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California Court of Appeal: Prejudgment interest accrual did not violate Rosenthal Fair Debt Collection Practices Act

Courts State Issues Debt Collection Attorney Fees Interest

Courts

On July 1, the California Court of Appeal for the Fourth Appellate District affirmed in part and reversed in part a previous superior court judgment in favor of a debt collector, holding that the debt collector did not violate the California Rosenthal Fair Debt Collection Practices Act (the Rosenthal Act) by adding prejudgment interest from the date of charge-off to a consumer’s account, and reporting the account, with such additional interest, to several credit bureaus.

The lawsuit initially arose when the debt collector sued to collect the entire amount owed, and the consumer filed a cross-complaint alleging the debt collector had violated the Rosenthal Act, among other laws, by “‘falsely representing the character, amount, or legal status of the alleged debt,’ ‘failing to verify that the amount demanded was accurate,’ and ‘failing to provide an accurate accounting of the alleged debt.’” The superior court rejected the consumer’s claims and entered judgment in favor of the debt collector in the amount of the debt plus attorney’s fees.

On appeal, the Court of Appeal concluded that the debt collector did not violate the Rosenthal Act because the consumer failed to show that the original creditor waived the right to accrue additional interest on the account by not accruing the interest after charge-off. Moreover, the Court of Appeal noted that the statutory prejudgment interest rate is only available when there is no specified contractual rate. However, the Court determined that the debt collector did not improperly accrue interest when it applied a seven percent interest rate, as seven percent is lower than the statutory interest rate and the contractual interest rate. With respect to attorney’s fees, the Court of Appeal concluded the superior court improperly awarded fees associated with the legal action to collect the debt and the cross-complaint, noting that the superior court, “should have limited the fee award to time spent on efforts necessary to prove the allegations in the complaint.” Therefore, the court reversed the fee judgment and remanded the case back to superior court for “further consideration of the fee award in accordance with our narrower interpretation of the contractual fee provision.”

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