Arnold Agency v. W. VA. LOTTERY COM'N

• Decision Date: 13 December 1999
• Docket Number: No. 25405.,25405.
• Citation: 206 W.Va. 583,526 S.E.2d 814
• Court: West Virginia Supreme Court
• Parties: The ARNOLD AGENCY, Plaintiff Below, Appellant, v. WEST VIRGINIA LOTTERY COMMISSION, Defendant Below, Appellee.

526 S.E.2d 814

206 W.Va. 583

The ARNOLD AGENCY, Plaintiff Below, Appellant, v. WEST VIRGINIA LOTTERY COMMISSION, Defendant Below, Appellee.

No. 25405.

Supreme Court of Appeals of West Virginia.

Submitted March 9, 1999.

Decided December 13, 1999.

James B. Lees, Jr., Esq., Sharon F. Iskra, Esq., Hunt & Lees, Charleston, West Virginia, Attorneys for Appellant.

David P. Cleek, Esq., Marilyn T. McClure, Esq., Shuman, Annand, Bailey, Wyant & Earles, Charleston, West Virginia, Attorneys for Appellee. McGRAW, Justice:

The Arnold Agency ("Arnold"), plaintiff below, appeals the circuit court's adverse grant of summary judgment with respect to its fraud and breach of contract claims against defendant/appellee West Virginia Lottery Commission (the "Lottery Commission" or "Commission"). Arnold's claims are predicated upon the Lottery Commission's alleged failure to award it a $2.8 million advertising and public relations contract.

Arnold contends on appeal that the circuit court erred in (1) determining that the Lottery Commission is an agency of the State and cloaked in sovereign immunity under Article VI, § 35 of the West Virginia Constitution; (2) dismissing its fraud count; (3) permitting the Lottery Commission to assert the absence of insurance coverage after the deadline for filing dispositive motions; (4) concluding that the State's liability insurance policy does not provide coverage with respect to Arnold's breach of contract claim; and (5) granting a protective order prohibiting Arnold from deposing then-Governor Gaston Caperton. While we conclude that the Lottery Commission is immune from suit and that Arnold's fraud claim is therefore barred, we determine that the State's liability insurance potentially provides coverage for the breach of contract claim, thus permitting the present case to proceed to trial.

I. FACTUAL AND PROCEDURAL BACKGROUND

Arnold filed a two-count complaint on November 30, 1993, alleging breach of contract and fraud in connection with the bidding of the Lottery Commission's fiscal year 1991-92 advertising contract.¹ It is uncontested that the advertising contract was subject to competitive bidding, and that an evaluation committee was formed within the Commission for the purpose of evaluating competing bids. Arnold alleges that employees of the Commission represented that the evaluation committee would assign numerical scores to each bid, and that the contract would be awarded to the advertising agency receiving the highest score. Arnold was one of six agencies that bid on the contract in April 1991, and claims that it received the highest numerical score given by the evaluation committee. However, the contract in question was subsequently awarded to one of Arnold's competitors, Fahlgren Martin, Inc. ("Fahlgren Martin"). Count one of Arnold's complaint asserts that as a consequence of these facts, the Lottery Commission breached an agreement pertaining to the bidding of the contract. Among other relief, Arnold seeks expectancy damages in the form of its lost profits.

In the second count of its complaint, Arnold further alleges that the Lottery Commission fraudulently induced it to compete in the bidding process. It claims that the Commission's director, Elton "Butch" Bryan ("Bryan"), orchestrated a fraudulent scheme to ensure that Fahlgren Martin would be awarded the advertising contract notwithstanding the results of the formal evaluation process.² Specifically, Arnold alleges that upon Bryan's instructions, the Commission's deputy director for marketing, Tamara Gunnoe, falsely informed the members of the Commission that Fahlgren Martin had been chosen by the evaluation committee to receive the contract. Also, it claims that both Bryan and Gunnoe purposely misled the State's purchasing department by making false representations and providing a falsified memorandum regarding the evaluation committee's employment of a numerical scoring system in purportedly selecting Fahlgren Martin for the contract.

After Arnold filed its initial complaint, the Lottery Commission moved to dismiss on the ground that the circuit court lacked subject matter jurisdiction based upon the Commission's constitutional immunity. Arnold had previously submitted interrogatories to the Commission, which among other things requested information regarding whether there was insurance coverage for the conduct alleged in the complaint. After having received no response to these interrogatories, Arnold filed a motion to compel discovery on February 18, 1994. Shortly thereafter, Arnold also amended its complaint to seek damages under and up to the limits of the State's liability insurance coverage. Both the motion to dismiss and the motion to compel were the subjects of a March 24, 1994 hearing, after which the circuit court stayed all pending discovery pending a decision on the Commission's dismissal motion.

Another hearing on the Commission's motion to dismiss was conducted on September 22, 1994.³ The circuit court subsequently issued an order on October 27, 1994, ruling that while the Lottery Commission was a state agency and thus protected by sovereign immunity, Arnold could nevertheless proceed with its suit under Pittsburgh Elevator Co. v. West Virginia Bd. of Regents, 172 W.Va. 743, 310 S.E.2d 675 (1983), to the extent that the State's insurance policy provides coverage for the conduct alleged. The circuit court also ordered that all outstanding discovery be answered within thirty days. While depositions and other discovery were subsequently taken,⁴ the Commission apparently failed to answer Arnold's interrogatories concerning the existence of insurance coverage.

The Lottery Commission subsequently moved for summary judgment on October 16, 1995, asserting that (1) it was not liable for the fraudulent, illegal or unauthorized acts of its officers, agents, or employees; and (2) that Arnold's breach of contract claim was barred by constitutional immunity. This motion was later supplemented to include an assertion that the statute of frauds bars the present action. Following a hearing on August 5, 1996, the circuit court issued an order on August 21, 1996, dismissing Arnold's fraud claim on the basis that "fraud may not be maintained against a state governmental agency for the acts of its agents as estoppel for such acts does not apply to the State." While the court refused to dismiss Arnold's breach of contract claim—rejecting the Commission's statute of frauds argument—it expressly noted that "the issue of whether insurance coverage is present is not properly before this court and therefore was not considered in the rulings rendered herein...." Consequently, the crucial issue of whether the circuit court had subject matter jurisdiction over the breach of contract claims was yet unresolved at this time.

Trial was set for November 18, 1996. Before this date, however, the Lottery Commission presented another motion for summary judgment on October 29, 1996, this time contending that the State's insurance policy does not provide coverage for Arnold's breach of contract claim. The Commission also at this point proffered a copy of the applicable policy. On the date of trial, counsel for the Lottery Commission reiterated its position on the issue of insurance coverage, and, following argument on this issue, the circuit court granted the Commission's motion for summary judgment. The circuit court subsequently issued an order dismissing Arnold's suit on March 11, 1998, ruling that "no insurance coverage exists under the applicable insurance policy for the acts complained of... by the plaintiff throughout these proceedings...."⁵ The court later entered a more comprehensive "Final Order" on May 6, 1998, which supplied a detailed rationale for the court's conclusion regarding the absence of insurance coverage.

II. DISCUSSION

A. Status of the Commission as an Arm of the State

Article VI, § 35 of the West Virginia Constitution peremptorily requires that "[t]he State of West Virginia shall never be made defendant in any court of law or equity...." We have consistently held that this "grant of immunity is absolute and ... cannot be waived by the legislature or any other instrumentality of the State." Mellon-Stuart Co. v. Hall, 178 W.Va. 291, 296, 359 S.E.2d 124, 129 (1987); see also Clark v. Dunn, 195 W.Va. 272, 465 S.E.2d 374, 378 (1995)

. "[T]he policy which underlies sovereign immunity is to prevent the diversion of State monies from legislatively appropriated purposes. Thus, where monetary relief is sought against the State treasury for which a proper legislative appropriation has not been made, sovereign immunity raises a bar to suit." Mellon-Stuart, 178 W.Va. at 296,

359 S.E.2d at 129 (citations and footnote omitted).

In this case, Arnold argues that the Lottery Commission is not a state agency, and therefore may not seek refuge under the cloak of constitutional immunity. The primary justification for this position is that the Commission is financially self-sustaining, and is engage in a proprietary activity intended solely to generate revenue for the State.

As a practical consequence of the expansion of government and the proliferation of bodies charged with conducting the State's business, we have recognized that "proceedings against boards and commissions, created by the Legislature, as agencies of the State, are suits against the state within the meaning of Article VI, Section 35, of the Constitution of West Virginia, even though the State is not named as a party in such proceedings." Hamill v. Koontz, 134 W.Va. 439, 443, 59 S.E.2d 879, 882 (1950); see also Hesse v. State Soil Conservation Committee, 153 W.Va. 111, 115, 168 S.E.2d 293, 295 (1969)

(constitutional immunity "relates not only to the State of West Virginia but extends to an agency of the state to which it has delegated performance of certain of its duties").

However, not every entity created by the Legislature is entitled to the...