Debt buyers and their collection agencies should review their accounts' underlying purchase agreements in the Northern District of Illinois (N.D. Ill.) because a trend is emerging about whether or not debt buyers can collect post-charge-off interest. In a recent decision in Tabiti v. LVNV Funding, LLC, et al., No. 13-cv-7198 (N.D. Ill. Mar. 27, 2019), the court found that the language of the purchase agreement as well as the original creditor's waiver precluded a debt buyer and its collection agencies from collecting post-charge-off interest.
Factual and Procedural Background
After plaintiff defaulted on his credit card account, the bank charged off the balance. While the underlying credit agreement allowed the bank to collect post-charge-off interest, the bank chose not to do so. According to plaintiff, this was to avoid having to continue sending periodic account statements.
The bank eventually sold the account to a debt buyer. The original purchase agreement -- which is the crux of this case -- stated as follows:
“Unpaid Balance” means, as to any Account, the total outstanding unpaid balance, as shown on Seller's books and records as of the last Business Day prior to the File Creation Date (including all amounts due in respect of purchases, cash advances, finance charges, payments and credit adjustments, late fees, return check charges, overlimit fees and all other applicable fees and charges) excluding post charge-off interest.
. . . .
(a) Purchaser represents and warrants to Seller that Purchaser's primary purpose in purchasing Charged-off Accounts is to attempt legal collection of the Unpaid Balances owed on such Charged-off Accounts and is not to commence an action or proceeding against Cardholders obligated under such Charged-off Accounts. Notwithstanding the preceding, the Purchaser retains the right to pursue an action or proceeding in the event that reasonable legal collections are not successful in securing a satisfactory payment on the account.
(b) Subject to the terms and conditions of this Agreement, on the Closing Date, Seller will sell, assign and transfer to Purchaser and Purchaser shall purchase all of Seller’s rights, title and interest in and to eligible Charged-off Accounts (which Accounts shall be listed either on a diskette or a spreadsheet to be provided to Purchaser) at a Purchase Price determined by multiplying the total Unpaid Balances of the Charged-off Accounts as of the File Creation Date being sold by Purchase Price Percentage.
The original debt buyer sold the account to a subsequent debt buyer, transferring “all ownership rights.”
The subsequent debt buyer’s collection agencies sent two letters to plaintiff: One attempting to collect a balance of $11,734.86 in April 2011 and another attempting to collect a balance of $12,108.97 in December 2011. Both letters included a disclosure that the account balance may increase due to interest.
When these attempts to collect were unfruitful, the subsequent debt buyer retained a law firm to file a collection suit against plaintiff. Specifically, the lawsuit sought to recover the purchase balance, which was $10,463.51, plus any additional accrued interest.
Procedurally, there was some back and forth, but ultimately plaintiff claims that the subsequent debt buyer and its collection agencies violated the Fair Debt Collection Practices (FDCPA) because they did not have the authority to accrue and collect post-charge-off interest.
The court granted summary judgment in favor of plaintiff on the FDCPA claim. The court found that the FDCPA claim “turns on the legal effect of the purchase agreement” between the bank and the first debt buyer. Since the subsequent debt buyer purchased “all ownership rights” of the original debt buyer, the rights that were transferred from the bank to the original debt buyer are what would have transferred to the subsequent debt buyer.
The original purchase agreement transferred “all of the Seller’s rights, title and interest in and to eligible Charged-off Accounts.” (Internal quotations omitted.) Since the underlying credit agreement between the bank and plaintiff allowed the bank to assess and collect post-charge-off interest, defendants argued that this right transferred down the chain of debt buyers.
The court, however, disagreed for two main reasons.
First, the court noted that the definition of “Charged-off Accounts” in the purchase agreement refers to the unpaid balance excluding post-charge-off interest. Another section of the agreement states that its purpose is to attempt legal collection of the unpaid balances, which, read in conjunction with the definition of charged-off accounts, also excludes post-charge-off interest. Read in its entirety, the court concludes that the agreement both contemplated and excluded the transfer of the right to post-charge-off interest.
Second, even if the purchase agreement transferred the right to assess and collect post-charge-off interest, the bank's "waiver of post-charge-off interest precluded defendants from collecting it." By ceasing to collect post-charge-off interest -- regardless of the reason behind the bank's decision -- the bank effectively waived it. Since the bank could not sell or transfer a right it no longer had, the right to post-charge-off interest did not transfer with the sale.
This is not the first time that N.D. Illinois ruled that an original creditor’s waiver of assessing post-charge off interest precludes subsequent debt buyers from then assessing and collecting the same. Back in September 2018, insideARM published an article about a case called Gomez v. Cavalry Portfolio Services, LLC, which came to a similar conclusion. The rulings in Gomez and here in Tabiti were decided by two different judges within the district, which indicates a trend.
On a side note, these decisions bring back memories of the interest disclosure cases, also known as “reverse-Avila” claims, out of New York. When the Second Circuit heard cases such as Taylor v. FRS and DeRosa v. CAC Financial Corp., a repeated argument on the consumer’s side was that even though the original creditor was not accruing interest at that time, it was not indicative of what would happen with the account in the future. This argument was supported by the language of underlying credit agreements that, similar to this case, allowed the original creditor to assess and collect post-charge-off interest. The lack of consistency -- specifically, that consumer attorneys can argue one thing in one jurisdiction and then argue the exact opposite in another and allege both are FDCPA violations -- is something that contributes to the litigation dilemma in this industry.