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Cavalry SPV I, LLC v. Watkins

California Court of Appeals, Fourth District, First Division

July 1, 2019

CAVALRY SPV I, LLC, Plaintiff, Cross-defendant, and Appellant,
SUE WATKINS, Defendant, Cross-complainant, and Appellant CAVALRY PORTFOLIO SERVICES, LLC, Cross-defendant and Appellant.

          APPEAL from a judgment of the Superior Court of San Diego County, No. 37-2014-00016933- CU-BC-CTL Kevin A. Enright, Judge. Affirmed in part, reversed in part, and remanded for further proceedings.

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

          Simmonds & Narita, Tomio B. Narita 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.


         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; § 1785.25, subd. (a)), and the Fair Debt Buying Practices Act (FDBPA; § 1788.50 et seq.)[3] by, among other things, "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."

         In September 2015, while the litigation was pending, Watkins sent a letter to CPS disputing the accuracy of the information CPS was reporting to the credit bureaus and stating, "I believe that this account does not belong to me." The letter demanded substantiating documentation proving Watkins owned the alleged account and reported debt. When CPS did not respond, Watkins sent a second notice on November 11, 2015, making essentially the same complaints and demands.

         In April 2016, CPS sent Watkins's attorney a letter including verification of the debt. However, due to an accounting error, the letter stated the principal due was only $687.73.[4]

         Through discovery, Watkins learned that CPS had reported the alleged debt to the credit agencies through April 2016, and had included post charge-off interest in the reported account balances prior to the various policy changes. As Watkins now believed there were as many as 408 reporting violations-and because she was potentially entitled to statutory damages of up to $5, 000 for each violation-she moved to reclassify the case as unlimited. The court granted the motion in October 2016.

         Statement of Decision

         Following a bench trial, the superior court issued a written statement of decision (SOD). It concluded that Watkins entered into a contract with Citibank when she filled out the credit card application, received the card along with written terms, and then used the card. Watkins raised a statute of limitations defense, but the court concluded that a four-year statute of limitations applied since the claims were based on a writing, and Cavalry's lawsuit was filed within the four-year period. Accordingly, the court awarded Cavalry $1, 603.22, plus attorney fees and costs on the contract claim.

         Regarding the cross-complaint, the superior court determined that the debt was a consumer debt, CPS was a debt collector within the meaning of the Rosenthal Act, and Cavalry was vicariously liable for the actions of CPS. The court concluded, however, that Watkins failed to meet her burden to prove Cavalry or CPS violated the Rosenthal Act or the CCRA. Specifically, it found that the terms and conditions of the contract and section 3287, subdivision (a) allowed interest to accrue on the past due amount and, Cavalry, "as owner of the debt, could therefore choose to charge interest from the charge-off date as it did." The court went on to explain that "[b]y choice, interest accrued at 7%, below the allowable 10%, and thereafter ceased accruing." It added that "Citibank's decision not to seek interest on the charge-off balance did not act as a waiver" of Cavalry's ability to do so. Similarly, regarding the CCRA, the court concluded that Watkins failed to prove CPS knew or should have known that it provided inaccurate information to the credit reporting agencies.

         In posttrial proceedings, Cavalry sought attorney fees. The superior court found the fees provision in the updated terms governing Watkins's use of the credit card-which stated in part, "[t]o 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"-was broad enough to permit fees related to both Cavalry's complaint and Watkins's cross-complaint. However, the court also determined that the matter was over litigated and therefore reduced the fees Cavalry requested by 50 percent, ultimately awarding $134, 604.86.


         I. Watkins Is Liable for the Debt

         Watkins asserts the superior court erred by finding her liable for the $1, 603.22 due on the account under either a breach of contract or open book account theory. We disagree.

         A. Breach of Contract

         Turning first to the breach of contract claim, Watkins contends Cavalry failed to prove the existence of a written contract and, therefore, the statute of limitations had expired when Cavalry filed its complaint. In California, the statute of limitations is four years for a breach of contract claim based on a written contract, but only two years for a breach of contract claim based on an oral agreement. (Code Civ. Proc., §§ 337, 339.) Watkins made her last payment in July 2010, and Cavalry filed its complaint in May 2014, so the complaint was within the statute of limitations only if the four-year period applied.

         Assuming without deciding that California law applies, [5] 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 (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');">97 Cal.App.4th 1094 [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 [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 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 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 ...

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