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

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 at

245–46; 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.