State’s Authority over North Carolina Railroad Company Might be Significant, but Deemed Control of a “Shareholder,” not a “Sovereign”
In a case closely watched by public transit activists and “government in the sunshine” advocates, the North Carolina Supreme Court last week affirmed a 2020 Business Court decision that found the North Carolina Railroad Company (NCRR) beyond the reach of the North Carolina Public Records Act. The dispute arose when the Southern Environmental Law Center (SELC) sought records from NCRR regarding its refusal to cooperate in the construction of a light rail transit line once slated to connect Durham and Chapel Hill. NCRR refused to provide any records, claiming the Act didn’t apply to it, and the Business Court agreed in a decision we discussed here.
In SELC v. N.C. Railroad Company, 2021 NCSC 84 (Aug. 13, 2021), the Supreme Court, in a 5-2 decision with Justices Earls and Hudson dissenting, held that NCRR was not an “agency of North Carolina government or its subdivisions” subject to the Act (N.C.G.S. § 132-1). The Court relied principally on NCRR’s status as a “separate corporate entity” that “makes decisions independently of any directives that it might receive from government officials, including the Governor.” ¶¶ 29, 39. Justice Ervin’s majority opinion was particularly focused on viewing the NCRR’s sole shareholder – the State of North Carolina – as a “single stockholder” having the role such solo owners can have, as opposed to the State acting as a sovereign in a way that would open up NCRR’s records to public review. Id. ¶ 40.
This “lens” was particularly important as the Court’s opinion notes the State: (i) picks all of NCRR’s directors; (ii) approves substantive amendments to its articles of incorporation; (iii) gets all of NCRR’s assets upon its dissolution; and (iv) can conduct thorough audits and receive detailed information in statutorily mandated reports. Id. ¶ 19. Indeed, the State’s control over NCRR is such that it once ordered payment of a $15 million dividend to the State, and “has the right to approve or disapprove certain fundamental corporate decisions.” Id. ¶¶ 10, 40.
While the Court allows that “the Railroad has enjoyed and continues to enjoy a number of benefits from its relationship with the State” (Id. ¶ 38), it cautioned that it would place “impermissible weight” on its analysis to effectively double-count “the fact that the State is the Railroad’s sole shareholder” and also that the State gets to take the actions and make the decisions that such a single shareholder can. Id. ¶ 40. Here’s how the majority set forth this newly announced “divisibility” doctrine of State actions that might trigger the Public Records Act:
“Simply put, most of the information upon which the SELC relies in seeking to persuade us that the Railroad should be deemed subject to the Public Records Act is the direct result of the State’s status as the Railroad’s sole shareholder rather than the exercise of the State’s sovereign authority.”
Id. Thus, the Court adopts a standard under which the State can be deeply intertwined into a private corporation’s activities, but nonetheless avoid public scrutiny of corporate actors like NCRR which frequently engage in matters that impact transit policies and projects across the state. In a gentle nod to the majority’s author, the dissent notes that legendary senator and Watergate interlocutor Sam J. Ervin, Jr. (Justice Ervin’s grandfather) might well have found the Court’s approach at odds with the ”uncontestable pre-condition of democratic government that the people have information about the operation of their government.” Id. ¶ 61.
Indeed, the “form versus substance” dialogue between the majority, dissent and the parties takes on a central role in the Court’s decision. The majority rejects SELC’s argument “that the nature of the State’s authority over the Railroad, rather than the source of that authority, should be deemed controlling.” Id. ¶ 41. Instead, it held that “authority derived from some other source” – here, as a solo shareholder – predominated over any purported exercise of “sovereign authority” by the State. Id. Justice Earls found that analysis to exalt form over the reality of how enmeshed the State is with NCRR:
“When the State owns the corporation, appoints its board, mandates its reporting, spends its revenue, and stands to receive the assets in the event of dissolution, we should recognize the obvious truth that the identity of the corporation, and its sole shareholder – the State – are meaningfully intertwined. NCRR’s argument – that the activities of this kind of corporation can be hidden from scrutiny by the people of North Carolina – is a self-interested attempt to cleave its public business from its public responsibilities. Today’s decision gives that attempt the force of law.”
Id. ¶ 55.
The Court also notes it was influenced by several bypassed opportunities the General Assembly has had to show that it considered NCRR “to be a government agency or subdivision that was subject to the Public Records Act.” Id. ¶ 34. Among these data points was the legislature’s allowance of NCRR board members to get D&O insurance coverage through the State’s policy without designating the Railroad as a public body; and NCRR being granted the eminent domain authority of a private, rather than a public, condemnor. N.C.G.S. § 40A-3(a)(4). ¶ 35. Yet, the dissent laments that the majority’s search for legislative intent in parallel enactments is not paired with “any meaningful evaluation of the scope and purpose of the Public Records Act.” NCSC 84, ¶ 59.
The Court’s decision in SELC v. NCRR also is notable for its adoption of a modified standard for judging when the State is so involved in a private entity that it triggers the public’s oversight through the Public Records Act. Like the Business Court, below, the Supreme Court found that the existing standards that have guided this analysis were insufficient to meet the circumstances. Previously, the benchmarks were set by two Court of Appeals cases: News & Observer Pub. Co. v. Wake Cty. Hosp. Sys., Inc., 284 S.E.2d 542, 548 (1981) (9-factor analysis that probes “the nature of the relationship between the [entity] and the [government]”) and Chatfield v. Wilmington Hous. Fin. And Dev. Inc., 603 S.E.2d 837, 840 (2004) (cautioning that in such analyses “each new arrangement must be examined anew and in its own context.”).
The majority concluded it was “not prepared to conclude that the nine factors delineated in News & Observer should be treated as outcome determinative,” and instead “recognize[d]” that the Court of Appeals actually endorsed in the two cases a “totality of the circumstances approach” that relies on a whole record analysis of whether “the government exercised such substantial control over the operations of the relevant entity[.]” NCSC 84, ¶ 29. Justice Earls wryly observed the necessity of this new approach in dissent, noting that “if we were to apply the rule which has been the law in our state for the past forty years, NCRR falls firmly” within the meaning of an agency under the Public Records Act. Id. ¶ 62.
- The decision is likely to lead to increased litigation over public oversight of public-private partnerships that conduct historically government-themed work in the public’s interest. As Justice Earls warned in dissent, the Court’s ruling could “create formalistic hideouts” for such enterprises “to escape scrutiny.”
- Lack of public scrutiny into NCRR’s activities comes at an inopportune time for the State, as political and community tensions rise over the role of public transit in energy and climate debates.
- The Supreme Court tends to affirm Business Court decisions per curiam without opinions. Perhaps that’s not the case here simply because there was a dissent, but it bears watching as litigants weigh the value of per curiam affirmances.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.