The Kentucky Supreme Court recently held that a debt collection agency seeking prejudgment statutory interest on a “charged off” credit card account was in violation of the Federal Fair Debt Collection Practices Act (FDCPA). Unifund CCR Partners v. Harrell, 2017 Ky. LEXIS 86 (16 Feb 2017).
In Harrell, a consumer defaulted on her promise to repay credit card debt. As a result, the credit card company “charged off” the account, stopped sending monthly account statements to the consumer, and stopped adding interest to the consumer’s balance, pursuant to 12 C.F.R. 226.5(b)(2)(i). Harrell at *1-2. The credit card company sold and assigned the consumer’s debt to a collection agency, Unifund, who then filed a collection action against the consumer in district court.
In addition to seeking the outstanding balance on the consumer’s account, Unifund sought statutory prejudgment interest of 8% per annum on the charged off balance from the date of the “charge off” to the time Unifund acquired the consumer’s debt, pursuant to Kentucky Revised Statute (KRS) 360.010(1). The consumer filed a counterclaim, alleging that Unifund’s request for statutory prejudgment interest was in violation of the FDCPA, and that Unifund could not lawfully claim interest for the time period between the “charge off” date and the date Unifund acquired the debt. Harrell at *2-3.
The Kentucky Supreme Court held that Unifund could not claim statutory or contractual interest from the time period between the “charge off” and the time Unifund acquired the debt, and found Unifund’s claim in violation of the FDCPA. The court first found that the credit card company extinguished its right to statutory prejudgment interest when it contracted with the consumer to an interest rate in excess of the 8% rate outlined in KRS 360.010(1).
In reaching its conclusion, the Kentucky Supreme Court noted that the “shall be bound” language of KRS 360.010(1) “extinguishes the right to a statutory interest rate once the parties contract to a rate in excess of the statutory rate.” Harrell at *9. The court found the language of the statute plainly provides a default statutory interest rate in the absence of a contractual rate between the parties. However, the statutory interest rate of 8% is waived once parties agree to contract a higher interest rate.
The court further found that the credit card company had waived its right to contractual interest once the company had “charged off” the consumer’s account. 12 C.F.R. 226.5(b)(2)(i) requires creditors to send monthly statements to consumers if they are charging interest on an open account. As the credit card company had “charged off” the account and ceased sending statements, they were prohibited from further accruing interest on the account.
Applying the well-settled notion that “an assignee . . . acquires no greater right than was possessed by his assignor . . . .” the court found that Unifund, as the assignee of the debt, had no legal right to collect either contractual or statutory interest on the consumer’s account. Harrell at *7, citing Whayne Supply Co. v. Morgan Constr. Co., 440 S.W.2d 779, 782 (Ky. 1969). Thus, the credit card company had neither a statutory nor a contractual right to collect interest at the time it sold and assigned the consumer’s debt to Unifund. Harrell at *7. Therefore, Unifund could not legally seek the 8% per annum interest. Seeking this amount in its complaint against Harrell resulted in a violation of 15 USC § 1692f(1) by seeking an amount not authorized by contract or law.
The Kentucky Supreme Court reached its decision in light of a recent Sixth Circuit case that came to a concurring legal conclusion. In Stratton v. Portfolio Recovery Associates, LLC, 770 F.3d 443 (6th Cir. 2014), the Sixth Circuit found that an assignee of a credit card debt was precluded from collecting statutory interest on the debt since the assignor of the debt expressly waived its right to collect contractual interest, and the assignee had no greater right to collect interest than the assignor.
While the Kentucky Supreme Court is not bound by the rulings of the Sixth Circuit, the court in Harrell nonetheless applied the Stratton rationale to the facts in Harrell and found that since the assignor credit card company had waived its right to charge interest once the company “charged off” the consumer’s credit card account, assignee Unifund was similarly precluded from claiming interest on that same account.
In light of Harrell, under Kentucky law, an assignee debt collector has no right to statutory prejudgment interest if the assignor credit card company has waived the right to collect contractual interest by “charging off” the credit card account and ceasing the delivery of statements. Thus, a debt collector who seeks statutory or contractual prejudgment interest on a “charged off” credit card account in Kentucky may be found in violation of the FDCPA.
This is an increasingly litigated area of law and it is therefore vital that plaintiffs carefully review their procedures to ensure that they are not seeking amounts that result in a violation of 15 USC § 1692f(1).