Lake v. State Health Plan for Teachers & State Employees

NO. COA13-1006

NORTH CAROLINA COURT OF APPEALS

Filed: 17 June 2014

I. BEVERLY LAKE, JOHN B. LEWIS,

JR., EVERETTE M. LATTA, PORTER L.

McATEER, ELIZABETH S. McATEER,

ROBERT C. HANES, BLAIR J.

CARPENTER, MARILYN L. FUTRELLE,

FRANKLIN E. DAVIS, JAMES D.

WILSON, BENJAMIN E. FOUNTAIN, JR.,

FAYE IRIS Y. FISHER, STEVE FRED

BLANTON, HERBERT W. COOPER, ROBERT

C. HAYES, JR., STEPHEN B. JONES,

MARCELLUS BUCHANAN, DAVID B.

BARNES, BARBARA J. CURRIE, CONNIE

SAVELL, ROBERT B. KAISER, JOAN

ATWELL, ALICE P. NOBLES, BRUCE B.

JARVIS, ROXANNA J. EVANS, and JEAN

C. NARRON, and all others

similarly situated,

Plaintiffs,

v. Gaston County

No. 12-CVS-1547

STATE HEALTH PLAN FOR TEACHERS AND

STATE EMPLOYEES, a corporation,

formerly Known as the North

Carolina Teachers and State

Employees’ Comprehensive Major

Medical Plan, TEACHERS’ AND STATE

EMPLOYEES’ RETIREMENT SYSTEM OF

NORTH CAROLINA, a corporation,

BOARD OF TRUSTEES TEACHERS’ AND

STATE EMPLOYEES’ RETIREMENT SYSTEM

OF NORTH CAROLINA, a body politic

and corporate, JANET COWELL, in

her official capacity as Treasurer

of the State of North Carolina,

and the STATE OF NORTH CAROLINA,

Defendants.

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Appeal by Defendants from order entered 23 May 2013 by

Judge Edwin G. Wilson, Jr. in Gaston County Superior Court.

Heard in the Court of Appeals 6 March 2014.

Attorney General Roy A. Cooper, III, by Special Deputy

Attorney General Marc Bernstein, for the Defendants-

appellants.

Gray, Layton, Kersh, Solomon, Furr & Smith, P.A., by

Michael L. Carpenter, for Plaintiffs-appellees.

DILLON, Judge.

The State Health Plan for Teachers and State Employees, et

al., (the “Defendants”) appeal from the denial of their motion

to dismiss pursuant to N.C. Gen. Stat. § 1A-1, Rule 12(b)(1),

(2), and (6) in favor of I. Beverly Lake, et al., (the

“Plaintiffs”). For the foregoing reasons, we affirm in part,

and dismiss in part.

I. Background

On 20 April 2012, Plaintiffs filed a complaint alleging,

inter alia, that they are all former employees and current

retirees with the State of North Carolina with at least five

years of contributory service; as part of their employment, they

were offered certain benefits, including a health benefit plan

after retirement through the State Health Plan; this health

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benefit plan provided the option to each Plaintiff to

participate on a non-contributory 80/20 basis or on a 90/10

basis with a contribution; they had vested by working at least

five years and were eligible upon retirement to receive these

health insurance benefits from the State Health Plan; Defendants

stopped providing a non-contributory 80/20 health benefit in

2011 and the 90/10 plan for retirees in 2009, respectively; and

that these actions by Defendants constituted a breach of

contract.1

On 23 July 2012, Defendants filed a motion to dismiss

pursuant to N.C. Gen. Stat. § 1A-1, Rule 12(b)(1), (2), and (6),

arguing that the trial court lacked jurisdiction based, in part,

on Defendants’ sovereign immunity defense and that the complaint

should otherwise be dismissed because the allegations therein

failed to state a claim upon which relief could be granted. On

23 May 2013, Judge Edwin G. Wilson, Jr.2, entered an order

denying Defendants’ motion to dismiss in its entirety. On 14

June 2013, Defendants filed notice of appeal from the trial

court’s denial of their motion to dismiss.

1

Plaintiffs also raised a number of other claims which are

not at issue in Defendants’ appeal.

2

On 26 November 2012, the Chief Justice of the North

Carolina Supreme Court designated this case as “exceptional”

under Rule 2.1 of the General Rules of Practice for the Superior

and District Courts, and assigned Judge Wilson to the case.

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II. Interlocutory Appeal

On 19 December 2013, Plaintiffs filed a motion to dismiss

Defendants’ appeal with this Court, arguing that “the appeal is

an impermissible interlocutory appeal and Defendant-Appellants

do not have a substantial right to immediate review[.]”

Plaintiffs raised similar arguments in their brief on appeal.

We have recently stated that

“[a]s a general rule, interlocutory orders

are not immediately appealable.” Id.

(citation omitted). However, “immediate

appeal of interlocutory orders and

judgments is available in at least two

instances: when the trial court certifies,

pursuant to N.C.G.S. § 1A-1, Rule 54(b),

that there is no just reason for delay of

the appeal; and when the interlocutory order

affects a substantial right under N.C.G.S.

§§ 1-277(a) and 7A-27(d)(1).” Id.

(quotation omitted).

Jenkins v. Hearn Vascular Surgery, P.A., ___ N.C. App. ___, ___,

719 S.E.2d 151, 153-54 (2011). Defendants admit that their

appeal is interlocutory, and we agree. Since there is no Rule

54(b) certification, we must determine whether Defendants’

appeal affects a substantial right.

In North Carolina, “appeals raising issues of governmental

or sovereign immunity affect a substantial right sufficient to

warrant immediate appellate review.” McClennahan v. N.C. Sch.

of the Arts, 177 N.C. App. 806, 808, 630 S.E.2d 197, 199 (2006),

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disc. review denied, 361 N.C. 220, 642 S.E.2d 443 (2007).

However, as stated by our Supreme Court, “[t]he denial of a

motion to dismiss for failure to state a claim upon which relief

can be granted, made pursuant to Rule 12(b)(6), Rules of Civil

Procedure, G.S. 1A-1, is an interlocutory order from which no

immediate appeal may be taken.” Teachy v. Coble Dairies, Inc.,

306 N.C. 324, 326, 293 S.E.2d 182, 183 (1982) (citation

omitted). Therefore, we dismiss Defendants’ appeal as to any

issues related to the trial court’s Rule 12(b)(6) ruling

regarding the validity of the alleged contract as interlocutory,

and address only those issues related to sovereign immunity and

Rule 12(b)(2)3, as those issues relate to a substantial right and

3

Our Supreme Court has stated that an order denying a motion

to dismiss for lack of subject-matter jurisdiction, pursuant to

Rule 12(b)(1) is not immediately appealable, but that an order

denying a motion for lack of personal jurisdiction, pursuant to

Rule 12(b)(2) is immediately appealable. Teachy, 306 N.C. at

327-28, 293 S.E.2d at 184. The Court in Teachy also noted that

there is a split in authority around the country as to whether a

motion to dismiss based on sovereign immunity is properly a

motion under Rule 12(b)(1) or under Rule 12(b)(2) and that the

determination of this issue is relevant in North Carolina in

situations involving an interlocutory appeal denying a motion to

dismiss based on sovereign immunity. Id. However, our Supreme

Court did not ultimately resolve the issue in Teachy, deciding

rather to review that appeal based on its supervisory

jurisdiction. Id. Though our Supreme Court has not resolved

the issue as to whether a motion to dismiss based on sovereign

immunity is a motion under Rule 12(b)(1) or under Rule 12(b)(2),

our Court has determined that the denial of a motion to dismiss

based on sovereign immunity can be based on Rule 12(b)(2), and

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are immediately appealable. See McClennahan, 177 N.C. App. at

808, 630 S.E.2d at 199. We next turn to address Defendants’

appeal and their arguments regarding sovereign immunity.

III. Rule 12(b)(2) Dismissal Based on Sovereign Immunity

To survive a Rule 12(b)(2) motion to dismiss based on

sovereign immunity, “the complaint must specifically allege a

waiver of governmental immunity. Absent such an allegation, the

complaint fails to state a cause of action.” Paquette v. County

of Durham, 155 N.C. App. 415, 418, 573 S.E.2d 715, 717 (2002)

(citations omitted), disc. review denied, 357 N.C. 165, 580

S.E.2d 695 (2003). However, consistent with the concept of

notice pleading, “as long as the complaint contains sufficient

allegations to provide a reasonable forecast of waiver, precise

language alleging that the State has waived the defense of

sovereign immunity is not necessary.” Fabrikant v. Currituck

County, 174 N.C. App. 30, 38, 621 S.E.2d 19, 25 (2005) (citation

omitted).

is, therefore, immediately appealable. See, e.g., Data Gen.

Corp. v. City of Durham, 143 N.C. App. 97, 99-100, 545 S.E.2d

243, 245-46 (2001), explained in Atl. Coast Conf. v. Univ. of

Md., ___ N.C. App. ___, __, 751 S.E.2d 612, 617 (2013).

Therefore, we dismiss Defendants’ appeal to the extent that it

is based on the denial of their motion to dismiss for lack of

subject-matter jurisdiction, pursuant on Rule 12(b)(1).

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Here, Plaintiffs argue that they have sufficiently pled

that sovereign immunity has been waived by alleging the

existence of a valid contract; and, therefore, the trial court

properly denied Defendants’ Rule 12(b)(2) motion to dismiss.

Specifically, Plaintiffs pled that they each had a contract of

employment with the State and that these contracts included a

promise to provide a guaranteed health benefit during retirement

on a non-contributory 80/20 basis or a 90/10 basis with a

contribution. Our Supreme Court has held that “whenever 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 contract.” Smith v. State, 289 N.C. 303, 320, 222

S.E.2d 412, 423-24 (1976) (emphasis added). We have held that

this waiver of immunity applies in the context of employment

contracts:

“The existence of the relation of employer

and employee . . . is essentially

contractual in its nature, and is to be

determined by the rules governing the

establishment of contracts, express or

implied.” Hollowell v. Department of

Conservation and Development, 206 N.C. 206,

208, 173 S.E. 603, 604 (1934). Guided by

this principle, as well as the reasoning in

[Smith v State, 289 N.C. 303, 222 S.E.2d 412

(1976)], we hold that the County may not

assert the defense of sovereign immunity in

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this case . . . . We agree with plaintiffs’

assertion that the employment arrangement

between the County and plaintiffs was

contractual in nature, although the contract

was implied. Employment contracts may be

express or implied. An implied contract

refers to an actual contract inferred from

the circumstances, conduct, acts or

relations of the parties, showing a tacit

understanding. . . . We do not limit Smith

to written contracts; its reasoning is

equally sound when applied to implied oral

contracts.

Archer v. Rockingham Cty., 144 N.C. App. 550, 557, 548 S.E.2d

788, 792-93 (2001), disc. review denied, 355 N.C. 210, 559

S.E.2d 796 (2002).

We believe that Plaintiffs sufficiently pled a valid

contract. For instance, Plaintiffs alleged in their complaint

that the State of North Carolina acted by offering specific

health plans when Plaintiffs were hired and made representations

to Plaintiffs while they were employed that if they worked five

years then those health plans would vest and be irrevocable upon

retirement. Also, Plaintiffs alleged that they acted by

accepting employment based, in part, on these health plans and

working a set amount of time with the State of North Carolina so

that those health plans would vest or be irrevocable upon

retirement. We believe that our decision in Sanders v. State

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Pers. Comm’n, 183 N.C. App. 15, 644 S.E.2d 10, disc. review

denied, 361 N.C. 696, 652 S.E.2d 654 (2007), is instructive.

In Sanders, the plaintiffs, who were employed as

“temporary” employees by the State of North Carolina for more

than 12 consecutive months, filed their action alleging that a

rule promulgated by the State Personnel Commission prohibited

individuals from being employed by the State as temporary

employees for more than twelve consecutive months; that this

rule was part of their contracts of employment; that by working

for more than twelve consecutive months, they were entitled to

be treated as “permanent” State employees; and that the State

breached their contracts of employment by “wrongfully den[ying]”

the plaintiffs the employment benefits that permanent employees

are entitled to receive. Id. at 16, 644 S.E.2d at 11. The

State moved to dismiss the plaintiffs’ breach of contract claim

based on sovereign immunity, a motion which was granted by the

trial court. Id. at 17, 644 S.E.2d at 11. On the plaintiffs’

appeal, the State argued that the “plaintiffs’ claim for relief

based on a breach of contract cannot overcome sovereign immunity

. . . because the alleged contract is ‘implied,’ ‘imaginary,’

and in no way ‘an authorized and valid contract.’” Id. at 19,

644 S.E.2d at 12.

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In our opinion, we stated that the plaintiffs alleged “that

the State entered into employment contracts with the plaintiffs,

incorporating state personnel regulations, pursuant to which

they were entitled to certain benefits as a result of their

employment for more than 12 months.” Id. at 18-19, 644 S.E.2d

at 13. We stated that these “allegations [were] materially

indistinguishable from those found sufficient in several

opinions of this Court[,]” including Peverall v. County of

Alamance, 154 N.C. App. 426, 430-31, 573 S.E.2d 517, 519-20

(2002) (reversing the trial court’s dismissal based on sovereign

immunity when the plaintiff had alleged a valid employment

contract in which the defendant had agreed to provide the

plaintiff “disability retirement benefits . . . in exchange for

five years of continuous service”), disc. review denied, 356

N.C. 676, 577 S.E.2d 632 (2003) and Hubbard v. County of

Cumberland, 143 N.C. App. 149, 150-51, 544 S.E.2d 587, 589,

disc. review denied, 354 N.C. 69, 553 S.E.2d 40 (2001). Id. at

19-20, 644 S.E.2d at 13. In further comparing these cases, we

held,

[p]laintiffs allege that defendants are

manipulating State personnel policies and

benefit plans, which govern the terms of

state employment, to avoid providing

plaintiffs benefits that they rightfully

earned as a result of the tenure of their

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employment. Plaintiffs’ complaint

sufficiently alleges that defendants

accepted plaintiffs’ services and,

therefore, “may not claim sovereign immunity

as a defense” to their alleged commitment to

provide the benefits provided by the

personnel policies setting forth the terms

of employment.

Id. at 20, 644 S.E.2d at 13 (quoting Hubbard, 143 N.C. App. at

154, 544 S.E.2d at 590).

In overruling the defendants’ argument “that any contract

was only ‘implied’ and, therefore, no waiver of sovereign

immunity has occurred[,]” the Court relied on the holding in

Archer, supra, which extended the holding in Smith, supra,

regarding written contracts to oral implied contracts and also

noted that Archer “held that plaintiffs could assert their

claims because they were ‘in the nature of a contractual

obligation[.]’” Id. at 20-21, 644 S.E.2d at 13-14.

Like Sanders, Defendants here essentially make an argument

that their Rule 12(b)(2) motion should have been granted because

Plaintiffs failed to allege an express agreement concerning the

retirement health benefits. Specifically, they point to

Plaintiffs’ allegations that Defendants have, through

representations, policies, and statutes, “avoid[ed] providing

plaintiffs benefits that they rightfully earned as a result of

the tenure of their employment” and because of this alleged

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exchange, Defendants, “‘may not claim sovereign immunity as a

defense’ to their alleged commitment to provide the benefits

provided by the personnel policies setting forth the terms of

employment.” See id. at 20, 644 S.E.2d at 13. However, as in

Sanders, we believe that Plaintiffs have alleged something “in

the nature of a contractual obligation” which would still amount

to a valid contract under Archer, sufficient to survive a Rule

12(b)(2) motion to dismiss based on sovereign immunity. See

Sanders, 183 N.C. App. at 21, 644 S.E.2d at 13.

We further held in Sanders that the defendants’ arguments

“that the alleged contract is ‘imaginary’ and not ‘an authorized

and valid contract’” went to the merits of the plaintiffs’

breach of contract claims, pointing out that

in considering the applicability of

sovereign immunity to allegations of breach

of a governmental employment contract, “that

we are not now concerned with the merits of

plaintiffs’ contract action. . . . [W]hether

plaintiffs are ultimately entitled to relief

are questions not properly before us.”

Archer v. Rockingham County, 144 N.C. App.

550, 558, 548 S.E.2d 788, 793 (2001), disc.

review denied, 355 N.C. 210, 559 S.E.2d 796

(2002). 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

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the State.”).

Id. at 20, 644 S.E.2d at 13-14.

In the same way, Defendants here make a number of arguments

which go to the merits of Plaintiffs’ breach of contract claims.

However, “[t]his Court has consistently held that we are not to

consider the merits of a claim when addressing the applicability

of sovereign immunity as a potential defense to liability.” Cam

Am South, LLC v. State of North Carolina, ___ N.C. App. ___,

___, ___ S.E.2d ___, ___, 2014 N.C. App. LEXIS 558 at *16 (N.C.

App. June 3, 2014). Rather, our analysis is restricted to

whether Plaintiffs have sufficiently alleged that Defendants

have waived sovereign immunity. As Plaintiffs sufficiently

alleged a valid contract between them and the State in their

complaint to waive the defense of sovereign immunity, we affirm

the trial court’s order denying Defendants’ motion to dismiss

pursuant to Rule 12(b)(2). See Cam Am South, at *18 (holding

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”) (emphasis in

original).

IV. Conclusion

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For the foregoing reasons, we affirm the trial court’s

order denying Defendants’ motion to dismiss this action based on

their sovereign immunity defense, pursuant to Rule 12(b)(2); and

we dismiss Defendants’ appeal of the trial court’s order denying

their motion to dismiss to the extent the order is based on

grounds other than Defendants’ sovereign immunity defense.

AFFIRMED, IN PART, and DISMISSED, IN PART.

Judge BRYANT and Judge CALABRIA concur.