North Carolina Department of Justice
North Carolina Department of Justice
North Carolina Department of Justice
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October 15, 1999

Mr. Peter Kolbe General Counsel North Carolina Department of Insurance

P.O. Box 26387

Raleigh, NC 27611 Advisory Opinion -N.C.G.S. §§ 58-2-60; 58-2-70(c), (d) and (e); 58-63-50-- Scope

Re: of Authority of Commissioner of Insurance

Dear Mr. Kolbe:

You ask for guidance concerning the proper disposition of monetary payments the Commissioner of Insurance coll ects from regulated personsandbusinessesforfailure to comply with North Carolina's insurance statutes, N.C.G.S. §§ 58-1-1 et seq. For the reasons explained below, the Commissioner must distr ibute to the State Civil Penalty and Forfeiture Fund for the benef it of local school systems the clear proceeds of all monetary payments, collected as part of those enforcement activities, which are punitive in nature and “intended to penalize the wrongdoer.” In contrast, the proceeds of monetary payments which are remedial or equitable in nature, or which are not otherwise intended to punish the wrongdoer, must be applied to purposes consistent with the statute under which they were collected, and are not paid into the State Civil Penalty and Forfeiture Fund.

Article IX, Section 7 of the North Carol ina Constitut ion provides:

. . . the clear proceeds of al l penalties and forfeitures and of al l fines collected in theseveral counties for any breach of the penal laws of the State, shal l belong to and remain in the several counties, and shall be faithfull y appropr iated and used exclusively for maintaining free public schools.

InCraven County Board of Education v. Boyles, 343 N.C. 87, 468 S.E.2d 50 (1996), the Supreme Court of North Carolina reaffirmed that Article IX, Section 7 applies only to civil penalties and forfeitures which are “penal in nature.” Id. 343 N.C. at 90-91, 468 S.E.2d at 52; see also State ex rel. Thornburg v. House and Lot, 334 N.C. 290,432 S.E.2d 684 (1993). Monetary payments which are “remedial in nature,” including those intended to “compensate a particular party,” are clear ly not included within the scope and coverage of Article IX, Section 7. Mussallam v. Mussallam, 321 N.C. 504, 508-509, 364 S.E.2d 364, 366-367 (1988); see also D. Lawrence, Fines, Penalties, and Forfeitures: An Historical and Comparative Analysis, 65 N.C.L. Rev. 49, 82 (1986).

The Commiss ioner of Insurance has several statutory mechanisms to foster compl iance with the insurance laws and regulations. The Commissioner may impose “civil penalties” of not more than $1,000 upon regulated persons who violate specif ied articles of the insurance laws, including Article 63, “Unfair Trade Practices.” N.C.G.S. § 58-2-70(c) and (d). In addition, he may impose a “forfeiture” of up to $5,000 upon a person who violates an order to cease and desist from engaging

Mr. Peter Kolbe L etter of October 15, 1999 Page 2

in unfair methods of competition or deceptive practices. N.C.G.S. § 58-63-50. The Commissioner also may petition the Superior Court of Wake County to order a violator of the insurance laws to “make restitution in an amount that would make whole any person harmed by the violation,”

N.C.G.S. § 58-2-70(c) and (e), and to seek injunctive relief to remedy certain violations of the insurance statutes, N.C.G.S. § 58-2-60. The proper disposition of monetary payments collected by the Commissioner in the exercise of his authority is determinedby the purpose for which the payments are obtained.

Applying the Supreme Court's reasoning in Craven County, Thornburg and Mussallam to the monetary payments about which you inquire, it is clear that civil penalties imposed by the Commissioner for a violation of the insurance laws, as well as forfeitures accruing to the Commissioner for failure of a regulated person to comply with a cease and desist order, are punitive in nature because they are intended to penalize the wrongdoer. Therefore, Article IX, Section 7 controls the disposition of these monetary payments and requires their clear proceeds to be paid to the local school systems and used for maintaining free publ ic schools. These conclus ions also are supported by the legislative directive contained in each statute that the “clear proceeds” of these monetary payments “shall be remitted to the Civil Penalty and Forfeiture Fund . . .” See N.C.G.S. §§ 58-2-70(d) and 58-63-50. The fact that a civil penalty is paid voluntarily pursuant to the settlement of a civil penalty claim, as opposed to involuntarily under an order issued in an administrative action or judicial proceeding, does not change its punitive nature. Craven County, supra, 343 N.C. at 90, 468 S.E.2d at 52.

In contrast, monetary payments for restorative, corrective or other equitable purposes are not penal in nature. Because such payments are not intended to punish the wrongdoer, they are not control led by Article IX, Section 7.Consequently, payments made to the Commissioner of Insurance pursuant to N.C.G.S. § 58-2-70(e), which provides for the Commissioner to recover restitution to “make whole any person harmed by the violation,”" must be applied to purposes consistent with that statute. Such payments usually are properly directed to injured parties. However, when the amount of restitution owing to each injured person isdeminimis, the persons entitled to restitution cannot reasonably be identified, or when otherwise required by equity, a remedial payment may be appl ied toward making the public whole through consumer protection programs consistent with the objectives of the laws at issue and beneficial to the public good.See e.g., United States v. Exxon Corporation, 561 F.Supp. 816 (D.D.C. 1983), aff’d, 773 F.2d 1240 (Temp. Emer. Ct. App. 1985), cert.denied, 474 U.S. 1105, 106 S.Ct. 892, 88 L.Ed.2d 926 (1986)(where victims of oil overcharge scheme could not be reasonably identified or the amount of each purchaser's overcharge could not reasonably be determined, equity permits defendant's restitution payment to the government to be forwarded to the states for use in energy conservation programs ); Asheville Land Co v. Lang, 150

N.C. 26, 164 S.E.2d 164 (1908)(remedial statutes must be l iberally construed to advance the remedy);Booher v. Frue, 86 N.C.App. 390, 358 S.E.2d 127, aff’d per curiam 321 N.C. 590, 364

S.E.2d 141 (1990)(purposes of restitution include not only compensating the victim, but also preventing unjust enrichment by wrongdoer); 1 Dan B. Dobbs,The Law of Remedies, § 4.1 (2d Ed. 1993)(same); Roberts v. Madison County Realtors Association, 344 N.C. 394,474 S.E.2d 783 (1996)(when equitable relief is sought, courts have the power to grant, deny, limit or shape that relief as a matter of discretion);Sharpe v. American Family Publishers, (Unpub. July 7, 1999 Order approving settlement)(Docket No. 91-181-CV-5-BO)(E.D.N.C. 1999)(remedial payment to the Attorney General for appropriate consumer education purposes is proper remedy to cure defendant’s decepti on).

Mr. Peter Kolbe L etter of October 15, 1999 Page 3

Accordingly, in keeping with the powers and duties of the Commissioner of Insurance to protect the publ ic against fraud, deception and overreaching by insurance companies, remedies obtained by the Commissioner which are remedial or equitable in nature may in appropr iate cases be directed to funding consumer protecti on programs admini stered by the Commissioner, i ncluding educating or warning the publ ic about certain unlawful practices.

In May of 1997 the Attorney General provided to the attorney for each state agency author ized to assess and col lect monetary payments a letter explaining the appropr iate disposition of each payment which arguably could be cons idered a civil fine, forfeiture, or penalty included within the scope of Article IX, Section 7. That letter included a l ist of the monetary payments collected by the Department which should go to the local school systems. The l ist is again provided for your consideration. The clear proceeds from civil penalties authorized by N.C.G.S. § 58-2- 70(d) and civil forfeitures authorized by N.C.G.S. § 58-63-50 were among those identified in the list as belonging to the local school systems. Remedies obtained under N.C.G.S. § 58-2-70(e) or N.C.G.S. § 58-2-60 were not identified as belonging to the school fund.

I trust this information has been responsive to your inquiry.

Sincerely,

Reginald L . Watkins Senior Deputy Attorney General

L orinzo L. Joyner Special Deputy Attorney General

W. Dale T albert

Special Deputy Attorney General