Sixth Circuit Holds that a “Settlement Offer” is Misleading Under the Fair Debt Collections Practices Act
What happens when a debt buyer sends a letter to a debtor offering to “settle” a debt—one whose statute of limitations has run? In the Sixth Circuit, at least, a claim that the communication violates the Fair Debt Collection Practices Act (FDCPA) may survive the pleadings stage.
In Buchanan v. Northland Group, Inc., No. 13-2523 (6th Cir. Jan. 13, 2015), Esther Buchanan received a “settlement offer” from Northland Group, which had been assigned Buchanan’s $4,768.43 debt by LVNV Funding, LLC. The letter stated, “The current creditor is willing to reduce your balance by offering you a settlement. We are not obligated to renew this letter. Upon receipt and clearance of $1,668.96, your account will be satisfied and closed and a settlement letter will be issued.” The problem was, however, that Michigan’s six-year statute of limitations had run on the debt, and the letter failed to mention that fact, in addition to the fact that any partial payment on the time-barred debt would reset the statute of limitations.
Buchanan sued Northland on behalf of herself and others similarly situated for violation of the FDCPA. Northland moved to dismiss for failure to state a claim, which the district court granted. The Sixth Circuit first acknowledged that, although Buchanan had a complete legal defense to the debt, the creditor remains free to try to collect the debt. The analysis did not end there, however, because questions of fact remained as to whether the letter was misleading, and Buchanan had identified an expert to testify about consumers’ attitudes toward and understanding of time-barred debt.
Buchanan had nudged her claim over the line from conceivable to plausible because it was plausible to allege that a “settlement offer” falsely implies that creditor could actually enforce the debt in court. In reaching this conclusion, Judge Sutton, writing for the majority, cited a variety of formal and informal dictionaries that linked the term “settlement” to legal proceedings. In addition, an unsophisticated debtor might assume, based on the language of the letter, that some payment was better than no payment. Judge Sutton noted that this was not, in fact, the case, as partial payment would restart the statute-of-limitations clock. This particular letter might very well have been misleading, and Buchanan’s claims therefore survived the motion to dismiss.
Judge Kethledge dissented, noting that the fulcrum of the case was the fact that Northland offered Buchanan a discount on the debt—something that, he opined, “[o]ne might expect a conscientious debtor . . . to accept.” He reasoned that Northland’s letter did not actually say anything about a lawsuit, and the “unsophisticated debtor” here had received dunning letters for years without a lawsuit ever being brought against her. In addition, Judge Kethledge stressed that Buchanan did have an obligation to pay the debt—even if the debt could no longer be enforced in court. The dissent would have affirmed the grant of the motion to dismiss, “rather than continue to make a federal case out of it.”
This case demonstrates that, even in a post-Twombly and Iqbal world, courts will take a careful and measured look at a consumer’s “sophistication” in assessing the plausibility of FDCPA claims.