N.C. Gen. Stat. § 6-21.2 generally provides that obligations to pay attorneys’ fees upon a promissory note “shall be valid and enforceable and collectible” as part of the debt. In short, a borrower who defaults on a promissory note that contains a provision obligating him to pay the lender’s attorneys’ fees is liable for those fees. There are conditions, of course. The lender or its attorney must first mail a written notice to the borrower that he has five days to pay the outstanding balance of the debt in full without being obligated to also pay the lender’s attorneys’ fees. There is also a fee cap. Specifically, the statute limits the amount of the lender’s attorneys’ fees that can be assessed against the borrower to 15% of the outstanding balance, which is defined as the sum of principal and interest owing at the time the lawsuit is filed. If the promissory note provides for attorneys’ fees in a specific percentage of the outstanding balance, then the borrower is liable for the lender’s attorneys’ fees up to but not in excess of 15% of the outstanding balance. If, however, the promissory note merely provides for the payment of “reasonable” attorneys’ fees, without specifying any specific percentage, then such provision “shall be construed to mean” 15% of the outstanding balance.
The North Carolina Court of Appeals has held that even if 15% of the outstanding balance exceeded the actual attorneys’ fees incurred by a bank in its efforts to collect on a promissory note, the attorneys’ fee award based on that statutory percentage could not be avoided as a “windfall” to the bank, since the promissory note provided for “reasonable attorneys' fees.” The Court held that, in such a scenario, N.C. Gen. Stat. § 6-21.2 predetermines 15% to be a reasonable amount of attorneys’ fees no matter what the actual attorneys’ fees are. Trull v. Central Carolina Bank & Trust, 124 N.C. App. 486, 478 S.E.2d 39, (1996) review allowed 345 N.C. 646, 483 S.E.2d 719, affirmed in part, review dismissed in part 347 N.C. 262, 490 S.E.2d 238.
In theory then, determining the amount of attorneys’ fees that can be awarded against a borrower under N.C. Gen. Stat. § 6-21.2 is often a simple exercise in mathematics. Consider this example:
James Debtor has defaulted on a promissory note to Bank and owes Bank $10,000. The note contains a provision obligating James to pay Bank’s “reasonable attorneys’ fees” if he defaults. The Bank gives James notice that he can pay the $10,000 in five days without incurring an additional award of attorneys’ fees; but James does not pay it. The Bank can enforce the attorneys’ fees provision and collect as part of the debt the $10,000 outstanding balance plus $1,500 in attorneys’ fees. On behalf of the Bank, the Bank’s lawyers, as is typical in North Carolina lawsuits, file suit against James to recover the $10,000 outstanding balance plus $1,500 in attorneys’ fees as allowed by N.C. Gen. Stat. §6-21.2.
That seems okay, right? Well, not so fast. Enter the Fair Debt Collection Practices Act (FDCPA) codified in 15 U.S. Code §1692 et. seq. Among other things, the FDCPA prohibits a debt collector (lawyers can be debt collectors) from making false or misleading representations (15 U.S.C. §1692e) and from using unfair and unconscionable means to collect a debt (15 U.S.C. §1692f). How does this affect what we just learned about attorneys’ fees? Consider the case of Elyazidi v. SunTrust Bank, 780 F.3d 227 (4th Cir. 2015). Note, while this was a case brought in federal court in Virginia, and involved questions of Maryland law as well as the FDCPA, North Carolina is within the jurisdiction of the United States Fourth Circuit Court of Appeals.
The facts of Elyazidi are pretty straightforward. Ms. Elyazidi opened a checking account with SunTrust Bank in September 2010. That same month, when she only had about $300 in her account, she wrote herself a check for $9,800 and cashed it. In short, Ms. Elyazidi overdrew her account by $9,490.82. The checking account was governed by an agreement which obligated Ms. Elyazidi to pay “attorney’s fees up to 25 percent . . . of the amount owed” if the Bank took court action to collect an overdraft. The Bank’s lawyers filed a debt collection lawsuit against Ms. Elyazidi in Virginia. In the lawsuit, the Bank sought to recover the $9,490.82 overdraft amount, plus 25% of that amount (or $2,372.71) in attorneys’ fees, as provided for in the agreement. To justify the request for an award of attorneys’ fees of $2,372.71, the Bank’s attorneys filed an affidavit: (1) attesting to their billable rate of $250 per hour, (2) declaring that they had only spent one hour on the matter up to that point, and (3) anticipating (based on similar cases they had handled) that they would likely spend an additional 23 hours on the case before the judgment was satisfied.
Ms. Elyazidi then sued the Bank and the Bank’s lawyers alleging violations of the FDCPA. Specifically, Ms. Elyazidi alleged that the Bank’s lawyers--by seeking an award of attorneys’ fees of $2,372.71 at the outset of the lawsuit at which point the attorneys admittedly had only spent one hour on the case-- used false, deceptive, or misleading representations or means in connection with the collection of the debt in violation of 15 U.S.C. § 1692e and “unfair and unconscionable means” to collect the debt in violation of 15 U.S.C. §1692f.
Ultimately, the district court dismissed Ms. Elyazidi’s lawsuit; and the Fourth Circuit affirmed holding that “where the debt collector sought no more than applicable law allowed and explained via affidavit that the figure was merely an estimate of an amount counsel expected to earn in the course of the litigation, the representations cannot be considered misleading under 15 U.S.C. §1692e(2).”
Although the Fourth Circuit ultimately got this decision right, the holding in Elyazidi still leaves unresolved the question of what would have happened if the Bank’s lawyers did not submit an affidavit estimating the amount they expected to earn in the course of the litigation.
Consider again the case of James Debtor. But this time assume that he owes the Bank a much greater amount—say $1,000,000, and that the Bank’s lawyers therefore seek $150,000 (15% of the outstanding balance of the loan) as their “reasonable attorneys’ fees” as allowed by N.C. Gen. Stat. §6-21.2.
Even though N.C. Gen. Stat. § 6-21.2 (and the opinion in Trull) would seem to allow the Bank’s lawyers to recover 15% of the outstanding balance for their attorneys’ fees, would it violate the FDCPA for the Bank’s lawyers to include an attorneys’ fee award request in a lawsuit against James Debtor for $150,000 when they had only spent an hour on the case up to that point? Does it matter if the lawyers do not, or in good faith could not, submit an affidavit attesting that the $150,000 is merely an estimate of the amount they expected to earn in the course of the litigation? What if, the Bank’s lawyers would readily admit that their estimated actual attorneys’ fees would likely be no greater than $5,000? Could they still claim entitlement to a $150,000 attorneys’ fees award under N.C. Gen. Stat. § 6-21.2 without violating the FDCPA?
Although the North Carolina Court of Appeals in Trull and the Fourth Circuit in Elyazidi both decided in favor of the creditors’ attorneys, there still appears to be a potential conflict between N.C. Gen. Stat. § 6-21.2 and the FDCPA. Until that potential conflict is ultimately resolved by a higher court, perhaps the safest course for North Carolina lawyers seeking an award of attorneys’ fees under N.C. Gen. Stat. § 6-21.2 is to stand ready to justify the reasonableness of their fees despite that statute’s “predetermination” that 15% is reasonable no matter the amount of actual attorneys’ fees; or perhaps include a demand only for “reasonable attorneys’ fees” as permitted by N.C. Gen. Stat. § 6-21.2 without identifying a specific amount.