Friday, March 17, 2017

FYI: Statutory Interest Cannot Accrue on Charged-off Credit Cards, Says Kentucky Supreme Court

The Kentucky Supreme Court recently held that a debt buying company may not charge or collect statutory interest under section 360.010 of the Kentucky Revised Statutes on a credit card account the debt buyer acquired after the account was charged off by the original creditor.


A copy of the opinion is available at:  Link to Opinion


A consumer's credit card account was charged off by the original creditor and was sold to a debt buying company. In a collection lawsuit, the debt buying company sought judgment for the charged-off balance plus statutory interest from the date of charge off. In response, the consumer counterclaimed alleging that because the original creditor charged off her account, the debt buyer was no longer permitted to charge interest. In seeking statutory interest, the consumer alleged the debt buying company violated the federal Fair Debt Collection Practices Act (FDCPA).


The Kentucky Supreme Court held that once a credit card account is charged off and the original creditor ceases sending monthly statements, federal law prohibits further contract interest charges. Because the original creditor stopped assessing contract interest, it waived its right to collect "agreed-to interest." The Court held that this waiver amounted to a waiver of any right to assess interest, including statutory interest. As the assignee of the original creditor, the debt buying company had "no greater right to collect interest" and so could not seek statutory interest as part of its collection lawsuit.


The Court also found that the consumer stated a claim for violations of sections 1692e and 1692f of the FDCPA arising from the debt buying company's request for statutory interest in its state court collection complaint.


As the consumer's case was making its way through the Kentucky state court system, the Sixth Circuit Court of Appeals in Stratton v. Portfolio Recovery Associates held a consumer stated a claim for violation of the FDCPA when a debt buying company's collection lawsuit sought statutory interest under the same section of the Kentucky Revised Statutes at issue in this case.


But there was a dissenting opinion in the Stratton ruling, which criticized its holding because the issue of whether statutory interest could be charged in these circumstances was undecided under Kentucky law. The dissent in Stratton concluded that imposing FDCPA liability under such circumstances "impermissibly expands the scope of the FDCPA, exposing debt collectors to liability under federal law whenever we later determine a debt collector's reasonable construction of an as-yet uninterpreted state law is wrong."


To establish a waiver of a known contractual right, most decisional law (including Kentucky's) requires a demonstration that the waiver was "voluntary" relinquishment of a known right. The federal regulation at the center of this case and in the Sixth Circuit's ruling in Stratton is the Truth in Lending Act's Regulation Z (12 C.F.R. 226.5(b)(2)), which governs when periodic statements must be provided for open-end credit accounts.


The regulation excuses the sending of a periodic statement "if the creditor has charged off the account in accordance with loan-loss provisions and will not charge any additional fees or interest on the account . . ." Following the reasoning of Stratton and this ruling by the Kentucky Supreme Court, when a creditor makes this election under Regulation Z and stops sending periodic statements, it has decided it will no longer charge interest and has waived the right to charge interest.


The Kentucky Supreme Court ruling was not unanimous, and the dissent noted that the majority opinion misconstrued the federal regulation. The dissent noted that federal regulations require banks to charge off accounts to prevent them from inflating their net worth with assets that are noncollectible. Second, the act of charging off an account serves the purpose of terminating further use of the card and establishes the balance owed as a liquidated sum.


Under Kentucky law, the dissent notes, prejudgment, statutory interest is a "matter of right on a liquidated demand." Accordingly, the dissent concluded, the majority decision "punishes banks for their compliance with federal regulations and it bestows an unearned and undeserved windfall upon delinquent debtors."


The dissent's view that creditors have a "right" to seek prejudgment statutory interest on a liquidated claim is also contained in decisional law in other jurisdictions. Kentucky, however, has spoken and no right exists to charge interest on charged-off credit card accounts in Kentucky.




Ralph T. Wutscher
Maurice Wutscher LLP
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