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From Banking and Finance Law Daily, January 15, 2015

Stale-debt settlement offer could be collection practices act violation

By Richard A. Roth, J.D.

A debt collector that offered to settle a time-barred debt for 35 percent of the claimed balance could have misrepresented to the consumer that the debt was enforceable in court, according to the U.S. Court of Appeals for the Sixth Circuit. While the court did not say the settlement offer was a violation, it did say the consumer was entitled to an opportunity to prove that an unsophisticated consumer could be misled. The appellate court’s narrow ruling reversed the district court’s dismissal of the Fair Debt Collection Practices Act suit (Buchanan v. Northland Group, Inc., Jan. 13, 2014, Sutton, J.).

According to the appellate court, Northland Group was a debt collector acting on behalf of LVNV Funding, a company in the business of buying and attempting to collect bad debts. Northland claimed the consumer owed LVNV $4,768.43, but offered to settle for a single payment of $1,668.96. The collection letter did not, however, tell the consumer that the statute of limitations on the debt had run, making it uncollectible in court, or that making a payment in any amount other than the offered 35-percent settlement would restart the statute of limitations, making the debt collectible in full.

Rather than settling the debt, the consumer sued Northland for alleged misrepresentations that violated the FDCPA. According to her, the settlement offer could mislead an unsophisticated consumer into believing that the debt still could be collected in court.

Trial court dismissal. The federal district court disagreed with the consumer. The judge rejected the consumer’s request for discovery on whether the settlement offer could be misleading and dismissed the suit. According to the appellate court, the district court judge decided that the settlement offer was not misleading as a matter of law.

The consumer appealed.

Basic principles. The appellate court accepted two basic premises as starting points for its analysis. First, a time-barred debt remains a debt the consumer is obligated to pay. The statute of limitations does not eliminate the debt, it only provides a complete defense against collection suits. There is nothing wrong with asking a consumer to pay a stale debt, the court said.

Second, the court observed, a settlement offer alone is not an implicit threat to sue.

Nevertheless, the settlement offer could be a misrepresentation, the court decided.

Possible consumer deception. Whether the settlement offer was misleading was a question of fact, and questions of fact usually should be decided by juries, the appellate court began. A judge should dismiss a fact-based claim only if the consumer’s complaint does not describe a plausible theory of relief after all reasonable inferences are drawn in the consumer’s favor. That is a low hurdle, the court said.

The consumer already had identified an expert who could testify on consumer understanding of debt settlement offers, the court said. Perhaps of greater importance was that the Federal Trade Commission and Consumer Financial Protection Bureau both were studying the collection of time-barred debts. To say that Northland’s settlement offer could not possibly have been misleading would be a premature “declaration that the CFPB’s efforts on this score are a waste of time,” according to the court.

The consumer’s theory of deception was plausible, the court added. Northland offered to settle the debt, and most ordinary uses of “settlement” imply at least the possibility of litigation.

The court also was concerned about the possibility that a consumer who could not afford the offered settlement might choose to make a partial payment, feeling that it was better than doing nothing. However, in this case, “Some payment is worse than no payment,” since a partial payment would restart the statute of limitations and revive the debt collector’s ability to sue, the court said. Most consumers would not understand that, and some could be misled into making the situation worse.

Consumer warnings. The court also turned aside Northland’s worries that allowing the suit could force it to begin giving legal advice to consumers about the effects of statutes of limitations. After all, Northland already had revised its collection letter to address the situation, the court pointed out. Northland’s letter says “The law limits how long you can be sued on a debt. Because of the age of your debt, LVNV Funding LLC will not sue you for it, and LVNV Funding will not report it to any credit reporting agency.”

The court did not address why a consumer would pay anything after reading that notice.

Dissent. In dissent, Judge Raymond Kethledge said that “Some lawsuits make sense only to lawyers.” There was no question that Northland had the right to demand the consumer pay her debt, the dissenter said; the suit was over whether including an offer to settle for 35 percent of the debt made the demand a misrepresentation.

Northland’s use of the word “settlement” alone was not enough to do that, Judge Kethledge said, characterizing the consumer’s interpretation of the offer as “gossamer.” That a voluntary partial payment would revive Northland’s ability to sue on the debt was unfortunate, he added, but the settlement offer did not invite a partial payment.

The case is No. 13-2523.

Attorneys: Daniel A. Edelman (Edelman Combs Latturner & Goodwin LLC) for Esther Buchanan. David M. Schultz (Hinshaw & Culbertson LLP) for Northland Group, Inc. Theodore Metzler for amicus curiae Federal Trade Commission.

Companies: LVNV Funding LLC; Northland Group, Inc.

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