Circuit Court Rules Against ARM Firm in Allowable Interest FDCPA Case

The Sixth Circuit Court of Appeals Friday ruled against a debt buyer who it said violated the FDCPA when it sought interest charges for a credit card debt. The decision reversed a lower court ruling and included a sharp dissent from the third judge in the appellate panel.

The case, Stratton v. Portfolio Recovery Associates, stems from a GE Money credit card account that was charged off in 2008. When GE charged off the $2,630.95 debt as uncollectable, the plaintiff insisted that it waived its right to continue collecting interest on the account.

Portfolio Recovery Associates (PRA) bought the debt a year later. Two years after that, PRA filed a debt collection action against Stratton in Kentucky state court. In that suit, PRA asked for statutory prejudgment interest of 8 percent, running from when the account was charged off by GE, although the contract Stratton signed allowed for 21.99 percent interest.

The 8 percent interest rate did not appear out of thin air; it is the default rate set by Kentucky’s usury statute, section 360.010 of the Kentucky Revised Statutes. Rather than attempt to collect the full 21.99 percent interest, PRA chose to abide by state law.

Stratton then filed a putative class action against PRA in the Eastern District of Kentucky, alleging that the company’s attempt to collect 8 percent interest for the period between the date GE charged off Stratton’s debt and the date it sold that debt to PRA violated the FDCPA. In particular, Stratton alleged that the 8% interest was not “expressly authorized by the agreement creating the debt or permitted by law,” [§ 1692f(1) of the FDCPA], that PRA had falsely represented the “character” of Stratton’s debt and the “amount” she owed [§ 1692e(2)(A)], and that PRA’s suit to recover interest it was not owed was a “threat” to take an “action that cannot legally be taken,” [§ 1692e(5)].

The district court dismissed Stratton’s case at PRA’s request. The court held that Kentucky law gave PRA a right to “prejudgment interest” and that, consequently, PRA could not have violated section 1692f(1) of the FDCPA. Further, the court concluded that, taken together, “even an unsophisticated consumer would have understood that” the allegation in PRA’s complaint “was just a request” rather than a “false representation” prohibited by the FDCPA.

Stratton appealed the decision to the 6^th Circuit.

A two-judge majority disagreed with the lower court decision, overturning it and remanding the case for further action.

The majority focused on GE’s initial waiving of its right to collect interest when it charged off the account. They noted, “GE’s decision was neither irrational nor altruistic: By charging off the debt and ceasing to charge interest on it, GE could take a bad-debt tax deduction, and could avoid the cost of sending Stratton periodic statements on her account.”

But they took that idea further and noted that when GE waived its right to collect the statutory 8 percent interest rate when it voluntarily waived its right to collect the contractual 21.99 percent interest rate. “GE cannot recover the right it bargained away simply because it later chose to waive the right for which it bargained,” the majority wrote. They found that, “PRA cannot be given a right to collect interest — contractual or statutory — that GE waived.” Since PRA was not entitled to charge interest, the judges found that its suit violated the FDCPA.

In a dissent, the third Circuit Judge disagreed with the reasoning, writing, “The majority asks — and then answers — the wrong question. The question is not, ‘can someone collect interest if they agree not to collect interest?’ The question instead is whether someone can collect statutory interest after they agree not to collect contractual interest.”

Judge Alice M. Batchelder said that the majority was employing a “gotcha!” maneuver in holding that that a potential violation of state law violates the federal FDCPA. The ruling, in her opinion, “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.”