N.D. Illinois: Debt Buyer Cannot Collect Interest if Implicitly Waived by Original Creditor’s Actions; Finds Debt Buyer is Subject to FDCPA

Gomez v. Cavalry Portfolio Services, LLC et al., Case No. 14-cv-9420 (N.D. Ill. Sept. 24, 2018) is a court decision full of questions but not much analysis on some key issues. The case involved the statute of limitations, whether a purchaser of defaulted debt is a debt collector subject to the Fair Debt Collection Practices Act (FDCPA), and what happens to a subsequent creditor's right to collect interest if the original creditor stopped doing so after charge off. The insideARM perspective below discusses some gaps in this decision.

Factual and Procedural Background

Plaintiffs incurred a credit card debt through FIA Card Services, a subsidiary of Bank of America (BOA). In accordance with its policies on charged off accounts, BOA stopped assessing interest on the account and stopped sending periodic statements to plaintiffs once it charged off the account. The cardholder agreement for this account, which plaintiffs agreed to when they opened the credit card, states that BOA’s failure to exercise any of its rights under the agreement does not constitute a waiver those rights in the future.

Eventually, BOA sold the account to Cavalry SPV I, LLC (Cavalry SPV), which placed the account for collection with Cavalry Portfolio Services, LLC (CPS). When CPS began collection efforts on the account, it assessed interest from the time of charge off through the date of its first letter to plaintiffs, and continued to assess interest while collection efforts continued. CPS sent collection letters to plaintiffs on January 16, 2013 and March 27, 2013, with the balance increasing in the subsequent letter due to interest.

After plaintiffs received the second letter, they retained an attorney for the purposes of settling the account. The attorney sent a request for debt validation to CPS. On March 21, 2014, CPS responded with a letter that stated, “Per your request, please find enclosed the verification of your client’s debt. Your account is now subject to resumption of collection efforts. You may contact us at [phone number] from [time] Monday through Friday.” There response letter did not contain a request for payment or any reference to settling the debt.

On November 24, 2014, plaintiffs filed a lawsuit against CPS alleging that adding post-charge off interest to the account after BOA waived such interest violated the FDCPA. Both parties filed motions for summary judgment.

The Decision

The court’s decision was broken down into three parts -- one per each issue referenced in the beginning of this article.

Waiver of Post-Charge Off Interest

The court found that BOA’s actions qualified as an implied waiver of the right to collect post-charge off, pre-sale interest. The court was convinced that BOA effected an implicit waiver by not charging interest or sending periodic statements to plaintiffs for two years for two years. The court referenced BOA's broader policy of stopping the calculation and assessment of interest for charge off accounts as a knowing and voluntary action.

According to the court, since BOA waived its right to post-charge off interest, it could not transfer such right when it sold the account to Cavalry SPV. The court based this on the principle that a party cannot assign a right it does not possess. Since, according to the court, Cavalry SPV did not obtain the right to post-charge off interest, then CPS could not collect it for this account. The first two letters sent by CPS attempted to collect such interest, the court found them problematic under the FDCPA. However, the court found the verification response letter to be compliant because it made no reference to post-charge off interest and made no demand for payment.

Cavalry SPV as Debt Collector Subject to FDCPA

Next the court turned to whether Cavalry SPV, as a debt purchaser, is subject to the FDCPA when CPS -- not Cavalry SPV -- was collecting on the debt. The court cited the U.S. Supreme Court's three-part definition of debt collector from Henson v. Santander Consumer USA, Inc. as “(1) a person whose principal purpose is to collect debts; (2) a person who regularly collects debts owed to another; or (3) a person who collects its own debts, using a name other than its own as if it were a debt collector.”

However, the court then jumped to a pre-Hansen Seventh Circuit decision, Ruth v. Triumph Partnerships, 577 F.3d 790 (7th Cir. 2009), that states a debt purchaser is considered a debt collector if the purchased debt is in default. The reasoning for this being “[t]he purchaser of an already-defaulted debt -- like the debt collector, and unlike the originator and servicer of a non-defaulted debt -- has no ongoing relationship with the debtor and, therefore, no incentive to engender goodwill by treating the debtor with honesty and respect.”

Without any further analysis, the court simply found that Cavalry SPV is subject to the FDCPA because it purchased the account in question after default.

Statute of Limitations

Ultimately, the court granted summary judgment in favor of the defendants on statute of limitations grounds. While the court did take issue with the first two letters sent to plaintiffs, it noted that these two letters were sent more than a year prior to the filing of the lawsuit and thus were outside of the FDCPA's statute of limitations. The court found nothing false or misleading about the verification response letter, which was the only letter that was within the statute of limitations. Based on this, the court entered judgment in favor of Cavalry SPV and CPS.

insideARM Perspective

While the statute of limitations ultimately saved the day, the court's decision contains many unanswered questions and some eyebrow-raising reasoning.

First, even though the court referenced the cardholder agreement, there is zero analysis about the impact of the contractual terms on BOA's alleged waiver. By agreeing to the cardholder agreement, plaintiffs explicitly waived a non-action, implicit waiver. If plaintiffs waived the "non-action waiver," how can it then be the grounds for finding a violation? And let's also address the larger elephant in the room: why does an alleged implicit waiver by BOA hold water in the court's eyes but not a concrete, explicit contractual waiver by plaintiffs? 

Second, the decision regarding whether or not Cavalry SPV -- as opposed to CPS -- is a debt collector lacks much needed analysis. The court cites Henson but fails to analyze how it impacts Ruth, a pre-Henson Seventh Circuit decision, when all courts in the United States are bound by the Supreme Court's ruling. The court’s decision does zero analysis on Cavalry SPV and CPS being two, separate entities with separate roles. There was also no analysis of whether Cavalry SPV and CPS, both of which contain "Cavalry" in their name, avoid prong 3 of the Henson definition.

Third, as more of an observation, the court dodged analyzing an issue that will be heard by the U.S. Supreme Court in the upcoming term: is an action that does not request payment considered debt collection? Defendants argued in their motion for summary judgment that the verification response letter was not a collection communication. Instead of performing any analysis on this particular issue, the court instead said that even if it was, the letter was not false or deceptive.

In sum, it would have been nice to see a deeper analysis by the court.