The Sixth Circuit Court of Appeals ruled Tuesday in a 2-1 decision that merely offering a settlement on a time-barred debt can run afoul of the Fair Debt Collection Practices Act (FDCPA) because a consumer might consider the word “settlement” to be a legal term and may assume they are being sued or that they could be sued in the future.

The case, Buchanan v. Northland Group, generated a lot of interest from government agencies and debt industry trade groups. The CFPB and FTC filed a joint amicus brief supporting the plaintiff and ACA International and the National Association of Retail Collection Attorneys (NARCA) sided with the defense in their briefs.

The Sixth Circuit opinion also furthers a rift in case law between circuits on the matter, with two now taking the position that settlement offers on time-barred debt can violate the FDCPA and two ruling the opposite.

The Facts of the Case

The facts of Buchanan v. Northland Group are relatively straightforward and uncontested. Debt collection agency Northland Group, working on behalf of a debt buyer, sent a letter to Esther Buchanan offering to settle a nearly $4,800 debt for around $1,700. The letter even disclosed the debt had been purchased, including specifically naming the buyer and seller, and that it had been assigned to Northland for collection.

Buchanan’s debt had already run her state’s six-year statute of limitations. Northland’s letter did not disclose this fact. So Buchanan filed a lawsuit that sought class action status claiming that the settlement offer was deceptive and illegal under the FDCPA.

A district court rejected Buchanan’s discovery request and granted Northland’s motion to dismiss, concluding that Northland’s letter was not misleading as a matter of law. Buchanan then appealed to the Sixth Circuit.

The Majority’s Rationale

The primary issue in the case wasn’t so much what was in the letter, rather, what was not in it. In their opening summary of the case, the majority called out the lack of meaningful disclosure that the debt in question was time-barred. They also took issue with the fact that the letter did not disclose that a partial payment – specifically, any amount less than the full settlement offer quote – would restart the statute of limitations and could expose Buchanan to legal liability.

This distinction was important because Buchanan’s main argument was that the absence of these disclosures, along with the use of the word “settlement,” “falsely implied that Northland held a legally enforceable obligation.”

In examining that claim, the majority whipped out the dictionary, citing numerous examples where the word “settle” is defined as closing a legal argument. But in all of the examples cited, the financial definition of the word appears before the legal definition.

For example, the entry for “settle” — as cited by the opinion — defines the word as “to terminate (legal proceedings) by mutual consent of the parties.” That definition appears as the 16th entry under a separate Law heading. The third and fourth general definitions given by that resource are, respectively, “to pay, as a bill” and “to close (an account) by payment.”

The minutiae of defining the word was important to the majority, as it served as the basis for the “unsophisticated debtor” standard by which the case was judged, writing, “All of these definitions make it plausible to allege that a ‘settlement offer’ falsely implies that the underlying debt is enforceable in court.”

The Dissent

Circuit Judge Raymond Kethledge hit the “unsophisticated debtor” standard used by the majority in his dissent. He noted that Buchanan’s arguments and the majority’s agreement are “Not the perspective of the unsophisticated debtor, but rather our own perspective as lawyers and judges—whose work, by definition, is done through the vehicle of lawsuits … we have no basis to read a single word—‘settlement’—from a lawyerly perspective and the rest of Northland’s letter from an unsophisticated one. To the contrary, we are bound to apply the unsophisticated-debtor standard all the way through.”

He did, however, note that there is an equitable point of discussion surrounding the lack of disclosure concerning a partial payment restarting the statute of limitations on the account. But he said that Northland’s letter does not invite that result.

Kethledge wrote that he would have rejected the claim outright as a matter of law rather than sending it back to the district court, as the majority opted to do.

Further Proceedings and Industry Impact

Indeed, the Sixth Circuit majority did not decide on the merits of the case. And the CFPB and FTC similarly did not comment on the final legal outcome in their brief. Rather, they felt that the district court’s dismissal of the case should be overturned and remanded back to that court for further proceedings.

Specifically, the Sixth Circuit majority said that the case should proceed through discovery and that ultimately “a jury should determine whether the letter is deceptive and misleading.”

It leaves things quite up in the air with regard to settlement offers on time-barred debt. The Sixth’s decision closely aligns with a decision last year in the Seventh Circuit, McMahon v. LVNV Funding, one also supported by a CFPB-FTC brief. But it runs counter to decisions in the Third and Eighth Circuits.

ACA International advised “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.”

Joann Needleman, President of NARCA and an appointee to the CFPB’s Consumer Advisory Board, urged caution of a different sort. She noted that settlement offers themselves are under fire.

In a blog post, she wrote that, “It would easy, not to mention comforting, to put Buchanan and McMahon on a shelf and call them the time-barred debt cases. You would be foolish to do so. Buchanan and McMahon have more to do with language than content. Neither court made any distinction regarding the word ‘settlement;’ that both cases involve old debts is superfluous. Both courts took the inherent desire by all parties to resolve disputes and otherwise turned that desire upside down.”


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