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The Sixth Circuit rules that making an offer to settle a valid but time-barred debt may give rise to an FDCPA violation.

In a case that will likely cause debt collectors seeking to collect time-barred obligations grave concern, the Sixth Circuit recently ruled that making an offer to settle a time-barred debt at a discount could mislead an unsophisticated consumer to believe the debt could be enforced in court in violation of the Fair Debt Collection Practices Act.  Buchanan v. Northland Group, Inc., No. 13-2523 (January 13, 2015). 

The facts of the case are very straightforward.  A debt buyer bought Buchanan’s time-barred debt of $4,768.43 from her original creditor at a discount and assigned it to Northland for collection.  Northland sent Buchanan a letter offering on behalf of the debt buyer to accept $1,668.96 as settlement in full.  The letter conveying the settlement offer did not disclose two things that later proved critical: (i) that the debt was time barred under Michigan’s six year statute of limitations; and (ii) that if Buchanan rejected the offer, but nevertheless chose to make a partial payment, that it would restart the statute of limitations under Michigan law.  

Buchanan, on her behalf and on behalf of those similarly situated debtors, sued Northland for violating the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§  1692-1692p. The gravamen of Buchanan’s complaint was that by making the settlement offer, Northland falsely implied that it held a legally enforceable obligation, thereby making a “false, deceptive or misleading” statement in violation of 15 U.S.C. § 1692e.  The district court granted Northland’s motion to dismiss, finding the letter was not misleading as a matter of law.  Buchanan appealed.

In the Sixth Circuit, as in the District Court, Northland argued that under Michigan law, a debt remains a debt even after the statute of limitations has run and nothing legally prevented Northland from trying to collect it even though Northland couldn’t enforce the debt in court.  Northland further argued that merely offering to “settle” a debt which is time-barred by itself could not be construed even by an unsophisticated consumer as a threat of litigation. 

The Sixth Circuit agreed with Northland’s arguments on these points.  However, the Sixth Circuit reversed on other grounds.  First, whether a letter is misleading is a question of fact which should generally be decided by a jury.  Second, Buchanan identified an expert, a professor of psychology, who plans to testify about consumers’ attitudes towards, and understanding of, time-barred debt.  The Sixth Circuit reasoned that since her claim was legally plausible, Buchanan should be given an opportunity to present evidence to support it.  Finally, the Sixth Circuit wrestled with the question of whether an offer to settle a time-barred debt is misleading.  Because various dictionaries define “settle” in reference to concluding lawsuits, the Sixth Circuit held it was plausible to allege that an offer to settle falsely implies that the underlying debt is enforceable in court.  Moreover, the Sixth Circuit stretched further to hold that an unsophisticated debtor who cannot afford the settlement offer might nevertheless assume that some payment is better than none – which under Michigan law, would actually restart the statute of limitations, giving the creditor a new opportunity to sue for the full debt.  The Sixth Circuit reversed and remanded the case for further proceedings.

Northland and its amici argued that this result will require debt collectors to give legal advice to every debtor about the statute of limitations.  The Sixth Circuit disagreed, pointing to a new letter used by Northland to a debtor expressly stating the debt was time-barred and that the debtor will not be sued on it.   

While the ultimate resolution of the case remains to be seen, the Sixth Circuit’s opinion does indeed seem to raise obstacles to collecting time-barred debts – effectively rewriting state substantive law by turning still valid debts into invalid ones.  If you include the notice apparently now used by Northland, one would presume the odds of collecting anything on the otherwise still valid debt would approach zero. 

The conclusion of Judge Kethledge’s dissent bears repeating verbatim: 

“In this case, rather, Buchanan seeks up to $1,000 in statutory damages-for herself, and also for each member of a putative statewide class-for the trouble of reading a letter that offered her a discount on an entirely valid debt that for years she failed to pay.  I would reject this claim as a matter of law, rather than continue to make a federal case out of it.”