February 26, 2014

Important Supreme Court Case Regarding Spousal Guarantees

image by Silver Season
Few things seem to vex commercial lenders with more frequency than spousal guarantees.  The Equal Credit Opportunity Act ("ECOA"), its implementing regulation, Regulation B, and the interpretations given to them by some courts and federal regulators, can present challenges to commercial lenders when arranging and underwriting loans to married borrowers or married business owners.

A relatively recent opinion of the North Carolina Court of Appeals has held that a spouse may escape his or her obligations under a guaranty if the guaranty was improperly obtained.   

The North Carolina Supreme Court has agreed to hear the appeal of the creditor in this case.  On behalf of the North Carolina Bankers Association, one of my colleagues and I filed an amicus curiae (friend of the court) brief with the Supreme Court.  You can read our motion, which the Court granted, here, and the brief here.  Here's an excerpt:

"This case presents an issue of first impression in North Carolina, and involves issues of great importance to lenders conducting business in North Carolina, including the banking community, as well as borrowers in North Carolina who rely upon the access to credit that those lenders provide."


[Post Script - NC law most commonly uses the spelling "guaranty" rather than "guarantee."]

February 19, 2014

A Win for Arbitration Clauses in North Carolina

art by Todd Berman / flickr
Arbitration clauses in consumer contracts are now more likely to be enforced in North Carolina, thanks to a a pair of opinions issued a few days ago by the North Carolina Court of Appeals.  The companion cases are Torrence v. Nationwide Budget Finance and Knox v. First Southern Cash Advance.

Arbitration clauses are used in contracts to limit the delay and expense often associated with traditional litigation in the judicial system.  Generally speaking, they serve to streamline the dispute resolution process.  Consumer advocates, however, have long objected to their use in consumer contracts, believing they weaken the ability of consumers to obtain remedies for breaches and violations of law.

In Torrence, which contains the rationale for both of the Court of Appeals' recent decisions, the Court ruled that an earlier North Carolina Supreme Court decision limiting the use of arbitration clauses in consumer contracts has been preempted by subsequent decisions of the U.S. Supreme Court.  The leading case in North Carolina dealing with the invalidation of arbitration clauses is Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93 (2008).  Two cases subsequently decided by the United States Supreme Court have changed the legal landscape, however: AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), and American Express Co. v. Italian Colors Rest., 133 S.Ct. 2304 (2013).  In Concepcion, the Court held that the Federal Arbitration Act supersedes any state law (including a state court opinion) that sets aside arbitration agreements upon grounds that are exclusive to arbitration agreements (i.e., not applied to contracts generally).  In 2013, the Court decided in Italian Colors that arbitration clauses could be used to effectively prevent class-action lawsuits by consumers. 

In Torrence, the North Carolina Court of Appeals was forced to acknowledge that the North Carolina Supreme Court's decision in Tillman had been essentially overruled by the United States Supreme Court in Concepcion and Italian Colors.  The Court of Appeals explained that, despite judicial hostility to arbitration clauses, the law clearly permits them: "The United States Supreme Court has made it clear that the use of unconscionability attacks directed at the arbitration process can no longer serve as a basis to invalidate arbitration agreements."

As a result of these two recent opinions, arbitration clauses should be enforced more reliably in North Carolina.  Businesses in North Carolina may want to re-evaluate the use of arbitration clauses, or the language of arbitration clauses, in light of the recent decisions.

February 12, 2014

How Does a State of Emergency Affect Prices in North Carolina?

On Tuesday, Governor McCrory issued Executive Order number 43, which declared a state of emergency across the entire state pursuant to Chapter 166A of the General Statutes (the North Carolina Emergency Management Act).

One of the interesting legal consequences of this development is that the ordinary economic rules of supply and demand are partially suspended, and price gouging prohibitions become effective under Section 75-38 of the General Statutes.

Price gouging is selling or renting certain goods and services "with the knowledge and intent to charge a price that is unreasonably excessive under the circumstances."   The goods and services covered by the statute are those "which are consumed or used as a direct result of an emergency or which are consumed or used to preserve, protect, or sustain life, health, safety, or economic well-being of persons or their property." 

Although we commonly think of price gouging as a retail issue, the price gouging law applies to all parts of the chain of distribution, including manufacturers, suppliers, wholesalers, and distributors.

The law makes price gouging an "unfair trade practice" and gives consumers who were gouged the right to sue and recover treble (triple) damages from the seller.  The Attorney General may also sue to enforce the law, and courts can impose civil penalties against price gougers of up to $5,000 per violation.  (By way of example, the Consumer Protection Division of the N.C. Department of Justice obtained $71,000 from 14 gas stations as result of a price gouging investigation in 2008.)

In the event the Attorney General investigates a complaint of price gouging and determines that a seller has not violated the law, the wrongfully-accused seller can demand that the Attorney General issue a signed statement indicating the seller's innocence.

The Executive Order--and therefore the prohibition on price gouging--will remain in effect until rescinded by the Governor.

Wampa from the frozen planet Hoth (Star Wars reference) by Chris Griego

Read more here: http://www.newsobserver.com/2014/02/12/3614487/nc-price-gouging-law-in-effect.html#storylink=cpy

February 4, 2014

Consumers May Now Dispute Debts Verbally

The U.S. Court of Appeals for the Fourth Circuit (which covers North Carolina) has ruled that debt collection notices violate the Fair Debt Collection Practices Act (FDCPA) if they require consumers to submit disputes of debts in writing. 

In Clark v. Absolute Collection Service, Incorporated (4th Circuit, Jan. 31, 2014), the Court ruled that the FDCPA does not require a consumer to dispute the validity of a debt in writing. 

The FDCPA requires that debt collectors send written notices to consumer debtors containing “a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector.”

However, if the consumer notifies the debt collector that he or she disputes the validity of the debt, the debt collector must stop the collection activity until it has mailed a verification of the debt to the consumer. (This is sometimes used as a delay tactic by consumers and their lawyers.)

The Court ruled that any collection notice sent by a creditor that purports to require a consumer to dispute the validity of the debt in writing is incorrect, and the consumer's oral dispute is all that is necessary to stop collection efforts and trigger the verification requirement.  (Furthermore, an incorrect debt collection notice might be deemed invalid even if the consumer does not orally dispute the validity of the debt.) 

The decision of the Fourth Circuit Court of Appeals in this case is now the law of the land in North Carolina, and creditors and collection agencies in North Carolina will now have to adjust their policies and procedures to accommodate oral disputes from customers.

"Squeezing the Turnip"
Photo credit: Ula Gillion