AGI Associates, LLC v. City of Hickory, NC , 773 F.3d 576 ( 2014 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-2097
AGI ASSOCIATES, LLC,
Plaintiff - Appellee,
v.
CITY OF HICKORY, NORTH CAROLINA,
Defendant – Appellant,
and
PROFILE AVIATION CENTER, INCORPORATED,
Defendant.
Appeal from the United States District Court for the Western
District of North Carolina, at Statesville. Richard L.
Voorhees, District Judge. (5:13-cv-00061-RLV-DCK)
Argued: October 28, 2014 Decided: December 11, 2014
Before TRAXLER, Chief Judge, DIAZ, Circuit Judge, and DAVIS,
Senior Circuit Judge.
Affirmed by published opinion. Senior Judge Davis wrote the
opinion, in which Chief Judge Traxler and Judge Diaz joined.
ARGUED: J. Samuel Gorham, III, John William Crone, III, GORHAM &
CRONE, LLP, Hickory, North Carolina, for Appellant. Edward
Bilbro Davis, BELL, DAVIS & PITT, P.A., Charlotte, North
Carolina, for Appellee. ON BRIEF: Frank C. Newton, Jr.,
Charlotte, North Carolina, for Appellant. Adam T. Duke, BELL,
DAVIS & PITT, P.A., Winston-Salem, North Carolina, for Appellee.
2
DAVIS, Senior Circuit Judge:
This case concerns a question of North Carolina law:
whether governmental immunity from equitable claims is waived
when a county or municipality acts in a proprietary, rather than
governmental, capacity. The district court answered that
question in the affirmative and denied Appellant City of
Hickory’s motion to dismiss for lack of subject matter
jurisdiction. For the reasons that follow, we affirm. 1
I.
In January 2013, Appellee AGI Associates, LLC, commenced
this action against City of Hickory and Profile Aviation Center,
Inc. on claims arising out of an agreement between Hickory and
Profile. Jurisdiction was based on diversity of citizenship.
Hickory and Profile agreed that Hickory would pay Profile for
aviation services that Profile provided at the Hickory Regional
Airport. In addition, the agreement granted Profile a leasehold
interest in certain parcels of land at the airport and allowed
Profile to grant security interests in its leasehold interest to
obtain financing. The parties agreed that in the event of
Profile’s default, Hickory had a first right to cure, which
1
We have jurisdiction over this interlocutory appeal. See
Davis v. City of Greensboro, N.C., 770 F.3d 278, 281-82 (4th
Cir. 2014).
3
would allow Hickory to reclaim the leasehold interest free of
any security interests.
In June 2004, Profile executed and delivered a $2 million
promissory note to RBC Centura Bank, which it secured by
granting the bank an interest in the leased premises and
assigning rents from tenants at the airport. In April 2010, RBC
Centura Bank assigned its rights, title, and interest in the
promissory note to AGI. Ultimately, Profile defaulted on the
promissory note 2 and in May 2011, filed a petition for
reorganization in the U.S. Bankruptcy Court for the Western
District of North Carolina. In February 2012, the bankruptcy
court placed Hickory in possession of the leased premises. AGI
claims that pursuant to the agreement between Hickory and
Profile, Hickory had to first cure Profile’s financing
obligations before taking possession of the leased premises. It
also demands from Hickory the rental payments from tenants of
the airport, which Hickory has refused.
AGI filed this action against Profile and Hickory.
Against Profile, it asserted a breach of contract claim, which
is not at issue in this appeal. Against Hickory, it asserted an
action for judicial foreclosure, a demand for accounting,
2
The district court noted that the “precise timing of
Profile’s default on its bank note is unknown,” but that letters
“demonstrate[d] Hickory’s understanding of Profile as being in
default” as of May 15, 2009 and April 21, 2011. J.A. 220-21.
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disgorgement of rents, and unjust enrichment. Hickory promptly
moved to dismiss the claims asserted against it for lack of
subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1) and
failure to state a claim under Fed. R. Civ. P. 12(b)(6). The
district court held that by acting in a proprietary, as opposed
to governmental, capacity in operating the airport, Hickory
waived its governmental immunity and therefore denied the motion
to dismiss for lack of subject matter jurisdiction.
Furthermore, it dismissed AGI’s claims for judicial foreclosure
and an accounting as moot, leaving only the disgorgement of
rents and unjust enrichment claims intact. Hickory now appeals.
II.
Questions of subject matter jurisdiction are reviewed de
novo. Dixon v. Coburg Dairy, Inc., 369 F.3d 811, 815 (4th Cir.
2004) (en banc). When a defendant argues that the complaint
fails to allege facts establishing subject matter jurisdiction,
as Hickory does here, “the facts alleged in the complaint are
taken as true, and the motion must be denied if the complaint
alleges sufficient facts to invoke subject matter jurisdiction.”
Kerns v. United States, 585 F.3d 187, 192 (4th Cir. 2009). The
burden of establishing subject matter jurisdiction rests with
the plaintiff as “the party asserting jurisdiction.” Adams v.
Bain, 697 F.2d 1213, 1219 (4th Cir. 1982).
5
Under North Carolina law, counties and municipalities
retain immunity from suit unless they consent to be sued or
waive immunity. Whitfield v. Gilchrist, 497 S.E.2d 412, 414
(N.C. 1998). This immunity, often referred to as governmental
immunity, can be waived by a municipality in three discrete
ways: (1) by entering into a valid contract; (2) by acting in a
proprietary capacity; and (3) by purchasing liability insurance. 3
Under the contract theory of waiver, when a county or
municipality enters into a valid contract, it has “implicitly
consent[ed] to be sued for damages on the contract in the event
it breaches the contract.” Smith v. State, 222 S.E.2d 412, 423–
24 (N.C. 1976)(addressing the State’s immunity from suit); see
also Data Gen. Corp. v. Cnty. of Durham, 545 S.E.2d 243, 247
(N.C. Ct. App. 2001)(citing to Smith v. State for the
proposition that when a governmental entity such as a county
“enters into a valid contract, the entity ‘implicitly consents
to be sued for damages’” if there is a breach). To successfully
establish waiver under this theory, a plaintiff must show that
N.C. Gen. Stat. § 159-28(a), which sets out the requirements for
3
The State of North Carolina has further partially
abrogated its sovereign immunity by passing the North Carolina
Tort Claims Act, N.C. Gen. Stat. § 143-291 et seq., which
permits suits against the State. The Act does not apply to
local governments or their agents, and is not at issue here.
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a county to enter into a valid contract, has been met. Data
Gen., 545 S.E.2d at 247.
Alternatively, under the proprietary function theory, a
county or municipality waives its governmental immunity by
acting in a proprietary, as opposed to governmental, capacity.
Estate of Williams ex rel. Overton v. Pasquotank Cnty. Parks and
Recreation Dep’t., 732 S.E.2d 137, 141 (N.C. 2012). The
rationale for this exception is that when a municipality acts
beyond the scope of its ordinary governmental functions and
engages in services for a profit, it should be treated as a
private corporation, including with respect to the liability to
which private corporations are subject. Id. The final way that
a municipality may waive immunity is by purchasing liability
insurance, which is not at issue here. Data Gen., 545 S.E.2d at
246.
A.
The crux of the parties’ disagreement is whether under the
proprietary function theory, a municipality waives governmental
immunity for equitable claims. Hickory, which has conceded that
it was acting in a proprietary capacity, claims that when a
municipality acts pursuant to a proprietary function, it waives
immunity only for tort and contract claims, not for equitable
claims such as unjust enrichment and disgorgement of profits.
AGI, by contrast, posits that governmental immunity is waived
7
for any suit, including equitable claims, in which the
underlying cause of action arises from the county or
municipality acting in a proprietary capacity.
To resolve this issue, we look to North Carolina state law
on immunity to supply the rule of decision, as jurisdiction is
based on diversity. Horace Mann Ins. Co. v. Gen. Star Nat’l
Ins. Co., 514 F.3d 327, 329 (4th Cir. 2008). With no
controlling precedent from the Supreme Court of North Carolina
on this issue, we are confronted with the task of predicting how
that court would rule. 4 Salve Regina Coll. v. Russell, 499 U.S.
225, 241 (1991) (Rehnquist, C.J., dissenting); Ellis v. Grant
Thornton LLP, 530 F.3d 280, 287 (4th Cir. 2008). “In such
circumstances, the state’s intermediate appellate court
decisions ‘constitute the next best indicia of what state law
is,’ although such decisions ‘may be disregarded if the federal
court is convinced by other persuasive data that the highest
court of the state would decide otherwise.’” Liberty Mut. Ins.
Co. v. Triangle Indus., Inc., 957 F.2d 1153, 1156 (4th Cir.
4
A lack of controlling precedent on the state rule of
decision can merit certification of the issue to the state’s
highest court. The State of North Carolina, however, has no
certification procedure in place for federal courts to certify
questions to its courts. Fontenot v. Taser Int’l, Inc., 736
F.3d 318, 326 (4th Cir. 2013).
8
1992) (quoting 19 Charles A. Wright, Arthur R. Miller & Edward
H. Cooper, Federal Practice and Procedure § 4507 (2d ed. 1982)).
Because (1) North Carolina precedent suggests that the
Supreme Court of North Carolina would rule that immunity from
equitable claims may be waived pursuant to the proprietary
function theory and (2) the rationale behind the theory, as
articulated by both the United States Supreme Court and the
Supreme Court of North Carolina, is consistent with the waiver
of immunity for equitable claims, we hold that the district
court did not err in its application of North Carolina state
law.
B.
1.
Hickory contends that North Carolina law limits waiver of
governmental immunity under the proprietary function theory to
contract and tort cases only. In so arguing, it relies most
heavily on Data General, and also Whitfield and M Series
Rebuild, LLC v. Town of Mount Pleasant, 730 S.E.2d 254 (N.C. Ct.
App. 2012).
We readily conclude that neither Whitfield nor M Series
Rebuild is of assistance to Hickory. Reliance on these cases is
misguided because in neither case did the courts analyze the
government’s claim of immunity under the proprietary function
theory. Rather, the courts’ finding of immunity hinged entirely
9
upon the contract theory of waiver. See Whitfield, 497 S.E.2d
at 414–15 (explaining that it was reversing the lower court on
the basis that it “improperly expanded” Smith v. State, which
addressed only the contract theory of waiver); M Series Rebuild,
LLC, 730 S.E.2d at 258–60 (setting forth the requirements of
N.C. Gen. Stat. § 159-28(a) and finding that plaintiff had not
met those requirements). Indeed, neither case even mentioned
the parallel proprietary function theory of waiver, much less
expressly addressed whether immunity from the equitable claims
could be waived under that theory. Neither case, therefore,
imposes any limitations on whether governmental immunity from
equitable claims may properly be waived under the proprietary
function theory.
Hickory’s reliance on Data General is stronger, but the
case still falls short of holding that waiver of immunity
pursuant to the proprietary function theory is limited to
contract and tort actions. In Data General, the plaintiff, a
computer equipment lessor, asserted breach of contract, quantum
meruit, estoppel, and negligent misrepresentation claims against
the County of Durham, which moved to dismiss the claims on the
basis of immunity. Data Gen., 545 S.E.2d at 245. With respect
to the equitable claims of quantum meruit and estoppel, the
court concluded that governmental immunity barred both claims
because the county had not “expressly entered [into] a valid
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contract” pursuant to the statutory requirements of N.C. Gen.
Stat. § 159-28(a). Id. at 248. Then, the court concluded that
the plaintiff’s claim for negligent misrepresentation was not
barred by immunity because Durham County had acted proprietarily
by entering into a lease that was “‘chiefly for the private
advantage’ of the county.” Id. at 249 (quoting Britt v. City of
Wilmington, 73 S.E.2d 289, 293 (N.C. 1952)). If immunity from
equitable claims can properly be waived under the proprietary
function theory, the court could have upheld the quantum meruit
and estoppel claims on the same basis that it had upheld the
negligent misrepresentation claim: that Durham County had acted
in a proprietary capacity. The fact that it chose not to do so
creates at least an inference that waiver under the proprietary
function theory does not extend to equitable claims.
But we decline to give to Data General the controlling
weight which Hickory urges for two independent reasons. First,
we hesitate to apply Data General to the facts of this case. In
Data General, the plaintiff negotiated directly with officials
of Durham County to procure a final lease agreement between the
parties. Id. at 245. In finding that the county retained its
immunity from the plaintiff’s claims, the Data General court
relied in part on the maxim that parties contracting with the
government are presumed to know the limitations of their
dealings with the government. See id. at 248 (“Furthermore,
11
parties dealing with governmental organizations are charged with
notice of all limitations upon the organizations’ authority, as
the scope of such authority is a matter of public record.”). As
such, Data General should have known that one of the
requirements for suing a county for breach of contract is the
inclusion of a pre-audit certificate under N.C. Gen. Stat. §
159-28(a), and the court rightly penalized it for failing to
comply with the statutory requirements. But unlike Data
General, AGI was a complete stranger to the negotiations between
Profile and Hickory. In this light, the equities that propelled
the Data General court to find that the county retained its
immunity do not exist here. Indeed, applying Data General would
engender inequity; it would penalize AGI for the shortcomings of
Profile. We see no reason to impose this type of burden on a
successor-in-interest with no control over the deficiencies of
an original contracting party, and Hickory has not suggested any
reasonable basis for us to do so.
And second, even if Data General were apposite, its
persuasiveness is called into question by a recent North
Carolina Court of Appeals case, which strongly implies, although
it does not explicitly hold, that immunity from equitable claims
may be waived pursuant to the proprietary function theory. In
Viking Utilities Corp. v. Onslow Water and Sewer Authority, 755
S.E.2d 62, 63 (N.C. Ct. App. 2014), the court of appeals
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affirmed the trial court’s denial of defendant’s motion to
dismiss a host of equitable claims, including specific
performance, a request for declaratory relief, rescission,
reformation, unjust enrichment and quantum meruit, and estoppel
based on governmental immunity. The court found that where
further development of the record could uncover that the
defendant was acting in a proprietary capacity, the district
court did not err in denying defendant’s motion to dismiss. Id.
at 63, 66. If the rule were clear that the proprietary function
theory does not waive immunity for equitable claims, as Hickory
contends, then the court should have reversed the trial court on
the basis that regardless of whether further facts revealed that
the municipal entity was acting in a proprietary function,
immunity barred the claim. By failing to do so, the court
implicitly acknowledged the notion that proprietary function
theory operates to waive immunity for equitable claims.
Considering the lack of precedent from the Supreme Court
of North Carolina, Viking Utilities, as the most recent opinion
from the North Carolina Court of Appeals, provides the “best
indicia of what constitutes state law” on this issue of
immunity. See Liberty Mut., 957 F.2d at 1156. To be sure, this
opinion from a state intermediate court does not, in our view,
singularly control the outcome of this case. But it is
consistent with the view taken in Estate of Williams, the most
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recent decision of the Supreme Court of North Carolina in which
the court “restate[d] [its] jurisprudence of governmental
immunity.” Estate of Williams, 732 S.E.2d at 139. Although the
precise issue presented here was not before the court, it
stated: “Nevertheless, governmental immunity is not without
limit. ‘Governmental immunity covers only the acts of a
municipality or a municipal corporation committed pursuant to
its governmental functions.’” Id. at 141 (quoting Evans v.
Housing Auth. of Raleigh, 602 S.E.2d 668, 670 (N.C. 2004)
(emphasis added by Estate of Williams court) (citations
omitted)). The court’s emphasis on the limitation of
governmental immunity in Estate of Williams combined with the
Viking Utilities decision lends substantial credence to our
prediction that, when it is presented with the issue, the
Supreme Court of North Carolina will hold that immunity from
equitable claims may be waived pursuant to the proprietary
function theory.
2.
We now turn to whether extending governmental immunity to
Hickory is consistent with the public policy purposes underlying
governmental immunity and its waiver in North Carolina. We are
persuaded that given the rationale underlying the proprietary
function theory, the Supreme Court of North Carolina would hold
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that immunity from equitable claims may be waived pursuant to
the proprietary function theory.
“The governmental-proprietary distinction owe[s] its
existence to the dual nature of the municipal corporation.”
Owen v. City of Independence, 445 U.S. 622, 644 (1980). When a
municipality acts in its governmental capacity, “it share[s] the
immunity traditionally accorded the sovereign.” Id. at 645.
When it acts as a corporation, it is “held to the same standards
of liability as any private corporation.” Id. at 644; see also
Bowling v. City of Oxford, 148 S.E.2d 624, 628 (N.C. 1966)
(“When a city or town engages in an activity which is not an
exercise of its governmental function but is proprietary in
nature, the city, like an individual or a privately owned
corporation engaged in the same activity, is liable in damages
for injury to persons or property due to its negligence or other
wrongful act in the conduct of such activity.”). Thus, just as
a private corporation would ordinarily be subject to liability
for disgorgement of profits and unjust enrichment claims, so too
should a municipality when it acts proprietarily.
This is especially so considering that Hickory has failed
to articulate why it, or any municipality for that matter, needs
protection from equitable claims such as unjust enrichment when
it chooses deliberately to act beyond its governmental duties.
The traditional problems associated with imposing liability on
15
governmental entities, such as disrupting essential public
services and imposing monetary liability for nonprofit services,
do not concern us here. See Smith, 222 S.E.2d at 419 (detailing
literature which presents the arguments in favor of and against
sovereign immunity). If Hickory is concerned about the exposure
to litigation that its proprietary activities may entail, it has
the same form of protection available to it as any other private
corporation: it may refuse to engage in such proprietary
activities. But once it chooses to do so, we have confidence
that the mandate from the Supreme Court of North Carolina
clearly controls: a municipality may not hide behind the veil of
its governmental status and seek a special protection from
liability not afforded to its peers engaging in similar
proprietary activities. See City of Oxford, 148 S.E.2d at 628.
III.
For the reasons set forth, the order of the district court
is
AFFIRMED.
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