Author Archives: George Sanderson

Does the Fair Credit Reporting Act Preempt State-Law Claims for Unfair and Deceptive Trade Practices?

In cases that involve claims brought under North Carolina’s Unfair and Deceptive Trade Practices Act, an often overlooked issue is whether federal law preempts the 75-1.1 claim.

In a case of apparent first impression, a federal district court in North Carolina recently ruled that the federal Fair Credit Reporting Act (FCRA) can preempt a 75-1.1 claim, at least where there is no evidence that the defendant’s acts were willful or malicious.

Equifax doesn’t report the bankruptcy discharge of a consumer’s debt

Myrick v. Equifax Information Services, LLC involves a consumer whose obligations under a mortgage that had been discharged in bankruptcy. The consumer alleged that Equifax failed to properly report the status of the debt on the consumer’s credit report. Equifax was reporting that the consumer’s loan payments were past due, but did not note the discharge of the obligation.

The consumer disputed the report with Equifax through Equifax’s website. The consumer asserted that the credit report should reflect the discharge.

After Equifax received the dispute, Equifax contacted the bank that had extended the credit line and attempted to verify the status of the debt. The bank indicated that the consumer had an open account. The bank did not verify to Equifax that the account had been discharged. Equifax then informed the consumer that Equifax believed that the account reporting was correct.

Several months later, the consumer sent a dispute letter to Equifax. In the letter, the consumer reiterated that this debt had been discharged.  The consumer also attached a copy of the bankruptcy court’s order of discharge. As is typical, the discharge order did not specifically identify the bank’s debt.  The order further indicated that the bankruptcy had discharged at least some of the consumer’s debts, but may not have discharged all of them.

In response to the letter, Equifax requested that the consumer “be specific with [his] concerns by listing the names, numbers, and the nature of the dispute.”

The consumer sues Equifax for its reporting and dispute investigation procedures

The consumer did not provide the information requested. Instead, the consumer sued both the bank and Equifax in the United States District Court for the Eastern District of North Carolina. The lawsuit alleged that the companies violated both the FCRA and section 75-1.1.

The FCRA is a federal statutory scheme that governs the reporting of consumer debt. The FCRA imposes statutory duties on consumer reporting agencies about how they maintain and report consumer credit histories. The FCRA creates a private right of action, and provides for the recovery of actual damages, for the negligent or willful violation of any duty that the statute imposes. An aggrieved consumer can also recover punitive damages, but only if the consumer can prove that the reporting agency was willfully non-compliant.

After the consumer filed the lawsuit, the bank verified to Equifax that the debt had been discharged and settled with the consumer.  The consumer and Equifax proceeded to litigate the matter.  At the conclusion of discovery, Equifax moved for summary judgment.

Senior District Judge W. Earl Britt partially denied summary judgment as to the FCRA claims, but granted summary judgment to Equifax on the 75-1.1 claim.

The consumer alleged that Equifax violated the FCRA through both its procedures for preparing credit reports, and for conducting post-dispute investigations. As to its investigation, the consumer contended that Equifax had an independent duty to verify that the disputed debt had been discharged once Equifax received notice of the general bankruptcy discharge.

Judge Britt determined that the evidence was insufficient to make out a FCRA violation for Equifax’s original credit reporting, but denied summary judgment as to the FCRA claim premised on Equifax’s post-dispute investigation procedures. The judge did not believe that the consumer forecast sufficient evidence of willful non-compliance to take a punitive-damages claim to a jury.

The FCRA preempts the consumer’s 75-1.1 claim

Equifax also sought summary judgment on the 75-1.1 claim. Equifax argued that the 75-1.1 claim was preempted by the FCRA. The FCRA broadly limits consumers from bringing a suit against a reporting agency under state law “except as to false information furnished with malice or willful intent to injure such consumer.”

In a decision of apparent first impression, Judge Britt determined that the FCRA preempted the 75-1.1 claim in this particular case because Equifax’s conduct was, at most, negligent. In his decision, Judge Britt referenced Congress’s intent to allow state-law claims only in very narrow circumstances. Because the consumer failed to forecast any malice or willful intent to injure by Equifax, the consumer could not maintain his state-law claim for unfair and deceptive trade practices.

As Myrick shows, preemption can be a powerful way for a defendant to eliminate potential treble-damages liability under a state unfair and deceptive practices statute. The FCRA is one of a few federal statutes with an express preemption statute. Defendants have been successful, however, in arguing that other federal statutes so pervasively regulate conduct impliedly as to preempt state-law claims

Myrick is a reminder that plaintiffs and defendants alike should consider potential preemption arguments where federal statutes or regulations may also regulate conduct that allegedly violates section 75-1.1.

Author: George Sanderson

Failure to Hold Back Settlement Funds Subject to a Medical Lien Can Expose an Insurer to Treble Damages

A court’s decision to impose liability for committing an unfair or deceptive trade practice in a particular case may have wide-ranging implications—even when the amount in dispute in the matter itself is relatively minor.

Such is the case in Nash Hospitals, Inc. v. State Farm Mutual Automobile Insurance, Co., a recent decision by the North Carolina Court of Appeals.

In Nash, the Court of Appeals concluded that State Farm committed an unfair and deceptive trade practice in its handling of the disbursement of settlement proceeds subject to a medical lien. Although the matter arose over a hospital bill of only $757, the reasoning and holding in Nash could have broader implications for how insurers handle personal injury settlements.

State Farm settles without notifying the hospital

Jessica Whitaker was injured in an automobile accident caused by another driver. She incurred medical expenses with Nash Hospitals and two other healthcare providers following the accident.

State Farm insured the culpable driver. State Farm negotiated a settlement with Ms. Whitaker to pay a substantial portion of her medical expenses. Ms. Whitaker did not involve counsel in those negotiations.

State Farm sent a check to Ms. Whitaker for the negotiated settlement amount. The check was jointly payable to Ms. Whitaker, Nash Hospitals, and the other medical providers. Ms. Whitaker was unable to cash the check because it required the endorsement of the co-payees.

North Carolina law grants hospitals and medical providers with certain statutory rights to assert an interest in the personal injury recoveries of their patients. These statutory rights are commonly referred to as medical liens. Pursuant to N.C. Gen. Stat. § 44-50, Nash Hospitals possessed a medical lien on Ms. Whitaker’s settlement proceeds pro rata with the other healthcare providers. Under the statute, the lienholders’ recovery was capped at 50% of the total settlement. 

Nash Hospitals notified State Farm of its medical lien prior to the settlement. State Farm did not notify Nash Hospitals, however, that it had reached a settlement with Ms. Whitaker.

Nash Hospitals subsequently contacted State Farm to inquire about the status of the claim. Only then did State Farm disclose that it had reached a settlement with Ms. Whitaker and issued the joint check to her. State Farm took the position that the issuance of the joint check satisfied and extinguished any obligation it had to satisfy Nash Hospitals’ medical lien. State Farm told Nash Hospitals to contact Ms. Whitaker directly to resolve how the settlement proceeds should be divided.

After finding out about the settlement, Nash Hospitals advised State Farm that State Farm’s failure to retain funds sufficient to satisfy its lien violated the medical lien statutes. Nash Hospitals also pointed out that, by issuing a joint check to Ms. Whitaker that she was unable to cash, Ms. Whitaker would be forced to obtain an attorney and incur additional unnecessary expenses in order to actually recover any of the insurance proceeds.

Nash Hospitals sues for its share of the settlement proceeds

State Farm did not respond to the letter. Nash Hospitals then sued State Farm for violating North Carolina’s medical lien statutes. Nash Hospitals’ complaint also included an unfair and deceptive trade practices claim.

The trial court granted summary judgment to Nash Hospitals, finding that State Farm violated both the medical lien statutes and N.C. Gen. Stat. § 75-1.1.

State Farm appealed and the North Carolina Court of Appeals affirmed State Farm’s liability for both claims. The Court of Appeals remanded the case, however, to have the trial court recalculate the damages originally awarded.

The Court of Appeals determined that State Farm had a statutory duty to retain sufficient funds from the settlement to satisfy the lien claims and to distribute proceeds to the lienholders before disbursing to Ms. Whitaker.

With respect to the 75-1.1 claim, State Farm first challenged the hospital’s standing to bring the claim. State Farm argued that Nash Hospitals lacked privity with the insurer. The Court of Appeals rejected that argument. The court reasoned that Nash Hospitals was a third-party beneficiary of the insurance contract and came into privity with State Farm upon notifying State Farm of its asserted lien.

The court also found that State Farm’s failure to notify Nash Hospitals of the settlement with Ms. Whitaker, coupled with its direction that Nash Hospitals seek recovery from Ms. Whitaker herself, was both an unfair and a deceptive act.  The Court of Appeals appears to have viewed the insurer’s conduct as a species of direct unfairness. The court also indicated that the same conduct met the statutory definition of a deceptive act because State Farm’s handing of the lien claim possessed “the capacity or tendency to deceive.”

The court was careful, however, to indicate that State Farm’s violation of the North Carolina medical lien statutes did not make State Farm per se liable under 75-1.1. Rather, liability stemmed from State Farm’s underlying conduct and “its failure to cure the violation absent litigation.”

The Court of Appeals directed the trial court to enter summary judgment to Nash Hospitals for a mere $971.07 (treble the actual damages of $323.69 awarded) . Upon remand, it is possible that Nash Hospitals will also seek an attorney fee per N.C. Gen Stat. § 75-16.1.

Although it appears that State Farm will not incur a significant cash outlay in this matter, the case is likely to have broader implications for how the company handles claims settlement generally. State Farm’s counsel indicated at oral argument that the insurer routinely issued joint checks and told “the . . . parties [to] agree . . . who’s going to get what.” State Farm will presumably need to end the practice of issuing joint checks to head off potential future treble damages awards. Going forward, it also appears the burden of determining how personal injury settlement proceeds should be allocated will fall more on the insurer.

Author: George Sanderson

Can Forcing a Company into Bankruptcy Be an Unfair or Deceptive Trade Practice? Part 2

In a recent post, we examined the bankruptcy case of In re American Ambulette & Ambulette Service, Inc.—a case in which a trustee raised a novel theory of liability under N.C. Gen. Stat. § 75-1.1. The bankruptcy trustee alleged that certain business strategies that forced the debtors into bankruptcy constituted unfair and deceptive trade practices.

The bankruptcy court dismissed the trustee’s original 75-1.1 claim for failing to plead how the defendants’ alleged conduct affected either competitors or consumers. But the court allowed the trustee to amend the complaint.

The trustee’s amended 75-1.1 claim survived dismissal. Today, we examine the court’s opinion about the amended complaint.

The Trustee’s Original Allegations

The debtors in American Ambulette were in the medical-transport business. Each of them filed for liquidation under chapter 7 of the bankruptcy code. The bankruptcy court consolidated the cases and appointed a single bankruptcy trustee to administer the debtors’ assets.

The trustee then filed an adversary proceeding against the debtors’ parent and sister corporations, as well as their officers and directors.

The trustee alleged that the debtors’ corporate parents developed a business plan to expand their operations. As part of the expansion plans, the parent entities established two new subsidiaries. The new subsidiaries allegedly competed with the debtors. According to the trustee, the corporate parents and their officers and directors caused the debtors to incur substantial expenses to further the expansion plans.

In the original complaint, the trustee accused the defendants of (1) diverting the fruits of their business-development activities to the competing subsidiaries, (2) transferring assets from the debtors to those subsidiaries, and (3) forcing the debtors into liquidation. Those activities, the trustee argued, eliminated the debtors as competition for the new subsidiaries.

The complaint included a claim against the parent companies and their officers and directors for violations of section 75-1.1.

The First Motion to Dismiss

The defendants moved to dismiss the original complaint. The motion largely relied on a recent federal district court decision since affirmed on appeal. The defendants argued that, under the recent decision, a business can pursue a 75-1.1 claim only when the business has acted as a consumer or is engaged in commercial dealings with the defendant. The defendants also stressed that the defendants on the 75-1.1 claim did not include the competing subsidiaries themselves.

The bankruptcy court granted the motion to dismiss. The court identified three categories of cases in which a business plaintiff may assert a 75-1.1 claim:

  • The plaintiff has acted as a consumer or has otherwise engaged in commercial dealings with the defendant.
  • The plaintiff and the defendant were competitors.
  • The conduct that gives rise to the claim has had a negative effect on the consuming public.

In the original complaint, the trustee did not allege that the debtors were engaged in commercial dealings with—or were competitors of—the defendants. The complaint also lacked any allegations on how the defendants’ conduct affected consumers. 

After the court dismissed the original 75-1.1 claim, the trustee filed an amended complaint. The amended complaint added the competing subsidiaries as parties to the 75-1.1 claim. It also asserted that the defendants’ actions benefited the competing subsidiaries.

The amended complaint also contained detailed allegations about how the defendants affected the marketplace and the consuming public.  The trustee’s amended complaint specifically alleged that the defendants’ conduct did not merely cause the replacement of one competitor with another, but actually removed a competitor from the relevant market altogether.  The trustee further alleged that the removal forced the county in which the debtors previously operated to declare a state of emergency. The county was also allegedly forced to obtain an injunction to compel the debtors to continue to provide the 911 emergency services that the debtors contracted to provide to the county.

The Second Motion to Dismiss

The defendants moved to dismiss the amended complaint, but the court refused to dismiss the amended 75-1.1 claim. The court used the same analytical framework, and categories for when a business may assert a 75-1.1 claim, as in the prior opinion.  This time around, however, the trustee convinced the court that the debtor’s alleged removal from the relevant market, and the alleged interruption of emergency medical service to citizens that was a result, made a sufficient impact on the consuming public to violate section 75-1.1.

The factual scenario in which the possible 75-1.1 violation in American Ambulette arose is relatively unique.  But the caselaw concerning when a business may assert a 75-1.1 claim is developing quickly.  Going forward, we may see other “theft of corporate opportunity” claims—both in and out of bankruptcy.

Author: George Sanderson