California Appellate Court OKs Prejudgment Interest After Charge-off

Financial Services Law

Adding prejudgment interest to a consumer’s debt from the date of charge-off—and reporting the account with that interest to multiple credit bureaus—did not violate the Rosenthal Fair Debt Collection Practice Act, a California appellate panel has ruled.

The court concluded that the original contract between the consumer and the bank permitted the collection of such interest and that the bank had not waived its rights, passing along to the purchaser of the debt the ability to accrue interest.

What happened

Sue Watkins held a credit card issued by a national bank. In 2010, she stopped using the card and stopped making payments on the balance she had accrued. In March 2011, the bank charged off the account, sent Watkins a final statement with a balance of $1,603.22 and sold the account to a debt buyer.

The debt buyer added prejudgment interest from the date of the charge-off and attempted to collect the debt through one of its associated entities. A September 2012 letter to Watkins stated that the account balance was $1,772.32 and that the balance was continuing to accrue interest. In addition, the debt buyer began reporting the debt, including the prejudgment interest, to various credit reporting agencies.

The debt buyer changed its policy in February 2013 to freeze the accrual of interest on accounts like Watkins’, whose balance was frozen at $1,809.22. Later in the year, the debt buyer further amended its policy to collect only the original charged-off balance on accounts that had been placed with a collection attorney. As a result, the debt buyer reduced the balance of Watkins’ debt to $1,603.22 and reported that amount to credit reporting agencies thereafter. It also referred her debt to a law firm, which filed suit in 2014.

Watkins responded with a cross-complaint alleging that the debt buyer and its related entities violated the Rosenthal Act, the Consumer Credit Reporting Act and the Fair Debt Buying Practices Act. Among other claims, she asserted the defendants violated the statutes by accruing, reporting and attempting to collect post-charge-off prejudgment interest.

Following a bench trial, the court sided with the defendants and awarded them $1,603.22, plus attorney fees and costs. The court found that the terms and conditions of the original credit card contract allowed interest to accrue on the past-due amount and that the bank’s decision not to seek interest on the charged-off balance did not act as a waiver of the defendants’ ability to do so.

Watkins appealed. She argued that the bank—and therefore the defendants—waived the right to accrue post-charge-off interest. But the appellate panel disagreed, affirming judgment in favor of the defendants.

The court first rejected Watkins’ contention that the bank’s decision to treat the account as uncollectible and stop sending statements impacted the analysis. The bank “expressly informed Watkins in each set of terms that it could continue to add interest to the account even if it stopped sending statements after deeming the account uncollectible,” the court wrote. “Thus, the fact that [the bank] stopped sending regular monthly statements after it deemed the account uncollectible and charged it off does not, itself, establish that [the bank] waived its right to post charge-off interest.”

Watkins did not present evidence regarding how the bank handled her account after charge-off or its general policies and practices with regard to waiving interest on post-charge-off debts, the court said.

Concluding that the plaintiff failed to prove the bank knowingly or intentionally waived its right to post-charge-off interest, the appellate panel turned to the rate at which the defendants collected prejudgment interest. The contract between Watkins and the bank set forth a contractual rate of interest, but the debt buyer chose instead to collect at 7% , lower than the statutory rate set forth in Section 3289(b) of the Rosenthal Act.

The court held that if a creditor entered into an agreement containing a legal rate of interest, it remains bound by the terms of that agreement, and prejudgment interest at the statutory rate is available only in the absence of an applicable contractual provision.

The debt buyer elected the rate of 7% because it was below the statutory rate of 10% and allowed the company to avoid the burdensome task of determining the specific contract terms governing each individual debtor’s account, as the company often did not receive a copy of the applicable written terms or agreement when it purchased debts.

While the appellate panel disagreed with the trial court that the statute allowed collection of the 7% rate—emphasizing that the written contract between the parties containing a specific rate of interest trumped Section 3289(b)—it still found the rate was valid.

The trial court did not make a finding as to the specific rate of interest under the contract, but the evidence in the record showed that the terms sent to Watkins by the bank contained interest provisions with rates that exceeded 10% and allowed compound interest.

“Accordingly, while it appears the superior court based its ruling on what we now conclude to be an inaccurate interpretation of section 3289, we nevertheless agree with the court’s finding that [the debt buyer] did not improperly accrue or report interest when it applied the 7% interest rate to Watkins’ account,” the panel wrote. “As a result, the court’s ultimate conclusion that [the debt buyer] did not violate the Rosenthal Act was correct.”

As the defendants had the right to charge prejudgment interest, they never reported an incorrect balance to the credit reporting agencies, the court added, affirming judgment in favor of the defendants.

To read the opinion in Cavalry SPV I, LLC v. Watkins, click here.

Why it matters

The California appellate panel found that because the bank did not waive its right to accrue, report and attempt to collect prejudgment interest, the debt collector was able to step into its shoes and do so. As for the rate of interest charged, while the court determined the trial court incorrectly found the rate permissible based on statute, it affirmed judgment for the defendants because the rate was still below the rate in the original contract between the debtor and the bank, which governed the applicable rate.