Opinion ID: 1353617
Heading Depth: 1
Heading Rank: 1

Heading: Law Governing Proper Disposition of Payments Made to State Agencies and Claimed by Plaintiffs

Text: Plaintiffs and defendants each except to certain determinations by the Court of Appeals that payments made to the various state agencies do or do not fall within the purview of Article IX, Section 7. All parties agree as to the basic precedent which governs this Court's consideration of these payments. The parties' arguments, however, diverge on how this precedent should be applied in this case. Plaintiffs argue that the precedents hold that any civil penalties paid for violation of a penal law of the State and accruing to the State are necessarily punitive and must be paid to the public schools. Defendants, on the other hand, argue that any penalty paid to the State to compensate it for an injury, damage, or loss above normal operating costs falls outside the scope of Article IX, Section 7. In Mussallam v. Mussallam, 321 N.C. 504, 364 S.E.2d 364 (1988), an action to recover the proceeds of a civil appearance bond which had been forfeited, this Court interpreted Article IX, Section 7 as providing two categories of monies. In Mussallam the Court stated: These are (1) the clear proceeds of all penalties and forfeitures in all cases, regardless of their nature, so long as they accrue to the state; and (2) the clear proceeds of all fines collected for any breach of the criminal laws. In the second category, it is quite apparent from the words of section 7 that the clear proceeds of all fines collected for the violation of the criminal laws are to be used for school purposes. One could not legitimately argue that the violation of a criminal law is not a breach of the penal laws. While its intent as to the first category is less obvious, the wording of the entire section 7 makes its meaning clear. The term penal laws, as used in the context of article IX, section 7, means laws that impose a monetary payment for their violation. The payment is punitive rather than remedial in nature and is intended to penalize the wrongdoer rather than compensate a particular party. See D. Lawrence, Fines, Penalties, and Forfeitures: An Historical and Comparative Analysis, 65 N.C.L.Rev. 49, 82 (1986). Thus, in the first category, the monetary payments are penal in nature and accrue to the state regardless of whether the legislation labels the payment a penalty, forfeiture or fine or whether the proceeding is civil or criminal. Id. at 509, 364 S.E.2d at 366-67. The Court then held that the purpose of the forfeiture was to punish the defendant if he did not appear in court and noted that the bond specifically made its proceeds payable to the State of North Carolina. Id. at 509, 364 S.E.2d at 367. Thus, the Court held that the bond fell within the scope of the first category. Id. Citing Katzenstein v. Raleigh & Gaston R.R. Co., 84 N.C. 688 (1881), and State ex rel. Hodge v. Marietta & N. Ga. R.R., 108 N.C. 24, 12 S.E. 1041 (1891), the Court rejected the plaintiff's argument that the proceeds were payable to her, saying, the distinction lies in the nature of the penalty or forfeiture, i.e., whether it was designed to penalize the wrongdoer or to compensate a particular party. Id. at 510, 364 S.E.2d at 367. In State ex rel. Thornburg v. House & Lot, 334 N.C. 290, 432 S.E.2d 684 (1993), an action involving the proceeds of the sale of a house forfeited pursuant to Chapter 75D of the General Statutes, the State's Racketeer Influenced and Corrupt Organizations (RICO) Act, this Court explained the Court's reliance on Hodge and Katzenstein in Mussallam. The Court noted that in Katzenstein this Court concluded that the constitutional provision applied only to penalties and forfeitures that accrued to the State; thus, plaintiff, a private company, could sue and recover for violation of the statute in question because that right was given by the statute to `any person suing for the same.' Id. at 295, 432 S.E.2d at 687 (quoting Katzenstein, 84 N.C. at 689). In Hodge, however, the statute specifically required the penalty `be sued for in the name of the State of North Carolina.' Id. (quoting Hodge, 108 at 25, 12 S.E. at 1041). The Court concluded that [t]he RICO Act provides that the proceeds from the sale of RICO forfeited property accrue to the State. Such proceeds must therefore be paid to the public school fund. Id. The Court noted that while alternative dispositions of forfeited property were permitted under the RICO Act, the Act in every instance, requir[ed] that the proceeds of any sale of such property `shall be paid to the State Treasurer.' §§ 75D-5(j)(1-7). Id. at 294, 432 S.E.2d at 686. Although this Court has said in previous cases that the label attached to the money is not controlling, Cauble v. City of Asheville, 301 N.C. 340, 271 S.E.2d 258 (1980); State v. Rumfelt, 241 N.C. 375, 85 S.E.2d 398 (1955); Cty. Bd. of Sch. Dirs. v. City of Asheville, 128 N.C. 185, 128 N.C. 249, 38 S.E. 874 (1901), and Bd. of Educ. v. Town of Henderson, 126 N.C. 689, 36 S.E. 158 (1900), this language arose in the determination of whether a particular assessment was a fine or a penalty, usually in the context of a municipal ordinance that had been declared by statute a violation of the state's penal laws. In Town of Henderson the Court said: A fine is the sentence pronounced by the court for a violation of the criminal law of the State; while a penalty is the amount recovered  the penalty prescribed for a violation of the statute law of the State or the ordinance of a town. This penalty is recovered in a civil action of debt. 126 N.C. at 691, 36 S.E. at 159. Then in City of Asheville, the Court, utilizing the law explicated in Town of Henderson, held that Article IX, Section 5 (now 7) applied also to penalties, the collection of which is enforceable by proceedings before a Justice of the Peace or municipal officers empowered by law to enforce the collection of such penalty in a criminal action under section 3820 of The Code, for, in such cases, though the word penalty is used, it is really a fine. 128 N.C. at 251, 38 S.E. at 875. In Shore v. Edmisten, 290 N.C. 628, 227 S.E.2d 553 (1976), the Court, in determining whether money payments imposed by a trial judge as a condition of probation were fines or restitution, said, In determining whether a given payment is a fine or restitution, the label given by the judge (or the legislature) is not determinative. Id. at 633, 227 S.E.2d at 558. The Court explained that [a] state or a local agency can be the recipient of restitution where the offense charged results in particular damage or loss to it over and above its normal operating costs. Id. at 633-34, 227 S.E.2d at 559. The Court specifically held that a suspended sentence could not be conditioned on payment of money for continued law enforcement. Id. at 638-39, 227 S.E.2d at 562. As the Court further noted, the trial court must identify whether the payment is restitution, and a showing must be made that the money is to compensate an aggrieved party for damages suffered; otherwise, the payment is subject to Article IX, Section 7. Id. at 633-34, 227 S.E.2d at 559. We do not, however, understand these rulings, that the label affixed by either a legislative body or the judge is not determinative, to undermine or negate the canons of construction. In matters of statutory construction the task of the Court is to determine the legislative intent, and the intent is ascertained in the first instance from the plain words of the statute. Elec. Supply Co. v. Swain Elec. Co., 328 N.C. 651, 656, 403 S.E.2d 291, 294 (1991). The words used to describe the payment are, thus, to be considered in deciding whether the payment made on account of a violation comes within the purview of Article IX, Section 7. In the instant case, all the payments in question fall into the first category identified in Mussallam. Thus, the determinative question under Mussallam is whether the civil penalty is punitive or remedial in nature. The word remedial means affording a remedy. Black's Law Dictionary 1293 (6th ed.1990). The critical issue is whether the penalty mandated for violation of the statute is imposed as punishment to deter noncompliance or to measure the damages accruing to an individual or class of individuals resulting from the breach. Id. at 1294. This determination can only be made by examining each of the statutory penalties challenged in plaintiffs' complaint.