McAdoo v. University of North Carolina at Chapel Hill
Docket: 1:14-cv-935
Court: District Court, M.D. North Carolina; March 29, 2017; Federal District Court
Michael McAdoo and Kenya McBee, former student-athletes at the University of North Carolina at Chapel Hill, filed a putative class action lawsuit alleging multiple state law claims against UNC-Chapel Hill. The university sought to dismiss the case, citing lack of subject matter jurisdiction and Eleventh Amendment immunity, among other defenses. In response, the plaintiffs requested jurisdictional discovery, which the court allowed, leading to supplemental briefing on jurisdiction.
The court ultimately granted UNC-Chapel Hill's motion to dismiss due to a lack of subject matter jurisdiction. The plaintiffs' amended complaint outlined systemic educational failures at UNC-Chapel Hill from 1993 to 2011, claiming students were placed in a 'shadow curriculum' of non-educational courses and alleging six state law claims: breach of contract, breach of fiduciary duty, unfair and deceptive trade practices, fraud in the inducement, constructive fraud, and fraudulent concealment.
The court emphasized that subject matter jurisdiction is a threshold issue, necessary to determine before addressing the merits of the claims. The plaintiffs carry the burden of establishing this jurisdiction, which in this case hinges on diversity of citizenship, requiring that the parties are from different states and that the amount in controversy exceeds $75,000. Since the plaintiffs only asserted state law claims, the court's lack of subject matter jurisdiction necessitated the dismissal of the complaint entirely.
UNC-Chapel Hill contends that it does not qualify as a “citizen” of any state, which affects the applicability of diversity jurisdiction in this case. This argument is rooted in the principle that states and their public entities, including universities, are not considered “citizens” for jurisdictional purposes, thereby making it impossible to satisfy diversity requirements if any party is not a citizen. The central jurisdictional question is whether UNC-Chapel Hill is regarded as an arm or alter ego of North Carolina. Although the Fourth Circuit has not definitively classified UNC as such, it has treated the university in this manner, supported by district court rulings that have either explicitly recognized or assumed this status.
In the case of Huang v. Board of Governors, the Fourth Circuit ruled that UNC could not be sued for monetary damages due to the State's Eleventh Amendment immunity, implying UNC’s status as an arm of the State. Additionally, the district court case Roberson v. Dale determined that UNC and UNC-Chapel Hill are alter egos of North Carolina, thus not citizens under diversity jurisdiction. Similar conclusions have been reached in other district court cases, reinforcing the notion that UNC and its constituent universities are treated as arms or alter egos of the State. This is consistent with numerous cases across various jurisdictions that uphold the classification of state universities as arms of the state, highlighting a near-universal judicial interpretation in such matters.
The determination of whether the University of North Carolina (UNC) is an arm or alter ego of the State hinges on various legal precedents and factors, particularly as outlined in Ram Ditta v. Maryland National Capital Park and Planning Commission. Prior cases are not controlling, and district court decisions are not binding, as emphasized by Gasperini v. Ctr. for Humanities, Inc. The Fourth Circuit's assumption of UNC's entitlement to Eleventh Amendment immunity, as seen in Huang, does not resolve the issue since it did not address the arm or alter ego status directly. Legal precedent requires that unstated assumptions on non-litigated issues are not binding for future cases, necessitating a fresh evaluation of UNC’s status.
Despite the general consensus that state universities are usually considered arms of the state, the Fourth Circuit mandates a case-by-case analysis based on unique characteristics. In this case, plaintiffs argue for subject matter jurisdiction based on the Department of Athletics at UNC-Chapel Hill, asserting its financial independence from the state. However, they fail to provide legal authority supporting their narrow focus on the Athletics Department, and UNC-Chapel Hill contends that the plaintiffs improperly connect their arm-of-the-state analysis to the relief sought rather than the entity's nature. The Court agrees with UNC-Chapel Hill, stating that the claims are primarily related to irregularities in academic classes rather than athletics, indicating that the broader context of UNC-Chapel Hill must be considered in assessing its arm-of-the-state status.
Plaintiffs claim that UNC-Chapel Hill is failing to provide the promised education, labeling the case as potentially “the largest academic fraud in U.S. history.” Their allegations relate to UNC’s fundamental duty to deliver quality educational services, including athletics, to North Carolina residents. Legal precedents affirm that education is a core governmental function, with athletics being a vital component of higher education. Courts have ruled against using a single department's funding status to assess Eleventh Amendment immunity for the university as a whole. In prior cases, arguments that certain university departments, such as dining services or medical centers, should be treated as independent were rejected, emphasizing that the university remains an integrated entity under state control. The Fourth Circuit has established that the UNC system functions as a single agency, not allowing for the Department of Athletics to be treated as separate. Therefore, the Court will evaluate the arm-of-the-state analysis based on the entire UNC system rather than focusing solely on the Department of Athletics, rejecting the Plaintiffs’ arguments to the contrary.
To determine if a public entity qualifies as an arm or alter ego of the state, impacting its status as a “citizen” under diversity jurisdiction, the Fourth Circuit employs a four-factor test: 1) whether judgments against the entity will be paid by the state, 2) the entity's degree of autonomy, including aspects such as appointment of directors, funding, and state veto power, 3) the entity's involvement in state versus non-state concerns, and 4) the treatment of the entity under state law, reflecting its closeness to the state. Although these factors are critical, courts are not limited to them, and the analysis requires detailed examination of the entity's structure and operations.
The first factor, concerning the impact of judgments on the state treasury, is typically deemed the most significant in the analysis. However, its importance may vary in diversity cases compared to Eleventh Amendment immunity cases. The court notes that while no state statute explicitly claims liability for judgments against UNC, the absence of any provision exempting the state from UNC's debts suggests functional liability. Thus, the analysis will focus on the practical implications of a judgment against UNC on the state's finances, indicating that a state may be functionally liable for an agency's debts if the agency's survival depends on state treasury resources.
Courts assess the impact of a judgment on state finances by examining the funding and revenue sources of state entities. A state is deemed functionally liable for judgments if the funds to satisfy them effectively belong to the state. The North Carolina Constitution mandates the General Assembly to maintain a public higher education system, including the University of North Carolina (UNC), with a focus on minimizing costs to citizens. To support this, UNC and its institutions receive significant annual state appropriations. The Board of Governors (BOG) of UNC is responsible for preparing a unified budget for state funding, which is approved by the Governor and General Assembly. These appropriations are managed by the BOG and allocated to constituent institutions, with any unspent funds reverting to the state. Education constitutes over half of North Carolina's $20 billion budget, with UNC receiving approximately $2.6 billion, or nearly 12%. UNC-Chapel Hill derives 15-20% of its funding from state appropriations, amounting to nearly $480 million in 2015, while also generating revenue through tuition, fees, auxiliary enterprises, research grants, and donations. The General Assembly mandates each board of trustees to maintain an endowment fund for donations. Unlike state appropriations, funds from other sources are often restricted for specific uses. The state and BOG regulate intercollegiate athletic funds as "special funds," with chancellors responsible for their management, ensuring these funds are used according to statutory and BOG policies.
Surplus funds generated by the Department of Athletics at UNC-Chapel Hill are maintained in a state-administered account for departmental use. Legal judgments against UNC-Chapel Hill are categorized as unbudgeted expenses, which do not have dedicated reserves and must be covered by direct state appropriations or unrestricted funds. These funds may include surplus from the previous year’s budget or savings from lapsed salaries. The availability of unrestricted funds for satisfying a judgment can fluctuate significantly. If UNC-Chapel Hill cannot pay a judgment, it could seek help from the State Contingency and Emergency Fund; however, there is no precedent for such requests, and any payment would require legislative appropriation. There is also no obligation for private foundations or endowments to pay judgments on behalf of UNC-Chapel Hill, and while assistance could be requested from third parties, they cannot be compelled to contribute. Consequently, a judgment against UNC-Chapel Hill would likely necessitate action from the Board of Governors (BOG) or the State legislature, impacting the State Treasury directly. The court concludes that the State of North Carolina is functionally liable for judgments against UNC and its institutions, reinforcing their status as arms or alter egos of the state. Additionally, UNC’s autonomy is limited by substantial reliance on state funding, the state's control over the appointment of the Board of Governors, and statutory requirements regarding the BOG's composition and operational procedures. While UNC may exercise some operational independence, it remains substantially tied to the state’s governance and financial structure.
Members of the Board of Governors (BOG) for the University of North Carolina (UNC) are appointed by the General Assembly, which has recently reduced the BOG’s size from 32 to 24 members. The BOG is responsible for the general supervision, management, and governance of UNC, including the governance of constituent institutions, determining their functions and academic programs, and setting tuition and enrollment policies. While the BOG can delegate certain powers to the boards of trustees of constituent institutions, this authority can be revised or revoked at any time.
The BOG and the Governor jointly oversee the boards of trustees at each institution, with the BOG appointing eight out of thirteen members and the Governor appointing four. Despite the BOG’s governance role, it remains under the control of the General Assembly, which can withdraw its delegated authority. The General Assembly retains several controls over UNC, including the necessity for its approval on certain bonds and real estate transactions, capping procurement spending authority at constituent institutions, and requiring the Attorney General's permission for legal counsel and settlements.
Additionally, the BOG's operations regarding property acquisition and management are regulated by statute. UNC-Chapel Hill operates on state property designated as “State lands,” and most of its assets benefit the State Treasury. UNC and its employees must comply with various state laws applicable to state entities. The institution is also limited in purchasing insurance, primarily relying on state-provided options. Recent legislative actions have further demonstrated state control, such as overriding BOG decisions on tuition and enrollment policies.
UNC-Chapel Hill and UNC are not autonomous from the State of North Carolina, as they remain under the control and veto power of the General Assembly despite some operational autonomy. This relationship positions them as arms or alter egos of the State. The University of North Carolina is deeply engaged in statewide concerns, serving the educational needs of North Carolina's residents and aiming to enhance the quality of life within the State. This commitment is supported by various statutory provisions that define UNC’s mission and responsibilities, emphasizing its role as serving the best interests of the entire State.
State law further reinforces the classification of UNC and UNC-Chapel Hill as state entities by designating them as instrumentalities of the state with Eleventh Amendment immunity, which limits their susceptibility to lawsuits. Multiple North Carolina statutes characterize UNC as a state entity, and UNC is granted sovereign immunity under state law. Additionally, property owned by UNC is exempt from public taxation, confirming its status as state property. Thus, UNC and its constituent institutions are firmly established as state entities under both operational and legal frameworks.
Employees of the University of North Carolina (UNC) are classified as state employees, with North Carolina courts consistently recognizing UNC and its constituent universities as state agencies. This classification means that the doctrine of sovereign immunity applies to UNC, including UNC-Chapel Hill and North Carolina State University (NCSU), which can only be sued if sovereign immunity is waived. The courts view UNC as an "arm of State government," reinforcing its status as a state agency. Consequently, UNC and its institutions are not considered "citizens" for diversity jurisdiction purposes, leading to a lack of subject matter jurisdiction for the plaintiffs' state law claims. As a result, the plaintiffs' complaint must be dismissed without prejudice. The court also denies the plaintiffs’ motion to file a second amended complaint and UNC-Chapel Hill's motion to strike as moot due to the jurisdictional issue. Further, the court emphasizes that the analysis considers the UNC system as a whole and notes a historical separation from liability related to university management of revenue bonds. The North Carolina Tort Claims Act specifies that claims against state agencies must be brought before the North Carolina Industrial Commission.
