James M. Weiss

It has been some time since we have written about the attorneys’ fee provision in N.C. Gen. Stat. § 75-16.1(1). Back in 2015, we wrote about that section’s requirement for a fee award of “an unwarranted refusal” by the party charged with the violation “to fully resolve the matter.”

Attorney fee awards are not as rare as Moby Dick, but are still relatively infrequent. That’s why it may have been a surprise to see two opinions released on the same day—April 16, 2020—awarding the prevailing party attorneys’ fees under section 75-16.1(1).

In both cases out of the United States District Court for the Middle District of North Carolina, Hongda Chem USA, LLC v. Shangyu Sunfit Chemical Co., and DENC, LLC v. Philadelphia Indemnity Insurance Co., Judge Catherine Eagles awarded attorneys’ fees to the prevailing party. While the cases share that similarity, the paths to a fee award were slightly different in each one.

Hongda Background

The Hongda case was about a contract for Shangyu Sunfit Chemical Co. to supply a product called NBPT to Hongda. Hongda filed the suit, alleging that Sunfit breached an exclusivity provision in the parties’ contract. Sunfit counterclaimed for Hongda’s failure to pay for products that it had already shipped to Hongda. And later, Sunfit filed a third-party complaint against another company, Vasto, and three individuals who owned Hongda.

At trial, a jury found that Hongda and its owners committed numerous unfair or deceptive acts in connection with their purchase of NBPT from Sunfit. Judge Eagles concluded that these acts constituted unfair trade practices under section 75-1.1.

Sunfit moved for an award of attorneys’ fees under section 75-16.1(1).

DENC Background

We wrote about this case just a few months ago, focusing on the intersection between North Carolina’s insurance laws and claims under section 75-1.1. In short, the defendant insurer, Philadelphia Indemnity, sent conflicting letters on whether it would cover a specific loss. In the earlier opinion, the court granted summary judgment to DENC, concluding that the second letter denying coverage was deceptive. At that time, a decision on whether to award attorneys’ fees was deferred until after trial. Now, that decision was ripe for consideration.

The Statutory Requirements

Section 75-16.1(1) gives the presiding judge discretion to “allow a reasonable attorney fee to the duly licensed attorney representing the prevailing party” following two findings:

• The party charged with the violation has willfully engaged in the act or practice; and
• There was an unwarranted refusal by such party to fully resolve the matter which constitutes the basis of such suit.

Of note, the North Carolina Court of Appeals has found that if the party responsible for the unfair or deceptive conduct considered that conduct to be a permissible business practice, that can be a factor in determining whether there was an unwarranted refusal to resolve the matter.

Both Cases Involved Willful Behavior

The path to finding willful behavior in Hongda was straightforward. Judge Eagles noted the “overwhelming evidence” that Hongda, Vasto, and the three owners engaged in a large-scale fraudulent scheme. Add to that the jury’s findings of deception, misrepresentations, and concealment. Then top it off with the jury’s finding that instead of paying Sunfit for the product that it received, Hongda fraudulently transferred money to other entities designed to compete with Sunfit in violation of their contract. This was as willful as Captain Ahab’s last trip to the South Pacific.

Likewise, in DENC, Philadelphia sent the denial letter to DENC intentionally. Philadelphia argued that there was an honest disagreement about coverage, and thus, there was no evidence of “fraud, malice, gross negligence” or similar conduct.  But the relevant deceptive conduct was sending the deceptive denial letter. Judge Eagles noted that conduct does not have to be fraudulent, malicious, or grossly negligent to be willful, and DENC easily met its burden by showing that Philadelphia intentionally sent the letter.

Both Cases Had an Unwarranted Refusal to Settle

In the Hongda case, Judge Eagles found that the record was silent as to any realistic offer to settle. She also detailed a full account of Hongda’s behavior that she concluded amounted to an unwarranted refusal to settle. For example, shortly before trial, Hongda agreed to enter judgment against it for the balance of outstanding invoices. But Hongda no longer existed, so this was essentially an offer to pay nothing.

And at trial, two of Hongda’s owners testified that they were justified in not paying Sunfit and that their attempts to circumvent the contract were permissible business practices. The court found this testimony not credible. Citing Pinehurst, Inc. v. O’Leary Bros. Realty, Inc., the court found that the evidence that Hongda and its owners “intended to cheat Sunfit” was also relevant to concluding that there was an unwarranted refusal to settle.

Philadelphia also defended its deceptive denial letter as a permissible business practice. And it put no money on the table to resolve the case until mediation. And even at that point, it made an offer of judgment for about half of the contract damages that DENC ultimately recovered. 

Why was 50% of the contract damages not a reasonable offer to settle? According to the court, this offer did not include any amount to account for the unfair and deceptive acts in the denial letter; and “only after the court ruled in DENC’s favor on the chapter 75 claim did Philadelphia make an offer incorporating that claim’s settlement value.”

The Paths Diverge

But if Philadelphia eventually made an offer incorporating the settlement value of the section 75-1.1 claim, why would it have to pay fees past that day? The court agreed that Philadelphia should not have to pay those fees, and cut off the fee award as of the date of that reasonable settlement overture (December 18, 2019). The ultimate award was $221,455.49, covering the period from the deceptive denial letter through the reasonable settlement offer.

In Hongda, however, the parties had agreed on a specific amount—$600,000—in the event that the court awarded fees. The court found this to be a reasonable award, given the length of the litigation, the extensive motion practice, the many depositions, and a week-long trial.

Final Takeaways

While Herman Melville may have believed that there are some enterprises in which a careful disorderliness is the true method, this is less than sage advice when prosecuting or defending a section 75-1.1 claim. Instead, take these three points from these two decisions awarding fees.

First, the “unwarranted refusal to settle” prong of section 75-16.1(1) does not only mean specific settlement negotiations—it can encompass items like maintaining that the challenged conduct was a permissible business practice. 

Second, fees can be awarded for a period of time where settlement offers were unreasonable, but can be cut off by making a reasonable offer.

Third, although not discussed above, the damages awarded on Philadelphia’s section 75-1.1 claim were only nominal. Why was a large fee award still justified?

Judge Eagles explained:  “Here, the Court found Philadelphia violated North Carolina’s proscription on unfair and deceptive trade practices in the way that it responded to DENC’s claim. While DENC recovered only nominal damages on the successful Chapter 75 claim, there is a substantial public purpose served by this kind of litigation, which can, and one hopes will, affect not only Philadelphia’s conduct in the future but perhaps that of other insurance companies tempted to write incomprehensible denial letters. A significant attorneys’ fee award directly serves both this public purpose and the specific statutory aims of Chapter 75.”

Author: Jamie Weiss