Stratton v. Portfolio Recovery Assocs., LLC

770 F.3d 443

Dede STRATTON, Plaintiff–Appellant

v.PORTFOLIO RECOVERY ASSOCIATES, LLC, Defendant–Appellee.

No. 13–6574.

United States Court of Appeals, Sixth Circuit.

Argued: June 19, 2014.

Decided and Filed: Oct. 24, 2014.

As Amended on Denial of Rehearing En Banc Dec. 11, 2014.^*

ARGUED:James H. Lawson, Lawson at Law, PLLC, Louisville, Kentucky, for Appellant. Joseph N. Tucker, Dinsmore & Shohl, LLP, Louisville, Kentucky, for Appellee. ON BRIEF:James H. Lawson, Lawson at Law, PLLC, Louisville, Kentucky, for Appellant. Joseph N. Tucker, Dinsmore & Shohl, LLP, Louisville, Kentucky, for Appellee.

Before: KEITH, BATCHELDER, and STRANCH, Circuit Judges.

STRANCH, J., delivered the opinion of the court, in which KEITH, J., joined. BATCHELDER, J. (pp. 452–56), delivered a separate dissenting opinion.

OPINION

JANE BRANSTETTER STRANCH, Circuit Judge.

This case involves the intersection of the usury law, “society's oldest continuous form of commercial regulation,” Robin A. Morris, Consumer Debt and Usury: A New Rationale for Usury, 15 Pepperdine L.Rev. 151, 151 (1988) ; debt buying, “one of the most financially lucrative businesses you can get into,” Victoria J. Haneman, The Ethical Exploitation of the Unrepresented Consumer, 73 Mo. L.Rev. 707, 712 (2008) (citation and internal quotation marks omitted); and the Fair Debt Collection Practices Act (FDCPA), whose purpose is to protect consumers by “eliminat[ing] abusive debt collection practices by debt collectors,” 15 U.S.C. § 1692(e). Kentucky's usury statute sets the legal rate of interest for all loans made in that state at 8%. Ky.Rev.Stat. § 360.010(1). However, the statute merely provides a default rule—the parties to a contract can agree to a different rate of interest if they so desire. But what happens if a creditor waives its contractual right to collect the interest it contracted for in the original agreement? Can the creditor or its assignee then claim a right to collect interest based on the statutory rate that the contract displaced? If not, would the assignee's attempt to collect that interest constitute a violation of the FDCPA?

Under Kentucky law a party has no right to statutory interest if it has waived the right to collect contractual interest. And any attempt to collect statutory interest when it is “not permitted by law” violates the FDCPA. The district court held otherwise; we reverse and remand.

FACTS & PROCEDURAL HISTORY

On December 19, 2008, after Dede Stratton stopped making payments on her credit card, GE Money Bank “charged off” Stratton's $2,630.95 debt—GE determined that the debt was uncollectible and at least partially worthless. See McDonald v. Asset Acceptance LLC, 296 F.R.D. 513, 518 (E.D.Mich.2013). GE also stopped charging Stratton interest on her debt. 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, I.R.C. § 166(a)(2), and could avoid the cost of sending Stratton periodic statements on her account, 12 C.F.R. § 226.5(b)(2)(i). See also McDonald, 296 F.R.D. at 525. A little more than a year later, in an increasingly common practice, see Bartlett v. Portfolio Recovery Assocs., 438 Md. 255, 91 A.3d 1127, 1132 (2014), GE assigned its interest in Stratton's charged-off debt to PRA. According to industry norms, PRA would have paid anywhere between 4 and 14 cents on the dollar for Stratton's debt. See Fed. Trade Comm'n, The Structure and Practices of the Debt Buying Industry at ii (2013).

PRA is a “debt buyer.” “The most significant change in the debt collection business in recent years has been the advent and growth of debt buying.” Fed. Trade Comm'n, Collecting Consumer Debts: The Challenges of Change at 13 (2009). Judge Kollar–Kotelly provides an overview of the debt-buying industry:

To recoup a portion of its lost investment, an originating lender may sell a charged-off consumer loan to a Debt Buyer, usually as part of a portfolio of delinquent consumer loans, for a fraction of the total amount owed to the originating lender. Once a Debt Buyer has purchased a portfolio of defaulted consumer loans, it may engage in collection efforts (or hire a third-party to do so), which may include locating borrowers, determining whether borrowers are in bankruptcy, commencing legal proceedings, or “otherwise encouraging” payment of all or a portion of the delinquency.

Debt Buyers' Ass'n v. Snow, 481 F.Supp.2d 1, 4 (D.D.C.2006) (internal citations omitted). The industry has expanded rapidly. Debt buyers now pay billions of dollars to purchase tens of billions of dollars of consumer debt each year, most of it charged-off credit card debt like Stratton's. Debt buyers usually purchase bad debts in bulk portfolios, often in the form of a spreadsheet, and rarely obtain the underlying documents relating to the debt. See Fed. Trade Comm'n, The Structure and Practices of the Debt Buying Industry at ii-iii. Debt buying has attracted increasing attention from regulators. See Bureau of Consumer Fin. Prot., Debt Collection (Regulation F), 78 Fed.Reg. 67,847, 67,850 (Nov. 12, 2013) (advance notice of proposed rulemaking).

Two years after buying Stratton's debt, PRA filed suit against her in Kentucky state court. The complaint alleged that Stratton “owes [PRA] $2,630.95, with interest thereon at the rate of 8% per annum from December 19, 2008[,] until the date of judgment with 12% per annum thereafter until paid, plus court costs.” There are two things to note in this sentence: First, PRA alleged that Stratton owed interest during the 10 months after GE charged off her debt and before GE sold that debt to PRA. Second, PRA alleged that Stratton owed 8% interest rather than the 21.99% interest established in her contract with GE. The 8% 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.

Stratton then filed a putative class action against PRA in the Eastern District of Kentucky, alleging that PRA's attempt to collect 8% 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,” 15 U.S.C. § 1692f(1), 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. The court held that section 360.010 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 section 1692e(2)(A). Finally, the court concluded that PRA's suit was not a “threat” within the meaning of section 1692e(5) because “[t]he state court collection action was a lawful vehicle for PRA to recover the debt Stratton owes.”

Stratton appealed.

STANDARD OF REVIEW

We review de novo a district court's grant of a rule 12(b)(6) motion. Seaton v. TripAdvisor LLC, 728 F.3d 592, 596 (6th Cir.2013). A complaint, which need only contain a “short and plain statement of the claim showing that the pleader is entitled to relief,” Fed.R.Civ.P. 8(a)(2), must be read in the light most favorable to the plaintiff. The plaintiff's allegations must be accepted as true, the complaint must be read “as a whole,” and all reasonable inferences must be drawn in the plaintiff's favor.

Matrixx Initiatives, Inc., v. Siracusano, ––– U.S. ––––, 131 S.Ct. 1309, 1323, 179 L.Ed.2d 398 (2011). The ultimate question is whether the complaint, read sympathetically, shows that the plaintiff is at least plausibly entitled to relief. Top Flight Entm't, Ltd. v. Schuette, 729 F.3d 623, 630 (6th Cir.2013). And “of course, a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and ‘that a recovery is very remote and unlikely.’ ” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) ).

ANALYSIS

A. Kentucky's Usury Statute

“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). Section 360.010(1) of the Kentucky Revised Statutes 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 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....

There is no question that GE and Stratton “agree[d], in writing, for the payment of interest in excess of that rate.” Id. And for the purposes of this appeal, PRA concedes that GE waived its right to collect interest at the contractually agreed upon rate of 21.99%. The question is whether GE's waiver of its right to contractual interest could somehow give it or PRA, GE's assignee, the right to collect statutory interest. In other words, can someone collect interest if they agree not to collect interest? The answer must be no.

The plain text of the statute supports this conclusion. It states that any assignee “shall be bound for such rate of interest as...