Grace v. LVNV Funding, Inc.

• Decision Date: 23 May 2014
• Docket Number: Civil Action No. 3:13–CV–1021–H.
• Citation: 22 F.Supp.3d 700
• Court: U.S. District Court — Western District of Kentucky
• Parties: Tiffany GRACE, Plaintiff v. LVNV FUNDING, INC. and PSI Louisville, Inc., Defendants.

22 F.Supp.3d 700

Tiffany GRACE, Plaintiff

v.LVNV FUNDING, INC. and PSI Louisville, Inc., Defendants.

Civil Action No. 3:13–CV–1021–H.

United States District Court, W.D. Kentucky, at Louisville.

Signed May 23, 2014.

James H. Lawson, Lawson at Law, PLLC, James R. McKenzie, James R. McKenzie Attorney PLLC, Louisville, KY, for Plaintiff.

Stephen A. Brooks, Stephen Brooks PSC, Louisville, KY, for Defendants.

MEMORANDUM OPINION AND ORDER

JOHN G. HEYBURN II, Senior District Judge.

This case raises the interesting question of when a “service charge” might actually constitute interest under Kentucky law. Defendant PSI Louisville (“PSI”) collects debts for an emergency room that Grace once visited. The emergency room charges what its intake contract deems an 18% “service charge” on past due accounts. Grace failed to pay her bill and PSI eventually reported to various credit agencies a past due amount that included the “service charge.” Grace argues that this “service charge” is actually disguised interest. If so, it would be usurious under Kentucky law, and PSI's attempt to collect interest to which neither it nor the emergency room was entitled violates three separate provisions of the Fair Debt Collection Practices Act (“FDCPA”). PSI has moved to dismiss Grace's claims and Grace has cross-motioned for summary judgment. These motions present questions concerning Kentucky's usury laws which the state's courts have yet to answer.

I.

On June 5, 2010, Grace received medical services from Physicians in Emergency Medicine (“PEM”), the emergency care group at Jewish Hospital, Louisville, Kentucky.¹ Upon admission, Grace signed an agreement accepting responsibility for charges for services rendered by PEM, including “any balance due in excess of amounts paid by other persons or agencies.” The agreement contained the following clause:

A service charge may be applied on all accounts which are 90 days or more past due at a rate of 1 ½% per month.

Grace did not pay her medical bill. In February 2012, PEM engaged PSI to collect the debt. PSI is not an assignee; rather, after a certain period of time has passed, PEM engages PSI to take over collection activity on its behalf on a contingency fee basis.² In May 2012, PSI reported Grace's debt and the accumulated 18% per annum “service charge” to various credit agencies. The original debt was for $292, but with the accumulated service charge, the total amount PSI reported in arrears was $411.

In May 2013, Grace obtained a credit report showing PSI had reported her PEM debt.³ In September 2013, Grace filed suit in state court; Defendants removed the suit to federal court on October 18, 2013. Grace's complaint alleges that by reporting with her debt an amount she contends is disguised interest at a rate that violates Kentucky law, PSI has violated the FDCPA provisions that prohibit: (1) falsely representing the “character, amount, or legal status” of Grace's debt, 15 U.S.C. § 1692e(2)(A) ; (2) communicating credit information PSI knew or should have known to be false, 15 U.S.C. § 1692e(8) ; and (3) attempting to collect an amount “(including any interest, fee, charge, or expense incidental to the principal obligation)” not permitted by law, 15 U.S.C. § 1692f(1).⁴

II.

Here, not only has PSI presented matters outside of the pleadings, Grace has moved for summary judgment and PSI has fully responded. Thus, the Court will treat each motion as one for summary judgment. Summary judgment is proper if the pleadings, depositions, answers to interrogatories and admissions on file, together with any affidavits, show that there exists no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c) ; Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Celotex addressed the initial burdens of the parties under Rule 56, and Anderson addressed the standards under which the record is to be analyzed within the structure of Rule 56. The initial burden is on the moving party to demonstrate, “with or without supporting affidavits,” the absence of a genuine issue of material fact and that judgment as a matter of law should be granted in the moving party's favor. Celotex, 477 U.S. at 324, 106 S.Ct. 2548 (quoting Fed.R.Civ.P. 56). The Supreme Court has instructed that a genuine issue of material fact exists when there are “disputes over facts that might affect the outcome of the suit under the governing law.” Anderson, 477 U.S. at 248, 106 S.Ct. 2505. Once the moving party has met the initial burden, the opposing party must “go beyond the pleadings” and “designate specific facts showing that there is a genuine issue for trial.” Id.

III.

Before assessing the true nature of PEM's “service charge,” the Court will briefly discuss Kentucky's pertinent statutory backdrop.

Kentucky's general interest and usury statute provides a default legal interest rate but also caps the upward deviation that parties may agree to in writing. For contracts where the original principal amount is $15,000 dollars or less, KRS § 360.010 provides the following:

The legal rate of interest is eight percent (8%) per annum, but any party or parties may agree, in writing, for the payment of interest in excess of that rate as follows: (a) at a per annum rate not to exceed four percent (4%) in excess of the discount rate on ninety (90) day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District where the transaction is consummated or nineteen percent (19%), whichever is less....

Id. This statute is one of general applicability, designed to protect consumers from usurious rates in consumer contracts. Unlike some states' usury laws, Kentucky does not limit the types of transactions covered by its statute.⁵ The interest cap stated in KRS § 360.010 explicitly applies to “any contract or other obligation,” which encompasses the medical services contract between Grace and PEM at issue here.

Over the years, Kentucky's legislature has carefully and explicitly delineated narrow exceptions for charges that certain businesses can collect without violating the general interest and usury statute.⁶ The legislature also allows “time price differentials” at higher rates than the legal interest rate in retail installment transactions if a bevy of conditions are met.⁷ None of those provisions apply here. Further, while some states have enacted specific statutory schemes governing medical services providers' ability to impose “late payment charges” on accounts receivable,⁸ Kentucky has not. In Kentucky, then, KRS § 360.010 applies to cap the interest rate that medical service providers with contracts like PEM's can charge patients.⁹ Thus, if PEM's 18% per annum service charge on delinquent accounts is nothing more than disguised interest, it is usurious under Kentucky law.

A.

To decide whether PEM's contract violates Kentucky law, the Court must answer whether PEM's “service charge” is a veritable service charge or disguised interest. In Kentucky, when a party claims a transaction is usurious, courts have looked past the form of the transaction to its substance:

No case is to be judged by what the parties appear to be or represent themselves to be doing, but by the transaction as disclosed by the whole evidence; and, if from that it is in substance a receiving or contracting for the receiving of usurious interest for a loan or forbearance of money the parties are subject to the statutory consequences, no matter what device they may have employed to conceal the true character of their dealings.

Hurt v. Crystal Ice & Cold Storage Co., 215 Ky. 739, 286 S.W. 1055, 1056–57 (1926) (citation omitted). Though the Hurt case has some age, it makes sense and has been referenced recently. See Hamilton v. York, 987 F.Supp. 953 (E.D.Ky.1997) (citing Hurt approvingly and finding a company's “check cashing” and “deferral” charges to be, in substance, nothing more than interest bearing loans).

KRS Chapter 360 does not define the term “interest,” but Kentucky courts construe the words of a statute according to their common and approved usage and to construe any ambiguity in such a way as to give a statute its intended effect. KRS § 446.080(4) ; Devasier v. James, 278 S.W.3d 625, 631 (Ky.2009). To accomplish this directive, when a popular term is left undefined, Kentucky courts often look to the well-established definitions in Black's Law Dictionary for guidance.¹⁰ Black's Law Dictionary defines interest as “compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use; esp., the amount owed to a lender in return for the use of borrowed money.” Black's Law Dictionary (9th ed.2009); see also Brown v. Hiatts, 82 U.S. 177, 185, 15 Wall. 177, 21 L.Ed. 128 (1872) (defining “interest” as the “compensation allowed by law, or fixed by the parties, for the use or forbearance of money, or as damages for its detention”).

Looking through to the substance of the transaction between PEM and Grace, the Court is persuaded that what PEM's contract nominally calls a “service charge” is actually interest: “compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use. ” PEM is not a “lender” in the traditional sense of the term, but it anticipates from the outset of its relationship with patients the contingency that an account receivable may become past due, a situation in which it is an unwilling creditor.¹¹ PEM plans for this event by reserving the right to charge 1.5% per month against accounts that become 90 days or more past due.¹² Unless one turns words and circumstances on their heads, this charge appears to be disguised interest.

The Court is further persuaded by observing how PEM's charge operates. It functions as a penalty or delinquency...