Collection of Accrued Interest Not Allowed in the Absence of a Written Contract Provision

A common query posed to collection attorneys by their small business clients is whether, upon the default of a standard contract agreement, the client will receive the “benefit of the bargain” and be made whole as part of the collection process. Many business agreements have not been drafted in a comprehensive manner, nor with the aid of competent legal counsel. As a result, an often-raised question is whether accrued interest may legally be sought and recovered in the absence of a specific contract interest rate provision being included in the agreement.

Typically, contracts contain covenants that allow a party, after a breach of contract is declared, to seek and recover money damages as part of their choice of legal remedies. In addition to the recovery of principal damages, accrued interest, costs, and reasonable attorneys’ fees are commonly sought in the total claim amount. However, not all agreements are built the same and, therefore, the fine print may become very important once a contract is alleged to have been breached.

Usually, as part of recovering losses, accrued interest at a stipulated non-usury rate may be calculated and added into collection letters and any complaint for breach of contract which is filed in a civil action. However, where there is no mention of interest in a contract, (or any other written agreement to a stipulated rate), the law in Michigan dictates that interest cannot be claimed under these circumstances. As a result, interest may only commence to accrue once a money judgment is entered at the prevailing money judgment interest rate.

In Michigan, interest is currently not to exceed 7%, otherwise it will be considered a usury rate per MCL 438.31. “Interest shall not be allowed upon any claim up to the date of the rendition of judgment by the court unless upon a contract expressly stipulating for the payment of interest.” MCL 600.6455.

Notably, interest is also barred from the date of filing the complaint, until judgment, unless a contract rate is stipulated and in effect:

“For a complaint filed on or after July 1, 2002, if a judgment is rendered on a written instrument evidencing indebtedness with a specified interest rate, interest is calculated from the date of filing the complaint to the date of satisfaction of the judgment at the rate specified in the instrument if the rate was legal at the time the instrument was executed.” MCL 600.6013(7)

However, once a judgment is entered, interest will accrue at the prevailing money judgment interest rate:

“For Complaints filed on or after January 1, 1987, interest on a money judgment recovered in a civil action shall be calculated from the date of filing the complaint at a rate of interest which is equal to 1% plus the average interest rate paid at auctions of 5-year United States Treasury Notes during the six (6) months immediately preceding July 1 and January 1, as certified by the state treasurer, and compounded annually, pursuant to this section.” MCL 600.6455(2)

(Currently, the judgment interest rate in Michigan, as of July 1, 2020, for complaints filed in state court on or after Jan. 1, 1987, is 1.699%. This rate includes the statutory 1%.)

These various statutory mandates can be a minefield for lawyers, and other debt collectors, if pre-judgment interest which is not allowable is nevertheless included in written demands which are sent on behalf of their clients. It could leave a debt collector susceptible to claims for violations of the Michigan Consumer Protection Act (MCPA), the Federal Collection Practices Act (FDCPA), and other statutes which protect consumers from these types of practices. For these reasons, businesses and consumers should be aware, and govern themselves accordingly, of the existence or absence of hidden terms or exorbitant interest rates contained in otherwise executable agreements.

John D. Gwyn focuses his practice on the representation of community associations, management companies and developers with a particular emphasis on real estate and commercial litigation. He has handled many types of community association related matters including assessment collections, lien foreclosures, bylaw violations, civil rights defense and creditor bankruptcy matters. Mr. Gwyn has gained experience in community association law over the years through his representation of condominium and homeowners associations, as well as individual homeowners, in matters involving real estate, contract, and construction defect litigation issues. His extensive litigation and transactional background provides him with the experience necessary to handle even the most complex legal issues that neighborhood associations may encounter. He may be reached at (734) 261-2400 or jgwyn@cmda-law.com