On January 13, 2015, the Sixth Circuit Court of Appeals rendered its decision in Buchanan v. Northland Group, Inc., No. 13-2523. Judge Sutton, writing for the 2-1 majority, reversed the trial court’s dismissal of a Fair Debt Collection Practices Act (FDCPA) action that challenged a dunning (collection) letter that offered a “settlement” on a debt without disclosing that the statute of limitations had expired on claims related to the debt or that a partial payment could restart the statute of limitations. The district court had granted Northland’s motion to dismiss, holding that a debt collector does not mislead a consumer (and, therefore, does not violate the FDCPA) when it sends the consumer a discounted settlement offer without disclosing that the statute of limitations has already expired.

In reversing, the Sixth Circuit held that stage a “settlement” offer to resolve a time-barred debt at a discount without disclosing that the statute of limitations has expired could plausibly mislead a “reasonable unsophisticated consumer” into thinking the debt is enforceable in court. The court concluded such a letter could violate the FDCPA for three reasons. First, the court concluded that whether “a letter is misleading raises a question of fact” that generally a jury (not a judge) should determine. Slip Op. at 5. Although the court did not rule out the possibility that motions to dismiss could be granted in the future (“[a] claim may be implausible on its face because even an unsophisticated consumer would not be confused, making discovery pointless and jury resolution unnecessary,” id.), it stressed the low hurdle needed (“only that the plaintiff plead a plausible theory of relief,” id.) and how it favored Buchanan.

Second, the court noted that Buchanan claimed to have evidence (an expert and Consumer Financial Protection Bureau data or potential data) supporting her allegation that the letter was misleading. Reiterating the low hurdle needed to survive a motion to dismiss, the court stated:

For now, it suffices to say that parties who wish to present evidence in support of their claim usually will be given an opportunity to do so, making summary judgment, not a motion to dismiss, the relevant time for ascertaining whether the claim should be resolved as a matter of law.

Id. at 6.

Third, the court concluded Buchanan offered a “plausible theory of consumer deception and confusion” that made her claim plausible. The court explained “[w]hen a dunning letter creates confusion about a creditor’s right to sue, that is illegal,” under the FDCPA. Id. at 7.

The court concluded that a letter containing the word “settlement” on a time-barred debt could be considered misleading for two reasons. First, the use of the word “settlement” could falsely imply that payment on a time-barred debt could be compelled through litigation, which implication would be misleading. Second, under Michigan law, a partial payment “restarts the statute-of-limitations clock, giving the creditor an opportunity to sue for the full debt,” id. at 8, a legal reality that could cause problems for consumers who are unaware of the doctrine. “Without disclosure, a well-meaning debtor could inadvertently dig herself into an even deeper hole.” Id.

The court, therefore, reversed and remanded the case for further proceedings to allow Buchanan to present evidence that the least sophisticated consumer would have been misled, confused and/or deceived by the debt collector’s letter.

Judge Kethledge issued a dissenting opinion. He explained that “[s]ome lawsuits make sense only to lawyers.” Id. at 10 (Kethledge, J., dissenting). He concluded that Buchanan’s reading was implausible and that only lawyers would read “settlement” 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.” Id. at 11 (Kethledge, J., dissenting).

Practical Implications

At one level, Buchanan appears to deepen a split between the circuit courts of appeals. The Third and Eighth Circuits have held that collection letters on time-barred debts do not violate the FDCPA unless actual litigation is threatened. Some have suggested that the Sixth and Seventh Circuits have created a split by holding that offers to “settle” time-barred debts may give rise to an FDCPA cause of action even if actual litigation is not threatened.

However, the Sixth and Seventh Circuits conducted a nuanced analysis that the Third and Eighth Circuits forewent. Buchanan and the Seventh Circuit in McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1020 (7th Cir.2014), have concluded there is no conflict because the Third and Eighth Circuits considered only the limited question of whether an attempt to collect a time-barred debt – in and of itself – is a thinly veiled threat to sue. The Third and Eighth Circuits have not taken the further step (as the Sixth and Seventh Circuits have) and considered the use of the term “settlement” in collection letters related to time-barred debts.

Buchanan certainly deepens another Circuit split. The Fifth, Seventh, and Eleventh Circuits, like the Sixth, have concluded that whether a collection letter would mislead an unsophisticated consumer raises a question of fact for the jury. On the other hand, the Second and Ninth Circuits have concluded the issue raises a question of law for the court. The question is a fundamental one that could lead to significantly different interpretations of the same dunning letter depending upon where suit is brought and who decides whether the letter is misleading. In addition, it is critical that defense attorneys and their clients think long and hard about whether to file a motion to dismiss in an FDCPA letter case, especially in the Fifth, Sixth, Seventh, and Eleventh Circuits, to avoid disheartening rulings driven more by letting the consumer have more time to develop his theory than the actual merits of the claim.

From a compliance stand point, Buchanan raises an even more significant concern with the use of the word “settlement” in dunning letters. The Sixth and Seventh Circuit’s conclusion that the term “settlement” implies a threat of litigation could pose problems for debt collectors who attempt to collect a debt and either offer a “settlement” or use the word “settlement” in its collection letters even when a lawsuit on the debt would not be time-barred. Under § 1692e(5) of the FDCPA, a debt collector violates the FDCPA by threatening “to take any action that cannot legally be taken or that is not intended to be taken.” In theory, if a debt collector offered a settlement on a claim that was not time barred but for which the debt collector had no intention to file a suit), the debt collector’s implied threat of litigation coupled with its lack of intention to file suit could violate the FDCPA. Debt collectors should thus give serious thought to eliminating the word “settlement” from their vocabulary unless they have actually filed a lawsuit against the consumer.