The Sixth Circuit Court of Appeals has decided Stratton v. Portfolio Recovery Associates, a proposed FDCPA class action, which grew from a typical debt buyer lawsuit.
Stratton involves a charged off defaulted credit card issued by GE, on which GE stopped charging interest and stopped sending out periodic statements. GE later sold the debt to Portfolio Recovery Asslociates, which then tried to collect the debt through a state court lawsuit.
In bringing the lawsuit, PRA included a claim for statutory prejudgment interest at 8%, even though the credit card agreement provided for interest at 21.99%. This raises two questions: First, can PRA do that? Second, why would PRA do that?
Can a Debt Buyer Revert to the Default Rate?
The Sixth Circuit held at page 4 of its opinion that GE had waived its right to collect interest when it charged off the debt. The court’s explanation of why GE chose not to collect is worth quoting
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).
So, if GE waived its right to collect contractual interest at 21.99%, could PRA later fall back on the statutory default usury rate of 8%, or as the court put it on page 6 of its opinion:
[C]an someone collect interest if they agree not to collect interest? The answer must be no.
The Court’s reasoning was straightforward: having opted out of the claiming interest at the contractual rate, GE, and its successor, PRA, were stuck with that decision:
The plain text of the statute supports this conclusion. It states that any assignee “shall be
bound for such rate of interest as is expressed in any such . . . assumption” and that “no law of this state prescribing . . . interest rates shall apply to any such agreement or to any charges which pertain thereto.” Ky. Rev. Stat. § 360.010(1) (emphasis added). 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 A party’s right to collect statutory interest is extinguished, superseded by her right to collect an interest rate she has specified by contract.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 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).1
FDCPA Applies to Claims Made in State Court Litigation
The trial court had held that “claims made in court [are not] the type of abusive tactics most often invoked under the FDCPA” and that there was “no need to invoke the protections [of the FDCPA]”. The Sixth Circuit described such a reading of the FDCPA as “untenable”:
Here, the district court set out a vision of the FDCPA, a vision PRA advances, at odds
with Congress’s. The district court distinguished “claims made in court from the type of abusive tactics most often invoked under the FDCPA” and saw “no need to invoke the protections” of the Act “when a claim is made to the court,” (quoting Argentieri v. Fisher Landscapes, Inc., 15 F. Supp. 2d 55, 62 (D. Mass. 1998).FN2 Both Supreme Court precedent and the other traditional tools of statutory construction make clear that the district court’s understanding of the FDCPA is untenable.
In this regard, the court’s FN2 is also worth noting: “Judge Gertner, who authored Argentieri, has repeatedly cautioned against misreading her words. ‘Taken out of context,’ she wrote, ‘this [sentence] could seem to indicate that claims made to a court simply are not covered by the FDCPA. I want to emphasize now that I intended no such reading. My point was meant to be taken in the
context of the facts of this case.'”
PRA’s attempt to roll back FDCPA coverage seems to be part of a trend in which the debt collection industry is pushing back against federal regulation of state court lawsuits – the same trend evident in CFPB v. Frederick J. Hanna & Associates.