The U.S. Court of Appeals for the Ninth Circuit recently ruled that a debt collection letter seeking prejudgment interest on the debt did not violate the Fair Debt Collection Practices Act (FDCPA) or California’s Rosenthal Act.  A violation of the FDCPA is deemed to be a violation of the Rosenthal Act.

The debt collector sent a letter to the plaintiff in May 2012 demanding that she pay a principal amount owed for dental services plus 10 percent interest. The plaintiff argued that the interest charge violated the FDCPA’s prohibition on attempting to collect any amount that is not “expressly authorized by the agreement creating the debt or permitted by law.”  According to the plaintiff, the prejudgment interest was not “permitted by law” because California does not allow a debt collector to charge interest without a prior judgment.  The plaintiff also argued that, even if prejudgment interest is permitted under California law, it is awarded only pursuant to a judgment, and therefore is not “permitted by law” for purposes of prejudgment debt collection under the FDCPA.

California’s Civil Code allows a creditor to recover prejudgment interest from the date as of which the creditor has a vested right to recover “damages certain, or capable of being made certain by calculation.”  When no rate is stipulated by contract, such interest can be charged at an annual rate of 10 percent.

The Ninth Circuit concluded that under these Civil Code provisions, a creditor is entitled to prejudgment interest at the allowed rate “as of the day the amount at issue becomes ‘calculable…mechanically, on the basis of uncontested and conceded evidence,’ and it is available ‘as a matter of right,’ rather than at the discretion of a court.”  Accordingly, the Ninth Circuit found that if the collector’s position was correct that the debt was certain when it wrote to the plaintiff, its attempt to seek prejudgment interest was “permitted by law” and did not violate the FDCPA or the Rosenthal Act.   Since there was a factual dispute as to whether the debt was certain or capable of being made so, the Ninth Circuit ruled that that the district court had inappropriately entered summary judgment in favor of the plaintiff.

The Ninth Circuit also rejected the plaintiff’s argument that a debt collector generally cannot seek to collect prejudgment interest without a judgment.  Noting that the FDCPA would prohibit the filing of a lawsuit to collect an amount not authorized by the agreement or permitted by law, the court observed that the plaintiff’s proposed rule would lead to a Catch-22 since “a person would not be able to file a lawsuit seeking prejudgment interest unless she had already obtained a judgment awarding prejudgment interest.”

Attorneys in Ballard Spahr’s Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. To assist clients in responding proactively to the documentation-related challenges being faced by the debt collection industry and creditors attempting to collect their own debts, the Group has formed a Collection Documentation Task Force. Attorneys in the Group also prepare clients for Consumer Financial Protection Bureau examinations.

For more information, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, Collection Documentation Task Force Chair Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or Scott M. Pearson at 424.204.4323 or pearsons@ballardspahr.com.


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