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8th Cir. Rejects Arguments That Collecting Interest Not Allowed Under State Law Did Not Violate FDCPA

The U.S. Court of Appeals for the Eighth Circuit recently held that seeking to collect compound interest in violation of state usury law results in a misrepresentation of the amount of a debt in material violation of the federal Fair Debt Collection Practices Act (FDCPA).

In so ruling, the Eighth Circuit reversed and remanded the trial court’s judgment against the consumer, in part, as to his claims for alleged violation of the FDCPA, 15 U.S.C. 1692, et seq., based on a letter that sought to collect compound interest on the subject debt, in violation of Minnesota’s usury statute.

A copy of the opinion in Coyne v. Midland Funding LLC is available at:  Link to Opinion.

A consumer cardholder received a letter from a law firm regarding credit card debt in his name, and asserting that the consumer owed an “account balance of $17,230.29 consist[ing] of the principal balance of $13,205.30 and interest of $3,871.39 at the rate of 6.00% plus incurred costs of $153.60” (the “debt-collection letter”).  Two additional letters were sent on behalf of the debt’s current owner by another debt collection entity, but these letters were not at issue.

The consumer filed a putative class action lawsuit against the law firm, as well as a non-law firm debt collector and the owner of the debt, alleging violations of subsections § 1692e and § 1692f of the FDCPA for using “false, deceptive, or misleading representation or means” and “unfair or unconscionable means” in attempting to collect interest on the debt’s principal balance not authorized by the underlying card agreement not permissible under Minnesota law.  See Minn. Stat. § 334.01(1) (“[i]n the computation of interest upon any . . . instrument or agreement, interest shall not be compounded” unless the parties have contracted for compound interest).

The law firm, debt collector, and debt owner moved to dismiss the amended complaint for failure to state a claim, which was granted on the grounds that the consumer failed to allege that any statement in the letters “was not only false but materially so.”  The trial court denied the consumer’s request for leave to file a motion to reconsider, holding that the letters’ representations “regarding interest were either not material or did not violate the FDCPA.”  This appeal followed.

The only issue considered on appeal was whether the law firm violated 15 U.S.C. 1692e and 1692f by attempting to collect, and representing the plaintiff owed, compound interest on the debt in violation of Minn. Stat. 334.01.

Though the parties initially disputed in the lower court whether the “unsophisticated consumer” or “competent lawyer” standard should apply to the collection letter at issue, due to the fact that the consumer is a licensed attorney, the law firm chose not to contest the trial court’s holding that the unsophisticated consumer standard applies, and thus the allegations were evaluated under this standard on appeal.

The Eighth Circuit first examined the consumer’s allegations that he did not agree to pay compound interest on the debt, and that the debt’s principal balance already contained contractual interest.

The trial court agreed that an unpaid credit-card debt sold to another party would include “the interest and fees [the credit-card company] originally charged.” Because neither party contested this ruling on appeal, the Eighth Circuit concluded that the consumer plausibly alleged that the principal balance mentioned in the debt-collection letter included contractual interest.  See Haney v. Portfolio Recovery Assocs., L.L.C., 837 F.3d 918, 921, 924 (8th Cir. 2016) (per curiam).

In reviewing the debt-collection letter’s assertion that the consumer owed “interest of $3,871.39 at the rate of 6.00% on “the principal balance of $13,205.30,” the Eighth Circuit calculated this amount to be consistent with amounts that would have accrued on the principal balance from the date the credit card company sold the debt (April 14, 2011, according to the debt-collection letter) to the date of the debt collection letter (Feb. 26, 2016).

The Court reasoned that if the principal balance already included contractual interest, that the debt-collection letter sought to collect interest on contractual interest.  Thus, the Eighth Circuit held, the consumer’s amended complaint plausibly alleged that the law firm attempted to collect, and told him he owed, an amount and type of interest not permitted under state law.  See Minn. Stat. § 334.01(1);  Lampert Lumber Co. v. Ram Constr., 413 N.W.2d 878, 883 (Minn. Ct. App. 1987) (“[i]n the computation of interest upon any . . . instrument or agreement, interest shall not be compounded” unless there is a “contract to pay [such] interest.”).

In Haney v. Portfolio Recovery Assocs., LLC, the Eighth Circuit previously held that under the unsophisticated-consumer standard, a debtor’s allegations that a debt-collection letter sought to collect “an interest-on-interest amount not allowed as a matter of state law,” stated valid claims under sections 1692e and 1692f of the FDCPA, but did not address whether attempts to collect a debt amount that the debtor does not legally owe constituted material violations of those subsections.  Haney, at 931-932.

The Eighth Circuit since established that a materiality standard applies to 1692e (Hill v. Accounts Receivable Servs., LLC, 888 F.3d 343, 346 (8th Cir. 2018)), but had not yet clarified whether the standard applies to 1692f.  However, the Court did not address the issue here, because “an attempt to collect a debt not owed is a material violation of 1692f(1).”  Demarais v. Gurstel Cargo, P.A., 869 F.3d 685, 699 (8th Cir. 2017).

Here, the Eighth Circuit held that a false representation of the amount of debt that overstates what is owed under state law materially violates section 1692e(2)(A) as well.

The Court found that the representation not only violates the plain language of the statute prohibiting the “false representation” of the “amount” of “any debt,” but also because an overstatement of the debt’s amount necessarily misleads the debtor about the amount he owes under his agreement with the creditor. See Hill, 888 F.3d at 345–46; cf. Demarais, 869 F.3d at 699.

Although the Eighth Circuit did not outright reject the law firm’s argument that the debt collection letter did not violate the FDCPA because the amount of interest stated in its letter was contractually authorized, at the pleading stage, it must accept the consumer’s allegations that he did not agree to be charged compound interest and so may not be charged it.  See Minn. Stat. § 334.01(1).

Moreover, the Court declined to consider the law firm’s argument that a debt collector may try to collect compound interest (which state law does not allow) without materially violating the FDCPA so long as the total amount of interest sought does not exceed the maximum amount permitted under the debtor’s contract, as neither of the lower court’s orders support its contention that requesting less interest than the amount owed does not materially violate the FDCPA.

Lastly, the Eighth Circuit rejected the law firm’s claims at oral argument that the trial court noted that the debt collection letter was not, in fact, a collection letter, as the trial court did not make that observation, and could not do so at the pleading stage, as doing so would conflict not only with the allegations of the amended complaint, but the plain language on the face of the debt collection letter that it “is from a debt collector and is an attempt to collect a debt.”

Accordingly, the Eighth Circuit concluded that the trial court erred in holding that the debt-collection letter’s assertion that the consumer owed, and attempts to collect, compound interest in violation of Minn. Stat. § 334.01 did not state a plausible claim under §§ 1692e and 1692f.  The Appellate Court therefore reversed the trial court’s judgment only as to these claims against the law firm, and remanded for further proceedings.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions.

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