The Kentucky Supreme Court is shaking things up for banks that collect on charged-off debts. The decision in Unifund CCR Partners v. Carol Harrell, 509 S.W.3d 25 (Ky. 2017), is an eye-opener for lenders regarding their strategies to recover a contractual or statutory right to collect interest on prejudgment debt.
In this case, Harrell executed a credit card agreement in September 2007 with Citibank, which included a default rate of interest of 27.24% applied to the principal amount. Sometime after Harrell’s default, Citibank “charged-off” the account balance, and pursuant to 12 C.F.R. 22.6.5(b)(2)(1), Citibank stopped sending monthly statements and adding interest to Harrell’s account. In November 2011, Citibank sold the debt, which was later assigned to Unifund CCR Partners (Unifund). In 2012, Unifund sued Harrell to collect the principal amount, plus interest at Kentucky’s pre-judgment statutory rate of 8% under KRS 360.010(1).
In its decision, the Court made two key holdings: (1) Citibank waived its right to collect the contractual rate of interest (27.24%) following the charge-off of Harrell’s account; and, (2) once the contractual rate is waived, Citibank also extinguished its statutory right to collect on the pre-judgment interest rate (8%). In other words, because Citibank contracted with its customer an interest rate higher than 8%, and charged-off – or, waived its right to collect the debt at the contract rate, the Court will not impose the statutory rate in its place. The Court further opined that Unifund, assignee of Citibank, stood in the shoes of its assignor, and thus had no greater right to collect interest – contractually or statutorily – on Harrell’s account.
Thus, banks holding charged-off debts that may be subject to future collection might consider applying payments only to charged-off principal amounts, and not charged-off interest. Regardless, the Harrell decision ultimately punishes banks for charging-off a debt in compliance with federal regulations, even though the unliquidated debt owed by the borrower still exists. Undoubtedly, Unifund forfeited its right to apply the contractual interest rate after the bank charged-off the debt and closed Harrell’s account; yet Unifund and other similarly situated creditors must now forfeit the statutory right to prejudgment interest as well.