STATE OF NORTH CAROLINA, ex rel. JOSHUA H. STEIN, Attorney General v. KINSTON CHARTER ACADEMY, a North Carolina non-profit corporation; OZIE L. HALL, JR., individually and as Chief Executive Officer of Kinston Charter Academy; and DEMYRA MCDONALD HALL, individually and as Board Chair of Kinston Charter Academy
No. 16PA20
IN THE SUPREME COURT OF NORTH CAROLINA
Filed 17 December 2021
2021-NCSC-163
On discretionary review pursuant to
Attorney General Joshua H. Stein, by Assistant Attorney General Matthew L. Liles, Sr.; Senior Deputy Attorney General Kevin D. Anderson; and Special Deputy Attorney General Daniel P. Mosteller, for the State-appellant.
Ragsdale Liggett PLLC by Amie C. Sivon, Mary M. Webb, and Edward E. Coleman, III, and Demyra McDonald-Hall for defendant-appellant Kinston Charter Academy.
Ozie L. Hall, Jr., pro se defendant-appellant.
Stam Law Firm, PLLC, by R. Daniel Gibson and Paul Stam for amicus Pinnacle Classical Academy.
Womble, Bond Dickinson (US) LLP by Matthew F. Tilley for amicus N.C. Coalition for Charter Schools, amicus curiae.
¶ 1 The issues before us in this case involve the extent to which the non-profit corporations that operate charter schools are (1)
I. Factual and Procedural History
A. Substantive Factual Background
¶ 2 The Academy is a nonprofit corporation organized and existing under North Carolina law that began operating a charter school in 2004.1 The Academy served students from kindergarten through eighth grade and provided transportation for students residing in Lenoir, Pitt, and Greene counties. Mr. Hall served as Kinston Charter Academy‘s Chief Executive Officer. As Chief Executive Officer, Mr. Hall provided both financial and academic leadership for the Academy. Mr. Hall‘s wife, Demyra McDonald-Hall, began serving as the Chair of the Academy‘s Board of Directors in 2007.
¶ 3 The Academy experienced financial difficulties from the date upon which it began operation and would, in all probability, have closed in 2007 except for the fact that five of the eight members of the Board of Directors took out personal loans for the purpose of ensuring the Academy‘s continued operation. The Department of Public Instruction, which has the responsibility for overseeing North Carolina public schools, cited the Academy on at least six occasions between 2008 and 2013 for having deficit fund balances. For example, the Department placed the Academy on “Financial Probationary Status” on 5 June 2008 given the existence of a deficit fund balance that totaled over $300,000. Similarly, the Department placed the Academy on the highest level of “Financial Disciplinary Status” on 24 March 2010. In the final full year during which the Academy operated, Mr. Hall‘s daughter, who did not have a degree in education and who had never previously worked at a school, was hired as the Academy‘s “academic officer” at an annual salary of $40,000 in place of an associate principal who had more than twenty years’ experience working in public education. On 5 June 2013, the Department placed the Academy on “Governance Cautionary Status” in light of the fact that the Academy, after withholding funds from its employees’ paychecks, had failed to submit the amounts associated with premiums for those employees’ health insurance plans to the State Treasurer.
¶ 4 In an effort to obtain sufficient funds to pay its outstanding obligations, the Academy obtained two short-term loans in the spring and early summer of 2013. On 31 May 2013, the Academy obtained a $100,000 short-term loan that included a $15,000 origination fee that was to be subtracted from the loan amount and a $15,000 broker‘s fee. On 21
¶ 5 On 21 January 2013, the Academy reported to the Department that it projected having an average daily membership of 310 students, with this figure representing an estimate of the number of students that the Academy would enroll during the following academic year that was used for the purpose of establishing the amount of funding that the Academy was entitled to receive from the State. On 26 April 2013, the Academy provided the Department with a revised average projected daily membership of 366 students. More specifically, Mr. Hall told a representative of the Department during a 26 April 2013 phone call that, even though he had “not physically been on the [Academy] campus much and that the person [that he had] left in charge was incompetent,” the Academy‘s projected enrollment for the 2013–14 school year would increase to 366 students, with this revised estimate representing an increase of 92 students over the actual enrollment for the previous year (despite three years of declining enrollment) and being the maximum estimate of student attendance that the Academy was entitled to claim without seeking and obtaining prior approval from the State Board of Education. According to a later examination by the State Auditor, there was “no evidence supporting an estimated student attendance increase.”
¶ 6 In July of 2013, the Academy received funds from the local school board, with these funds having been used to pay off loans that had been taken out in connection with the previous academic year and to pay off contributions to the State Health Plan that the Academy had failed to make during that same period of time. On 29 July 2013, Mr. Hall sent a letter to the Department stating that the Academy‘s employees had been informed that the payments associated with their health insurance premiums and retirement contributions had been delayed, that the Academy was attempting to refinance the indebtedness associated with its facilities in order to obtain the funds needed to continue to operate the Academy, and that, in the event that he was unable to complete the refinancing process, he would recommend that the Board of Directors close the Academy.
¶ 7 On 6 August 2013, the Academy received over $600,000 from the State for use during the 2013-14 school year. This amount had been calculated based upon an average daily membership of 366 students and was intended to last until October 2013, when the Academy would receive its next scheduled allotment. On the same day, the Academy paid Mr. Hall $5,000 for “unused vacation time.” On 12 August 2013, the Academy paid $2,500 to Mr. Hall‘s daughter for a “website redesign” that was never implemented. On 16 August 2013, the Academy paid Ms. McDonald-Hall over $1,000 as an advance against her “unused annual leave.” On the same day, the Department sent a letter to Mr. Hall for the purpose of informing the Academy that the Department intended to recommend the revocation of the Academy‘s charter in light of its persistent failure to comply with applicable financial requirements and its failure to pay employee benefits. On 22 August 2013, the Academy made another payment of $1,500 to Mr. Hall for “unused annual leave.” On 23 August 2013, Mr. Hall sent an e-mail to a Department official stating that he had recommended to the Board that the Academy “close the school and surrender the charter to the State Board of Education.”
¶ 8 At the time that the Academy opened on 26 August 2013, it had enrolled only 189 students for the 2013–14 academic year, an amount that was 177 students less than the estimate that the Academy had submitted to the Department in the spring. In spite of Mr. Hall‘s 23 August 2013 e-mail, the Board discussed, over the course of the ensuing week, the implementation of a “corrective action plan” that involved a change in the Academy‘s management structure and was intended to keep the Academy open. On 4 September 2013, after the Department rejected requests made by Mr. Hall and Ms.
¶ 9 On 10 September 2013, Department officials informed Mr. Hall and Ms. McDonald-Hall during a contentious meeting that the Academy would need to repay the funds that had been allotted to the Academy based upon the over-estimate of its student enrollment numbers. Mr. Hall refused to grant the Department officials access to the Academy‘s records and later complained that the Department was attempting to conduct an “illegal search and seizure” of those records. On 12 September 2013, the Board held a meeting during which it approved the payments that had been made to Mr. Hall and Ms. McDonald-Hall relating to “unused annual leave” and the purchase of a new laptop computer to replace Mr. Hall‘s personal computer.
¶ 10 On 28 January 2015, the Office of the State Auditor released the findings that it had made as the result of an investigation into the Academy‘s failure. The Auditor found that the Academy had “overstated enrollment,” that it had “employed defendants Hall and McDonald-Hall‘s unqualified relatives at a cost to the school [of] $92,500 in the final year,” and that “defendants Hall and McDonald-Hall accepted over $11,000 in questionable payments despite owing more than $370,000 in payroll obligations” to the Academy‘s employees. The State did not recoup any funds from the Academy after it closed.
B. Procedural History
¶ 11 On 26 April 2016, the State filed a complaint against the Academy; Mr. Hall, both individually and as the Academy‘s Chief Executive Officer; and Ms. McDonald-Hall, both individually and as the Chair of the Academy‘s Board. In its complaint, the State alleged that the defendants had “violated the North Carolina False Claims Act by making false or fraudulent statements” in order to receive money from the State, with these statements having included the Academy‘s projected enrollment of 366 students, “a number that defendants knew or should have known they would not achieve“; the Academy‘s “claim for state educational funds for the 2013–14 school year when defendants knew or should have known that [the Academy] would not survive the year“; and the Academy‘s “false claim for state funds to be used for a non-profit educational purpose that were instead used to benefit defendants.” Secondly, the State alleged that defendants had violated various duties imposed upon them by the statutory provisions governing the operation of non-profit corporations by “[m]aking unreasonable distributions to directors and officers“; by “[f]ailing to discharge their duties to the corporation in good faith[,] with ordinary care[,] and [in] a manner in the best interest of the corporation“; by “[f]ailing to comply with the conflict of interest requirements“; and by “[f]ailing to comply with [the statute] in disposing of all or substantially all of [the Academy]‘s assets.” The State also alleged that Mr. Hall and Ms. McDonald-Hall had violated other relevant statutory provisions by failing to discharge their duties “in good faith,” “with the care an ordinarily prudent person in a like position would exercise under similar circumstances,” and “in a manner [that they] reasonably believe[d] to be in the best interests of the corporation.” Finally, the State alleged that defendants had violated the North Carolina Unfair and Deceptive Trade Practices Act,
¶ 12 On 26 May 2017, Mr. Hall filed a motion to dismiss the claims that the State had lodged against him in his individual capacity pursuant to
¶ 13 On 13 February 2018, Mr. Hall filed another motion in which he sought to have the State‘s False Claims Act claim dismissed pursuant to
¶ 14 In seeking relief from the trial court‘s order before the Court of Appeals, the Academy argued that the trial court had erred by denying its motion to dismiss the False Claims Act claim that had been asserted against it given that the Academy was protected from liability under the False Claims Act by the doctrine of sovereign immunity. In addition, the Academy argued that the State had failed to plead its False Claims Act claim with the requisite “particularity” and that the “[a]lleged [f]alse [s]tatement,” which involved the estimate of the number of students that the Academy would enroll for the 2013–14 academic year, was “an [a]uthorized [p]rojection for the [f]uture, [n]ot [p]ossible of [b]eing [f]alse at the [t]ime [i]t [w]as [m]ade.” Similarly, Mr. Hall sought relief from the trial court‘s order before the Court of Appeals on the grounds that an “enrollment goal of 366 students” was permitted by law and could not, for that reason, be a “false or fraudulent claim.” In addition, Mr. Hall argued that the State‘s False Claims Act claim was barred by the separation of powers clause of the North Carolina Constitution and “the doctrine of governmental/public official immunity.”
¶ 15 In a unanimous published opinion, the Court of Appeals reversed the trial court‘s order denying the Academy‘s motion to dismiss the State‘s False Claims Act claim on the grounds that the Academy was entitled to sovereign immunity and that it did not qualify as a “person” for purposes of the False Claims Act. State v. Kinston Charter Acad., 268 N.C. App. 531, 536 (2019). In reaching this result, the Court of Appeals began by reasoning that, since
¶ 16 The Court of Appeals went on to hold that, “assuming, arguendo, that charter schools [we]re not categorically entitled to claim sovereign immunity from the” False Claims Act, the Academy could not be the subject of a claim brought pursuant to the False Claims Act given that the Academy functioned as an “arm of the state” for purpose
- whether any judgment against the entity as defendant will be paid by the State or whether any recovery by the entity as plaintiff will inure to the benefit of the State;
- the degree of autonomy exercised by the entity, including such circumstances as who appoints the entity‘s directors or officers, who funds the entity, and whether the State retains a veto over the entity‘s actions;
- whether the entity is involved with state concerns as distinct from non-state concerns, including local concerns; and
- how the entity is treated under state law, such as whether the entity‘s relationship with the State is sufficiently close to make the entity an arm of the State.
Kinston, 268 N.C. App. at 540 (citing United States ex rel. Oberg v. Ky. Higher Educ. Student Loan Corp., 681 F.3d 575, 580 (4th Cir. 2012)).
¶ 17 In addressing the first of these factors, the Court of Appeals noted that a charter school‘s board of directors is required to obtain liability insurance under
¶ 18 As far as the second factor in the required analysis is concerned, the Court of Appeals recognized that a charter school has a high degree of autonomy from the State in matters relating to the manner in which the school is operated and issues relating to budgets, management, and curriculum. On the other hand, however, the Court of Appeals acknowledged that the charter school‘s authority is “limited by regulatory and reporting requirements” imposed by the State, so that its “autonomy only extends as far as [it complies] with its Board-approved charter and oversight by [the Department of Public Instruction].” Id. at 543.
¶ 19 In addressing the third factor, the Court of Appeals determined that the North Carolina Constitution “makes the State solely responsible for ensuring ‘the right of every child in North Carolina to receive a sound basic education.’ ” Id. at 544 (quoting Silver v. Halifax Cnty. Bd. of Comm‘rs, 371 N.C. 855, 856 (2018)). After reiterating its earlier determination that charter schools were public schools pursuant to
¶ 20 Next, the Court of Appeals rejected Mr. Hall‘s contention that the trial court had erred by refusing to dismiss the False
II. Analysis
A. Standard of Review
¶ 21 “North Carolina has a well-established common law doctrine of sovereign immunity which prevents a claim for relief against the State except where the State has consented or waived its immunity.” Harwood v. Johnson, 326 N.C. 231, 238 (1990) (quoting Electric Co. v. Turner, 275 N.C. 493 (1969)). Sovereign immunity applies to “state agenc[ies] created for the performance of essentially governmental functions” which are generally shielded from civil liability in the absence of a statutorily-based waiver. Id.
¶ 22 The doctrine of governmental immunity, which resembles that of sovereign immunity, renders local governments such as counties and municipal corporations “immune from suit for the negligence of [their] employees in the exercise of governmental functions absent waiver of immunity.” Meyer v. Walls, 347 N.C. 97, 104 (1997) (quoting State ex rel. Hayes v. Billings, 240 N.C. 78, 80 (1954)). Although “[t]he State‘s sovereign immunity applies to both its governmental and proprietary functions,” the “more limited governmental immunity covers only the acts of a municipality or a municipal corporation committed pursuant to its governmental functions.” Evans v. Hous. Auth. of City of Raleigh, 359 N.C. 50, 53 (2004) (quoting Guthrie v. N.C. State Ports Auth., 307 N.C. 522, 533 (1983)). In other words, while governmental immunity protects units of local government from suit for “acts committed in [their] governmental capacity,” if the entity in question “undertakes functions beyond its governmental and police powers and engages in business in order to render a public service for the benefit of the community for a profit, it becomes subject to liability for contract and in tort as in case of private corporations.” Id. (quoting Town of Grimesland v. City of Washington, 234 N.C. 117, 123 (1951)) (cleaned up). As a result, while a unit of local government may be entitled to governmental immunity “in tort and contract for acts undertaken by its agents and employees in the exercise of its governmental functions,” such entities do not enjoy the full protections of sovereign immunity which the State and its agencies enjoy. Id. A state agency may assert sovereign immunity, or a municipal corporation may assert governmental immunity, as a complete defense to a civil lawsuit at the pleading stage. See Guthrie v. N.C. State Ports Auth., 307 N.C. 522, 527 (1983).
¶ 23 As a general proposition, interlocutory orders are not immediately appealable unless the order in question affects a substantial right.
¶ 24 Similarly, this Court reviews issues involving the construction of statutes using a de novo standard of review. Wilkie v. City of Boiling Spring Lakes, 370 N.C. 540, 547 (2018) (quoting In re Ernst & Young, LLP, 363 N.C. 612, 616 (2009)). “It is well settled that where the language of a statute is clear and unambiguous, there is no room for judicial construction and the courts must construe the statute using its plain meaning.” In re Est. of Lunsford, 359 N.C. 382, 391–92 (2005) (quoting Burgess v. Your House of Raleigh, Inc., 326 N.C. 205, 209 (1990)) (cleaned up).
¶ 25 Finally, in determining whether a trial court correctly decided whether to dismiss a complaint for failure to state a claim for relief pursuant to
B. Liability of Kinston Charter Academy
1. Sovereign Immunity
¶ 26 In seeking to persuade us to reverse the Court of Appeals’ decision in this case, the State begins by contending that the Court of Appeals erred by deciding that charter schools were entitled to the protections afforded by the doctrine of sovereign immunity. In the State‘s view, the Charter School Act, which is contained in Chapter 115C of the North Carolina General Statutes, demonstrates that charter schools are private, rather than public, institutions. In addition, the State cites our decision in Turner v. Gastonia City Board of Education, 250 N.C. 456, 463 (1959), for the proposition that local school boards in North Carolina are not considered “departments, institutions, [or] agencies of the State” and that local school boards operate with a significant degree of autonomy. Furthermore, the State argues that Turner distinguishes between the State Board of Education, which is an agency of the State, and local school boards, which serve “purely local functions.” Id. According to the State, since charter schools enjoy an even greater level of autonomy from State control than is the case with local school boards and are “purely local” in character,
charter schools are not entitled to the protections of the doctrine of sovereign immunity.
¶ 27 The State also contends that any judgment entered against the Academy in this case would not be collectable from the State given that the State is not liable for
¶ 28 Similarly, the State contends that relevant provisions of the Charter School Act demonstrate that the General Assembly did not intend for charter schools to be categorized as state agencies, with this contention resting upon the statutory requirement that charter schools “operate independently of existing schools” and that charter schools be “operated by [ ] private nonprofit corporation[s].”
¶ 29 Finally, the State contends that the Academy is not entitled to rely upon a defense of sovereign immunity in response to an action brought by the State given that the immunity of a lesser sovereign, such as a county, local school board, or charter school, must yield to the greater sovereignty of the State. See State Highway Comm‘n. v. Greensboro City Bd. of Educ., 265 N.C. 35, 39–40 (1965) (holding that the State Highway Commission, which was a “State agency or instrumentality,” was entitled to use the State‘s power of eminent domain to take property belonging to a local school board); see also N.C. DOT v. Cnty. of Durham, 181 N.C. App. 346, 349 (2007) (reasoning that, “[b]ecause the counties derive their sovereign immunity and all other powers and authority from the State” “the counties’ sovereign immunity cannot be superior to that of the State“). As a result, for all of these reasons, the State urges us to reverse the Court of Appeals’ determination that the Academy was entitled to rely upon a defense of sovereign immunity in response to the claim that the State had asserted against it pursuant to the False Claims Act.
¶ 30 In seeking to persuade us to affirm the Court of Appeals’ decision with respect to the sovereign immunity issue, the Academy claims that it is a part of the North Carolina school system rather than a unit of local government. In addition, the Academy emphasizes the provisions of the Charter School Act which “show[ ] that [charter schools] are public schools” and which “discuss how a charter school may waive sovereign immunity“; the fact that the North Carolina Constitution “requires [that] the State provide education and [that] charter schools help fulfill this mandate“; and the fact that “charter schools function as part of the State” and are managed as such. The Academy argues that the existence of
¶ 31 The Academy argues that the relevant authorities provide no support for the State‘s claim that “lesser sovereigns” are not entitled to assert a defense of sovereign immunity in opposition to claims advanced by the State given that both the State and its agencies enjoy “absolute and unqualified” sovereign immunity, citing Guthrie, 307 N.C. at 534–35. As additional support for this contention, the Academy directs our attention to N.C. Insurance Guaranty Ass‘n v. Board of Trustees of Guilford Technical Community College, 364 N.C. 102, 112 (2010), in which this Court held that the General Assembly had clearly waived sovereign immunity by making the Workers’ Compensation Act applicable to claims brought by governmental employees. According to the Academy, the Court in N. Carolina Ins. Guar. Ass‘n “necessarily found that sovereign immunity was otherwise available as a defense that could be waived” by the community college.
¶ 32 In assessing whether charter schools are state agencies entitled to assert a defense of sovereign immunity, we begin by examining the relevant provisions of the Charter School Act. In authorizing the creation of such schools, the General Assembly stated that they were intended to “provide opportunities for teachers, parents, pupils, and community members to establish and maintain schools that operate independently of existing schools.”
(a) A charter school that is approved by the State shall be a public school within the local school administrative unit in which it is located. All charter schools shall be accountable to the State Board for ensuring compliance with applicable laws and the provisions of their charters.
(b) A charter school shall be operated by a private nonprofit corporation that shall have received federal tax-exempt status no later than 24 months following final approval of the application. The board of directors of the charter schools shall adopt a conflict of interest and anti-nepotism policy that includes, at a minimum, the following:
(1) The requirements of Chapter 55A of the General Statutes related to conflicts of interest.
. . .
(d) The board of directors of the charter school shall decide matters related to the operation of the school, including budgeting, curriculum, and operating procedures.
¶ 33 As this Court has previously stated, the General Assembly‘s decision to explicitly categorize an entity as an agency of the State “carries great weight.” Guthrie, 307 N.C. at 528. The General Assembly has not, for whatever reason, chosen to categorize charter schools as state agencies or instrumentalities and has, instead, classified charter schools as entities that “operate independently of existing schools” that are run by “private non-profit corporations.” As a result, given that statutory language must be construed in accordance with its clear and unambiguous meaning, we hold that the General Assembly did not intend for charter schools to be deemed to be agencies or instrumentalities of the State.
¶ 34 Although the Academy and the Court of Appeals place considerable reliance upon the 1997 amendment to the Charter School Act addressing the extent to which charter schools may be held to be civilly liable in the course of concluding that charter schools are entitled to assert a defense of sovereign immunity, we do not find that argument persuasive. According to the relevant statutory language:
(a) The board of directors of a charter school may sue and be sued. The State Board of Education shall adopt rules to establish reasonable amounts and types of liability insurance that the board of directors shall be required by the charter to obtain. The board of directors shall obtain at least the amount of and types of insurance required by these rules to be included in the charter. Any sovereign immunity of the charter school, of the organization that operates the charter school, or its members, officers, or directors, or of the employees of the charter school or the organization that operates the charter school, is waived to the extent of indemnification by insurance.
(b) No civil liability shall attach to the State Board of Education, the Superintendent of Public Instruction, or to any of their members or employees, individually or collectively, for any acts or omissions of the charter school.
¶ 35 In addition, we agree with the State‘s contention that charter schools are local rather than statewide in character and that such locally oriented entities are typically protected by governmental, rather than sovereign, immunity. In Turner v. Gastonia City Board of Education, 250 N.C. 456, this Court examined the viability of a claim asserted by the plaintiff stemming from an injury that allegedly resulted from the negligent operation of a lawnmower by an employee of the Gastonia City Board of Education, with the question before the Court in that case being whether the plaintiff was entitled to recover compensatory damages from the local board of education, the State Board of Education, or both, and whether any such claim had to be heard before the Industrial Commission, which has exclusive jurisdiction over claims brought against the State pursuant to the State Tort Claims Act. Id. At 460. In distinguishing between a local
[t]he General Assembly created the State Board of Education and fixed its duties. It is an agency of the State with statewide application. The General Assembly likewise created the county and city boards and fixed their duties which are altogether local. The Tort Claims Act, applicable to the State Board of Education and to the State departments and agencies, does not include local units such as county and city boards of education.
Id. at 462–63. At that point, the Court addressed the issue of whether an employee of a local school board was an employee of the State, so that the State could be held liable for negligent conduct on the part of such an employee under the State Tort Claims Act. Id. at 463. In answering this question in the negative, this Court stated that:
[i]n no sense may we consider the Gastonia City Board of Education in the same category as the State Board of Education . . . . The Gastonia City Board of Education does not meet the classification. County and city boards of education serve very important, though purely local functions. The State contributes to the school fund, but the local boards select and hire the teachers, other employees and operating personnel. The local boards run the schools.
Id. As a result, in determining that local school boards had a “purely local” character and were not agencies or instrumentalities of the State, this Court held that the plaintiff was not entitled to maintain a claim against either defendant given that local school boards were protected by the doctrine of governmental immunity and an employee of a local school board was not an employee of the State.
¶ 36 This Court‘s conclusion in Turner that local school boards were not state agencies or instrumentalities was echoed by the decision of the United States Court of Appeals for the Fourth Circuit in Cash v. Granville County Board of Education, 242 F.3d 219, 221 (4th Cir. 2001). In Cash, the Fourth Circuit held that, since the Granville County Board of Education was “more like a county than an arm of the State,” id. at 221, it was not entitled to rely upon the doctrine of sovereign immunity, reasoning that, even though state agencies and state instrumentalities are protected by the State‘s sovereign immunity for Eleventh Amendment purposes, any such immunity “does not extend to counties and similar municipal corporations . . . even if the counties and municipalities exercise a slice of State power,” id. at 222 (cleaned up). As a result, both this Court and the Fourth Circuit have recognized that local school boards are not entitled to claim sovereign, as compared to governmental, immunity.
¶ 37 As we understand the applicable statutory provisions, the board of directors of a charter school serves much the same function as a local school board, in that both entities are responsible for the immediate supervision of the schools subject to their control. Admittedly, while local school boards control the school system in a particular geographic area, charter schools are not subject to any such specific statutorily grounded geographic constraint. On the other hand, most charter schools are subject to a de facto geographic limitation in that, as a practical matter, they can only serve students that are able to travel to and from the school on a daily basis.3 The State, on the other hand, has responsibility for establishing the overall policies, rules, and regulations applicable to both local school boards and charter school boards of directors. In other words, both local school boards and charter school boards of directors have much more hands-on responsibility for the operation of specific educational institutions than either the Department of Public Instruction or the State Board of Education. Thus, given the similarities between the functions performed by a local school board and the board of directors of a charter school and given that a local school board is entitled to governmental, rather than sovereign, immunity, we conclude that the analogy between these two
governmental, rather than sovereign, immunity.4 As a result, for all of these reasons, we conclude that the Court of Appeals erred by holding that charter schools are entitled to assert a defense of sovereign immunity in opposition to the False Claims Act claim that the State brought against the Academy.
2. Whether the Academy is a “person” under the False Claims Act
¶ 38 In seeking to persuade us that the Court of Appeals erred by holding that the Academy was not a “person” for purposes of the False Claims Act, the State begins by noting that, while the False Claims Act does not contain a specific definition of a “person,” a generally applicable statute provides that “[t]he word ‘person’ shall extend and be applied to bodies politic and corporate, as well as to individuals, unless the context clearly shows to the contrary.”
¶ 39 In addition, the State contends that, when the False Claims Act is read consistently with the federal False Claims Act as required by
¶ 40 The State contends that, in this case, there is no need for the use of “arm-of-the-state” analysis given that the use of such a method is not necessary to “determine the scope of sovereign immunity in state court,” with this issue being, “instead[,] controlled by state law.” In the alternative, however, the State contends that, even if “arm-of-the-state” analysis should be used in instances like this one, the Academy would still be a “person” capable of being sued under the False Claims Act given that the State is not liable for civil judgments entered against charter schools, charter schools operate with significant autonomy from the State, the operation of a charter school implicates purely local concerns, and the relevant statutory
¶ 41 In seeking to have us affirm the Court of Appeals’ determination that charter schools are not “persons” subject to liability pursuant to the False Claims Act, the Academy begins by suggesting that, as a state agency, it is protected by the doctrine of sovereign immunity. In addition, the Academy asserts that a charter school is not a “person” for purposes of the False Claims Act in light of the failure of the False Claims Act to define “person” and the fact that the False Claims Act gives no indication that it was intended to authorize the filing of actions against state agencies, public schools, or charter schools. In the same vein, the Academy contends that treating charter schools as “persons” for purposes of the False Claims Act would conflict with the Act‘s “spirit, intent, or purpose” given that the availability of qui tam actions, in which between fifteen and twenty-five percent of the resulting recovery would be paid to a private citizen who initiated such an action, would have the effect of “taking funds designated for educational purposes and giving them to a private citizen.” According to the Academy, the Court of Appeals correctly utilized “arm-of-the-state” analysis in determining that charter schools were not subject to liability under the False Claims Act given that the False Claims Act is supposed to be construed consistently with the equivalent federal statutory provisions.
¶ 42 We begin our analysis of this issue by noting that the rules for statutory construction delineated in
¶ 43 We see no reason why utilizing a definition of “person” consistent with that set out in
¶ 44 In addition, none of the arguments that have been advanced by the Academy in opposition to the use of the definition of a “person” set out in
3. Pleading Requirements under the False Claims Act
¶ 45 In its conditional petition for discretionary review, the Academy sought and obtained authorization to address an additional issue that the Court of Appeals did not reach relating to the sufficiency of the State‘s complaint in stating a claim under the False Claims Act. According to the Academy, the State‘s complaint did not satisfy the requirements for pleading a False Claims Act claim given the State‘s failure to plead its claim with sufficient particularity or to plead the existence of an objective falsehood.
¶ 46 According to the Academy, the average daily membership estimate of 366 students that it reported for the 2013–14 school year was nothing more than a “projection” that the Academy was statutorily authorized to make rather than an objective falsehood. In support of this assertion, the Academy directs our attention to the decision by the United States Court of Appeals for the Fifth Circuit that “[a] prediction, or statement about the future, is essentially an expression of opinion” that cannot be deemed to be objectively false. Presidio Enters., Inc. v. Warner Bros. Distrib. Corp., 784 F.2d 674, 680 (5th Cir. 1986). According to the Academy, “the alleged statement was legally authorized by statute and cannot be a false statement” given that the number of students specified in the allegedly false estimate “was within the twenty percent increase authorized” by
¶ 47 Finally, the Academy argues that the fact that defendants made efforts to increase student enrollment at the Academy and to keep the school viable suffices to “defeat” the State‘s “allegations that the claim made for 366 students was knowingly false at the time it was made” in light of the board‘s hope that the school would remain open. More specifically, the Academy claims that it “engage[d] in an advertising campaign, repair[ed] the HVAC, [bought] buses, and [sought] refinancing” in an attempt to remain open. In addition, the Academy argues that the State was fully aware of the Academy‘s financial situation at the time that the allegedly false estimate was made and contends that, “[i]f the government knows and approves of the particulars of a claim for payment before that claim is presented, the presenter cannot be said to have knowingly presented a fraudulent or false claim.” United States ex rel. Laird v. Lockheed Martin Eng‘g & Sci. Servs. Co., 491 F.3d 254, 263 (5th Cir. 2007).
¶ 48 In response to the Academy‘s contentions, the State asserts that it satisfied the requirements for pleading a fraud-based claim set out in
¶ 49 According to the False Claims Act, any “person” who “[k]nowingly presents or causes to be presented a false or fraudulent claim for payment or approval” or who “[k]nowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” shall be “liable to the State for three times the amount of damages that the State sustains because of the act of that person.”
¶ 50 In its complaint, the State alleged that, during a conversation with a Department official that occurred on 26 April 2013, Mr. Hall had “increased the school‘s projected enrollment for the next year to 366 students,” with this number representing “an increase of 56 students from the 310 estimated enrollment that [the Academy] submitted with a draft budget three months earlier” and that the making of this statement resulted in a violation of the False Claims Act because it constituted
a. making a claim for state educational funds based on a projected enrollment of 366 students — a number that defendants knew or should have known they would not achieve;
b. making a claim for state educational funds for the 2013–14 school year when defendants knew or should have known that [the Academy] would not survive the year;
c. making a false claim for state funds to be used for a non-profit educational purpose that were instead used to benefit defendants.
As a result, the State clearly satisfied the requirements of
¶ 51 In addition, we reject the Academy‘s contention that the State failed to plead the making of an “objective falsehood” and that the State was on notice that the enrollment estimate upon which its False Claims Act claim relied might be lacking in substantive support. Although the Academy vigorously argues that a projected enrollment figure cannot be the sort of objective falsehood necessary to support liability under the False Claims Act and that the State should have known the nature and extent of the Academy‘s financial situation at the time that the Academy submitted the enrollment estimate upon which the State‘s False Claims Act relies, we do not find either of these arguments to be persuasive.
¶ 52 As we read the applicable statutory provision, the estimate of a charter school‘s student enrollment, which determines how much money the charter school is entitled to receive from the State, must be a genuine, good-faith estimate of the number of students that the charter school anticipates serving rather than an arbitrary figure that the charter school is entitled to present to the Department regardless of its accuracy. A contrary interpretation of the relevant statutory language would authorize charter schools to requisition ever-greater amounts of money from the State regardless of their actual need for the amount of money in question. On the basis of similar logic, the
¶ 53 Similarly, while the State certainly knew that the Academy had long-standing financial difficulties and that the Academy‘s enrollment numbers had been declining, the State‘s complaint does not establish that the State had full knowledge of the Academy‘s situation at the time that Mr. Hall submitted an allegedly inflated student enrollment estimate to the Department. In fact, the complaint alleges that the Academy never informed the Department of the two short-term loans that the Academy took out in the late spring and early summer of 2013. Assuming, without in any way deciding, that knowledge of the falsity of the relevant representation might be sufficient to prevent a finding of liability for the making of that statement under the False Claims Act, any such argument would lack sufficient support given the record that is before us in this case.
¶ 54 The potential harm worked by the Academy‘s interpretation of the relevant statutory provisions is demonstrated by the allegations in the State‘s complaint, in which the Academy allegedly estimated that it would serve a far greater student population than it had any basis for believing would actually materialize, received more funds than it could actually use for the purpose of educating students in the upcoming academic year, and used the funds to make questionable payments that had the effect of benefitting school officials and their relatives. Had the Academy refrained from making such an unsupported estimate of student enrollment, the funds that it obtained and used to pay expenses associated with operations during earlier periods of time would have been available for the education of North Carolina students rather than used for purposes that benefitted the Academy and school officials. As a result, for all of these reasons, we hold that the trial court did not err by denying the Academy‘s motion to dismiss the State‘s complaint for failure to state a claim under the False Claims Act.
C. Liability of Mr. Hall
¶ 55 In seeking to persuade us to reverse the Court of Appeals’ determination that the record failed to contain sufficient information to establish that he was entitled to invoke the protections of public official immunity, Mr. Hall begins by asserting that he is a public official because his position as “CEO/Principal” of the Academy was “created by delegation from the Constitution and Statutes as a matter of law,” including
¶ 56 In response, the State contends that, in determining whether a person is entitled to public official immunity, reviewing courts must consider a number of factors, including “(1) whether the position was created by the constitution or statutes, and (2) whether the official exercises a portion of the sovereign power.” See Isenhour v. Hutto, 350 N.C. 601, 610 (1999). In view of the fact that the duties of the Chief Executive Officer or principal of a charter school are not outlined in any statutory or constitutional provision, the State asserts that Mr. Hall is not a public officer entitled to the protection of public official immunity. Finally, the State asserts that, even if Mr. Hall was otherwise entitled to claim the benefits of the public official immunity doctrine, the knowing making of false statements is not the sort of activity for which an award of immunity would be appropriate.
III. Conclusion
¶ 58 Thus, for the reasons set forth above, we hold that the Court of Appeals erred by concluding that charter schools were entitled to assert a defense of sovereign immunity and were not “persons” for purposes of the False Claims Act. In addition, we hold that the State adequately stated a claim for relief against the Academy and Mr. Hall under the False Claims Act. Finally, we hold that the Court of Appeals correctly held that Mr. Hall was not, at least on the basis of the present record, entitled to obtain the dismissal of the State‘s complaint on the basis of public official immunity and that Mr. Hall‘s other challenges to the trial court‘s order lack merit. As a result, the Court of Appeals’ decision is affirmed, in part, and reversed, in part, and this case is remanded to the Court of Appeals for further remand to Superior Court, Wake County, for further proceedings not inconsistent with this opinion.
AFFIRMED, IN PART; REVERSED, IN PART; AND REMANDED.
Justice BERGER did not participate in the consideration or decision of this case.