In Stratton v. Portfolio Recovery Assoc., LLC, No. 13-6574 (6th Cir. Oct. 24, 2014), the Sixth Circuit reversed dismissal of a putative class action, holding a party’s waiver of statutory interest in favor of a different contractual interest rate waives the ability to pursue statutory interest in a subsequent collection effort.  Kentucky’s usury statute sets the legal rate of interest for all loans at 8%.  However, the statute also provides that parties may contractually agree to a different rate of interest. 

In 2008, Dede Stratton stopped making payments on her credit card owned by GE Money Bank.  GE stopped charging Stratton interest on her debt and claimed a bad-debt tax deduction.  A year later, GE assigned its interest in Stratton’s charged-off debt to the defendant, Portfolio Recovery Association (“PRA”).  PRA thus became a “debt buyer” with respect to Stratton’s debt.  PRA  filed suit against Stratton in Kentucky state court, alleging that Stratton owed not only the original debt, but interest at 8% from the date of accrual through the judgment.  PRA alleged that Stratton owed interest on the debt even for the time period that GE charged off the debt as a tax deduction.  Further, PRA alleged that Stratton owed 8% interest under Kentucky law, rather than the 21.99% interest established in her contract with GE (which GE had waived by claiming a bad-debt deduction).

In response, Stratton 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 the debt and sold it to PRA violated the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. (“FDCPA”).  The District Court dismissed Stratton’s complaint, holding that: (1) PRA had a right to interest at the default statutory rate of 8% even though GE had waived its right to contractual interest; (2) that PRA’s claim for prejudgment interest was a “request” rather than a “false representation” under the FDCPA; and (3) that PRA’s suit was not a “threat” under the FDCPA because it constituted a lawful mechanism for PRA to recover the debt.

In a 2-1 decision, the Sixth Circuit reversed the District Court’s dismissal of Stratton’s claims.  The Sixth Circuit held that while Kentucky’s usury statute set a default rule of 8% interest, “it applies until displaced by a contract, whereupon the contracting parties and their assignees ‘shall be bound’ by the terms of their agreement and the statutory rate shall not apply.”  The Sixth Circuit concluded that GE gave up its right to collect statutory interest when it and Stratton had agreed to a 21.99% interest rate, and the fact that GE later waived it right to contractual interest did not revive its right to collect statutory interest.  Thus, because PRA as GE’s assignor could not acquire any greater right than GE had in the contract and resulting debt, PRA was foreclosed from obtaining statutory interest. 

The FDCPA prohibits both “false, deceptive, or misleading representation or means in connection with the collection of any debt,” which includes the false representation of “the character, amount, or legal status of any debt.”  Further, the FDCPA is a strict-liability statute; a plaintiff is not required to prove that a defendant knowingly or intentionally violated the statute.  Because PRA did not have the legal right to collect statutory interest on Stratton’s debt, the Sixth Circuit concluded that PRA’s allegation that it could recover statutory interest constituted a “false representation” as to both the “amount” and “character” of the debt.  Thus, under the least sophisticated consumer test (by which FDCPA claims are determined), the Court concluded that PRA’s complaint could constitute a “threat” to take action that PRA could not legally take.

The Sixth Circuit also distinguished PRA’s claim for statutory interest as a mere “request,” noting that PRA’s claim for interest was not simply pled in vague terms in the prayer for relief in its complaint.  Instead, PRA’s express allegation in the body of its complaint that Stratton owed PRA interest at the statutory rate could plausibly constitute a representation regarding the character and amount of the debt. 

Accordingly, the Sixth Circuit reversed the District Court’s dismissal of Stratton’s putative class action.