In Stratton v. Portfolio Recovery Associates, LLC, — F.3d —-, 2014 WL 5394517 (6th Cir. 2014), the Court of Appeals for the 6th Circuit found that attempts to collect pre-judgment interest before a judgment was obtained violated the FDCPA due to the intersection of the state’s usury statute with its pre-judgment interest statute.
This case involves the intersection of the usury law, “society’s oldest continuous form of commercial regulation,” Robin A. Morris, Consumer Debt and Usury: A New Rationale for Usury, 15 Pepperdine L.Rev. 151, 151 (1988); debt buying, “one of the most financially lucrative businesses you can get into,” Victoria J. Haneman, The Ethical Exploitation of the Unrepresented Consumer, 73 Mo. L.Rev. 707, 712 (2008) (citation and internal quotation marks omitted); and the Fair Debt Collection Practices Act ( FDCPA), whose purpose is to protect consumers by “eliminat[ing] abusive debt collection practices by debt collectors,” 15 U.S.C. § 1692(e). Kentucky’s usury statute sets the legal rate of interest for all loans made in that state at 8%. Ky.Rev.Stat. § 360.010(1). How-ever, the statute merely provides a default rule—the parties to a contract can agree to a different rate of interest if they so desire. But what happens if a creditor waives its contractual right to collect the interest it contracted for in the original agreement? Can the creditor or its assignee then claim a right to collect interest based on the statutory rate that the contract displaced? If not, would the assignee’s attempt to collect that interest constitute a violation of the FDCPA? Under Kentucky law a party has no right to statutory interest if it has waived the right to collect contractual interest. And any attempt to collect statutory interest when it is “not permitted by law” violates the FDCPA. The district court held otherwise; we reverse and remand. . . .On December 19, 2008, after Dede Stratton stopped making payments on her credit card, GE Money Bank “charged off” Stratton’s $2,630.95 debt—GE determined that the debt was uncollectible and at least partially worthless. See McDonald v. Asset Acceptance LLC, 296 F.R.D. 513, 518 (E.D.Mich.2013). GE also stopped charging Stratton interest on her debt. GE’s decision was neither irrational nor altruistic: By charging off the debt and ceasing to charge interest on it, GE could take a bad-debt tax deduction, I.R.C. § 166(a)(2), and could avoid the cost of sending Stratton periodic statements on her account, 12 C.F.R. § 226.5(b)(2)(i). See also McDonald, 296 F.R.D. at 525. A little more than a year later, in an increasingly common practice, see Bartlett v. Portfolio Recovery Assocs., 91 A.3d 1127, 1132 (Md.2014), GE assigned its interest in Stratton’s charged-off debt to PRA. According to industry norms, PRA would have paid anywhere between 4 and 14 cents on the dollar for Stratton’s debt. See Fed. Trade Comm’n, The Structure and Practices of the Debt Buying Industry at ii (2013). PRA is a “debt buyer.” “The most significant change in the debt collection business in recent years has been the advent and growth of debt buying.” Fed. Trade Comm’n, Collecting Consumer Debts: The Challenges of Change at 13 (2009). Judge Kol-lar–Kotelly provides an overview of the debt-buying industry: To recoup a portion of its lost investment, an originating lender may sell a charged-off consumer loan to a Debt Buyer, usually as part of a portfolio of delinquent consumer loans, for a fraction of the total amount owed to the originating lender. Once a Debt Buyer has purchased a portfolio of defaulted consumer loans, it may engage in collection efforts (or hire a third-party to do so), which may include locating borrowers, determining whether borrowers are in bankruptcy, commencing legal proceedings, or “otherwise encouraging” payment of all or a portion of the delinquency. Debt Buyers’ Ass’n v. Snow, 481 F.Supp.2d 1, 4 (D.D.C.2006) (internal citations omitted). The industry has expanded rapidly. Debt buyers now pay billions of dollars to purchase tens of billions of dollars of consumer debt each year, most of it charged-off credit card debt like Stratton’s. Debt buyers usually purchase bad debts in bulk portfolios, often in the form of a spreadsheet, and rarely obtain the underlying documents relating to the debt. See Fed. Trade Comm’n, The Structure and Practices of the Debt Buying Industry at ii-iii. Debt buying has attracted increasing attention from regulators. See Bureau of Consumer Fin. Prot., Debt Collection (Regulation F), 78 Fed.Reg. 67,847, 67,850 (Nov. 12, 2013) (advance notice of proposed rulemaking). Two years after buying Stratton’s debt, PRA filed suit against her in Kentucky state court. The complaint alleged that Stratton “owes [PRA] $2,630.95, with interest thereon at the rate of 8% per annum from December 19, 2008[,] until the date of judgment with 12% per annum thereafter until paid, plus court costs.” There are two things to note in this sentence: First, PRA alleged that Stratton owed interest during the 10 months after GE charged off her debt and before GE sold that debt to PRA. Second, PRA alleged that Stratton owed 8% interest rather than the 21.99% interest established in her contract with GE. The 8% interest rate did not appear out of thin air—it is the default rate set by Kentucky’s usury statute, section 360.010 of the Kentucky Revised Statutes.
The Court of Appeals found that Kentucky law prohibited the debt-buyer from charging pre-judgment interest.
Nothing in the statute suggests that a contracting party retains the option to charge statutory interest. Rather, Kentucky’s usury statute states a default rule—it applies until displaced by a contract, whereupon the contracting parties and their assignees “shall be bound” by the terms of their agreement and the statutory rate shall not apply. Id. A party’s right to collect statutory interest is extinguished, superseded by her right to collect an interest rate she has specified by contract. A court must honor that party’s choice—even if it is a choice it or its assignee later regrets. But what if a party waives its bargained-for right to collect contractual interest? Does the waiver somehow resurrect that party’s forgone right to statu-tory interest? The district court concluded that GE’s waiver of its right to collect contractual interest al-lowed it (and PRA as its assignee) to seek statutory interest. Given the plain text of the usury statute and basic principles of waiver and freedom of contract, we must disagree. A waiver is “a voluntary and intentional surrender or relinquishment of a known right, or an election to forego an advantage which the party at his option might have demanded or insisted upon.” Conseco Fin. Serv. Corp. v. Wilder, 47 S.W.3d 335, 344 (Ky.Ct.App.2001) (quoting Greathouse v. Shreve, Ky., 891 S.W.2d 387, 390 (Ky.1995)). GE concededly waived its right to collect contractual interest, a right it had acquired in part by forgoing its right to collect statutory interest. GE gave up the right to collect 8% statutory interest when it had Stratton agree to a 21.99% contractual rate of interest. GE cannot recover the right it bargained away simply because it later chose to waive the right for which it bargained. GE and any party “who may assume or guarantee any such contract or obligation[ ] shall be bound by such rate of interest;” GE’s choices are binding and “no law of this state prescribing or limiting interest rates shall apply” to relieve it of the consequences of those choices. Ky.Rev.Stat. § 360.010(1). PRA, as GE’s assignee, moreover, “acquire[d] no greater right than was possessed by [its] assignor … but simply stands in the shoes of the latter.” Whayne Supply Co. v. Morgan Constr. Co ., 440 S.W.2d 779, 782–83 (Ky.1969). PRA cannot be given a right to collect interest—contractual or statutory—that GE waived. Based on the limited record before the panel, Stratton has plausibly alleged that PRA does not have a legal right to collect interest on her debt. It may be that the discovery process could reveal some contractual provision that entitles PRA to collect some sort of interest, but there is currently no such provision before us. And it is true that in certain cases, Kentucky law permits courts to award prejudgment interest as a matter of equity to fully compensate a prevailing party. See Nucor Corp. v. Gen. Elec. Co., 812 S.W.2d 136, 144 (Ky.1991). But PRA did not request that the court exercise its equitable discretion to award interest. Instead, PRA asserted that it had a legal right to “$2,630.95, with interest thereon at the rate of 8% per annum” as a factual matter. Section 360.010(1) makes clear that PRA had no such right.
Accordingly, the Court of Appeals found that the Plaintiff stated a claim for an FDCPA violation. Judge Reeves reached a similar conclusion on the same day in Fulk v. LVNV Funding LLC, 2014 WL 5364807 (E.D.Ky. 2014).
On July 14, 2009, HSBC sold the Yamaha Ac-count to the defendant, a company that purchases charged-off debts, for around $173.00. [Record No. 1, p. 5 ¶ 37; Record No. 11, p. 13] At the time the debt was sold, the total amount due remained $3,487.67, indicating that HSBC did not charge any interest on the account from the June 30, 2009 charge-off date, until LVNV bought the debt. On July 22, 2013, LVNV filed a Complaint in the Fayette District Court, seeking to recover the full debt ($3,487.67), plus statutory prejudgment interest under KRS § 360.010.
Plaintiff claimed that the Defendant violated the FDCPA; Judge Reeves agreed, in part.
LVNV argues that it could not have violated the FDCPA by including prejudgment interest in the March 3, 2014 credit report, because “Kentucky cases show one is entitled to interest as a matter of law on a liquidated claim.” FN6 [Record No. 14, pp. 2–3] Absent an agreement to the contrary, “[t]he legal rate of in-terest is eight percent (8%) per annum,” which runs as a matter of right on a liquidated demand. KRS § 360.010. Further, interest begins to accrue from the date of breach. Lang v. Bach, 142 Ky. 224, 134 S.W. 188, 191 (Ky.1911) (“[T]he law is now well settled that a liquidated claim, whether oral or written, carries with it, as a matter of law, interest from the time it was due, in the absence of any agreement to the contrary.”). Fulk claims that, even if liquidated claims are entitled to prejudgment interest as a matter of course, there is no right to extra-judicially accrue prejudgment interest prior to entry of a state court judgment. [Record No. 11, pp. 8–16] LVNV asserts that it does have the right, but relies solely on case law addressing prejudgment interest awarded by trial courts as part of a judgment. Under Kentucky law, prejudgment inter-est follows as a matter of course in claims for liqui-dated debt, and it “may be allowed as justice requires” in instances of unliquidated debt. Nucor Corp. v. General Electric Co., 812 S.W.2d 136, 144 (Ky.1991). However, an award for either type of claim presupposes that “the trier of fact, judge or jury, has decided both the question of breach of contract and the amount due for the breach before reaching the question of interest as damages.” Id. Thus, a creditor may not collect prejudgment interest from a debtor until a judgment has been awarded.