Abusive debt collection practices have often been portrayed in the movies, frequently involving the unconventional use of baseball bats and needle-nose pliers. But there are other, more sophisticated practices that – while not calling to mind the more unsettling scenes from films like “Casino” – also cross the line into abuse.

In 1977, the NC General Assembly acted to control such abusive practices by enacting the NC Debt Collection Practices Act (NCDCA), whose measures were amended in 2015 to more closely conform to the federal Fair Debt Collection Practices Act. The NCDCA identifies and prohibits unacceptable practices and provides a mechanism for individuals to seek “actual damages” and civil penalties when debt collectors engage in the prohibited practices. “Debt collectors” subject to the NCDCA include creditors who seek to recover directly from debtors, as well as collection agencies.

This month in Legal Sidebar, we explore a case decided just this past December, McMillan v. Blue Ridge Companies, Inc., involving the NCDCA.

The Questions Raised

At issue in McMillan was whether the plaintiffs seeking to enforce their rights under the NCDCA were required to identify and enumerate their “actual damages” as a prerequisite to establishing their right to recover under the act. In other words, could Blue Ridge be held liable under the NCDCA to individuals who had not alleged, and perhaps could not allege, any actual damage resulting due to a violation of the NCDCA? That issue was complicated by the interesting wrinkle that McMillan was brought as a class action.

The plaintiff class in this case consisted of persons who had rented residential properties from Blue Ridge and had become delinquent in their rental payments at some point during the period of the lease contract. Not all the class members had been evicted, or even sued. Some had only been sent a threatening letter from Blue Ridge.

Yet, all the delinquent tenants were included in one of three subdivisions of the class, which meant that each class member might be able to collect any actual damages and civil penalties between $500 and $4000 for each violation that could be proven. The breadth of the NCDCA makes it a formidable weapon for debtors, most especially for those in a class action where each letter constituting a violation might bring with it a penalty of up to $4000 per letter.

The NC Rules of Civil Procedure explicitly authorize class actions in North Carolina courts. A class action may be appropriate where the persons who make up the plaintiff class are so numerous that it is impractical to bring them all before the court, and that the named and unnamed members of the class each have an interest in the same issue of law or fact. The issue common to all class members must predominate over other issues affecting only individual class members. Each member of the class must be able to show a genuine personal interest in the outcome of the case. Even with these showings, it remains within the discretion of the trial court to determine whether a class action is the best method of proceeding with the claims.

The Courts’ Response

The trial court in this case certified, or approved, the classes (actually, three distinct classes) proposed by plaintiffs. With respect to the substantive violations alleged by the plaintiffs, the trial court ruled that Blue Ridge had, in fact, violated the provisions of the NCDCA, but the issue of damages was held over to be determined at trial. Blue Ridge then filed an interlocutory appeal of the order by the trial court certifying the class.

An interlocutory appeal is one that is filed before the case has proceeded to judgment and contests a procedural ruling that the party appealing believes will have an unfair influence on the outcome of the case. In this case, Blue Ridge claimed that it was unfair to include in the class those tenants who were only sent a collection letter. Blue Ridge believed that those tenants were injured, if at all, in ways and degrees that would necessarily be unique to each individual. Thus, damages suffered by members of that class would vary significantly and could not be shown through a class-wide theory of generalized proof.

Blue Ridge based their appeal in large part on recent North Carolina caselaw. It claimed the case required a showing of actual injury as an element of standing for a statutorily created cause of action of this type – that is, where the law prohibits certain activities to protect the public. Standing is generally premised on a showing of actual injury or harm to the litigant.

The NC Supreme Court ruled against Blue Ridge and upheld the trial court’s class certifications. In order to be appropriately determined as a class, the Court said, it was not necessary that each class member allege a personal, factual injury based on the individual’s subjective reaction to the action found to violate the NCDCA. The injury in this case that was common to all class members was an “informational” injury and a deprivation of statutory rights.

Indeed, North Carolina courts do not require a showing of injury-in-fact on the part of the plaintiff. That is not the case for the federal courts. Article III of the U.S. Constitution requires that cases before federal courts must present a “case or controversy.” As Chief Justice Earl Warren observed:

“Case or controversy are two complementary but somewhat different limitations. In part those words limit the business of federal courts to questions presented in an adversary context and in a form historically viewed as capable of resolution through the judicial process. And in part those words define the role assigned to the judiciary in a tripartite allocation of power to assure that the federal courts will not intrude into areas committed to the other branches of government.”

Not so for North Carolina. There is no “case or controversy” limitation on state court jurisdiction in the North Carolina Constitution. The Court’s assertion of standing-type justiciability issues as being constitutionally limited has been principally in cases found to be collusive or based on feigned issues.

The Upshot for Business

Ultimately, McMillan turned on whether the trial court’s grant of class certification was an abuse of its discretion – the Court found it not to be so. In essence, it suggested that the recourse for this magnified exposure to liability should be found in the legislature, not in the courts. Indeed, some legislators might be surprised by the unanimous outcome reached here.

Without question, the civil penalties in the NCDCA could dwarf the damages, particularly in a case of a plaintiff class consisting of individuals who received nothing more than collection letters, however threatening they may have been. The civil penalties qualify as an in terrorem provision that may deserve legislative scrutiny. And it is certainly true that certification of the class in this matter magnified the defendants’ exposure particularly to those civil penalties.

The lesson the business community can take from this case is to pay close attention to our methods of debt collection and other matters with statutorily created causes of action based on “informational” injury and deprivation of statutory rights.

Sincerely,

Ray Starling
President
NC Chamber Legal Institute