248 F. Supp. 3d 705
M.D.N.C.2017Background
- Plaintiffs Michael McAdoo and Kenya McBee, former UNC–Chapel Hill student‑athletes, filed a putative class action asserting only state‑law claims (breach of contract, fiduciary duty, UDTP, fraud variants) based on alleged systemic academic misconduct at UNC from 1993–2011.
- Defendants (UNC–Chapel Hill / UNC system) moved to dismiss under Rules 12(b)(1) and 12(b)(6), arguing lack of subject matter jurisdiction, Eleventh Amendment immunity, lack of standing, statutes of limitation, and failure to state claims; the court permitted limited jurisdictional discovery focused on jurisdiction.
- Because plaintiffs asserted only state‑law claims, federal jurisdiction depended solely on complete diversity under 28 U.S.C. § 1332; the threshold question was whether UNC–Chapel Hill is a “citizen” or instead an arm/alter ego of North Carolina (which would defeat diversity).
- Plaintiffs urged the court to analyze only the Athletics Department (arguing financial/operational independence); the court rejected slicing out a department and held the arm‑of‑the‑state inquiry must address the UNC system/constituent institution as a whole.
- Applying the Fourth Circuit’s four‑factor arm‑of‑the‑state test (effect on treasury; autonomy; state vs. local concerns; treatment under state law), the court found: (1) the State is functionally liable for judgments against UNC (state appropriations, state‑held accounts, lack of institutional legal reserves); (2) UNC/Chapel Hill lack meaningful autonomy (statutory control, appointments, budgetary and legal constraints); (3) UNC carries out statewide concerns (education is a core state function); and (4) North Carolina law treats UNC as a state entity (statutes, sovereign‑immunity treatment, state employee status).
- Conclusion/procedure: The court held UNC and its constituent institutions are arms/alter egos of the State, are not “citizens” for diversity purposes, and therefore dismissed the complaint without prejudice for lack of subject matter jurisdiction; related motions were denied as moot.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the court has subject‑matter jurisdiction via diversity | Diversity exists because plaintiffs and UNC–Chapel Hill are citizens of different states (plaintiffs rely on alleged institutional independence, esp. Athletics) | UNC–Chapel Hill is an arm/alter ego of North Carolina and thus not a “citizen” for diversity purposes | Held: No diversity; UNC–Chapel Hill is an arm of the State; court lacks subject‑matter jurisdiction (dismissed without prejudice) |
| Proper scope of arm‑of‑the‑state analysis | Focus on Athletics Department’s private funding and autonomy to show UNC–Chapel Hill is independent | Arm‑of‑the‑state analysis must consider UNC system/constituent institution as a whole, not a single department | Held: Analysis applies to UNC system/constituent institution as a whole; department‑level slicing rejected |
| Effect of a judgment on the State treasury (functional liability) | Plaintiffs contended certain departments are self‑supporting, limiting state exposure | State appropriations, state‑held accounts, lack of institutional reserves, and potential need for legislative appropriations make the State functionally liable | Held: Factor favors arm‑of‑the‑state — State is functionally liable for judgments against UNC |
| Degree of autonomy | Plaintiffs stressed private funding and operational independence of some units | Statutory control (appointments, budget process, property control, legal oversight) demonstrates lack of autonomy | Held: Factor favors arm‑of‑the‑state — UNC lacks meaningful autonomy from the State |
Key Cases Cited
- Elyazidi v. SunTrust Bank, 780 F.3d 227 (4th Cir. 2015) (jurisdiction is a threshold issue to address before the merits)
- Md. Stadium Auth. v. Ellerbe Becket Inc., 407 F.3d 255 (4th Cir. 2005) (state universities often treated as arms of the state; instructs detailed, fact‑specific analysis)
- Oberg v. Pa. Higher Educ. Assistance Agency, 804 F.3d 646 (4th Cir. 2015) (articulates the four‑factor arm‑of‑the‑state test and discusses functional liability)
- Ram Ditta v. Maryland Nat’l Capital Park & Planning Comm’n, 822 F.2d 456 (4th Cir. 1987) (instructs consideration of multiple factors in alter‑ego analysis)
- Hess v. Port Auth. Trans‑Hudson Corp., 513 U.S. 30 (1994) (explains functional liability — when an agency’s survival requires expenditure from state treasuries)
- Huang v. Bd. of Governors of Univ. of N.C., 902 F.2d 1134 (4th Cir. 1990) (applied Eleventh Amendment protection to UNC, evidencing circuit practice of treating state universities as arms of the state)