Court of Appeal (Cal.) Addresses Evidence Required to Prove Credit Card Debt; Rejects Rosenthal Act Claim; Says Contractual Attorneys’ Fee Clause Does Not Permit Recovery of Fees to Oppose Rosenthal Act

In Cavalry SPV I, LLC v. Watkins, No. D072299, 2019 Cal. App. LEXIS 603, at *12-15 (Ct. App. July 1, 2019), the California Court of Appeal addressed the evidence necessary to prove up a credit card debt in a debt collection action.

Assuming without  deciding that California law applies, a party may accept a contract by conduct, as well as by words, and parties to a written contract may modify the contract through an additional writing. (§ 1698; Russell v. Union Oil Co. (1970) 7 Cal.App.3d 110, 114 [86 Cal. Rptr. 424] (Russell).) Accordingly, a credit card company may modify the terms of a written contract by sending new or additional terms to the cardholder and stating that the cardholder’s continued use of the card constitutes acceptance of those terms. (See Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094 [118 Cal. Rptr. 2d 862] [concluding an amended cardholder agreement in the form of a “bill stuffer” accepted by the cardholder’s continued use of the credit card is a generally enforceable adhesion contract]; Meyers v. Guarantee Sav. & Loan Assn. (1978) 79 Cal.App.3d 307, 312 [144 Cal. Rptr. 616] [adhesion contracts generally enforceable absent other factors].)  Here, Citibank enclosed a written agreement when it first sent Watkins the credit card and then modified the applicable terms in writing several times thereafter. Watkins testified at trial that she filled out, signed, and mailed in a Citibank credit card application and that she received a Citgo gas station credit card issued by Citibank in return. Although Citibank was unable to produce the original written agreement it sent to Watkins, a Citibank representative testified that Citibank’s regular practice [*14]  was to provide a copy of the terms and conditions governing the use of the card along with the card, and that the agreement would have stated that use of the card constituted acceptance of those terms. Watkins used the Citgo credit card numerous times over the next several years, thereby accepting the written terms that accompanied the original credit card. (Russell, supra, 7 Cal.App.3d at p. 114.)  Watkins contends Citibank could not rely on the original written agreement given its inability to produce a copy at trial, but even if that were the case, Citibank also sent Watkins several written “Notice of Change in Terms and Right to Opt Out” documents over the years, as well as a written amended card agreement in 2011. (Boldface omitted.) Each of the 2008 and 2009 notices stated that Watkins “must call or write” by a certain date to opt out of the new terms, but Watkins never contacted Citibank to do so. Instead, she continued to make payments to her account. Through her conduct, Watkins accepted the updated terms, creating an enforceable written agreement in each context. (§ 1698; Russell, supra, 7 Cal.App.3d at p. 114.)  Moreover, Citibank also sent Watkins an amended card agreement in 2011 that stated, “[t]his Card Agreement is your contract with us,” “[i]t governs [*15]  the use of your card and account,” “[y]ou agree to use your account in accordance with this Agreement,” and “[t]his Agreement is binding on you unless you close your account within 30 days after receiving the card and you have not used or authorized use of the card.” Again, Watkins took no action in response. Watkins argues her account was already closed when she received the amended agreement in 2011 and, therefore, the new agreement was not binding on her. Again, even if we accept this argument, the earlier change-in-terms documents sent in 2008 and 2009, establish the existence of a written agreement.  Thus, while there may be some dispute regarding exactly which terms governed, the evidence does establish the existence of a written agreement between the parties. Accordingly, Cavalry timely filed its complaint in accordance with the four-year statute of limitations. (Code Civ. Proc., § 337.)

The Court of Appeal held that the debt buyer was a “debt collector” under the Rosenthal Act.

Cavalry relies on Gold v. Midland Credit Mgmt. (N.D.Cal. 2015) 82 F.Supp.3d 1064 to argue that a mere debt buyer who retains another company to collect debts does not meet the definition of a “debt collector” under the FDCPA or the Rosenthal Act. Midland, however, actually supports the superior court’s conclusion in this case. (Id. at pp. 1072–1073.) Midland was decided in the context of a motion for summary judgment based on the court’s conclusion that the debtor (Gold) had not offered any evidence tending to show that the debt buyer (Midland) was involved, directly or indirectly, in debt collection beyond Midland’s acknowledgement that it was in the business of purchasing defaulted consumer accounts. (Id. at p. 1071.) While this fact alone was not sufficient to establish that Midland was a “‘debt collector’” under the Act, the court acknowledged that a debt holding entity may be a “‘debt collector’” if it indirectly collects debts through a separate entity where the two entities together form an interdependent “single economic enterprise.” (Id. at p. 1072, citing Jenkins v. Union Corp. (N.D.Ill. 1998) 999 F.Supp. 1120, 1143.)  Here, there was ample evidence to suggest that Cavalry and CPS formed the type of “‘single economic enterprise’” discussed in Midland. (See Midland, supra, 82 F.Supp.3d at p. 1072.) Cavalry and CPS operated under common ownership and pursuant to a servicing and managing agreement under which debts purchased by Cavalry were routinely placed with CPS for collection immediately upon purchase. Anne Thomas, the designated witness for Cavalry, acted as chief compliance officer for both Cavalry and CPS, and testified at trial that it was Cavalry’s policy to accrue post charge-off interest at the state rate and to report that interest to the credit reporting agencies. Thus, the evidence demonstrates that Cavalry and CPS were closely related, CPS was acting under the direction of Cavalry, and Cavalry itself set the allegedly improper policy and practice of accruing and reporting post charge-off interest at the statutory rate, which forms the basis of Watkins’s claim under the Rosenthal Act. Moreover, the Lang firm also sent letters on behalf of Cavalry attempting to collect the debt and threatening to take legal action if Watkins did not pay. It then filed the lawsuit against Watkins from which this appeal arises on behalf of Cavalry. Thus, Cavalry was involved in debt collection efforts, is itself a debt collector, and cannot escape liability under the Rosenthal Act simply because it used a legally separate but closely associated entity to contact debtors on its behalf.

The Court of Appeal found that the debt collector was permitted to charge pre-judgment interest consistent with the Rosenthal Act, rather than charging interest at the contractual rate.

Instead, [Cavalry] claims to have accrued statutory prejudgment interest in reliance on sections 3287 and 3289, subdivision (b). Watkins responds that Cavalry was not entitled to statutory prejudgment interest because Cavalry’s damages were not certain or capable of being made certain at the time Cavalry accrued and reported the interest as required by section 3287. In our view, both parties misinterpret the relevant statutes. . . . Here, although the contract at issue specified a legal rate of interest, Cavalry purported to accrue interest based on the statutory rate set forth in section 3289, subdivision (b). While Cavalry portrays this as a consumer-friendly policy, it also benefited Cavalry by allowing it to avoid the burdensome task of determining the specific contract terms governing each individual account. Indeed, the record suggests that Cavalry did not receive a copy of the applicable written terms or agreement when it purchased Watkins’s account, such that it may not have been able to determine the exact interest rate that applied under the contract at the time that it first contacted Watkins or started reporting the debt to the various credit reporting agencies.  In the SOD, the superior court found that both the underlying contract and section 3287 allowed interest to accrue on Watkins’s account, but made no findings as to what contractual rate of interest—or even specifically which set of terms—applied. Nevertheless, the court concluded that Cavalry could choose to accrue interest at 7 percent, “below the allowable 10%.” Although the SOD does not reference section 3289, subdivision (b), the court’s reliance on section 3287 and the 10 percent figure does suggest that the court agreed with Cavalry’s position that it could apply the statutory rate set forth in section 3289, subdivision (b). As we have discussed, however, that interpretation is inconsistent with the plain language of the statute. Because there was a written contract between the parties that contained a specified rate of interest, section 3289, subdivision (a)—not subdivision (b)—applied. In its supplemental briefing, Cavalry points out that even if it were restricted to recovering interest under section 3289, subdivision (a), the 7 percent rate it claimed was lower than both the statutory interest rate of 10 percent and the contractual interest rate such that Watkins has no basis for complaint. Although the superior court did not make a finding as to the specific rate of interest under the contract, the evidence in the record fully supports this conclusion. Each of the updated terms sent in 2008 and 2009 contained interest provisions with interest rates that exceeded 10 percent, and each also allowed for compound interest. Further, the superior court referred to these exhibits when concluding that the terms and conditions of the contract allowed interest to accrue on the past due amount (although it did not specifically identify the controlling agreement or interest rate). Accordingly, while it appears the superior court based its ruling on what we now conclude to be an inaccurate interpretation of section 3289, we nevertheless agree with the court’s finding that Cavalry did not improperly accrue or report interest when it applied the 7 percent interest rate to Watkins’s account. As a result, the court’s ultimate conclusion that Cavalry did not violate the Rosenthal Act was correct.

Finally, the Court of Appeal found that the attorneys’ fee clause in the instrument was not broad enough to encompass the fees incurred to defend the cross-complaint.

Watkins asserts that the superior court erred by broadly interpreting the attorney fee provision to encompass fees related to the defense of the claims in her cross-complaint. HN22 Although section 1717 relates primarily to fees associated with the contract claims, courts have permitted recovery of fees related to associated tort claims where the language of the fee provision is broad enough [*44]  to encompass such additional fees. (See, e.g., Cruz v. Ayromloo (2007) 155 Cal.App.4th 1270 [66 Cal. Rptr. 3d 725] (Cruz) and Thompson v. Miller (2003) 112 Cal App.4th 327 [4 Cal. Rptr. 3d 905] (Thompson).) . . . Here, each of the 2008, 2009, and 2011 agreements that potentially governed the account are form agreements drafted by Citibank, and each contained the following provision regarding fees: “Collection Costs. To the extent permitted by law, you are liable to us for our legal costs if we refer collection of your account to a lawyer who is not our salaried employee. These costs may include reasonable attorneys’ fees. They may also include costs and expenses of any legal action.” . . . We agree with Watkins that this provision is not broad enough to cover fees incurred by Cavalry in defense of the cross-complaint, particularly when construed against Citibank, the drafter. The title of the provision is “collection costs” and the provision allows for the recovery [*45]  of fees “if we refer collection of your account to a lawyer that is not our employee.” A plain reading of the provision indicates it is limited to fees and costs incurred by a nonemployee attorney attempting to collect an outstanding debt. Here, the claims in the cross-complaint primarily involved actions undertaken by Cavalry and CPS, that are not third-party attorneys, before the case was referred to Lang. Further, although the last sentence refers to “any legal action,” this phrase appears under the heading “collection costs” and, particularly when construed against Citibank, necessarily refers to a legal action to collect on the account. . . . Here, we agree that to recover on its complaint, Cavalry had to prove the debt was valid and that it had purchased all of Citibank’s rights under the contract. However, Watkins’s claims were broader and included assertions regarding the shifting balance of the account and, specifically, Cavalry and CPS’s reporting of the account as having a balance in excess of the amount that Cavalry ultimately claimed Watkins owed. Cavalry’s ability to recover did not depend on whether it improperly accrued and reported statutory interest because Cavalry was no longer seeking prejudgment interest by the time it filed its complaint. Thus, Calvo and Finalco are distinguishable and, here, the trial court should have limited the fee [*49]  award to time spent on efforts necessary to prove the allegations in the complaint. We therefore remand the matter to the superior court for further consideration of the fee award in accordance with our narrower interpretation of the contractual fee provision.