The Fourth Circuit Settles Dispute As To Whether A Fifteen Percent Attorney Fee Award Under N.C.G.S. § 6-21.2(2) Is A “Mandate” Or A “Cap,” Subject To Judicial Review
N.C.G.S. § 6-21.2 is the North Carolina statutory provision that governs the right of lenders to collect attorneys’ fees from defaulting borrowers in the event an attorney is engaged to collect the defaulted debt. That statute provides in pertinent part as follows:
(1) If such note, conditional sale contract, or other evidence of indebtedness provides for attorneys' fees in some specific percentage of the “outstanding balance” as herein defined, such provision and obligation shall be valid and enforceable up to but not in excess of fifteen percent (15%) of said “outstanding balance” owing on said note, contract or other evidence of indebtedness.
(2) If such note, conditional sale contract or other evidence of indebtedness provides for the payment of reasonable attorneys' fees by the debtor, without specifying any specific percentage, such provisions shall be construed to mean fifteen percent (15%) of the “outstanding balance” owing on said note, contract or other evidence of indebtedness.
(emphasis added).
Although the above statute appears to be fairly straightforward on its face, federal and state court decisions interpreting the statute are far from uniform. While all courts tend to agree that subsection (1) allows for some judicial discretion as to the attorneys’ fee to be awarded, inasmuch as that statutory provision calls for an award “up to but not in excess of fifteen percent,” there is significant disagreement in the case law as to the proper interpretation of subsection (2).
Although subsection 6-21.2(2) states that loan documents that provide for the payment of “reasonable attorneys’ fees” without specifying a specific percentage, “shall be construed to mean fifteen percent,” some courts have determined that this subsection does not mandate a fifteen percent fee award, but rather, provides a “cap” of fifteen percent subject to judicial review and diminution. For example, in Nucor Corporation v. General Bearing Corporation, 405 S.E.2d 776 (N.C. App. 1991), the North Carolina Court of Appeals determined that a fifteen percent fee award under subsection 6-21.2(2) was a “statutory mandate.” Id. at 778. Likewise, in RC Associates v. Regency Ventures, Inc., 432 S.E.2d 394 (NC App. 1993), the North Carolina Court of Appeals wrote that a fifteen percent attorney fee award is “predetermined” under subsection 6-21.2(2). Despite the foregoing edicts by the North Carolina Court of Appeals, federal courts interpreting subsection 6-21.2(2) have held that that statute does not necessarily mandate a fifteen percent attorneys’ fee award. For example, the court in Silverdeer St. John Equity Partners I LLC, v. Kopelman, 2012 WL 4422811 (E.D.N.C. 2012) determined that subsection 6-21.2(2) merely imposes a cap of fifteen percent, subject to judicial review for reasonableness. In Ergs II, LLC v. Lichtin, 2013 WL 12250339 *5 (E.D.N.C. 2013), the court wrote that “the weight of recent cases in lower courts . . . supports looking at evidence of reasonableness when making an award under N.C. Gen. Stat. 6-21.2(2), up to a statutory cap of fifteen percent (15%).” In In re Brier Creek Corporate Center Associates Ltd. Partnership, 2103 WL 211119 (Bankr. E.D.N.C. 2013), the bankruptcy court opined that “recent cases suggest that strict application of the 15% calculation [under subsection 6-21.2(2) is not proper.” Likewise, in In re Shore, 2018 WL 8733061 *5 (Bankr. M.D.N.C. 2018), the bankruptcy court ruled that the case law “supports looking at evidence of reasonableness when making an award under N.C. Gen Stat. 6-21.2(2), up to a statutory cap of fifteen percent.”
The Fourth Circuit Court of Appeals recently settled this dispute, at least for the time being, in Colorado Bankers Life Insurance Co. v. Academy Financial Assets, LLC, 2023 WL 2000997 (4th Cir. 2023). In Colorado Bankers, the trial court awarded a fifteen percent attorneys’ fee to plaintiff. The defendant appealed, arguing that subsection 6-21.2(2) requires a court to conduct a reasonableness review of counsel’s billing records and rates, and allows a court to award an attorneys’ fee of less than fifteen percent if the facts and circumstances so warrant. Recognizing the divergence in the lower court decisions on the matter, the Fourth Circuit noted that its charge was to predict how the North Carolina Supreme Court would decide the issue and concluded that this case marked a situation where the North Carolina Supreme Court would most likely “give effect to the plain meaning of the statute.” Id. at *5. The Fourth Circuit noted that it is “well established” in North Carolina “that the word ‘shall’ is generally imperative or mandatory” and that “the inference is strengthened by the legislature’s use of ‘up to but not in excess of fifteen percent (15%)’ in the directly neighboring Subsection 1.” Id. Accordingly, the Fourth Circuit determined that a fifteen percent attorneys’ fee award under subsection 6-21.2(2) is a “mandate” and not a “cap,” and affirmed the trial court’s imposition of a fifteen percent fee award without requiring evidence of plaintiff’s counsel’s billing records and rates.
Although lower federal court are bound by the Colorado Bankers decision, North Carolina state court are not. Unless and until the Supreme Court of North Carolina decides to jump into the fray, it is possible that lower state courts may hold, unlike the Fourth Circuit Court of Appeals, that the term “shall” in subsection 6-21.2(2) is subject to judicial interpretation. That notwithstanding, Colorado Bankers provides very strong persuasive authority as to this issue. Given the relatively straightforward analysis in Colorado Bankers, it will likely be a tall order for a litigant to convince any North Carolina court that 6-21.2(2) does not mandate fifteen percent attorneys’ fee awards.
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