Kentucky Supreme Court Case Adopts 6th Circuit's Prohibition of Pre-Judgment Interest on Open-end Credit Accounts
A debt-collector seeking contractual or statutory pre-judgment interest on a credit card account after the account has been charged-off may be in violation of the Federal Fair Debt Collection Practices Act (FDCPA), according to a Kentucky Supreme Court decision made on February 16, 2017 in the case of Unifund CCR Partners v. Harrell, 2015-SC-000117-DG.1 This principle applies to any creditor seeking to enforce a consumer debt arising from an open-ended credit account in Kentucky.
The case involved a consumer who opened a credit card with Citibank and later defaulted. Citibank charged-off the account and assigned the account and debt to Unifund. Unifund then filed a lawsuit against the consumer seeking judgment for the principal sum due on the account, plus statutory pre-judgment interest at the rate of eight percent per year pursuant to Kentucky Revised Statute 360.010(1).
The consumer filed a counterclaim alleging Unifund's request for statutory pre-judgment interest violated the FDCPA. The trial court dismissed the counterclaim, but on appeal the Kentucky Court of Appeals reversed, holding the interest claim violated FDCPA. Kentucky's Supreme Court granted discretionary review and affirmed the appeals court decision.
The reasoning of both the Kentucky's Supreme Court and the appeals court relied heavily, if not exclusively, on the 6th U.S. Circuit Court of Appeals' decision in Stratton v. Portfolio Recovery Associates, LLC, 770 F.3d 443 (6th Cir. 2014).2 In this case, a similar set of facts were presented and the court analyzed the juxtaposition between Kentucky's interest provisions in KRS 360.010 and the federal regulations concerning charged-off open-ended credit products under 12 C.F.R. 226.5(b)(2)(i).
Kentucky's Supreme Court adopted this same approach as in the Stratton2 case, first looking at the specific language of KRS 360.010(1):
"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, obligation, assumption, or guaranty, 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. . . ."
As in Stratton2, the Kentucky Supreme Court found the language of KRS 360.010(1) does not automatically give a creditor the right to charge statutory interest pre-judgment on a charged-off account. Rather, according to the law the statutory rate serves only as a "default" rate in the absence of an otherwise agreed upon contractual rate. In this case, the Citibank credit card had an agreed upon contractual rate of 27.24 percent. The court decided because there was a contractual rate and it was waived through charge-off, KRS 360.010(1) did not entitle Unifund to seek interest otherwise at the "default" statutory rate.
The court then looked to 12 C.F.R. 226.5(b)(2)(i), which explains that in an open-ended credit agreement, which includes credit card accounts:
"A periodic statement need not be sent for an account . . . if the creditor has charged off the account in accordance with loan-loss provision and will not charge any additional fees or interest on the account."
Once a creditor has charged-off the account, they are no longer required to send monthly credit card statements. However, the regulation also provides that the creditor shall not charge any further fees or interest upon the balance.
The court therefore equated the act of charging off the account to a "waiver" of the right to accrue any future interest. Once Citibank charged-off the credit card and stopped sending the monthly account statements, any right to accrue further interest was waived. Because Unifund was the assignee of Citibank, the waiver applied to Unifund’s claim.
The Kentucky's Supreme Court mirrored the analysis undertaken by the 6th U.S. Circuit in Stratton2. While many creditors and attorneys may have disagreed with the outcome of the Stratton2 case, the holding in Harrell1 effectively makes it Kentucky law.
What can be learned from these cases? First, a debt-collector who seeks pre-judgment interest, whether statutory or contractual, on a charged-off, open-ended credit account in Kentucky is subject to a claim under the FDCPA.
On a positive note for creditors, due to the specific language of KRS 360.010(1) seized on by Harrell1 and Stratton2, the application of this rule appears to only affect collection litigation in Kentucky or matters where Kentucky law is applied. However, a prudent creditor's attorney practicing in another jurisdiction should review the language of that jurisdiction’s comparable statutory interest statute with KRS 360.010(1) to determine whether the same sort of claim could potentially be made.
Also, the holdings in Stratton2 and Harrell1 are limited to open-ended credit matters and do not apply to installment contracts or notes. In any attempt to collect debt in Kentucky, it is important for the prudent creditor's attorney to review the subject instrument giving rise to the claim to ensure it does not fall within 12 C.F.R. 226.5(b)(2)(i).
Additionally, both the Stratton2 and Harrell1 cases pertain to claims arising from the FDCPA and also, at least in part, from the Truth in Lending Act of 1968. Both of these federal laws specifically deal only with debts for personal, family or household purposes. Because of this, both cases appear to be wholly distinguishable from open-ended business or commercial loans or credit lines.
Finally, nothing in these cases or the subject statutes and regulations appears to alter or revoke a creditor's right to seek post-judgment interest at the statutory rate in Kentucky. A judgment "shall" bear interest at 12 percent compounded annually, or at the contractual rate, whether higher or lower than 12 percent, according to KRS 360.040. Once reduced to judgment, the same "waiver" argument would likely not apply.
We invite you to enlist the help of an attorney from Weltman, Weinberg & Reis Co., L.P.A.'s consumer and commercial collections division to double check if there are "waivers" to the right to claim accrued future interest in your case.
For more information, please contact James T. Hart, Esq. Mr. Hart is an attorney based in the Cincinnati office of Weltman, Weinberg & Reis Co., LPA. He practices in Consumer and Commercial Collections, with a focus on legal action recovery, healthcare collections, student loan recovery, subrogation, and complex commercial collections.
1 http://caselaw.findlaw.com/ky-supreme-court/1791773.html
2 http://www.opn.ca6.uscourts.gov/opinions.pdf/14a0266p-06.pdf
