On October 24, 2014, the Sixth Circuit Court of Appeals issued its decision in Stratton v. Portfolio Recovery Assocs. LLC, --- F.3d ---, 2014 WL 5394517 (6th Cir. Oct. 24, 2014). In that decision, the court held that (i) because the original creditor had charged off the debt owed by the plaintiff and waived its right to collect contractual interest thereon before selling the debt to the defendant- assignee, the defendant had no right under Kentucky law to collect statutory interest on the debt, and (ii) the defendant’s attempt to collect statutory interest provided the plaintiff with a cause of action under the Fair Debt Collection Practices Act (“FDCPA”).

The facts were that the plaintiff, Dede Stratton, defaulted on her credit card issued by GE Money Bank (“GE”).  After determining that the debt was uncollectible, GE charged off the debt and stopped charging interest on it.  (The contractual rate of interest was 21.99%.)  Subsequently, GE assigned the debt to Portfolio Recovery Associates, LLC (“PRA”).  PRA then filed suit against Stratton in Kentucky state court, alleging that Stratton owed PRA the principal amount, “with interest thereon at the rate of 8% per annum” from the date of charge-off until the date of judgment. The 8% interest rate is the default rate set by Section 360.010 of the Kentucky Revised Statutes (“Section 360.010”).

Stratton then filed a putative class action against PRA in the Eastern District of Kentucky, alleging that PRA’s attempt to collect 8% interest for the period between the date GE charged off her debt and the date it sold that debt to PRA violated the FDCPA. After the district court dismissed Stratton’s case, she appealed.

For the purposes of the appeal, PRA conceded that GE waived its right to collect interest at the contractually agreed upon rate. The questions to be decided on appeal were (1) whether GE’s waiver of its right to contractual interest precluded GE (or PRA) from collecting statutory interest and, if so, (2) whether PRA’s attempt to collect statutory interest constituted a violation of the FDCPA.

Right to Collect statutory Interest. In deciding the first question, the court focused on the plain text of Section 360.010. Section 360.010 states in pertinent part:

The legal rate of interest is eight percent  (8%) per annum, but any party or parties may agree, in writing, for the payment of interest in excess of that rate[;] ... and any such party or parties, and any party or parties who may assume or guarantee any such contract or obligation, shall be bound for such rate of interest as is expressed in any such contract, …, and no law of this state prescribing or limiting interest rates shall apply to any such agreement or to any charges which pertain thereto or in connection therewith....

The court interpreted this provision as setting a default rate of interest which applies in the absence of a contract setting a higher rate. This meant that once GE established the 21.99% interest rate by contract, it gave up the right to collect the 8% statutory interest permitted by Section 360.010. The court further determined that “GE cannot recover the right it bargained away [to charge 8% statutory interest] simply because it later chose to waive the right for  which it bargained [to charge 21.99% contractual interest].”

In this regard, the court stated:

The question is whether GE’s waiver of its right to contractual interest could somehow give it or PRA, GE’s assignee, the right to collect statutory interest. In other words, can someone collect interest if they agree not to collect interest? The answer must be no.

One wonders whether the court might have reached a different conclusion had PRA not conceded that the creditor “waived” its right to collect contractual interest. Does the fact that GE stopped collecting interest necessarily mean that it waived its right to do so? Did the credit card agreement include a provision indicating that GE’s failure to exercise a contractual right does not constitute a waiver of that right? Was there an “agreement” between GE and Ms. Stratton that interest would no longer be charged? None of these questions appears to have been addressed by the court.

FDCPA violation. With regard to the second question, the court held that, because PRA did not have the right to collect interest on Ms. Stratton’s debt, PRA’s assertion to the contrary was a “false representation” of the “character” and “amount” of Stratton’s debt.   The court thus characterized PRA’s state court collection action as both (i) an “attempt” to collect an “amount”—principal plus 8% interest—that was neither “expressly authorized” by any agreement in the record nor “permitted by law,” and (ii) from the perspective of the least sophisticated consumer, a “threat” by PRA “to take action that cannot legally be taken”—namely, to recover 8% interest.

In so holding, the Sixth Circuit rejected the position espoused by the district court below, in which that 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).” The Sixth Circuit stated:

“Litigating ... seems simply one way of collecting a debt,” [citation omitted] that could be used, especially against an unsophisticated consumer, in an unfair or deceptive manner. Indeed, the original FDCPA expressly exempted attorneys but—as the Supreme Court has explained—in 1986 “Congress repealed this exemption in its entirety ... without creating a narrower, litigation-related exemption to fill the void.”

Based on these holdings, the Sixth Circuit reversed and remanded the case back to the district court for further proceedings.