Debt Collection and Unfair Trade Practices
Ellis & Winters
Today we return to the vexing relationship between N.C. Gen. Stat. § 75-1.1 and the North Carolina Debt Collection Practices Act. The Debt Collection Act says that its “specific and general provisions . . . shall exclusively constitute the unfair or deceptive acts or practices proscribed by G.S. 75-1.1 in the area of” debt collection. The Act caps treble damages at $4,000, but it still allows aggrieved debtors to recover attorney fees.
A recent federal decision, Cole v. Wells Fargo, raises interesting questions about the interplay between section 75-1.1 and the Debt Collection Act. Cole shows the need for further judicial guidance on how the conduct standards under the two statutes overlap.
Cole v. Wells Fargo
The plaintiff in Cole was a borrower who was trying to negotiate a modification to a home loan. During the negotiations, a fire partially destroyed the home. The borrower took the proceeds from his fire insurance policy and tendered those proceeds to the bank. The bank applied those funds, reducing the principal due on the loan.
Ultimately, the borrower and the bank were not able to work out a loan modification, so the bank started foreclosure proceedings. During the foreclosure, the bank sent the borrower a statement of the principal sum that remained due after the bank had applied the insurance proceeds.
To preempt the foreclosure, the borrower sold the property to a third party. That sale was for less than the fair market value of the home. The borrower agreed to the sale, however, because he believed that the sale proceeds would be enough to pay off the remaining loan balance.
When the borrower went to pay off the mortgage, however, the bank told him that it had made an error in applying the insurance proceeds. The bank demanded that the borrower pay substantially more money before the mortgage would be satisfied.
The borrower paid the additional amount, but then sued the bank in state court. The bank removed the case to the United States District Court for the Western District of North Carolina.
The Debt Collection Act claim
The borrower’s original complaint included, among several other claims, a section 75-1.1 claim. In the face of a motion to dismiss, the plaintiff amended his complaint and reasserted his 75-1.1 claim as a claim under the North Carolina Debt Collection Act. The bank then moved to dismiss the amended complaint, including the Debt Collection Act claim.
The district court declined to dismiss the Debt Collection Act claim.
In analyzing that claim, the court applied an analysis that was first announced by the North Carolina Court of Appeals in Reid v. Ayers. Reid holds that, to state a claim under the Debt Collection Act, a plaintiff must allege the usual elements of recovery under section 75-1.1: (1) an unfair or deceptive act, (2) in or affecting commerce, (3) that proximately causes an injury to the plaintiff.
In Cole, the borrower alleged that the bank committed an unfair act by changing how it applied the insurance proceeds. The borrower alleged that he had relied, to his detriment, on the bank’s original statement of the principal amount that remained due after the insurance proceeds were applied. The court agreed that the bank’s change in how it calculated the balance due was an unfair act.
Did the bank in Cole really violate the Debt Collection Act?
The court in Cole, however, did not ask an additional question: Did the bank’s actions fall into one of the categories of misconduct that are listed in the Debt Collection Act?
This additional test seems necessary in view of the Debt Collection Act’s explicit statement that its “specific and general provisions” are the only types of 75-1.1 violations that North Carolina law recognizes in the area of debt collection. Indeed, the Cole court cited Campbell and Davis Lake, two earlier decisions that analyzed the Debt Collection Act’s categories of misconduct. Those decisions did not limit themselves to asking whether the defendants’ acts were generally unfair. On the other hand, the decisions are not entirely explicit in their reasoning.
The Cole court’s omission of these categories played a pivotal role in the outcome of the motion to dismiss. The Debt Collection Act prohibits collecting, or attempting to collect, a debt by “means of an unfair threat, coercion, or attempt to coerce.” The statute goes on to list several types of prohibited threats and harassment against debtors.
On the facts described in Cole, it is hard to see what type of statutorily prohibited misconduct the bank might have committed. All the bank was accused of doing was miscalculating or misallocating credits against the plaintiff’s mortgage. No harassment or threats were alleged.
It is possible that the court believed that the bank’s acts fell within another category of misconduct listed in the Debt Collection Act. For example, the Debt Collection Act bars deceitful or unconscionable conduct. The opinion does not, however, find that the bank’s conduct met these tests.
The exclusivity provision in the Debt Collection Act suggests that the General Assembly intended to limit the debt-collection-related acts that could generate liability—and to give creditors concrete guidance on what those acts are. Cole, however, suggests that liability under the Debt Collection Act (and thus under section 75-1.1) might extend beyond the explicitly listed categories. It’s not clear that the court intended this result, or that such a result would be faithful to the exclusivity provision.
Future courts will have opportunities to clarify whether the categories of conduct in the Debt Collection Act truly are exclusive—and, if not, what their relevance is.