Title: N.C.Dept. of Transportation v. Hodge
Citation: 347 N.C. 602
Docket Number: 559PA96
State: north-carolina
Issuer: north-carolina Supreme Court
Date: March 6, 1998

IN THE SUPREME COURT OF NORTH CAROLINA
No. 559PA96
FILED: 6 MARCH 1998
NORTH CAROLINA DEPARTMENT OF TRANSPORTATION
v.
GLENN I. HODGE, JR.
On discretionary review pursuant to N.C.G.S. § 7A-31 of
a unanimous decision of the Court of Appeals, 124 N.C. App. 515,
478 S.E.2d 30 (1996), reversing and remanding an order entered by
Stephens (Donald W.), J., on 6 September 1995 in Superior Court,
Wake County, which affirmed a decision and order of the State
Personnel Commission.  Heard in the Supreme Court 10 September
1997.
Michael F. Easley, Attorney General, by Grayson G.
Kelley, Special Deputy Attorney General; Robert O.
Crawford, III, Assistant Attorney General; and Sarah
Ann Lannom, Associate Attorney General, for respondent-
appellee Department of Transportation.
John C. Hunter for petitioner-appellant Hodge.
FRYE, Justice.
Both this and a companion case, Powell v. N.C. Dep’t of
Transp., 552PA96 (opinions filed simultaneously), raise the issue
of whether the Governor properly designated certain State
employee positions as policymaking exempt under N.C.G.S. § 126-5. 
In this case, we must determine whether the Court of
Appeals erred in reversing an order of the superior court sitting
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    We recognize at the outset that the relevant provisions of
1
the SPA have recently been amended.  However, we construe the
statute as it existed for purposes of this case.
    The panel was also charged with identifying confidential
2
positions which would be exempt pursuant to N.C.G.S. §
126-5(c)(2). 
    There was an initial determination, on or before 12 February
3
1993 and prior to the review by the panel of personnel officials,
in review of a final decision of a state agency.  We conclude
that the Court of Appeals did err.
The specific issue in this case is whether the position
of Chief of the Internal Audit Section of the Department of
Transportation (DOT) comes within the statutory definition of
policymaking and may therefore be designated as exempt from
provisions of the State Personnel Act (SPA).   The SPA permits
1
the Governor to designate as exempt certain policymaking
positions within departments of state government, including the
DOT.  N.C.G.S. § 126-5(d)(1) (1995).  A policymaking position is
defined as “a position delegated with the authority to impose the
final decision as to a settled course of action to be followed
within a department, agency, or division.”  N.C.G.S. § 126-5(b).
Glenn I. Hodge, Jr., was employed by the DOT as an
internal auditor beginning 1 January 1992.  On 23 May 1992, Hodge
was promoted to the position of Chief of the Internal Audit
Section.  In March 1993, under the direction of the Governor’s
office, a panel of personnel officials compiled a list of
positions within the DOT which could be designated as
policymaking exempt pursuant to N.C.G.S. § 126-5(d)(1).   Hodge’s
2
position was included on this list.  On 12 February 1993,  and
3
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that certain positions were exempt.
again on 3 May 1993, Hodge was notified by letter that his
position was to be designated as policymaking exempt and that he
would thereafter serve at the pleasure of the Secretary of the
DOT.  Hodge filed petitions for contested case hearings in the
Office of Administrative Hearings on 15 March 1993 and 14 May
1993, challenging the designation of his position as policymaking
exempt.  The cases were consolidated for hearing.
A contested case hearing was held before Senior
Administrative Law Judge (ALJ) Fred G. Morrison, Jr., in November
1993.  The evidence presented showed that the position of Chief
of the Internal Audit Section of the DOT had considerable
independence to direct and supervise audits inside the DOT.  The
person in this position had supervisory authority within the
section over other auditors’ work and assignments.  The Chief of
the Internal Audit Section consulted with the heads of units
being audited and with higher-ranking DOT officials and made
recommendations for changes based on the results of audits.  The
decisions made by the person in this position potentially had an
impact on policies within the DOT.  Importantly, however, the
evidence also showed that the Chief of the Internal Audit Section
had no inherent or delegated authority to implement
recommendations or order action based on audit findings.
ALJ Morrison issued a recommended decision reversing
the DOT’s designation of Hodge’s position as exempt.  The ALJ
made, inter alia, the following contested finding of fact:
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3.
As Chief of the Internal Audit Section,
the Petitioner [Hodge] exercised broad
flexibility and independence.  In
addition to supervising other auditors,
he could decide who, what, when, how,
and why to audit within the Department. 
While he could not order implementation
of any recommendations, he was free to
contact the State Bureau of
Investigation concerning his findings.
The ALJ also found that designation of the position as
policymaking exempt was the substantial equivalent of being
dismissed and that DOT officials had made no finding that a
political confidant of the Governor was needed for the effective
performance of this office (finding of fact number 5).  Finally,
the ALJ found that Hodge’s responsibilities included auditing
federally funded transportation programs and that applicable
federal rules and audit standards require that auditors be free
from organizational or external impairments in order to insure
objectivity and independence (finding of fact number 6).
The ALJ concluded that the purpose of N.C.G.S. §
126-5(d)(1) is to “allow the Governor to make partisan personnel
decisions in order to have loyal supporters who will carry out
administration policies.”  Citing Branti v. Finkel, 445 U.S. 507,
63 L. Ed. 2d 574 (1980), the ALJ stated that when employees
challenge these political decisions, the “ultimate inquiry” is
whether the hiring authority can demonstrate that party
affiliation is an appropriate requirement for the effective
performance of the office involved.  The ALJ concluded that “this
standard must be followed when positions are declared
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policymaking exempt from the State Personnel Act” and that it had
not been followed in this case.
By a decision and order entered 22 November 1994, the
State Personnel Commission (Commission) adopted the ALJ’s
findings of fact and conclusions of law as its own and ordered
that designation of the position as policymaking exempt under
N.C.G.S. § 126-5(d) be reversed.  The DOT objected to the above
findings of fact and conclusions of law, and to the final
decision and order of the Commission, and petitioned for judicial
review.  On 6 September 1995, Judge Donald W. Stephens affirmed
the Commission’s decision and order.
The Court of Appeals reversed the superior court order,
deciding that the Commission erred by applying an incorrect legal
standard and that the superior court, in turn, erred by
concluding that the Commission’s decision was not affected by an
error of law.  The Court of Appeals held that the Commission’s
findings, as supported by substantial record evidence, could
“only support the legal conclusion that Hodge’s position was
properly designated as policymaking exempt” and that the superior
court erred by affirming the contrary conclusion reached by the
Commission.  N.C. Dep’t of Transp. v. Hodge, 124 N.C. App. 515,
520, 478 S.E.2d 30, 32 (1996).  The case was remanded with the
mandate that the position of Chief of the Internal Audit Section
be designated as policymaking exempt.  On 7 March 1997, this
Court allowed Hodge’s petition for discretionary review.
Whether the position of Chief of the Internal Audit
Section of the DOT was properly designated as exempt under
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N.C.G.S. § 126-5(d)(1) first requires a determination of whether
the position met the statutory definition of policymaking under
N.C.G.S. § 126-5(b).  After an examination of the entire record,
we conclude that it did not.  Therefore, it was unnecessary in
this case for the ALJ to reach the question of the constitutional
definition of policymaking under the Branti v. Finkel decision.
Substantial evidence presented by both parties showed 
that the position of Chief of the Internal Audit Section carried
considerable independence and responsibility.  However, this is
not sufficient to make it “a position delegated with the
authority to impose the final decision as to a settled course of
action to be followed within a department, agency, or division.” 
N.C.G.S. § 126-5(b).  As defined in N.C.G.S. § 143B-11, a
division is the principal subunit of a department, and a section
is the principal subunit of a division.  The Court of Appeals
correctly recognized that, “[c]ontrary to the DOT’s assertions,
the record does not show that, as Chief Internal Auditor, Hodge
headed a division within the DOT.”  Hodge, 124 N.C. App. at 519,
478 S.E.2d at 32.  Even after a departmental reorganization in
February 1993, the Internal Audit Section did not function as a
division of the DOT.  While we emphasize that the statutory
definition of policymaking does not require that the person
holding the position actually head a department, agency, or
division, he or she must nonetheless have the authority to impose
a final decision as to a settled course of action to be followed
at the department, agency, or division level.
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As noted above, Hodge, as Chief Internal Auditor, could
recommend action on audit findings, but the decision to implement
changes based on those recommendations or findings rested with
the head of the audited unit and the Secretary of the DOT.  Hodge
had no authority to “impose” a final decision as to a settled
course of action within the DOT or any division of the DOT, and
his authority at the section level did not rise to the level of
authority required by N.C.G.S. § 126-5(b) to be considered
policymaking.  The substantial evidence in the record amply
supports a finding that the Chief of the Internal Audit Section
had final decision-making authority within that section but did
not have final decision-making authority to impose a settled
course of action to be followed within a department, agency, or
division.  We hold that the Court of Appeals erred to the extent
that it held that the Commission’s findings, as supported by
substantial record evidence, compelled a conclusion that the
position was properly designated as policymaking exempt.
In summary, the Commission adopted the ALJ’s findings
of fact and conclusions of law, which were based unnecessarily
upon constitutional standards that consider when political
affiliation is an appropriate factor in determining which
positions are policymaking.  This was not the proper legal
question and need not have been reached, if at all, until a
determination was made as to whether the position met the
definition of policymaking under N.C.G.S. § 126-5(b). 
Nonetheless, the Commission’s final decision, that the position
of Chief Internal Auditor was not policymaking, was correct based
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on an application of the statutory definition alone. 
Accordingly, we reverse the Court of Appeals as to this issue.  
Because the Branti standard was prematurely applied by
the Commission and the statutory definition of policymaking
decides the case, we do not address the issue of whether the
superior court erred in denying the DOT’s motion to remand to the
ALJ to present additional evidence in accordance with that
federal standard.
For the foregoing reasons, we reverse the decision of
the Court of Appeals.
REVERSED.
========================
Chief Justice MITCHELL dissenting.
I conclude that the Court of Appeals was correct in
reversing the Superior Court.  The State Personnel Commission
erred by applying an incorrect legal standard.  Therefore, the
Superior Court, in turn, erred by concluding that the
Commission’s decision was not affected by an error of law.
It is clear from the record on appeal that the
Commission never considered the only issue raised by the parties. 
Instead, the Commission rendered its decision entirely upon
grounds not raised by either party and not properly before the
Commission.
In his petition for a contested case hearing,
petitioner Glenn I. Hodge, Jr., stated that “[t]he facts
supporting my appeal are:  The Respondent [Department of
Transportation] has designated the Petitioner’s position as a
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‘policymaking position’ under NCGS 126-5.  Petitioner’s position
is not a ‘policymaking position’ as defined in NCGS 126-5(b).” 
(Emphasis added.)  Everything in the record on appeal emphasizes
that neither petitioner Hodge nor respondent Department of
Transportation (DOT) considered this case to in any way involve
questions of party affiliation or political discrimination.  In
fact, the prehearing order entered into by the parties and signed
by the Administrative Law Judge (ALJ) recites that the parties
“stipulated and agreed that the issue to be resolved” during the
contested case hearing was as follows:  “Was Petitioner’s
position as Chief of the Internal Audit Section in the Department
of Transportation properly designated by Respondent as a
policymaking exempt position in accordance with all the
provisions of North Carolina Gen. Stat. 126-5[?]”  (Emphasis
added.)  However, during counsel’s opening statements at the
contested case hearing, the ALJ specifically asked whether DOT
must establish the need for a “political confidant” of the
Governor in the position of Chief of the Internal Audit Section
of DOT, which Hodge had held.  Counsel for DOT replied that the
parties had agreed that “the definition that the General Assembly
has now set out for policy-maker doesn’t really speak to
politics.  It speaks to authority level.”  Counsel for petitioner
Hodge agreed that the ALJ was “not being called upon today to
rule on a political discrimination case.”  Additionally, the ALJ
declined to allow DOT to offer any evidence during the contested
case hearing concerning the political affiliation and partisan
activities and statements of petitioner Hodge during the time he
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held the position in question or evidence concerning the partisan
political nature of Hodge’s hiring for the position.
Despite the above referred to stipulation and
statements of counsel for both parties, the ALJ entered a
recommended decision that failed to address the stipulated issue
and dwelled almost exclusively on considerations relating to
partisan politics.  The findings and conclusions in that
recommended decision are as follows:
Based on a preponderance of the
substantial evidence admitted into the record
of this case, the Administrative Law Judge
makes the following:
FINDINGS OF FACT
1.
Governor James G. Martin, a Republican,
served as Governor of North Carolina
from January of 1985 to January of 1993. 
During those years the position of
Chief-Internal Audit Section of the
Department of Transportation was not
exempted from the provisions of the
State Personnel Act.
2.
Petitioner Glenn I. Hodge Jr., a
Republican, began his employment with
the State of North Carolina on
January 1, 1990, at Pay Grade 71, in the
Department of Human Resources.  He
transferred to the Respondent on
January l, 1992, as an internal auditor
at Pay Grade 71.  On May 23, 1992,
Petitioner was promoted to the position
of Chief-Internal Audit Section at Pay
Grade 78.
3.
As Chief of the Internal Audit Section,
the Petitioner exercised broad
flexibility and independence.  In
addition to supervising other auditors,
he could decide who, what, when, how,
and why to audit within the Department. 
While he could not order implementation
of any recommendations, he was free to
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contact the State Bureau of
Investigation concerning his findings.
4.
Governor James B. Hunt, Jr., a Democrat,
was elected in 1992 and began serving in
January of 1993.  He had previously
served as Governor from January of 1977
until January of 1985, during which time
the subject position was designated as
exempt from the provisions of the State
Personnel Act.
5.
During the early part of 1993,
Respondent’s officials recommended that
the Petitioner’s position be designated
as exempt because of the nature and
duties of the job.  They thought it met
the statutory definition of
policymaking.  No finding was made that
a political confidant of the Governor
was needed for the effective performance
of this office.  Upon being notified of
the Governor’s designation of his
position as exempt, the Petitioner
requested an investigation by the Office
of State Personnel after which he filed
petitions for contested case hearings
pursuant to G.S. §126-5(h).  The
designation of Petitioner’s position as
policymaking exempt was the substantial
equivalent of his being dismissed by
Respondent.
6.
Under various agreements and
arrangements with the United States
Department of Transportation,
Petitioner’s responsibilities include
the auditing of federally funded
transportation programs and activities. 
Applicable federal rules and audit
standards require that auditors of
federally funded activities be free from
organizational, external or other
impairments to assure individual
objectivity and operational independence
in presenting opinions, conclusions,
judgments and recommendations.  The
standards provide that auditors should
be “sufficiently removed from political
pressures to insure that they conduct
their audits objectively and can report
their findings, opinions and conclusions
objectively without fear of political
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repercussion.  Wherever feasible, they
should be under a personnel system in
which compensation, training, job tenure
and advancement are based on merit.”
Based on the foregoing Findings of Fact,
the Administrative Law Judge makes the
following:
CONCLUSIONS OF LAW
1.
G.S. 126-5(d)(1) allows the Governor to
designate certain positions as exempt
policymaking.  The purpose is to allow
the Governor to make partisan personnel
decisions in order to have loyal
supporters who will carry out
administration policies.  G.S. 126-5(c)
and (h) allow employees in these
positions to challenge such
designations.  The North Carolina
Supreme Court reiterated in Abels v.
Renfro Corp., 335 N.C. 209, 218[, 436
S.E.2d 822, 827] (1993), that “it would
[‘]look to federal decisions for
guidance in establishing evidentiary
standards and principles of law to be
applied in discrimination cases.[’]” 
[(Quoting] Dept. of Correction v.
Gibson, 308 N.C. 131[, 136, 301 S.E.2d
78, 82 (1983))].
2.
The Supreme Court of the United States
ruled in Branti v. Finkel, 445 U.S. 507,
[518, 63 L. Ed. 2d 574, 584 (1980),]
that when employees challenge these
political decisions, “. . . the ultimate
inquiry is not whether the label
[‘]policymaker[’] or [‘]confidential[’]
fits a particular position; rather, the
question is whether the hiring authority
can demonstrate that party affiliation
is an appropriate requirement for the
effective performance of the public
office involved.”  It is my conclusion
that this standard must be followed when
positions are declared policymaking
exempt from the State Personnel Act,
which was not done in this case. 
Respondent has not shown why a political
confidant is a necessary requirement in
this position.  Branti states “[i]t is
equally clear that party affiliation is
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not necessarily relevant to every
policymaking or confidential position.” 
[Id.]
3.
Reversal of the designation of this
position is in order pursuant to G.S.
126-5(d)(6) which states:  “Subsequent
to the designation of a policymaking
position as exempt . . . the status of
the position may be reversed . . . by
the Governor . . . in a letter to the
State Personnel Director, the Speaker of
the North Carolina House of
Representatives, and the President of
the North Carolina Senate.”
Based on the foregoing Findings of Fact
and Conclusions of Law, the Administrative
Law Judge makes the following:
RECOMMENDED DECISION
The designation of the position as
exempt be reversed.
As can readily be seen, only finding 3 was in any way related to
the issue to be resolved at the contested case hearing, and none
of the conclusions were in any way based upon that finding.  Most
of the other findings and all of the conclusions were based upon
considerations of whether being a “political confidant” of the
Governor or being affiliated with a particular political party
was “an appropriate requirement for the effective performance” of
the position at issue.  The recommended decision quite simply did
not mention or address the single issue properly presented by the
parties and to be decided--whether the position of Chief of the
Internal Audit Section in DOT had properly been designated by DOT
as a policymaking exempt position in accordance with all the
provisions of N.C.G.S. § 126-5.  Therefore, the recommended
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decision was not only affected by, but was the result of, an
error of law.
The Commission’s decision and order merely adopted the
findings of fact and conclusions of law of the ALJ as its own and
ordered that the designation of the position in question as
policymaking exempt under N.C.G.S. § 126-5 be reversed.  The
result was to repeat the error of law affecting the recommended
decision of the ALJ.  Therefore, the order of the Superior Court
based upon its findings and conclusions to the effect that the
decision of the Commission “was not affected by any error of law”
was erroneous and was properly reversed by the Court of Appeals.
Having determined that the Commission had committed
error of law and that the order of the Superior Court must be
reversed for concluding to the contrary, the Court of Appeals
could have remanded this case to the Superior Court for further
remand to the Commission with instructions that the Commission
address and resolve the question of whether the position at issue
had been properly designated as policymaking exempt in accord
with N.C.G.S. § 126-5.  Instead, the Court of Appeals concluded
that “the undisputed record evidence” and the single finding by
the Commission relating to the matter at issue before it
supported a conclusion that the position of Chief of the Internal
Audit Section of DOT was properly designated policymaking exempt. 
Accordingly, the Court of Appeals remanded with the mandate that
the position of Chief of the Internal Audit Section be designated
policymaking exempt.  The Court of Appeals did not err in this
regard.
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The proper scope of judicial review to be applied in an
appeal from a decision of a state administrative agency depends
on the issues presented on appeal.
Our courts have held that if it is alleged
that an agency’s decision was based on an
error of law then a de novo review is
required.  Brooks, Comr. of Labor v. Grading
Co., 303 N.C. 573, 281 S.E.2d 24 (1981). 
“‘When the issue on appeal is whether a state
agency erred in interpreting a statutory
term, an appellate court may freely
substitute its judgment for that of the
agency and employ de novo review.’”  Id. at
580-81, 281 S.E.2d at 29, quoting Savings &
Loan League v. Credit Union Comm., 302 N.C.
458, 465, 276 S.E.2d 404, 410 (1981).  A
review of whether an agency decision is
supported by sufficient evidence requires the
court to apply the “whole record” test. 
Thompson v. Board of Education, 292 N.C. 406,
233 S.E.2d 538 (1977).  The “whole record”
test is also applied when the court considers
whether an agency decision is arbitrary and
capricious.  High Rock Lake Assoc. v.
Environmental Management Comm., 51 N.C. App.
275, 276 S.E.2d 472 (1981).
Brooks v. Rebarco, Inc., 91 N.C. App. 459, 463, 372 S.E.2d 342,
344 (1988).  However, in the present case, the decision of the
Court of Appeals must be affirmed no matter which standard is
applied.
The sole issue raised by petitioner Hodge in his
petition for a contested case hearing was whether his position
was a “‘policymaking position’ as defined in NCGS 126-5(b).”  At
all times pertinent to this appeal, N.C.G.S. § 126-5(b) defined
“policymaking position” as “a position delegated with the
authority to impose the final decision as to a settled course of
action to be followed within a department, agency, or division.” 
The only finding by the Commission relating to the question of
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whether the position held by Hodge was “delegated with the
authority to impose the final decision as to a settled course of
action to be followed within a department, agency, or division”
was finding 3, which stated:
As Chief of the Internal Audit Section, the
Petitioner exercised broad flexibility and
independence.  In addition to supervising
other auditors, he could decide who, what,
when, how, and why to audit within the
Department.  While he could not order
implementation of any recommendations, he was
free to contact the State Bureau of
Investigation concerning his findings.
(Emphasis added.)  Certainly, the uncontroverted evidence
compelled this finding by the Commission, but the uncontroverted
evidence also required additional findings.
According to the job description for the position of
Chief of the Internal Audit Section, the person holding that
position independently directs and supervises all activities and
personnel in the Internal Audit Section.  The Internal Audit
Section is responsible for all internal audits of DOT, which
include financial and compliance audits, economy and efficiency
audits, management analysis audits, and special investigative
audits.  Those audits encompass all activities and phases of
operations within the Division of Highways, the Division of Motor
Vehicles, the State Ports Authority, and the Governor’s Safety
Program.  Auditors are assigned by the Chief of the Internal
Audit Section to conduct particular audits, and the Chief of the
Internal Audit Section also controls the scope, objectives,
findings, and recommendations of any audit conducted in any of
the divisions of DOT.  Further, the Chief of the Internal Audit
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Section prepares manuals, guide programs, and audit procedures
and gives related instructions for all auditors to utilize in
performing audits throughout the entire DOT.  The testimony of
petitioner Hodge was that his decisions in all the foregoing
regards were not reviewable or reviewed by anyone in DOT or
elsewhere.  All of this evidence was uncontroverted before the
Commission and is unchallenged on this appeal.
I conclude that the unfettered and unreviewable power
to establish auditing procedures to be applied throughout an
entire department of government and to implement those procedures
throughout the entire department, combined with the unfettered
and unreviewable power to decide who and what throughout the
department will be audited, when those audits will be conducted,
the manner in which audits will be conducted throughout an entire
department, and whether findings of any audit conducted within
the entire department shall be referred to the State Bureau of
Investigation, is the power “to impose the final decision as to a
settled course of action to be followed within a department,
agency, or division” within the meaning of N.C.G.S. § 126-5(b). 
The uncontroverted and incontrovertible evidence of record before
the Commission and before this Court establishes that the
position of Chief of the Internal Audit Section carries with it
these powers and more.  Accordingly, I believe that the Court of
Appeals was correct in holding that the Commission’s findings and
the record evidence compelled the legal conclusion that the
position of Chief of the Internal Audit Section is a
“policymaking position” within the meaning of N.C.G.S. § 126-5(b)
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and had properly been designated as such.  Accordingly, I would
affirm the decision of the Court of Appeals.
For the foregoing reasons, I must respectfully dissent.