Cavalry SPV I, LLC v. Watkins

• Decision Date: 01 July 2019
• Docket Number: D072299
• Citation: 249 Cal.Rptr.3d 334,36 Cal.App.5th 1070
• Court: California Court of Appeals Court of Appeals
• Parties: CAVALRY SPV I, LLC, Plaintiff, Cross-defendant, and Appellant, v. Sue WATKINS, Defendant, Cross-complainant, and Appellant; Cavalry Portfolio Services, LLC, Cross-defendant and Appellant.

36 Cal.App.5th 1070

249 Cal.Rptr.3d 334

CAVALRY SPV I, LLC, Plaintiff, Cross-defendant, and Appellant,

v.Sue WATKINS, Defendant, Cross-complainant, and Appellant;

Cavalry Portfolio Services, LLC, Cross-defendant and Appellant.

D072299

Court of Appeal, Fourth District, Division 1, California.

Filed July 1, 2019

Gersten Law Group, Ehud Gersten and David A. Stevens, San Diego, for Defendant, Cross-complainant, and Appellant Sue Watkins.

Simmonds & Narita, Tomio B. Narita, San Francisco and Jeffrey A. Topor, for Plaintiff, Cross-defendants, and Appellants Cavalry SPV I, LLC and Cavalry Portfolio Services, LLC.

DATO, J.

Sue Watkins defaulted on a credit card she opened through Citibank. As is common practice in the industry, Citibank charged off the debt,¹ stopped accruing interest or sending monthly statements, and eventually sold the account to a third party debt collection agency, Cavalry SPV I, LLC (Cavalry). Cavalry then added prejudgment interest from the date of charge-off and attempted to collect the debt through an associated entity, Cavalry Portfolio Services, LLC (CPS). As part of its collection efforts, CPS reported the debt with the additional interest included to several credit reporting agencies.

Watkins disputed the debt and did not pay it, Cavalry sued to collect, and Watkins filed a cross-complaint alleging violations of the Rosenthal Fair Debt Collection Practices Act (the Rosenthal Act; Civ. Code, § 1788 et seq. )² and other associated statutes governing debt collection practices. The superior court conducted a bench trial, rejected the claims in Watkins's cross-complaint, and entered a judgment in favor of Cavalry in the amount of the original debt, plus attorney fees. After the parties submitted additional briefing regarding the fees, the court awarded approximately one-half of the amount Cavalry requested.

On appeal, Watkins asserts the superior court erred by finding her liable for the original debt, denying the claims in her cross-complaint, and awarding Cavalry attorney fees. In their cross-appeal, Cavalry and CPS contend the superior court erred by reducing the attorney fees award. We conclude the superior court correctly determined that Watkins was liable for the original debt. With respect to the cross-complaint, we determine that Cavalry and the court relied on an inaccurate interpretation of section 3289, subdivision (b) to support the accrual of statutory prejudgment interest, but the superior court's denial of the counterclaims was nevertheless proper as Cavalry could have accrued such interest pursuant to section 3289, subdivision (a). Finally, we decide the superior court erred by awarding Cavalry and CPS attorney fees related to the defense of counterclaims. We therefore reverse the judgment as to the fees and remand the case to the superior court for further proceedings consistent with this opinion.

FACTUAL AND PROCEDURAL HISTORY

In 2002, Citibank sent Watkins a promotional offer for a Citgo gas station credit card. After Watkins filled out the application and returned it, Citibank sent her a credit card, along with written terms and conditions governing use of the card. Watkins used the credit card regularly and made monthly payments on the account for several years.

In 2004, Watkins paid off the entire balance on the account. But she continued to use the card, accruing additional balances and, in August 2007, she took out a cash advance of $1,400. She made a payment of $150 the month after the advance and then stopped using the card, but continued to make smaller payments, slowly reducing the balance.

Between 2008 and 2009, while Watkins was still making regular payments on the account, Citibank sent Watkins three separate "Notice of Change in Terms and Right to Opt Out" documents. Citibank informed her of one such notice in her January 2009 statement by including a statement in bold print and capital letters that read, "PLEASE SEE THE ENCLOSED NOTICE OF CHANGE IN TERMS FOR IMPORTANT INFORMATION ."

In 2010, Watkins stopped making payments on the account despite an outstanding balance of approximately $1,200. Citibank continued to accrue finance charges and interest over the next six months, sending Watkins regular statements during that time showing the additional fees and interest.

On March 6, 2011, having received no further payments, Citibank charged off the account. It sent Watkins a final statement in March 2011. There were no further monthly statements and Citibank stopped accruing interest. The account balance at the time of charge-off was $1,603.22. Although it was no longer sending statements to her, Citibank did send Watkins an additional amended card agreement in 2011, after the account was charged off.

In August 2012, Citibank sold Watkins's account to Cavalry, a major buyer of bad debt, along with numerous other delinquent accounts. At the time of sale, Citibank listed the balance on the account as $1,603.22, the same amount as when Citibank originally charged off the account in March 2011. After purchasing the debt, Cavalry added prejudgment interest from the date of the charge-off at a rate of 7 percent. Cavalry believed at the time that adding interest at this rate was permissible under California law because the 7 percent rate was below the state statutory rate of 10 percent.

Collection Efforts

Following its purchase of Watkins's account, Cavalry attempted to collect the debt through CPS, an associated entity. On September 7, 2012, CPS sent Watkins a letter informing her that Cavalry had purchased the account and referred it to CPS for servicing. The letter stated that the account balance was $1,772.32, and that it was continuing to accrue interest, but did not provide any details as to the interest rate or amount of interest already accrued. The letter added that "[u]nless you notify Cavalry within thirty days after receiving this letter that you dispute the validity of this debt or any portion thereof, Cavalry will assume this debt is valid."

That same month, CPS began reporting the debt to the various credit reporting agencies, including the prejudgment interest it had added to the account balance. In November, CPS sent Watkins another letter listing the account balance as $1,794.15 and offering up to a 20 percent discount if she paid the debt within 30 days. Again, the letter did not provide any details regarding the interest rate, and did not break down the outstanding balance or otherwise indicate the amount of interest already accrued.

In February 2013, Cavalry conducted a risk assessment with their in-house and external counsel and, as a result, changed its policy to freeze the accrual of interest on accounts (like Watkins's) that had been placed with CPS for collection. Accordingly, Watkins's account balance was frozen at $1,809.22. CPS sent Watkins two more letters, in June and August 2013; each listed the account balance as $1,809.22, and each offered a 40 percent "INSTANT DISCOUNT ." The letters also informed Watkins that CPS had told a credit bureau about a late payment, missed payment, or other default on the account, and that such information might be reflected on her credit report. Additional letters in October and December 2013 continued to list the balance at $1,809.22, but offered only 30 percent and 20 percent "INSTANT DISCOUNT[S] ," respectively. None of the letters provided any information about the interest rate or amount of interest accrued and Watkins did not respond to any of these letters.

In 2013, Cavalry conducted another risk assessment, again with internal and external counsel, and as a result changed its policy to collect only the original charge-off balance on accounts that had been placed with a collection attorney. However, Cavalry continued reporting the balance as $1,809 to the credit agencies through the end of November 2014. Thereafter, CPS reported a balance of $1,603 on Watkins's account.

Around the same time, Cavalry referred Watkins's account to the law firm of Lang, Richert & Patch (Lang). On March 14, 2014, Lang sent Watkins a letter informing her that they had been retained by Cavalry to collect the outstanding account balance of $1,603.22. The letter did not explain why the balance had been reduced, but did inform Watkins that: (1) she had 30 days to dispute the validity of the debt; (2) Lang would provide verification of the debt if requested within the 30-day period; and (3) thereafter, Lang would be entitled to file a lawsuit against her for the collection of the debt, along with associated attorney fees and costs.

On March 18, 2014, Watkins responded via letter formally disputing the debt and requesting notice of "the date that this alleged debt was purchased by Cavalry" and "the date this alleged debt became a charged-off account by Citibank." She also sent a second letter on April 1, 2014, stating, "I dispute this alleged Citgo debt." Lang responded via letter on April 23, 2014, and provided a copy of the charge-off statement from Citibank and certain documents related to the sale and assignment of certain accounts from Citibank to Calgary. In addition, as of April 14, 2014, CPS reported to the credit agencies that the debt was disputed.

On May 5, 2014, Watkins wrote separately to Citibank and requested information regarding the sale and assignment of her account, including "a true and correct copy of the Bill of Sale and Assignment from Citgo and, a copy of the final Citgo statement for this account." Citibank did not respond to this letter.

Complaint and Cross-complaint

On May 27, 2014, Lang filed a complaint against Watkins on behalf of Cavalry. The complaint alleged breach of contract and common counts and sought damages in the amount of $1,603.22, plus attorney fees according to proof. It did not seek interest on the alleged damages. In response, Watkins filed a cross-complaint, and later a first amended cross-complaint, alleging that Cavalry and CPS violated the Rosenthal Act, the Consumer Credit Reporting Act (CCRA...