Under North Carolina law, parties entering into loan agreements may specify an amount for attorneys’ fees, in the event that one of the parties breaches or there is a default. The prescribed amount of attorneys’ fees may be up to 15% of the amount owed under the terms of the loan agreement. Frequently, the loan agreement is silent about the specific amount of attorney’s and the agreement simply states that the breaching party shall be responsible for “all reasonable fees and expenses.” The applicable statute defines “reasonable” as 15%.
The United States Court of Appeals for the Fourth Circuit (which reviews federal court decisions from North and South Carolina, Virginia, West Virginia, and Maryland) recently held that under North Carolina law, the statute intends for reasonable attorneys’ fees to be 15% of the debt owed when the lender sues.
In this specific case, Colorado Bankers Life Insurance Company provided a $40 million revolving line of credit to Academy Financial Assets. The loan agreement contained an attorneys’ fees clause stating that Academy agreed 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)” should Academy breach the agreement or default.
Academy borrowed almost all of the $40 million and then defaulted. Colorado Bankers initiated suit and argued that Academy owed 15% of the $40 million to Colorado Bankers for attorneys’ fees. Academy, on the other hand, argued that Colorado Bankers was required to provide evidence to support an award of 15% attorneys’ fees. The District Court sided with Colorado Bankers and awarded close to $40 million in damages and over $6 million in attorneys’ fees.
On appeal, the Fourth Circuit affirmed the ruling of the District Court, describing two specific scenarios under the North Carolina attorneys’ fees statute:
- If the agreement calls for a specific percentage of the outstanding balance, courts should apply the percentage in the agreement (as long as it is not above 15%); or
- If the agreement calls for “reasonable” attorneys’ fees, without a specific amount or percentage of the outstanding balance, the court should use 15%.
In both instances, the actual amount billed, or the size of the awarded attorneys’ fees compared to the loan balance, are irrelevant.
This ruling makes it easier for all parties to forecast the cost of a possible attorneys’ fees award in the event of a borrower’s breach, and also provides a major victory for lenders in North Carolina, who can now collect attorneys’ fees equal to 15% of the debt owed under an agreement. Our office will provide an update on this ruling should the North Carolina Supreme Court rule differently in this matter.