report that amount to credit agencies. The Sixth Circuit has assumed without deciding that reporting a debt to credit agencies consti-tutes a “collection activity.” Purnell v. Arrow Fin’l Servs., LLC, 303 F. App’x 297, 304 n. 5 (6th Cir.2008); see also Sullivan v. Equifax, 2002 WL 799856, *4 (E.D.Pa.2002) (discussing the broad definition of the term “communication” in the FDCPA and concluding “[b]ecause reporting a debt to a credit reporting agency can be seen as a communication in connection with the collection of a debt, the reporting of such a debt in violation of the provisions of § 1629e(8) can subject a debt collector to liability under the FDCPA.”) (internal quotation omitted). PSI’s act of reporting an amount owing that included an unlawful amount of disguised interest apparently violates three separate provisions of the FDCPA: attempting to collect an amount not permitted by law (15 U.S.C. § 1692(f)(1)), falsely representing the character, amount, or legal status of a debt (15 U.S.C. § 1692e(2)(A), and communicating credit information which is known or should be known to be false (15 U.S.C. § 1692e(8)).  . . . Nevertheless, Plaintiff is not entitled to summary judgment on her FDCPA claims at this time because it is unclear from the record whether PSI’s reporting occurred within the FDCPA’s one-year statute of limitations