Court Opinion

ID: 2759871
Source: CourtListenerOpinion
Date Created: 2014-12-11 20:00:56.237404+00
Date Added: 2024-06-11T11:26:12.524382
License: Public Domain

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.

                                                    4
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.

                                             6
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

                                        10
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

                                              12
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

                                                13
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

                                             14
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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