AGI Associates, LLC v. City of Hickory, NC , 773 F.3d 576 ( 2014 )


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  •                                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.
    16