In a recent decision, the United States Court of Appeals for the Fourth Circuit upheld a lender’s statutory and contractual right to recover attorneys’ fees equal to 15% of the outstanding balance of a loan from a defaulting borrower in North Carolina, without any requirement that the lender present evidence supporting the reasonableness of such an award. 

In Colorado Bankers Life Insurance Company v. Academy Financial Assets, LLC (United States Court of Appeals for the Fourth Circuit, Case No. 22-1104, decided February 15, 2023), the borrower defaulted on a commercial loan and the lender exercised its right to accelerate the loan. The United States District Court for the Eastern District of North Carolina (to which the borrower had removed the case, which was originally filed by the lender in North Carolina state court, on diversity grounds) granted summary judgment in favor of the lender. The judgment included an award of attorneys’ fees in excess of $6 million (which was 15% of the unpaid balance of the loan) under N.C. Gen. Stat. § 6-21.2.

On appeal, the borrower argued that the district court erred by not requiring the lender to present evidence supporting the reasonableness of the attorneys’ fees award. The Fourth Circuit began its analysis with the fundamental proposition that a prevailing party is not entitled to attorneys’ fees unless expressly authorized by statute. The statute in question, N.C. Gen. Stat. § 6-21.2, makes contractual fee-shifting provisions in any note, conditional sale contract, or other evidence of indebtedness valid and enforceable, subject to the following subsections:

1. If such note, conditional sale contract, or other evidence of indebtedness provides for attorneys’ fees in some specific percentage of the outstanding balance, such provision and obligation shall be valid and enforceable up to, but not in excess of, 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 provision shall be construed to mean 15% of the outstanding balance owing on said note, contract, or other evidence of indebtedness.

In this case, the loan agreement required the borrower to pay “all out-of-pocket costs and expenses (including, without limitation, the reasonable fees, charges and disbursements of outside counsel and the allocated cost of inside counsel) incurred by [the lender] in connection with the enforcement or protection of its rights in connection with [the loan].”

Because this provision provided for the payment of “reasonable” attorneys’ fees without specifying a percentage, the court held that it was governed by subsection 2 above and thus the district court’s award of attorneys’ fees equal to 15% of the outstanding loan balance was proper. In so holding, the court rejected the borrower’s argument that subsection 2 did not apply because the loan agreement permitted the lender to recover its “out-of-pocket” costs only.

The court also rejected the borrower’s argument that decisions of the North Carolina Court of Appeals require a lender to prove the reasonableness of an award of attorneys’ fees under the statute, finding that (a) the North Carolina Court of Appeals’ decisions on the subject are in conflict with one another, and (b) as an intermediate appellate court, the North Carolina Court of Appeals’ decisions are not binding on a federal court attempting to discern how North Carolina’s highest court, the North Carolina Supreme Court, would decide the issue.

Determining that there was no conclusive authority from the North Carolina Supreme Court, the court predicted that the North Carolina Supreme Court would likely follow its own admonition that “statutory interpretation properly begins with an examination of the plain words of the statute” and give effect to its plain meaning. Having thus laid the groundwork, the court found that the plain words of N.C. Gen. Stat. § 6-21.2 recognize only two types of contractual fee-shifting provisions: those that provide for attorneys’ fees in some specific percentage of the outstanding balance (subsection 1 above), and those that provide for the payment of reasonable attorneys’ fees without specifying any specific percentage (subsection 2 above). Because the loan agreement permitted recovery of “the reasonable fees, charges and disbursements of outside counsel” without mentioning any specific percentage, the court determined that the district court did not err in applying subsection 2 and imposing a 15% fee award.

This decision is certainly a favorable one for lenders when the operative documents are governed by North Carolina law, and the Fourth Circuit’s prediction of how the North Carolina Supreme Court would decide this issue should be binding on all lower federal courts in the Fourth Circuit, including federal district courts and bankruptcy courts, unless and until the North Carolina Supreme Court itself decides the matter differently.

Although this decision is not binding on state courts in North Carolina, or anywhere else, it is a well-reasoned opinion which should have substantial persuasive power even in state court, especially in light of the North Carolina Court of Appeals’ conflicting opinions on the subject.

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