State v. Kinston Charter Acad., Carolina Non-Profit Corp.

• Decision Date: 17 December 2021
• Docket Number: No. 16PA20,16PA20
• Citation: 866 S.E.2d 647,379 N.C. 560
• Parties: 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
• Court: North Carolina Supreme Court

379 N.C. 560

866 S.E.2d 647

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

Supreme Court of North Carolina.

Filed December 17, 2021

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, Raleigh, 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, Apex, for amicus Pinnacle Classical Academy.

Womble, Bond Dickinson (US) LLP, Charlotte, by Matthew F. Tilley, for amicus N.C. Coalition for Charter Schools, amicus curiae.

ERVIN, Justice

¶ 1 The issues before us in this case involve the extent to which the non-profit corporations that operate charter schools are (1) agencies of the State entitled to sovereign immunity and (2) subject to claims brought pursuant to the North Carolina False Claims Act; whether (3) the State adequately pled claims under the False Claims Act against the non-profit corporation and a corporate officer; and (4) whether a corporate officer of such a non-profit corporation is entitled to public official immunity. After a careful review of the relevant legal authorities in light of the facts disclosed by the record, we conclude that North Carolina charter schools are not state agencies and are, for that reason, precluded from asserting a defense of sovereign immunity; that North Carolina charter schools are "persons" as defined in N.C.G.S. § 1-607 (2019) ; that the State properly pled claims against the Academy and Mr. Hall for purposes of the False Claims Act; and that the trial court did not err by denying Mr. Hall's request that the State's complaint be dismissed on the basis of public official immunity. As a result, the decision of the Court of Appeals in this case is affirmed, in part, and reversed, in part, with this case being remanded to the Court of Appeals for further remand to the Superior Court, Wake County, for further proceedings not inconsistent with this opinion.

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 June 2013, the Academy obtained a second $100,000 short-term loan that also included a $15,000 origination fee to be deducted from the loan amount and a separate $15,000 broker's fee. Having guaranteed repayment of both loans, Mr. Hall was personally liable to the lenders in connection with each of these obligations.

¶ 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. McDonald-Hall for additional time within which the Academy would be allowed to implement a corrective action plan, the Academy relinquished its charter to the State. Two days later, on the ninth day of the academic year, the Academy closed.

¶ 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...