The U.S. Court of Appeals for the Sixth Circuit recently held that a debt buyer’s request for interest on a charged-off credit card debt in its prayer for relief in its collection complaint were illegal under state law, and violated the federal Fair Debt Collection Practices Act (“FDCPA”).
A copy of the opinion is available at: http://www.ca6.uscourts.gov/opinions.pdf/14a0266p-06.pdf
In December 2008, after the debtor stopped making payments on her credit card, the creditor determined that the debt was uncollectible, ceased charging interest on the debt, and “charged off” the $2,630.95 debt. A little over a year later, the creditor sold off its interest in the charged-off debt to a debt buyer (“debt collector”).
Two years later, the debt collector brought suit against the debtor seeking the $2,630.95 balance, plus interest accrued after the charge-off at the rate of 8% per annum —the default rate set by Kentucky’s usury statute—rather than the 21.99% rate established under the initial credit agreement.
The debtor responded by filing a class action lawsuit against the debt collector, alleging that the debt collector’s collection lawsuit violated the FDCPA as: (i) an attempt to collect unauthorized interest; (ii) a false representation of the character of the debt, and (iii) a threat to take action that cannot legally be taken. See 15 U.S.C. § 1692f(1), § 1692e(2)(A) and § 1692e(5).
The lower court dismissed the debtor’s class action suit, holding that “[t]he state court collection action was a lawful vehicle for [the debt collector] to recover the debt,” as the state’s usury statute permitted prejudgment interest, and the allegation within the debt collector’s collection complaint was merely a request, rather than a false representation or threat.
On appeal to the Sixth Circuit, the questions before the Court were: (i) whether the original creditor’s waiver of its right to contractual interest gives it, or the debt collector, the right to collect statutory interest; and (ii) whether the debt collector’s complaint falsely represented the character and amount of the debt, in violation of the FDCPA.
Kentucky’s usury statute 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.” See Ky. Rev. Stat. § 360.010(1).
Applying Kentucky’s usury statute, the Sixth Circuit held that nothing in the statute suggests that a contracting party retains the option to charge statutory interest. Here, the right to collect statutory interest was extinguished and superseded by the right to collect interest at a rate specified by contract.
Thus, the Sixth Circuit held that the original creditor’s waiver of its right to collect contractual interest did not permit the debt collector to recover statutory interest that was bargained away.
Next, the Court was asked to determine if the allegations within the debt collector’s complaint rose to violations of the FDCPA.
As you may recall, the FDCPA prohibits both “false, deceptive, or misleading representations or means in connection with the collection of any debt,” 15 U.S.C. § 1692e; and “unfair practices”—“unfair or unconscionable means to collect or attempt to collect any debt,” id. § 1692f.
The Sixth Circuit acknowledged that the FDCPA has a broad and expansive purpose that the Supreme Court has held “applies to the litigating activities of lawyers” and “imposes some constraints to a lawyer’s advocacy.” Heintz v. Jenkins, 514 U.S. 291, 294 (1995); Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573, 600 (2010). Indeed, the FDCPA initially expressly exempted attorneys, but, in 1986 “Congress repealed this exemption in its entirety . . . without creating a narrower, litigation-related exemption to fill the void.” Id. at 294.
To determine whether the debt collector’s conduct violated the FDCPA, the Sixth Circuit considered the alleged violations through the lens of the “least sophisticated consumer” standard, the objective legal standard in FDCPA cases in the Sixth Circuit and other circuits. Gionis v. Javitch, Block, Rathbone, LLP, 238 F. App’x 24, 28 (6th Cir. 2007).
Here, the Court rejected the debt collector’s argument that its allegation regarding the allegedly-owed interest was merely a “simple request,” because “even a sophisticated consumer would read that numbered paragraph from the complaint to be a factual allegation.” The Sixth Circuit held, from the perspective of the least sophisticated consumer, that the request for statutory interest is a “threat.. to take action that cannot legally be taken,” i.e. attempt to collect recover interest that was not owed.
Accordingly, the Sixth Circuit that request for statutory interest in the debt collector’s collection complaint was an “attempt” to collect an “amount” that is neither “expressly authorized” by any agreement in the record nor “permitted by law.” § 1692f(1).
Accordingly, the Sixth Circuit reversed the district court’s order dismissing the debtor’s case, and remanded the matter to the district court for proceedings consistent with this opinion.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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