Can Am South, LLC v. State, North Carolina Department of Health & Human Services ( 2014 )

NO. COA13-1240
NORTH CAROLINA COURT OF APPEALS
Filed: 3 June 2014
CAN AM SOUTH, LLC,
Plaintiff,
v. Wake County
No. 12 CVS 14873
THE STATE OF NORTH CAROLINA, THE
NORTH CAROLINA DEPARTMENT OF
HEALTH AND HUMAN SERVICES, and THE
NORTH CAROLINA DEPARTMENT OF
ADMINISTRATION,
Defendants.
Appeal by defendants from order entered 8 May 2013 by
Senior Resident Judge Donald W. Stephens in Wake County Superior
Court. Heard in the Court of Appeals 5 March 2014.
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., by
Walter L. Tippett, Jr. and S. Wilson Quick, for plaintiff-
appellee.
Attorney General Roy Cooper, by Special Deputy Attorney
General Donald R. Teeter, Sr. and Assistant Attorney
General G. Mark Teague, for defendants-appellants.
HUNTER, Robert C., Judge.
The State of North Carolina (“the State”), the North
Carolina Department of Health and Human Services (“DHHS”), and
the North Carolina Department of Administration (collectively
“defendants”) appeal from an order denying their motion to
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dismiss. Can Am South, LLC (“plaintiff”) filed suit against
defendants for breach of contract and declaratory judgment.
Defendants argue that the trial court erred by: (1) denying
defendants’ motion to dismiss plaintiff’s claim for a
declaratory judgment because defendants did not waive sovereign
immunity, or in the alternative, the complaint fails to allege
the existence of an actual controversy; and (2) denying
defendants’ motion to dismiss because defendants did not breach
any contract with plaintiff, thus foreclosing waiver of
sovereign immunity. Defendants also argue that the availability
of funds clause in the lease agreements is enforceable and its
enforcement does not constitute a breach of contract.
After careful review, we dismiss the appeal in part and
affirm the trial court’s order denying defendants’ Rule 12(b)(2)
motion to dismiss on the ground of sovereign immunity.
Background
The facts of this case are undisputed. Plaintiff is a
limited liability company existing under the laws of North
Carolina but operating its principal place of business in New
York. Plaintiff owns a converted commercial office and storage
facility in Raleigh, N.C., which it leased at varying times and
capacities to defendants.
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Plaintiff entered into the first lease (“the DDS lease”)
with the State on 20 May 1999 for use by the Department of
Health and Human Services, Disability Determination Services
(“DDS”). Plaintiff and the State entered into a renewal
agreement, the effect of which was to extend the DDS lease
through 31 July 2019 and to include the so-called “availability
of funds clause.” The availability of funds clause states:
15. The parties to this lease agree and
understand that the continuation of this
Lease Agreement for the term period set
forth herein, or any extension or renewal
thereof, is dependent upon and subject to
the appropriation, allocation or
availability of funds for this purpose to
the agency of the Lessee responsible for
payment of said rental. The parties to this
lease also agree that in the event the
agency of the Lessee or that body
responsible for the appropriation of said
funds, in its sole discretion, determines in
view of its total local office operations
that available funding for the payment of
rents is insufficient to continue the
operation of its local office on the premise
leased herein, it may choose to terminate
the lease agreement set forth herein by
giving Lessor written notice of said
termination, and the lease agreement shall
terminate immediately without any further
liability to Lessee.
Defendants have not attempted to exercise their right to
terminate the DDS lease pursuant to the availability of funds
clause.
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On 6 November 2000, plaintiff and the State entered into
the second lease (“the ACTS lease”) for use by an administrative
unit of DHHS known as Automation Collections and Tracking
System(s) (“ACTS”). The availability of funds clause was
included in the ACTS lease, and after renewal, the lease was set
to run through 28 February 2014. However, DHHS notified
plaintiff on 12 May 2011 that the State was exercising its right
to terminate the ACTS lease pursuant to the availability of
funds clause, effective 30 June 2011. The State thus terminated
the ACTS lease on 30 June 2011, removed ACTS from the premises,
and stopped paying rent on the lease.
On 2 April 2001, plaintiff and the State entered into the
third lease (“the CSE lease”) for use by the Child Support
Enforcement (“CSE”) division of DHHS. The CSE lease also
contained the availability of funds clause, and after renewal,
the lease was set to run through 31 August 2014. However, the
Department of Administration notified plaintiff on 15 August
2011 that the State was exercising its right to terminate the
CSE lease pursuant to the availability of funds clause,
effective 31 October 2011. A second termination letter was sent
26 September 2011 notifying plaintiff that the termination date
was revised to 30 September 2011. The State terminated the CSE
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lease on 30 September 2011, removed CSE from the premises, and
stopped paying rent on the lease.
Plaintiff filed suit against defendants on 23 October 2012
claiming breach of both the ACTS and CSE leases and seeking
declaratory judgment prohibiting the State from terminating the
DDS lease under the availability of funds clause. Defendants
entered a motion to dismiss plaintiff’s complaint pursuant to
Rules 12(b)(1), (2), and (6), claiming specifically that
defendants’ sovereign immunity had not been waived in any way.
By order entered 8 May 2013, the trial court denied defendants’
motion to dismiss in its entirety. Defendants filed timely
notice of appeal.
Motion to Dismiss
Plaintiff filed a motion to dismiss this appeal on 7
January 2014. We must first determine what portion of
defendants’ appeal, if any, is properly before us. After
careful review, we allow in part and deny in part plaintiff’s
motion to dismiss.
“Generally, there is no right of immediate appeal from
interlocutory orders and judgments.” Goldston v. Am. Motors
Corp., 326 N.C. 723, 725, 392 S.E.2d 735, 736 (1990). “An
interlocutory order is one made during the pendency of an
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action, which does not dispose of the case, but leaves it for
further action by the trial court in order to settle and
determine the entire controversy.” Veazey v. City of Durham,
231 N.C. 357, 362, 57 S.E.2d 377, 381 (1950). “Typically, the
denial of a motion to dismiss is not immediately appealable to
this Court because it is interlocutory in nature.” Reid v.
Cole, 187 N.C. App. 261, 263, 652 S.E.2d 718, 719 (2007).
However, N.C. Gen. Stat. § 1-277 (2013) allows a party to
immediately appeal an order that either (1) affects a
substantial right or (2) constitutes an adverse ruling as to
personal jurisdiction.
Here, defendants moved to dismiss plaintiff’s cause of
action pursuant to Rules 12(b)(1), (2), and (6) of the North
Carolina Rules of Civil Procedure. See N.C. Gen. Stat. § 1A-1,
Rule 12(b)(1) (2013) (lack of subject matter jurisdiction); N.C.
Gen. Stat. § 1A-1, Rule 12(b)(2) (2013) (lack of personal
jurisdiction); N.C. Gen. Stat. § 1A-1, Rule 12(b)(6) (2013)
(failure to state a claim upon which relief can be granted).
Specifically, defendants moved to dismiss both of plaintiff’s
claims under Rules 12(b)(1) and (2), but notably not Rule
12(b)(6), based on the defense of sovereign immunity.
Defendants moved to dismiss the claim for a declaratory judgment
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under Rule 12(b)(6) for failure of the complaint to adequately
plead an actual controversy.
Had defendants moved to dismiss based on the defense of
sovereign immunity pursuant to Rule 12(b)(6), we would be bound
by the longstanding rule that the denial of such a motion
affects a substantial right and is immediately appealable under
section 1-277(a). See Green v. Kearney, 203 N.C. App. 260, 266,
690 S.E.2d 755, 761 (2010). However, defendants’ sovereign
immunity defense is premised on a lack of either subject matter
jurisdiction under Rule 12(b)(1) or personal jurisdiction under
Rule 12(b)(2). A denial of a Rule 12(b)(1) motion based on
sovereign immunity does not affect a substantial right is
therefore not immediately appealable under section 1-277(a).
See Meherrin Indian Tribe v. Lewis, 197 N.C. App. 380, 385, 677
S.E.2d 203, 207 (2009); Horne v. Town of Blowing Rock, __ N.C.
App. __, __, 732 S.E.2d 614, 616 (2012). Thus, discussion as to
whether sovereign immunity raises the question of subject matter
or personal jurisdiction under Rules 12(b)(1) and 12(b)(2) is
necessary to analyze whether defendants may immediately appeal
pursuant to section 1-277(b).
Initially, our Supreme Court held in Love v. Moore, 305
N.C. 575, 581, 291 S.E.2d 141, 146 (1982), that immediate appeal
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under section 1-277(b) is limited to adverse rulings on “minimum
contacts” questions, not issues of personal jurisdiction
generally. However, shortly over two months after the Love
decision was entered, the Supreme Court in Teachy v. Coble
Dairies, Inc., 306 N.C. 324, 327-28, 293 S.E.2d 182, 184 (1982),
hinted at the possibility of sovereign immunity defenses
triggering immediate appeal under section 1-277(b). The Court
noted that:
A viable argument may be propounded that the
State, as a party, is claiming by the
doctrine of sovereign immunity that the
particular forum of the State courts has no
jurisdiction over the State's person. On the
other hand, the doctrine may be
characterized as an objection that the State
courts have no jurisdiction to hear the
particular subject matter of [the] claims
against the State. Although the federal
courts have tended to minimize the
importance of the designation of a sovereign
immunity defense as either a Rule 12(b)(1)
motion regarding subject matter jurisdiction
or a Rule 12(b)(2) motion regarding
jurisdiction over the person, the
distinction becomes crucial in North
Carolina because G.S. 1-277(b) allows the
immediate appeal of a denial of a Rule
12(b)(2) motion but not the immediate appeal
of a denial of a Rule 12(b)(1) motion. The
determination of this issue is not essential
to this Court's authority to decide the
instant case, however, because the case is
before us on discretionary review under G.S.
7A-31, and we elect to exercise our
supervisory authority to determine the
underlying issues. . . . Therefore, we do
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not determine whether sovereign immunity is
a question of subject matter jurisdiction or
whether the denial of a motion to dismiss on
grounds of sovereign immunity is immediately
appealable.
The Supreme Court has yet to offer further guidance on this
distinction.
However, apparently beginning with Sides v. Hospital, 22
N.C. App. 117, 205 S.E.2d 784 (1974), mod. on other grounds, 287
N.C. 14, 213 S.E.2d 297 (1975), this Court has consistently held
that: (1) the defense of sovereign immunity presents a question
of personal, not subject matter, jurisdiction, and (2) denial of
Rule 12(b)(2) motions premised on sovereign immunity are
sufficient to trigger immediate appeal under section 1-277(b).
See Stahl-Rider, Inc. v. State, 48 N.C. App. 380, 383, 269
S.E.2d 217, 219 (1980) (citing Sides for the proposition that
“an immediate appeal lies under G.S. 1-277(b) from the trial
court's refusal to dismiss a suit against the State on grounds
of governmental immunity”); Zimmer v. N.C. Dep't of Transp., 87
N.C. App. 132, 133–34, 360 S.E.2d 115, 116-17 (1987) (noting
that the Teachy Court cited Sides and Stahl-Rider, Inc., but did
not expressly overturn them, and holding that the trial court’s
denial of a Rule 12(b)(2) motion premised on sovereign immunity
was immediately appealable under section 1-277(b) pursuant to
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those rulings); Data Gen. Corp. v. Cnty. of Durham, 143 N.C.
App. 97, 99–100, 545 S.E.2d 243, 245–46 (2001) (relying on
Zimmer for the same proposition); Meherrin Indian Tribe, 197
N.C. App. at 385, 677 S.E.2d at 207 (relying on Data Gen. Corp.
for the same proposition).
Pursuant to this line of precedent, we enter the following
disposition as to plaintiff’s motion to dismiss. First, we
dismiss defendants’ appeal from the trial court’s order denying
their Rule 12(b)(6) motion to dismiss based on the argument that
plaintiff failed to adequately plead an actual controversy in
the declaratory judgment claim; denial of this motion involves
neither a substantial right under section 1-277(a) nor an
adverse ruling as to personal jurisdiction under section 1-
277(b), and thus is not immediately appealable. See N.C. Gen.
Stat. § 1-277. Second, we dismiss defendants’ appeal from the
trial court’s order denying their Rule 12(b)(1) motion based on
the defense of sovereign immunity. As the Meherrin Indian Tribe
Court held, orders denying Rule 12(b)(1) motions to dismiss
based on sovereign immunity are not immediately appealable
because they neither affect a substantial right nor constitute
an adverse ruling as to personal jurisdiction. Meherrin Indian
Tribe, 197 N.C. App. at 384, 677 S.E.2d at 207. However, we
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allow defendants’ appeal from the trial court’s order denying
their Rule 12(b)(2) motion to dismiss based on sovereign
immunity. As has been held consistently by this Court, denial
of a Rule 12(b)(2) motion premised on sovereign immunity
constitutes an adverse ruling on personal jurisdiction and is
therefore immediately appealable under section 1-277(b). See
id.; Data Gen. Corp., 143 N.C. App. at 99–100, 545 S.E.2d at245–46; Zimmer, 87 N.C. App. at 133–34, 360 S.E.2d at, 116;
Stahl-Rider, Inc., 48 N.C. App. at 383, 269 S.E.2d at 219.
In sum, we will consider only one issue on appeal: whether
the trial court properly denied defendants’ Rule 12(b)(2) motion
to dismiss on the ground of sovereign immunity.
Discussion
I. Sovereign Immunity
Defendants argue that they did not expressly or impliedly
waive their sovereign immunity and the trial court therefore
erred by denying their motion to dismiss both the breach of
contract claim and the claim for declaratory relief. We
disagree.
The doctrine of sovereign immunity is well-settled in North
Carolina:
It is an established principle of
jurisprudence, resting on grounds of sound
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public policy, that a state may not be sued
in its own courts or elsewhere unless it has
consented by statute to be sued or has
otherwise waived its immunity from suit. By
application of this principle, a subordinate
division of the state or an agency
exercising statutory governmental functions
may be sued only when and as authorized by
statute.
Welch Contracting, Inc. v. N.C. Dep't of Transp., 175 N.C. App.
45, 51, 622 S.E.2d 691, 695 (2005) (citations omitted).
Sovereign immunity is not merely a defense to a cause of action;
it is a bar to actions that requires a plaintiff to establish a
waiver of immunity. Arrington v. Martinez, 215 N.C. 252, 263,
716 S.E.2d 410, 417 (2011). Thus, the trial court must
determine “whether the complaint specifically alleges a waiver
of governmental immunity. Absent such an allegation, the
complaint fails to state a cause of action.” Sanders v. State
Pers. Comm’n, 183 N.C. App. 15, 19, 644 S.E.2d 10, 13 (2007)
(internal quotation marks omitted). However, “[p]recise
language alleging that the State has waived the defense of
sovereign immunity is not necessary, but, rather, the complaint
need only contain sufficient allegations to provide a reasonable
forecast of waiver.” Richmond Cnty. Bd. of Educ. v. Cowell, __
N.C. App. __, __, 739 S.E.2d 566, 569 (2013) (citations and
internal quotation marks omitted).
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The seminal case on waiver of sovereign immunity in the
context of contractual disputes is Smith v. State, 289 N.C. 303,
222 S.E.2d 412 (1976). In Smith, the North Carolina Supreme
Court articulated five considerations which moved the Court to
recognize an implied waiver of sovereign immunity where the
State enters into a valid contract with a private party:
(1) To deny the party who has performed his
obligation under a contract the right to sue
the state when it defaults is to take his
property without compensation and thus to
deny him due process; (2) To hold that the
state may arbitrarily avoid its obligation
under a contract after having induced the
other party to change his position or to
expend time and money in the performance of
his obligations, or in preparing to perform
them, would be judicial sanction of the
highest type of governmental tyranny; (3) To
attribute to the General Assembly the intent
to retain to the state the right, should
expedience seem to make it desirable, to
breach its obligation at the expense of its
citizens imputes to that body “bad faith and
shoddiness” foreign to a democratic
government; (4) A citizen's petition to the
legislature for relief from the state's
breach of contract is an unsatisfactory and
frequently a totally inadequate remedy for
an injured party; and (5) The courts are a
proper forum in which claims against the
state may be presented and decided upon
known principles.
Id. at 320, 222 S.E.2d at 423. Based on these considerations,
the Smith Court held that “whenever the State of North Carolina,
through its authorized officers and agencies, enters into a
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valid contract, the State implicitly consents to be sued for
damages on the contract in the event it breaches the contract.”
Id. at 320, 222 S.E.2d at 423-24. “Thus, . . . in causes of
action on contract . . . the doctrine of sovereign immunity will
not be a defense to the State.” Id. at 320, 222 S.E.2d at 424.
In order to analyze the trial court’s order denying
defendants’ Rule 12(b)(2) motion to dismiss based on sovereign
immunity here, we must consider: (1) whether plaintiff
sufficiently pleaded that defendants waived their sovereign
immunity; and (2) whether defendants expressly or impliedly
waived sovereign immunity.
First, we hold that plaintiff sufficiently pleaded waiver
of defendants’ sovereign immunity. The requirement that a
plaintiff specifically allege waiver of governmental immunity
“does not . . . mandate that a complaint use any particular
language.” Fabrikant v. Currituck Cnty., 174 N.C. App. 30, 38,
621 S.E.2d 19, 25 (2005). Rather, “consistent with the concept
of notice pleading, a complaint need only allege facts that, if
taken as true, are sufficient to establish a waiver by the State
of sovereign immunity.” Id. Here, plaintiff specifically
pleaded in its complaint that “[t]he defense of sovereign
immunity is not applicable to any claims alleged herein.”
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Furthermore, plaintiffs pleaded with particularity the
circumstances surrounding their entry into three facially valid
contracts with defendants, which, as will be discussed below,
amount to “facts, if taken as true, [that] are sufficient to
establish a waiver by the State of sovereign immunity.” Id. at
38, 621 S.E.2d at 25.
Next, we conclude that defendants impliedly waived their
sovereign immunity by entering into the lease agreements with
plaintiff. Defendants argue that because they did not breach
either the ACTS or the CSE lease agreements, and because there
is no proof that they will breach the DDS lease, plaintiff
cannot establish waiver of sovereign immunity.1 However,
defendants cite to no authority, and we find none, for the
proposition that waiver of sovereign immunity is contingent on
breach of contract. This Court has consistently held that we
are not to consider the merits of a claim when addressing the
1
For example, defendants assert that: “In order to overcome the
bar of sovereign immunity and establish an implied waiver of
Defendants’ immunity to suit, the Plaintiff is required to plead
with sufficient certitude that Defendants did indeed breach the
lease contracts.” Regarding the DDS lease, defendants contend:
“Plaintiff has not alleged that the State has breached the DDS
lease in any manner and also has not alleged a sufficient
factual basis to find that there is a likelihood the State will
breach the DDS lease. Therefore, sovereign immunity bars
Plaintiff’s claim for declaratory relief and the trial court
erred in denying Defendants’ motion to dismiss.”
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applicability of sovereign immunity as a potential defense to
liability. See Archer v. Rockingham Cnty., 144 N.C. App. 550,
558 548 S.E.2d 788, 793 (2001) (noting that, when considering
the applicability of sovereign immunity as a defense to breach
of a governmental employment contract, “[this Court is] not now
concerned with the merits of plaintiff’s contract action. . . .
whether plaintiffs are ultimately entitled to relief [is a]
question[] not properly before us”); see also Smith, 289 N.C. at
322, 222 S.E.2d at 424 (“We are not now concerned with the
merits of the controversy. . . . We have no knowledge, opinion,
or notion as to what the true facts are. These must be
established at the trial. Today we decide only that plaintiff
is not to be denied his day in court because his contract was
with the State.”).
Furthermore, all applicable caselaw leads us to conclude
that the State waives its sovereign immunity when it enters into
a contract with a private party, not when it engages in conduct
that may or may not constitute a breach. See Smith, 289 N.C. at
320, 222 S.E.2d at 423-24 (“[W]henever the State of North
Carolina, through its authorized officers and agencies, enters
into a valid contract, the State implicitly consents to be sued
for damages on the contract in the event it breaches the
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contract.”) (emphasis added); Ferrell v. Dep’t of Transp., 334
N.C. 650, 654, 435 S.E.2d 309, 312 (1993) (“[V]arious policy
considerations compel the conclusion that when the State enters
into a contract through its authorized officers and agencies, it
implicitly consents to suit for damages if it breaches that
contract.”) (emphasis added). It is plain to us that the
phrases “in the event it breaches the contract” and “if it
breaches that contract” in the cases above refer to the events
that would typically trigger a suit against the State. They do
not mean that the State only waives its sovereign immunity “in
the event it breaches the contract” and “if it breaches that
contract.” To hold otherwise would require a plaintiff to
definitively establish its entire cause of action against the
State in its complaint without the opportunity to conduct
discovery, a result that was clearly unintended by the Smith
Court when it adopted the doctrine of implied waiver of
sovereign immunity in this context. See Smith, 289 N.C. at 320,
222 S.E.2d at 423 (noting that the same policy considerations it
identified as the basis for its holding are used in other states
to hold that “a state implicitly consents to be sued upon any
valid contract into which it enters”) (emphasis added).
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Defendants also cite Petroleum Traders Corp. v. State, 190
N.C. App. 542, 546-47, 660 S.E.2d 662, 664 (2008) for the
proposition that they did not waive sovereign immunity as a
defense to plaintiff’s claim for a declaratory judgment. We
disagree. This argument was previously addressed in ACC v.
University of Maryland, __ N.C. App. __, __, 751 S.E.2d 612, 621
(2013), where this Court held that Smith’s recognition of waiver
in “causes of action on contract” includes actions for
declaratory relief seeking to ascertain the rights and
obligations owed under a contract with the State. The ACC Court
distinguished Petroleum Traders Corp. on the ground that the
plaintiff in that case sought “a declaration that a statutorily
authorized bidding fee . . . violated the North Carolina
Constitution,” not a request to ascertain the rights and
obligations owed by the parties to a contract. Id. at __, 751
S.E.2d at 620. Because plaintiff here is seeking to ascertain
the rights and obligations of the parties to the DDS lease and
is not asking for a declaration as to a potential constitutional
breach, this case is more comparable to ACC than Petroleum
Traders Corp. Therefore the holding in ACC that “declaratory
relief actions are a ‘cause of action on contract’ sufficient to
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waive the State’s sovereign immunity” is binding and applicable
here.
Because it is undisputed that plaintiff and defendants
entered into three facially valid lease agreements, we hold that
defendants impliedly waived their sovereign immunity from suit
as to those contracts. We further conclude that it is
inappropriate to consider the merits of plaintiff’s claims at
this time, because such arguments are unnecessary to determine
the dispositive issues on appeal, namely, whether defendants
waived sovereign immunity.
Conclusion
For the foregoing reasons, we allow plaintiff’s motion to
dismiss the appeal as to defendants’ Rule 12(b)(1) and (6)
motions, but allow immediate appeal from the order denying
defendants’ Rule 12(b)(2) motion to dismiss on the ground of
sovereign immunity. Because plaintiff sufficiently alleged
waiver of sovereign immunity in its complaint and defendants
impliedly waived sovereign immunity by entering into the lease
agreements with plaintiff, we affirm the trial court’s order
denying defendants’ motion.
AFFIRMED IN PART; DISMISSED IN PART.
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Judges GEER and McCULLOUGH concur.