1. Collateral Estoppel and Res Judicata--issue of first impression--unfair debt
collection practices
Although defendants assert that collateral estoppel bars plaintiffs' claim for unfair debt
collection practices premised upon defendants having sought too much in attorney fees when
plaintiffs never contested the amount of attorney fees recoverable in the first case, the Court of
Appeals chose not to apply the doctrine in this situation because the issue is one of first
impression.
2. Consumer Protection--Debt Collection Act--no action against attorneys
Although plaintiffs' complaint met the three threshold requirements to state a claim under
The North Carolina Debt Collection Act in Chapter 75, Article 2 of the General Statutes, this Act
does not allow a cause of action against attorneys engaging in collecting debts on behalf of their
clients because: (1) the three generalized requirements found in N.C.G.S. § 75-1.1 must also be
met, and the “learned profession” exemption operates to invalidate plaintiffs' claim since
defendants, a law firm and its attorneys, are members of a learned profession; and (2) the
exemption applies anytime an attorney or law firm is acting within the scope of the traditional
attorney-client role, but not when the attorney or law firm is engaged in the entrepreneurial
aspects of legal practice that are geared more towards their own interests as opposed to the
interests of their clients.
Hewson Lapinel Owens, PA, by H.L. Owens, for plaintiff-
appellants.
Dean & Gibson, L.L.P., by Barbara J. Dean and Rodney A. Dean,
for defendant-appellees.
LEWIS, Judge.
This appeal involves a question of first impression in North
Carolina. Specifically, we are called upon to address whether the
North Carolina Debt Collection Act (NCDCA) contained within Chapter
75 of our General Statutes allows for a cause of action againstattorneys engaged in collecting debts on behalf of their clients.
We find that it does not and therefore affirm the trial court's
order dismissing plaintiff's claim.
Plaintiffs are residents of a planned development community in
Mecklenburg County known as Park Lake Recreation Association ("Park
Lake"). Defendants serve as legal counsel for Park Lake. During
1995, plaintiffs became delinquent on certain assessments and
association dues they owed to Park Lake. As of 30 November 1995,
this delinquency amounted to $478. In attempting to collect the
money owed their clients, defendants informed plaintiffs that they
would also have to pay attorney's fees in the amount of $996 in
order to fully satisfy their account. This was well in excess of
the amount permitted under our statutes. See N.C. Gen. Stat. § 6-
21.2(2) (1999) (limiting the amount of recoverable attorney's fees
to 15% of the obligation owed); McGinnis Point Owners Ass'n v.
Joyner, 135 N.C. App. 752, 757, 522 S.E.2d 317, 320 (1999)
(applying this statutory limit in the context of homeowners'
assessments). Nonetheless, a default judgment was eventually
entered against plaintiffs, ordering them to pay the $478delinquency plus $996 in attorney's fees. Plaintiffs eventually
paid off the entire amount owed, but not before their home was
foreclosed and they were forced to repurchase it for an additional
$4000.
Plaintiffs thereafter filed this action, claiming that
defendants engaged in unfair debt collection practices in violationof the NCDCA by attempting to collect attorney's fees well in
excess of the amount legally permitted. Their complaint also
alleged claims for infliction of emotional distress, fraud, and
civil conspiracy. In an order entered 8 March 1999, the trial
court dismissed all claims asserted against defendants pursuant to
N.C.R. Civ. P. 12(b)(6). Plaintiffs have only appealed the
dismissal of their unfair debt collection claim, and thus our
review is limited to a consideration of the validity of that claim. [1]At the outset, defendants claim this action
is barred by
principles of collateral estoppel. Specifically, they maintain
that plaintiffs cannot now assert a claim for unfair debt
collection practices premised upon defendants having sought too
much in attorney's fees when plaintiffs never contested the amount
of attorney's fees recoverable in the first case. However, even if
the formal requirements of collateral estoppel have all been
satisfied here, see generally King v. Grindstaff, 284 N.C. 348,
358, 200 S.E.2d 799, 806 (1973) (setting forth the four
requirements), we choose not to apply the doctrine in this
situation because the issue before us is one of first impression.
See generally Tar Landing Villas v. Town of Atlantic Beach, 64 N.C.
App. 239, 244, 307 S.E.2d 181, 185 (1983) ("When the issue [for
purposes of collateral estoppel], however, as in this case,
involves the scope and formulation of a law never before addressed
by an appellate court in this State, we believe that our duty to
develop the law outweighs the resulting burden on [defendants]."),
disc. review denied, 310 N.C. 156, 311 S.E.2d 296 (1984).
Accordingly, we reject defendants' argument and proceed to the
merits of this appeal.
[2]The North Carolina Debt Collection Act is contained in
Chapter 75, Article 2 of our General Statutes. In it, our
legislature has proscribed certain activities in the area of debt
collection. N.C. Gen. Stat. §§ 75-51 to -55 (1999). But before a
claim for unfair debt collection can be substantiated, three
threshold determinations must be satisfied. First, the obligationowed must be a "debt"; second, the one owing the obligation mus
t be
a "consumer"; and third, the one trying to collect the obligation
must be a "debt collector." N.C. Gen. Stat. § 75-50(1)-(3).
Plaintiff's complaint satisfies all three here.
For purposes of the NCDCA, our legislature has defined "debt"
as "any obligation owed or due or alleged to be owed or due from a
consumer." N.C. Gen. Stat. § 75-50(2). We conclude that the
homeowners' association dues and assessments in this case satisfy
this definition. In arriving at this conclusion, we have found
cases construing the parallel federal statute to be particularly
instructive, though not binding.
Under the federal Fair Debt Collection Practices Act
("FDCPA"), “debt” is defined as "any obligation or alleged
obligation of a consumer to pay money arising out of a transaction
in which the money, property, insurance, or services which are the
subject of the transaction are primarily for personal, family, or
household purposes, whether or not such obligation has been reduced
to judgment." 15 U.S.C.A. § 1692a(5) (1998). The Third Circuit
was the first to construe this definition. In Zimmerman v. HBO
Affiliate Group, 834 F.2d 1163 (3d Cir. 1987), that court
concluded that, to be a debt, there must be an actual extension of
credit plus a deferred payment obligation, i.e. a "transaction in
which a consumer is offered or extended the right to acquire" money
or property. Id. at 1168-69. Several courts thereafter used
Zimmerman's "extension of credit" requirement to conclude that
condominium or homeowners' association dues and assessments are notdebt because the unit owner is required to pay the dues and
assessments up front, before the association provides services in
return. See, e.g., Azar v. Hayter, 874 F. Supp. 1314 (N.D. Fla.
1995) (condominium association fees); Nance v. Petty, Livingston,
Dawson, & Devening, 881 F. Supp. 223 (W.D. Va. 1994) (homeowners'
association dues); see also Bryan v. Clayton, 698 So. 2d 1236 (Fla.
Dist. Ct. App. 1997) (holding that condominium association fees are
not debt under Florida state law).
Zimmerman's extension of credit requirement, however, has come
under sharp criticism. As the Seventh Circuit articulated:
Because the statute's definition of a "debt"
focuses on the transaction creating the
obligation to pay, it would seem to make
little difference under that definition that
unit owners generally are required to pay
their assessments first, before any goods are
provided by the association.
Newman v. Boehm, Pearlstain & Bright, Ltd., 119 F.3d 477, 481 (7th
Cir. 1997). The Newman court thus concluded that homeowners'
association assessments are indeed debt under the federal act. Id.
at 481-82. Since then, nearly every court, state or federal, that
has considered the issue has concluded that association dues,
assessments, and rent are properly classified as debt. See, e.g.,
Romea v. Heiberger & Assocs., 163 F.3d 111 (2d Cir. 1998); Ladick
v. Gemert, 146 F.3d 1205 (10th Cir. 1998); Garner v. Kansas, No.
98-1274, 1999 WL 262100 (E.D. La. 1999); Caron v. Charles E.
Maxwell, P.C., 48 F. Supp. 2d 932 (D. Ariz. 1999); Taylor v. Mount
Oak Manor Homeowners Ass'n, 11 F. Supp. 2d 753 (D. Md. 1998); Thies
v. Law Offices of William A. Wyman, 969 F. Supp. 604 (S.D. Cal.1997); Loigman v. Kings Landing Condominium Ass'n, 734 A.2d 367
(N.J. Super. Ct. Ch. Div. 1999). But see Barstow Road Owners, Inc.
v. Billing, 687 N.Y.S.2d 845 (Dist. Ct. 1998) (holding that back
rent is not debt under New York state law). We agree that an
extension of credit requirement under our state act would be too
restrictive for the purposes the act is designed to accomplish.
Accordingly, we conclude that homeowners' association dues and
assessments are debt within the meaning of the NCDCA.
The second threshold requirement under our act is that the one
owing the obligation must be a "consumer." Our legislature has
defined consumer as "any natural person who has incurred a debt or
alleged debt for personal, family, household or agricultural
purposes." N.C. Gen. Stat. § 75-50(1) (1999). Plaintiffs here
clearly meet this definition, as they have incurred these
assessments for family or household purposes.
Finally, the NCDCA requires that the one trying to collect the
obligation owed be a "debt collector," which is defined as "any
person engaging, directly or indirectly, in debt collection from a
consumer except those persons subject to the provisions of Article
70, Chapter 58 of the General Statutes [regarding collection
agencies]." N.C. Gen. Stat. § 75-50(3). We point out that, in
this regard, our state act is much broader than the federal
counterpart. The federal definition of "debt collector" focuses on
whether the principal purpose of the business is debt collection or
whether debt collection is regularly done in that business. 15
U.S.C.A. § 1692a(6) (1998). In this regard, attorneys and lawfirms can be debt collectors for purposes of the FDCPA only if
regularly engaged in that type of practice. Heintz v. Jenkins, 514
U.S. 291, 294, 131 L. Ed. 2d 395, 399 (1995). Because there is no
regularity or primary purpose limitation in our act, we conclude
that law firms and attorneys (such as defendants here) who attempt
to collect debts on behalf of their clients are debt collectors
under the NCDCA, regardless of how infrequently they perform that
type of work. We thus conclude that plaintiffs' complaint has met
all three threshold requirements.
Satisfaction of the threshold requirements of Article 2,
however, does not end our inquiry. Article 2 only contains the
specific requirements in the context of debt collection. After
these are satisfied, a plaintiff's claim then must satisfy the more
generalized requirements of all unfair or deceptive trade practice
claims, which are contained in Article 1 (in particular, section
75-1.1). Although our legislature does not specifically state that
Article 2 is subject to the more generalized requirements of
section 75-1.1, we conclude that was their intent. The final
section in Article 2 states:
The specific and general provisions of this
Article shall exclusively constitute the
unfair or deceptive acts or practices
proscribed by G.S. 75-1.1 in the area of
commerce regulated by this Article.
Notwithstanding the provisions of G.S. 75-15.2
and G.S. 75-16, in private actions or actions
instituted by the Attorney General, civil
penalties in excess of two thousand dollars
($2,000) shall not be imposed, nor shall
damages be trebled for any violation under
this Article.
N.C. Gen. Stat. § 75-56 (1999). By specifically referencing thegeneralized proscription in section 75-1.1, we conclude the
legislature intended that Article 2 be limited by the same
requirements applicable to those proscriptions. Furthermore, had
our legislature not intended for Article 2 to be governed by the
generalized provisions of Article 1, it would not have needed to
refer to Article 1's allowance for treble damages when limiting the
remedy for Article 2 violations to $2000. Thus, we conclude that
once the three threshold requirements in section 75-50 are
satisfied, a claim for unfair debt collection practices must then
meet the three generalized requirements found in section 75-1.1:
(1) an unfair act (2) in or affecting commerce (3) proximately
causing injury. See First Atl. Mgmt. Corp. v. Dunlea Realty Co.,
131 N.C. App. 242, 252, 507 S.E.2d 56, 63 (1998).
We need not address all three of these requirements, however,
as we find the "in or affecting commerce" requirement to be
dispositive here. Our legislature has defined this requirement in
the following manner: "'[C]ommerce' includes all business
activities, however denominated, but does not include professional
services rendered by a member of a learned profession." N.C. Gen.
Stat. § 75-1.1(b) (1999). We conclude that the "learned
profession" exemption provided for in the second half of this
definition operates to invalidate plaintiffs' claim here.
In order for the learned profession exemption to apply, a two-
part test must be satisfied. First, the person or entity
performing the alleged act must be a member of a learned
profession. Noel L. Allen, North Carolina Unfair Business Practice§ 14-3(c) (1995) (citing 47 N.C. Op. Att'y Gen. 118, 119-20
(1977)). Second, the conduct in question must be a rendering of
professional services. Id. With respect to the first part of the
test, although our legislature does not specifically define what
professions are considered "learned," we note that the practice of
law has traditionally been considered a learned profession, as
indeed it is. Id. § 14-3(b). Furthermore, this Court has recently
applied the exemption in the context of a law firm. Sharp v.
Gailor, 132 N.C. App. 213, 217, 510 S.E.2d 702, 704 (1999). Thus,
we conclude that defendants, being a law firm and its attorneys,
are members of a learned profession.
We conclude defendants meet the second part of the test as
well because they were attempting to collect moneys that were owed
to their clients. In doing so, they were rendering a professional
service that is often carried out by law firms or attorneys.
Plaintiffs attempt to distinguish debt collection from other
aspects of an attorney's work, such as drafting pleadings,
negotiating settlements, and preparing contracts, arguing that only
the latter should fall within the exemption. We disagree.
In Cameron v. New Hanover Memorial Hospital, 58 N.C. App. 414,
293 S.E.2d 901, disc. review denied, 307 N.C. 127, 297 S.E.2d 399
(1982), this Court entertained a similar argument in the context of
medical professionals. In that case, the hospital amended its by-
laws to eliminate all staff privileges for podiatrists working at
the hospital. Id. at 422-24, 293 S.E.2d at 907-08. Plaintiffs,
two licensed podiatrists, then sued the hospital, alleging that theamendment came as the result of a conspiracy and other unfair or
deceptive acts. Id. at 416, 293 S.E.2d at 903. In holding that
the learned profession exemption applied, this Court concluded that
the exemption could not be strictly separated along purely
administrative versus purely medical lines. Id. at 446-47, 293
S.E.2d at 920-21. Rather, the crucial inquiry was whether the
administrative functions were a necessary part of the medical
services provided. Id. Because staff privileges are an important
quality control component, the Cameron Court held that the grant or
denial of those privileges was a necessary part of assuring quality
medical services. Id. at 447, 293 S.E.2d at 921.
We feel the same type of analysis can be applied in the
context of the practice of law. Debt collection, along with the
collection of any attorney's fees incurred as a penalty, is a
necessary part of the practice of debtor-creditor law. Because
defendants were engaged in that very practice here, they were
rendering a professional legal service. Accordingly, their acts
fall within the learned profession exemption.
We point out that not all services performed by attorneys will
fall within the exemption. Advertising is not an essential
component to the rendering of legal services and thus would fall
outside the exemption. See 47 N.C. Op. Att'y Gen. 118, 120 (1977)
("Advertising by an attorney is a practice apart from his actual
performance of professional services. Indeed, it is not a
professional practice at all, but rather a commercial one.").
Likewise, the exemption would not encompass attorney price-fixing. Id. Although no bright line exists, we think that the exemption
applies anytime an attorney or law firm is acting within the scope
of the traditional attorney-client role. It would not apply when
the attorney or law firm is engaged in the entrepreneurial aspects
of legal practice that are geared more towards their own interests,
as opposed to the interests of their clients. See generally Short
v. Demopolis, 691 P.2d 163, 168 (Wash. 1984) (en banc) (espousing
a demarcation between "the actual practice of law" and "the
entrepreneurial aspects of legal practice"). Because we conclude
that defendants fall within the learned profession exemption, we
hold that plaintiffs' claim is legally insufficient.
In closing, we believe the tactics used by defendants in
trying to collect these delinquent assessments were indefensible,
whether done in ignorance of, or disdain for, the law. Our
statutes clearly limited the amount of recoverable attorney's fees
to $71.70 (15% of the $478 owed), thereby entitling defendants and
their clients to a total recovery of $549.70. (We note that the
provisions in newly-enacted Chapter 47F of our General Statutes are
not applicable here.) Notwithstanding this statutory mandate,
however, defendants refused to accept any payments less than $1374
from plaintiffs, two-and-a-half times that which was legally owed.
These tactics, however wrongly employed here, do not constitute a
legally valid claim under the North Carolina Debt Collection Act.
Affirmed.
Judges JOHN and EDMUNDS concur.
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