Consumer Finance Litigation

The United States District Court for the Eastern District of Kentucky recently held that an assignee of a debt may request prejudgment interest in a collection complaint dating from the time the debt was charged off by the original creditor, even where the original creditor had stopped charging interest on the account post charge-off. In Stratton v. Portfolio Recovery Associates, LLC, Case no. 5:13-cv-147-DCR (E.D. Ky. Nov. 26, 2013), the plaintiff filed a putative class action complaint alleging that the debt collector, who had been assigned a debt owed by the plaintiff, violated the Fair Debt Collection Practices Act ("FDCPA") by seeking statutory prejudgment interest in a state court collection action. The plaintiff alleged that the prior creditor had waived its right to collect contractual interest on the account post charge-off. Because the assignee "steps into the shoes" of the assignor, the plaintiff claimed that the debt collector assignee violated the FDCPA by seeking interest which it was not entitled to collect. The debt collector moved to dismiss the complaint, arguing that, even if the assignor had waived its right to charge contractual interest, it had not waived the right to seek statutory prejudgment interest. Kentucky law permits 8% prejudgment interest from the date of the breach; therefore, the debt collector argued, it had the right to request 8% interest from the date of charge-off in its collection action. The district court agreed, holding that "the fact that [the original creditor] waived its right to collect contractual interest on the debt did not necessarily waive its right to collect statutory interest." The court noted that the plaintiff only alleged that the original creditor waived the right to collect contractual interest, but did not allege that the right to statutory interest had been waived as well. Therefore, because the original creditor retained the right to seek statutory interest, the debt collector assignee was likewise permitted to seek statutory interest. The court further held that, even if the assignee was not permitted to seek statutory interest under Kentucky law, the request for prejudgment interest in the collection complaint still did not violate the FDCPA. The court first held that the request for prejudgment interest did not violate § 1692e(2)(A) of the FDCPA, because the request for prejudgment interest "was not a false representation but a request to the state court . . . that could have been denied if improper." The court held that "even an unsophisticated consumer would have understood that the request for interest was just a request, and would not have been misled by it." The court noted that the request for prejudgment interest was permissible since the debt collector "reasonably believed" it was entitled to prejudgment interest. The court noted, however, that the result might be different if the debt collector had requested both contractual and statutory interest for the same time period. Next, the court held that the request for prejudgment interest in the collection complaint did not violate § 1692e(5), because "[t]he state court collection action was a lawful vehicle for [the debt collector] to recover the debt," and the act of filing the state court complaint "was not a 'threat' within the meaning of § 1692e(5)." Finally, the court rejected the plaintiff's claim that the debt collector's request for statutory interest violated § 1692f(1), because the debt collector's "mere request in its valid state court debt collection action was not improper, much less unfair or unconscionable." Accordingly, the court dismissed the plaintiff's complaint with prejudice. For more information on consumer finance litigation topics, please contact one of the Burr & Forman team members for assistance. We are happy to answer any questions or concerns you may have.