Statutes of Limitations to Claims Under the Setoff Debt Collection Act

July 12, 1996

Paul Baldasare, Jr. Associate University Counsel University Development Office University of North Carolina CB # 6100 Chapel Hill, NC 27599-6100

RE: Applicability of Statutes of Limitations to Claims Under the Setoff Debt Collection Act and the State Employees Debt Collection Act; N.C.G.S. § 1-2, § 1-15, § 105A-1 et seq. and § 143552 et seq.

Dear Mr. Baldasare:

This letter responds to your request for a legal opinion regarding the applicability of the statutes of limitations in Chapter 1 of the General Statutes to claims of State agencies and institutions under the Setoff Debt Collection Act, Chapter 105A of the General Statutes, and the State Employees Debt Collection Act, Article 60 of Chapter 143. As you explain in your letter of June 13, 1995, many debtors assert a statute of limitations as an affirmative defense to the University’s claims against their State income tax refunds. Similarly, State employees contest the University’s actions to recover debts owed to the State under Article 60 of Chapter 143 based upon the age of the underlying debt.

Legal Issues

In the context of these administrative remedies you have asked us to address the following issues:

(1): Do the statutes of limitations in Chapter 1 of the General Statutes apply to the administrative setoff of a debt owed to a state agency or institution against the state tax refund due the debtor under Chapter 105A of the General Statutes?
(2): Is the action of a state agency or institution attempting to collect a debt from a state employee or public official pursuant to Article 60 of Chapter 143 of the General Statutes subject to the statutes of limitations in Chapter 1 of the General Statutes?

For the reasons explained herein, we conclude that the statutes of limitations in Chapter 1 of the General Statutes do not apply to the administrative procedures under Chapter 105A, the Setoff Debt Collection Act, and Article 60 of Chapter 143, the State Employees Debt Collection Act.

Discussion of the Issues The General Provisions of Chapter 1, "Civil Procedure," of the General Statutes are central to the interpretation and operation of the statutes of limitations. Pursuant to N.C. Gen. Stat. § 1-1, remedies in the courts of justice in this State are divided into two categories: (1) actions and (2) special proceedings. An "action" is defined as "an ordinary proceeding in a court of justice, by which a party prosecutes another party for the enforcement or protection of a right, the redress or prevention of a wrong, or the punishment or prevention of a public offense." N.C.G.S. § 1-2 (1983) (Emphasis added). The definition of an "action" focuses on an "ordinary proceeding," while N.C. Gen. Stat. § 1-3 provides that every other remedy in a court of justice is a "special proceeding." See, N.C.G.S. § 1-1; see also, Ocean Hill Joint Venture v. N.C. Dept. of E.H.N.R., 333 N.C. 318, 321, 426 S.E. 2d 274, 276 (1993).

A statute of limitations limits the period of time within which an action or proceeding may be instituted in a court of justice. See, Northampton County Drainage District Number One v. Bailey, 92 N.C. App. 68, 73, 373 S.E. 2d 560, 563 (1988), aff’d in part and rev’d on other grounds, 326 N.C. 742, 392 S.E. 2d 352 (1990). After the cause of action accrues, a party may only commence a civil action within the period of time prescribed in Chapter 1, except in a case where a different limitation is prescribed by statute. N.C.G.S. § 1-15(a) (1983). Article 5 of Chapter 1 prescribes the periods for the commencement of actions, other than for the recovery of real property. N.C.G.S. § 1-46 (1983). Consequently, a statute of limitations operates as an affirmative defense, available only to the person or persons against whom the action is commenced. See, Northampton County Drainage District at 73, 373 S.E. at 563-64. The limitation in N.C. Gen. Stat. § 1-52(1), for example, relates only to an action "[u]pon a contract, obligation or liability arising out of a contract, express or implied," and would provide a defense against a plaintiff seeking a monetary judgment in a court of justice beyond the three-year period. The expiration of the limitations period does not extinguish the underlying obligation; it merely forecloses the opportunity for a judicial remedy. See, e.g., Arch Mineral Corp. v. Babbitt, 894 F. Supp. 974, 982 (S.D. WVa. 1995).

1. The Setoff Debt Collection Act Chapter 105A of the General Statutes establishes an administrative remedy for certain State agencies and institutions to recover debts owed to the State. The General Assembly expressed the two fold-purpose of the Chapter as follows: The purpose of this Article is to establish as policy that all claimant agencies and the Department of Revenue shall cooperate in identifying debtors who owe money to the State through its various claimant agencies and who qualify for refunds from the Department of Revenue. It is also the intent of this Article that procedures be established for setting off against any such refund the sum of any debt owed to the State. Furthermore, it is the legislative intent that this Article be liberally construed so as to effectuate these purposes as far as legally and practically possible.

N.C.G.S.: § 105A-3(b) (1995). The Department of Revenue, in turn, is charged with the duty of assisting in the collection of any delinquent account or debt owing to any claimant agency by setting off any tax refunds due the debtor by the sum as certified by the claimant agency as due and owing. N.C.G.S. § 105A-5 (1995). The Department’s power to effect setoff is limited only by Article 1 of Chapter 105A. See, Id.

Most of Chapter 105A is devoted to the procedural limitations on the State’s power to setoff tax refunds. See, N.C.G.S. § 105A-6 through § 105A-15. However, the collection remedy of setoff remains an additional remedy–not a substitute for any other remedy available by law. N.C.G.S. § 105A-3(a) (1995). Although N.C. Gen. Stat. § 105A-3(b) allows for a decision not to submit a debt based upon advice of the Attorney General that there is a legitimate dispute over the validity of the debt, the procedure for contesting a setoff is clearly an administrative process, which is not subject to the limitations in Chapter 1. Accordingly, Chapter 105A itself does not specify the time within which an agency must initiate the setoff.

The Supreme Court considered the applicability of a statute of limitations to an administrative action in Ocean Hill Joint Venture v. N.C. Dept. of E.H.N.R., 333 N.C. 318, 426 S.E. 2d 274 (1993). In Ocean Hill the petitioner asserted the one-year statute of limitations of N.C. Gen. Stat. § 1-54(2) in defense to the assessment of a civil penalty by the Secretary of the Department of Environment, Health and Natural Resources pursuant to the Pollution Sedimentation Control Act, N.C.G.S. § 113A-64(a). Rejecting the petitioner’s defense, the Court held that the statute of limitations does not bar the assessment of civil penalties under N.C.G.S. § 113A-64(a). Ocean Hill at 324, 426 S.E. 2d at 278. In the Court’s opinion, the assessment of a penalty was not an "action" or "proceeding" as those terms are defined in Chapter 1 of the General Statutes. Id. at 321, 426 S.E. 2d at 276. The Court conducted its analysis in the context of two well-established principles: (1) "‘[A] statute of limitations should not be applied to cases not clearly within its provisions;’" and (2) Statutes of limitations running against the State must be strictly construed. Id. at 322-23, 426 S.E. 2d at 277, quoting, Carolina Beach Fishing Pier v. Town of Carolina Beach, 274 N.C. 362, 372, 163 S.E. 2d 363, 370 (1968), and citing, Rowan Co. Bd. of Education

v. U.S. Gypsum Co., 332 N.C. 1, 418 S.E. 2d 648 (1992).

Consistent with the analysis and holding in Ocean Hill, we conclude that the statutes of limitations in Chapter 1 of the General Statutes do not apply to the setoff of a debt owed to a claimant agency by a debtor against any refunds due the debtor from the Department of Revenue because the administrative remedy of setoff under Chapter 105A of the General Statutes does not constitute an action or proceeding in a court of justice. This Office further holds the view that the validity of a debt is not legitimately in dispute for the purposes of the remedy of setoff due to the possibility that a debtor may assert a statute of limitations as a affirmative defense in a civil action to collect the same debt.

2. State and Certain Local Educational Entity Employees, Nonsalaried Public Officials and Legislators Required to Repay Money Owed to State

Article 60 of Chapter 143 of the General Statutes provides the State a mechanism for the recovery of debts owed to the State by State employees, certain local educational unit employees, nonsalaried public officials and legislators. N.C. Gen. Stat. § 143-553(a) states: "All persons employed by an employing entity as defined by this Part who owe money to the State and whose salaries are paid in whole or part by State funds must make full restitution of the amount owed as a condition of continuing employment." N.C.G.S. § 143-553(a) (1993). An "employing entity" is defined as:

a.: Any State entity enumerated in G.S. § 143B-3 of the Executive Organization Act of 1973;
b.: Any city or county board of education under Chapter 115 of the General Statutes; or
c.: Any board of trustees of a community college under Chapter 115D of the General

Statutes.

N.C.G.S.: § 143-552(1) (1993). "Employee" refers to "any person who is appointed to or hired and employed by an employing entity . . . and whose salary is paid in whole or part by State funds." N.C.G.S. § 143-552(2). Part 1 of Article 60 imposes a duty upon any representative of one employing entity, who has knowledge that an employee is indebted to the State and is delinquent in satisfying the obligation, to notify the employing entity of that debtor. See,
N.C.G.S.: § 143-553(b). Part 2 imposes a similar duty upon a representative of an employing entity regarding knowledge of an appointed public official who is delinquent in satisfying an obligation to the State. See, N.C.G.S. § 143-556. When a representative knows that a legislator owes money to the State and is delinquent in satisfying the obligation, he should report the information to the Legislative Ethics Committee. N.C.G.S. § 143-559.

If, after written notice of his right to elect repayment in accordance with Part 1 or 2 of Article 60, the employee or appointed official does not repay the money in full within a reasonable time, Article 60 requires the employing entity to terminate his employment or appointment. See, Id. Under N.C. Gen. Stat. § 143-553(c), an employee who has elected in writing to permit the periodic withholding of at least ten percent (10%) of his net disposable earnings for application towards the debt is deemed to be repaying the State within a reasonable time. However, the Article does afford the employee or official protection from dismissal as long as he is pursuing administrative or judicial remedies to resolve a genuine dispute over "whether the money is owed or how much is owed." Like Chapter 105A, Article 60 establishes the procedure for appeal of the State’s administrative action of termination of employment. See, N.C.G.S. § 143-554.

The administrative procedures provided in Article 60 do not constitute an "action" or "proceeding" that is subject to the limitations in Chapter 1. See, Ocean Hill at 321, 426 S.E. 2d at

276. Furthermore, like the provisions of Chapter 105A, Article 60 does not prescribe the period of time within which the State may enforce its provisions. Notably, Article 60 does acknowledge the applicability of a statute of limitations in civil litigation even though the State may be requiring repayment of the debt as a condition of continuing employment or appointment. N.C. Gen. Stat. § 143-562 provides:

Payments on obligations to the State collected under the procedures established by this Article shall not be construed to revive obligations or any part thereof already barred by an applicable statute of limitations. Furthermore, payments made as a result of collection procedures established by the terms of this Article shall not be construed to extend an applicable statute of limitations.

N.C.G.S. § 143-562. This statute specifically prevents the State from filing a civil action to collect a debt once an employee or official terminates his employment or appointment after the applicable statute of limitations has run. Nevertheless, the limited protection afforded debtors under this section clearly indicates the General Assembly’s intent to permit the State to recover debts, which would otherwise be subject to a statute of limitations defense in a civil action, through the administrative remedy of Article 60.

Therefore, this Office holds the opinion that the statutes of limitations in Chapter 1 of the General Statutes do not apply to the State’s administrative act of terminating employment or appointment for nonpayment of a debt to the State pursuant to Article 60.

Summary Accordingly, the statutes of limitations do not operate to bar State agencies and institutions from utilizing the administrative remedies under the Setoff Debt Collection Act and the State Employees Debt Collection Act to recover debts owed to the State.

We trust that this advisory opinion satisfactorily addresses the issues that you have presented to us. If, however, we may be of further assistance, please do not hesitate to let us know.

MICHAEL F. EASLEY ATTORNEY GENERAL

Edwin M. Speas, Jr.

Senior Deputy Attorney General

Julia R. Hoke Assistant Attorney General