Title: Unifund CCR Partners v. Harrell

State: kentucky

Issuer: Kentucky Supreme Court

Document:

RENDERED: FEBRUARY 16, 2017
TO BE PUBLISHED

Supreme Court of Kentucky

2015-SC-000117-DG

UNIFUND CCR PARTNERS APPELLANT
ON REVIEW FROM COURT OF APPEALS
v. CASE NO. 2013-CA-001514
NELSON CIRCUIT COURT NO. 12-CI-00661
CAROL HARRELL APPELLEE
OPINION OF THE COURT BY JUSTICE KELLER
ar iG ING

Unifund CCR Partners (Unifund) appeals the deci

 

of the Court of
‘Appeals to reverse the Nelson Circuit Court's dismissal of Carol Harrel’s
counterclaim pursuant to Kentucky Rule of Civil Procedure (CR) 12.02. This
Court granted discretionary review, and for the reasons stated herein, we affirm
the opinion of the Court of Appeals and remand to the circuit court for further
proceedings.

1. BACKGROUND.

In September 2007, Harrell entered into a credit card agreement with
Citibank that included an interest rate of 27.24% on the principal amount.
Harrell defaulted on her promise to repay the debt and, on January 18, 2011,
Citibank “charged off the account with an outstanding balance of $1,472.58.!
‘At that point, Citibank stopped sending monthly account statements and, in

A *charge-off” is a method by which a bank's “debt is conclusively presumed
to be worthless.” 34 AM JUR. 20 Federal Taxation 20435 (2016)
compliance with 12 C.F.R, 226.5(b}(2)(1), ceased adding interest to Harrell's
balance. Thus, no interest was assessed to Harrell’s account during the
remainder of Citibank’s ownership of her debt. On November 21, 2011,
Citibank sold and assigned Harrell’s debt to Pilot Receivable Management, LLC,

which then

 

igned the right to collect the outstanding debt to the Appellant,
Unifund,

On April 10, 2012, Unifund filed a collection action against Harrell in the
district court. In addition to the outstanding balance of Harrell’s account,
Unifund sought statutory pre-judgment interest pursuant to Kentucky Revised
Statute (KRS) 360.010(1). In its complaint, Unifund alleged its damages totaled
“the amount of the remaining charged-off balance of $1472.58 plus interest
currently accruing (and continuing to accrue) at the rate of eight percent (8%)
per annum on the charged-off balance from the charge-off date of 01/18/2011
(which currently totals $92.56) ....”

Harrell filed an answer, and an amended answer and counterclaim, in
which she alleged that Unifund’s request for statutory prejudgment interest
was in violation of the federal Fair Debt Collection Practices Act (FDCPA). She
argued that Unifund violated the FDCPA by unlawfully claiming interest for the
time period between Citibank’s decision to charge-off the debt and Unifund’s

acquisition of the debt. Because Harrell's counterclaim purported to be a cl

 

action, the matter was transferred to the Nelson Circuit Court.
Unifund filed a motion to dismiss Harrell’s counterclaim, arguing that

Citibank’s decision to charge-off Harrell’s debt did not waive Unifund’s right to

2
collect interest at Kentucky's statutory rate and that its complaint, seeking pre-
judgment statutory interest, did not violate the FDCPA,
‘The circuit court found that Unifund’s actions did not violate the FDCPA.

and, therefore, granted Unifund’s motion to dismiss Harrell’s counterclaim for

 

failure to state a claim upon which relief could be granted. The circuit court

transferred the case back to the district court, designated its order as final and

 

appealable, and subsequently denied Harrell’s motion to alter, amend, or
vacate. Harrell appealed.

On appeal, the Court of Appeals reversed the circuit court, finding that it
erred in concluding that Unifund’s claim for statutory interest did not violate
the FDCPA and in granting Unifund’s motion to dismiss. For the reasons
stated below, we affirm and remand.

In its opinion, the Court of Appeals cited to the Sixth Circuit Court of
‘Appeals decision in Stratton v. Portfolio Recovery Associates, LLC, 770 F.3d 443

(6th Cir. 2014), We note that the Sixth Circuit's well-reasoned di

 

‘concerns a matter virtually identical to the appeal presently before us. While
Kentucky courts are not bound by the holding ofa federal court that construes
state law in the course of a diversity action, Embs v. Pepsi-Cola Bottling
Company of Lexington, Kentucky, Inc, 528 S.W.2¢ 703, 705 (Ky. 1975), we
agree with the Court of Appeals, and are equally persuaded that “the sound
reasoning of the Stratton court does not supplant but properly comports with
the statutory language of KRS 360.010(1) [and] [nothing in Kentucky's statute

~ by specific language, implication, or innuendo ~ contravenes the purpose and

3
spirit of the [FDCPA].” Carol Harrell v. Unifund CCR Partners, No. 13-CA-
001514-MR, at 7-8 (Ky. Ct. App. Feb. 6, 2016}.
I STANDARD OF REVIEW.

“A motion to dismiss for failure to state a claim upon which relief may be
granted admits as true the material facts of the complaint.” Fox v. Grayson,
317 S.W.3d 1, 7 (Ky. 2010) (internal citation omitted). “Accordingly, the
pleadings should be liberally construed in the light most favorable to the
plaintiff, all allegations being taken as true.” {d. (internal citations omitted). A
court should not grant such a motion “unless it appears the pleading party
‘would not be entitled to relief under any set of facts which could be proved .

” Pari-Mutuel Clerks’ Union of Kentucky, Local 541, SEIU, AFL-CIO v. Kentucky
Jockey Club, 551 8.W.2d 801, 803 (Ky. 1977). ‘A motion to dismiss for failure
to state a claim upon which relief may be granted is a pure question of law,

thus, a reviewing court owes no deference to a trial court's determination;

 

instead, an appellate court reviews the issue de novo.” Fox, 317 S.W. 34 at 7
(internal citation omitted).
I ANALYSIS.

To determine whether the trial court erred in granting Unifund’s motion
to dismiss for failure to state a claim upon which relief may be granted, we
‘must first analyze whether KRS 360.010(1) provided for Unifund’s recovery of
statutory pre-judgment interest. If the statute did not provide therefor, we
‘must then determine whether Harrell’s claim that Unifund violated the FDCPA

is viable.
A. KRS 360.010(1).
KRS 360.010(1) (commonly known as Kentucky's usury statute)
provides, in relevant 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 i

‘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 . . ..”

KRS 360.010(1) does not create an entitlement to statutory interest,
rather, it sets a default interest rate in the absence of a contractually agreed
upon interest rate. The parties agree that Citibank and Harrell contracted toa
27.24% interest rate. By contracting to an interest rate in excess of 8%,
Citibank extinguished its right to charge an interest rate under KRS
360.010(1).

Following Harrell’s default on her agreement with Citibank, it charged-off
Harrell’s account and stopped adding interest to Harrell’s account, as required
by federal law. See 12 C.F.R. 226.5(b)(2)() (‘A periodic statement need not be
sent for an account . .. ifthe creditor has charged off the account in
accordance with loan-loss provision and will not charge any additional fees or

interest on the account . .. .")2

 

2 As Harrell noted in her brief, Citibank’s decision to charge-off her debt was
likely one of business strategy, which permitted it to reduce the amount of bad debt
held, thereby, improving the bank's overall financial health.

5
Thus, at the point Citibank charged-off Harrell’s account, it waived its
right to collect the agreed-to interest on the account. (A waiver is “a voluntary
and intentional surrender or relinquishment of a known right, or an election to
forego an advantage which the party at his option might have demanded or
insisted upon.” Greathouse v. Shreve, 891 S.W.24 387, 390 (Ky. 1995}.)
‘Therefore, Citibank had neither a statutory nor a contractual right to collect,
interest when it sold and assigned Harrell’s debt to Unifund,

It has long been settled in our jurisprudence that “an assignee
acquires no greater right than was possessed by his assignor....” Whayne
‘Supply Co. v. Morgan Constr. Co., 440 8.W.24 779, 782 (Ky. 1969); see, e

 

Porter v. Breckenridge, 3 Ky. 21 (Ky. 1805) (*{T]he complainant, being the
assignee of an equity, took it subject to all the circumstances and equity which
was attached to it in the hands of the original obligec.). An assignee “simply
stands in the shoes of the [assignor], subject to all equities and defenses which
could have been asserted against the chose in the hands of the assignor at the
time of the assignment.” Whayne Supply Co., 440 8.W.24, at 782-83.

Citibank had a right to collect contractual interest — a right it elected to
take in place of its right to collect statutory interest. By then forgoing its right
to collect contractual interest during the ten months following the charge-off of
Harrell’s account, Citibank waived its right to collect that interest.
Consequently, Unifund acquired no greater right to collect interest on Harrell’s
account than Citibank had at the time the debt was assigned. As the Stratton

court posited, “(Clan someone collect interest if they agree not to collect,

6
interest? The answer must be no.” Stratton, 770 F.3d, at 447. “A party's right

to collect

 

atutory interest is extinguished, superseded by her right to collect,

an interest rate she has specified by contract. A court must honor that party's

 

choice - even if it is a choice it o

 

assignee later regrets.” Id. We agree.
Unifund directs this Court’s attention to Kentucky case law dating back

to 1802 that it

 

rts mandates entitlement to statutory pre-judgment

 

interest. These cases are easily distinguished from the present matter because
none of them involve a contractually agreed upon interest rate between the
parties?

Unifund also directs this Court’s attention to other jurisdictions’
approaches to similar statutes, specifically Kansas, Missouri, and Washington.*
As the Sixth Circuit noted in Stratton, Missouri's and Washington's statutes do
not contain the mandatory “shall be bound” language found in KRS 360.010(1),

id, at 448 n. 1; therefore, these statutes are inapplicable to the matter at hand

3 See Dicken v. Dicken, 2 Ky. 173, 173 (Ky. 1802) {interest accrues on legacy
where executor fails to pay legatee); White v. Green, 19 Ky. 155, 156 (Ky. 1826)
(interest accrues on default of contract where the parties did not agree to an interest
rate); Henderson Cotton Mfg. Co. v. Lowell Machine Shops, 7 S.W. 142, 146 (Ky. 1888)
(interest accrues on liquidated debt where the parties did not agree to an interest rate);
Nucor Corp. v. Gen. Elec. Co., 812 S.W.24 136, 141 (Ky. 1991) (trial court has
discretion over applying interest to tort damages); 3D Enters. Contr. Corp. v. Louisville
& Jefferson Cnty. Metro. Sewer Dist., 174 8,W.3d 440, 450 (Ky. 2005) (unliquidated
claims accrue interest at the court's discretion where the parties did not agree to an
interest rate); and Jones v. Marquis Terminal, Inc., 454 S.W.3d 849, 853 (Ky. App.
2014) (holding that the trial court exercised sound discretion in denying payment of
pre:judgment interest after breach of a rental agreement in which the parties did not
agree to an interest rate).

+ See Bunce v, Portfolio Recovery Assocs., LLC, No, 14-2149-JTM, 2014 WL
‘5849252 (D. Kan. Nov. 12, 2014); Peters v. Fin. Recovery Servs., 45 F. Supp 3d 915,
(W.D. Mo. 2014); and Grochowski v. Daniel N. Gordon, P.C,, No. C13-343 TSZ, 2014
WL 1516586 (W.D. Wash. Apr. 17, 2014).
because the absence of mandatory language in these states’ statutes allow each
state's citizens to contract to an interest rate in excess of the state’s usury
amount while still preserving their right to collect under the state's usury
statute,

In Bunce v. Portfolio Recovery Associates, LLC, the United States District
Court for the District of Kansas also distinguished KRS 360.010(1) from the
Missouri and Washington statutes referred to by Unifund. Bunce, No, 14-
2149-JTM, 2014 WL 5849252, *4 (D. Kan. Nov. 12, 2014). The Court found
that Kansas's usury statute, like Missouri and Washington, lacked the
‘mandatory “shall be bound” language and was, thus, equally inapplicable to
Kentucky's statute. Id.

“This Court has steadfastly adhered to the plain meaning rule unless to

do so would constitute an absurd result.” Exec. Branch Ethics Comm'n v.
‘Stephens, 92 S.W.3d 69, 73 (Ky. 2002}. Here, the statute plainly states that

the parties to a contract ~ and thei “shall be bound for such rate of

 

assignee:

 

interest as is expressed in any such contract ... or assumption .. . and no law
of this state prescribing or limiting interest rates shall apply to any such
‘agreement or to any charges which pertain thereto... ." KRS 360.010(1)
{emphasis added). The significance here is that this language - ‘shall be
bound” - extinguishes the right to a statutory interest rate once the parties
contract to a rate in excess of the statutory rate.

KRS 360.010(1) provides a default statutory interest rate in the absence

of a contractual rate between the parties; any other interpretation requires

8
reading outside the plain language of the statute. Contrary to Unifund’s

jertion, this sentiment has been embodied in our lower court’s precedent:

 

“Absent a contractually agreed upon rate, the appropriate rate of interest is
governed by statute.” Reliable Mech, Inc. v. Naylor Indus. Servs., Inc., 125,
S.W.3d 856, 857 (Ky. Ct. App. 2003).

We hold that Citibank extinguished its right to statutory pre-judgment
interest when it contracted with Harrell to an interest rate in excess of 8%.
Subsequently, by forgoing its right to collect contractual interest on Harrell’s
account, Citibank effectively waived its right to collect the contractual interest.
‘Therefore, Unifund, standing in the shoes of its assignor, has no legal right to
collect interest on Harrell’s account, be it contractual or statutory.

B. The FDCPA.

Because KRS 360.010(1) does not provide Unifund a right to collect

interest on Harrell’s account, we now determine whether her counterclaim

stated a cl

 

upon which relief may be granted. We hold in the affirmative for
the reasons below.

‘The FDCPA prohibits “false, deceptive, or misleading representations or
means in connection with the collection of any debt.” 15 U.S.C. 1692e. This
prohibition includes “[t]he false representation of .. . the character, amount, or

legal status of any debt] id. 1692c(2), and *[t]he threat to take any action that

 

+ In its Reply brief, Unifund cites to int'l Collection Serv. v, Walker Constr. Co,
1992 WL 205862 (ky. Ct. App. 1992}, an unpublished opinion. ‘This opinion has been
withdrawn; thus, Unifund’s citing to this case is not only unhelpful to the Court, but
is clearly inconsistent with CR 76.28(4)(c). See Commonwealth v. Wright, 415 S.W.34
(606, 613-14 (Ky. 2013) (analyzing the requirements of CR 76.28(4(c).

9
cannot legally be taken.” Id. 1692e(5). Additionally, the FDCPA prohibits a

 

debt collector from using “unfair or unconscionable means to collect or attempt
to collect any debt... . unless such amount is expressly authorized by the
agreement creating the debt or permitted by law.” 15 U.S.C. 1692f.

“Consistent with the Act’s expansive reach, both sections [1692e and
1692f] provide a list of unlawful conduct ‘without limiting the general
application of each section's broad prohibition of false or misleading
representations’ and ‘unfair practices.” Stratton, 770 F.3d at 450 (quoting
1692e and 16929.

The United States Supreme Court has held that the FDCPA “applies to
the litigating activities of lawyers.” Heintz v. Jenkins, 514 U.S. 291, 294 (1995).
‘As that Court noted in Jerman v. Carlisle, McNellie, Rini, Kramer é Ulrich LPA,
559 U.S. 573, 600 (2010), constraints on a lawyer's advocacy are “hardly
‘unique in our law.” For example, “an attorney's ethical duty to advance the
interests of his client is limited by an equally solemn duty to comply with the
law and standards of professional conduct.” Nix v. Whiteside, 475 U.S. 157,
168 (1986).

In determining “whether conduct fits within the broad scope of the
FDCPA, the conduct is viewed through the eyes of the ‘least sophisticated
consumer.” Currier v, First Resolution Inv. Corp., 762 F.3d 529, 533 (6th Cir.
2006). The purpose of this standard is to protect “the gullible and the shrewd

alike while simultaneously presuming a basic level of reasonableness and

10
understanding on the part of the debtor, thus preventing liability for bizarre or

 

idiosyncratic interpretations of debt collection notices.” Id.
When viewed through the eyes of the least sophisticated consumer, and

by a reading of the plain language of the FDCPA, Harrell clearly alleged more

than one plausible violation of the FDCPA. Unifund did not have the right to

collect interest on Harrell’s debt. By filing

 

‘complaint in demand of such
interest, Unifund arguably made a “false representation” of the ‘character” and
‘amount’ of Harrell’s debt. 15 U.S.C. 1692e(2). Thus, its suit was arguably an
attempt to collect an amount that is neither “expressly authorized” by

agreement between the parties nor permitted by law. See 15 U.S.C. 1692f{1),

 

Additionally, Unifund’s suit to collect 8% on the principal, when viewed from

the perspective of the least sophisticated consumer, was arguably a threat “

 

take action that cannot legally be taken...” See 15 U.S.C. 1692(e|5.

‘Therefore, we hold that Harrell plausibly alleged that Unifund violated
the FDCPA. As such, we affirm the Court of Appeals decision reversing the
circuit court.

IV. CONCLUSION.

For the reasons stated above, we affirm the opinion of the Court of
Appeals, and remand this case to the Nelson Circuit Court for reinstatement of
Harrell’s counterclaim.

Minton, C.J., Cunningham, Hughes, Keller and Wright, JJ., concur.

Venters, J., dissents by separate opinion. VanMeter, J., not sitting.

ul
VENTERS, J., DISSENTING: | respectfully disagree with the majority's
conclusion that Unifund, standing in Citibank’s shoes as its assignee, has no
legal right to collect prejudgment interest on Harrell’s account from the time
Citibank charged off Harrell’s account to the point Unifund purchased the
debt.© With Unifund’s rights being derivative of Citibank’s, if Citibank was
entitled to prejudgment interest, then so is Unifund.

‘The majority's conclusion follows the error of Stratton v. Portfolio
Recovery Associates, LLC, 770 F.3d 443, 447 (6th Cir. 2014) in misapplying
KRS 360.010(1) for determining when prejudgment interest is awarded. This
misconstruction of the applicable law, in effect, punishes banks for their
compliance with federal regulations and it bestows an unearned and
undeserved windfall upon delinquent debtors.

When a debtor fails to repay a debt in accordance with the contract, the
principal due, including accumulated unpaid interest, becomes a liquidated

claim.? “When the damages are ‘liquidated,’ prejudgment interest follows ai

 

matter of course.” Nucor Corporation v. General Electric Co., 812 S.W.2d 136,
141 (Ky. 1991), Interest for breach of a contract to pay a certain sum is
recoverable as damages from the time the amount is due. Id. at 144. “The

longstanding rule in this state is that prejudgment interest is awarded as a

© Pilot Receivables was Unifund’s predecessor in interest.

7 "Precisely when the amount involved qualifies as liquidated’ is not always
clear, but in general Tiquidated’ means {made certain or fixed by agreement of parties
or by operation of law.” Black's Law Dictionary 930 (6th ed.1990). Common examples
are a bill or note past due, an amount due on an open account, oF an unpaid fixed
contract price.” Nucor Corporation v. General Electric Co., 812 $.W.2d 136, 141 (Ky.
1991).

12
‘matter of right on a liquidated demand|.|" Hall v. Rowe, 439 $.W.3d 183, 188
(Ky. App. 2014) (quoting 3D Enterprises Contracting Corporation v. Louisville &
Jefferson County Metropolitan Sewer District, 174 8.W.3d 440, 450 (Ky. 2005)
Whether the debt is unliquidated or liquidated, “[eJquity and justice
demand that one who uses money or property of another for his own benefit,

particularly in a business enterprise, should at least pay interest for its use in

 

the absence of some agreement to the contrary.” Curtis v. Campbell, 336
S.W.2d 355, 361 (Ky. 1960) (citations omitted)

Citibank issued a credit card account to Harrell with an agreed upon
contractual interest rate of 26%, and a default rate of 27.24%. Approximately
six months after Harrell defaulted on the account, Citibank in compliance with
federal banking regulations, “charged off” the $1,472.58 balance due, thus
closing Harrell’s account, eliminating her right to use the credit card, and
fixing the principal balance owed. Upon the closing of the account, Citibank
stopped sending monthly or periodic statements to Harrell because Harrell
could make no new charges on the account and interest was no longer
accumulating at the contractual rate. The amount was a liquated sum as of
the date the account was charged off and closed.

Charging off a debt is not an abandonment of the claim against the

debtor. It

 

jimply an accounting mechanism that serves two purposes. First,
federal banking regulations require banks to charge off delinquent accounts at
@ certain point so that the bank’s net worth cannot be unreasonably inflated by

a portfolio of assets (debts owed to the bank) that cannot be realistically

13,
collected. Second, charging off the account eliminates further use of the credit
card and thus fixes the amount of the principal owed by the debtor to the bank
‘as a liquidated debt. At that point, accrual of contractual interest terminates
and the period for assessing prejudgment interest begins.

Much has been said about KRS 360.010, but KRS 360.010 governs only
the contractual rate of interest, and it embodies the general rule stated in Clark
. Life & Casualty Ins. Co., 53 8.W.24 968, 969 (Ky. 1932): “the measure of
recovery for the failure to pay money is the amount agreed to be paid with legal
interest, if no other rate is agreed upon; but, where there is an agreed rate of
interest, then the measure of recovery would be the amount agreed to be paid
with the agreed rate of interest, if not usurious.” To be sure, KRS 360.0101) is,
a usury statute and it sets limiting parameters on the contractual rate of
interest, albeit fairly high ones. Nevertheless, the statute has no application
here because it is recognized that Citibank’s assignee Unifund does not purport
to have the right to collect the contractual rate on interest. It seeks to recover
prejudgment interest on the liquidated debt.

‘There is no doubt that Citibank, and therefore its assignee, Unifund,
could not continue to apply the contractual rate of interest after the account
was closed and periodic account statements ceased. Harrell’s counterclaim
that Unifund’s demand that he pay interest on his debt violated the Fair Debt
Collection Practices Act (FDCPA) was properly rejected by the trial court. The
trial court correctly recognized the difference between the right to collect the

contractual interest and the right to collect prejudgment interest. The

14
forfeiture of the former does not portend the loss of the latter. The trial court
correctly concluded that pursuant to 12 C.F.R. Sec, 226.5(b)(2)(), when
Citibank stopped sending periodic statements to Harrell when the account was
charged off, and could no longer charge additional fees or collect the
contractual interest on the account, nothing forecloses the right to collect
prejudgment interest on the liquidated debt.

I see nothing in the applicable statutes or regulations that compels the
forfeiture of something as solidly-established and long-recognized as a
creditor's right to prejudgment interest. The trial court in this action and the
dissenting judge in Stratton correctly analyzed the situation. Unifund’s claim

for prejudgment interest is a well-established remedy in securing a just

 

resolution of an unpaid liquidated debt. Unifund's demand for it is not
deceptive, unfair, or unconscionable under the FDCPA. The trial court did not

err when dismissing Harrell's counterclaim. I would affirm the trial court.

COUNSEL FOR APPELLANT:

 

Joseph N. Tucker
Robert Herrick
Dinsmore & Shohl LLP

COUNSEL FOR APPELLEE:

James Robert McKenzie

15