In North Carolina, a loan agreement can require a borrower to pay attorneys' fees upon default to reimburse the lender for collection expenses.
The law provides that you can specify a percentage up to 15% of the amount due. Absent a specific percentage in your agreement – for example, "all reasonable fees and expenses" – the statute says that "reasonable" also means 15%. But what if the outstanding loan balance is so large that 15% dwarfs the actual fees expended by the lender? What if 15% equates to millions more in legal fees than what the lender paid its lawyers? Can a borrower reduce the attorneys' fee award to the lender's actual fees? According to the United States Court of Appeals for the Fourth Circuit, the answer is "no."
In a recent decision, the Fourth Circuit (which reviews federal court decisions from North Carolina, South Carolina, Virginia, West Virginia, and Maryland) held that under North Carolina law, reasonable attorneys' fees are statutorily defined as 15% of the debt when the lender sues. Courts should simply do the math and not consider the actual amounts billed or the "reasonableness" of the award vis-à-vis the amount owed on the loan.
In 2019, Colorado Bankers Life Insurance Company extended a $40 million revolving line of credit (revolver) to Academy Financial Assets. The revolver provided that Colorado Bankers could accelerate the loan if Academy defaulted and declared all principal and interest due. The loan agreement had an attorneys' fee clause: 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)" incurred by Colorado Bankers to enforce its rights under the revolver.
Academy borrowed nearly the full $40 million, then defaulted. Colorado Bankers accelerated the loan and sued for breach of contract. Academy did not deny the existence of a valid contract. But as to the attorneys' fees provision, Academy argued that Colorado Bankers needed to present evidence to support an award of 15% attorneys' fees. The District Court rejected Academy's argument and awarded Colorado Bankers nearly $40 million in damages, just under $5 million in prejudgment interest, and more than $6 million in attorneys' fees.
On appeal, the Fourth Circuit affirmed the District Court. Academy again argued that the court had to make a reasonableness finding supported by the documentation provided by the lender. According to Academy, the documentation should include evidence of "the attorneys' actual billing or usual rates." The Fourth Circuit rejected this argument. They held that the North Carolina attorneys' fees statute – § 6-21.2 – divides attorneys' fees claims in North Carolina into two worlds.
One, if the agreement calls for a specific percentage of the outstanding balance, courts should apply the percentage in the agreement – so long as it is not over 15%. If the agreement calls for "reasonable" attorneys' fees without specifying a percentage, then the court should use 15%. Actual amounts billed, or the size of the award relative to the loan balance, are irrelevant.
This decision is a victory for North Carolina creditors. It provides a strong defense against borrowers who try to chip away at an attorneys' fee demand in a lawsuit. Unless the North Carolina Supreme Court rules otherwise, when ruling on attorneys' fees, courts should follow this decision and simply do the math – 15% of the amount due. No more, no less, no discovery of invoices or evidentiary hearings on actual or reasonable fees. Fifteen percent.
