Court reverses district court decision in Buchanan holding that an offer to settle a stale debt may misleadingly imply a threat of litigation in violation of the FDCPA.

The Sixth Circuit Court of Appeals issued a 2-1 ruling in Buchanan v. Northland Group, Inc., No. 13-2523 (6th Cir., Jan. 13, 2015), on Jan. 13, 2015. The ruling reversed the trial court’s dismissal of a Fair Debt Collection Practices Act (FDCPA) action that challenged a dunning (collection) letter offering to settle a debt subject to the statute of limitations.

At issue in the Buchanan appeal was the district court’s decision that a debt collector does not mislead a consumer and therefore does not violate the FDCPA by making a settlement offer to collect a debt without disclosing that the statute of limitations for filing a collection lawsuit has expired.

Contrary to the district court’s decision, the Sixth Circuit ruled that a settlement offer to resolve an unpaid debt at a discount without disclosing that the statute of limitations had run on the debt could possibly mislead a “reasonable unsophisticated consumer” into thinking her debt is enforceable in court.

In so ruling, the court remarked that “when a dunning letter creates confusion about a creditor’s right to sue, that is illegal,” under the FDCPA. The court also noted that “[a] misrepresentation about the limitations period amounts to a ’straightforward’ violation of [the FDCPA],” citing the Seventh Circuit Court of Appeals decision in McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1020 (7th Cir.2014).

Since the Sixth Circuit found that the question of whether a letter is deceptive and misleading is a question of fact that should be determined by a jury, the court remanded the Buchanan case back to the trial court for further proceedings to allow the consumer to present evidence that she was misled, confused and deceived by the collection agency’s letter.

Notwithstanding the majority opinion in Buchanan, Circuit Judge Kethledge, in dissent, opined that only lawyers and judges would read a collection settlement offer letter like the one at issue in Buchanan as an implied threat to sue. Judge Kethledge explained that, “we have no basis to read a single word—“settlement”—from a lawyerly perspective and the rest of Northland’s letter form an unsophisticated one. To the contrary, we are bound to apply the unsophisticated-debtor standard all the way through.”

Practical Consideration:

Interestingly, the Third and Eighth Circuits have held that dunning letters of this type do not violate the FDCPA unless litigation is threatened. However, the Seventh Circuit in McMahon and now the Sixth Circuit in Buchanan have created a split holding that offers to “settle” time-barred debt may falsely suggest that the debt is actually legally enforceable. Despite the Sixth Circuit’s opinion that no conflict exists between the circuits as a result of its decision in Buchanan, a circuit split like this may make things ripe for an appeal to the U.S. Supreme Court. Until then, it is critical for the credit and collection industry and debt buyers alike to evaluate communications with consumers regarding out-of-statute debts in light of Buchanan and McMahon.