Business Court Narrows How Public Records Act Applies To Entities With Government Ties

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North Carolina Railroad Company Ruled Outside of Disclosure Law Even though State is Sole Owner and Selects all Board Members


Does an entity 100% owned by the State of North Carolina – with all of its directors appointed by the state, and which admittedly works for the benefit of the state’s citizens – produce public records that should be available for inspection? In Southern Environmental Law Center v. North Carolina Railroad Company, 2020 NCBC 61, the Business Court concluded that the Public Records Act does not reach documents created by the North Carolina Railroad Company (NCRR) that plaintiff SELC had sought.

The dispute arose from a highly charged public transit drama concerning the ultimately unsuccessful Durham-Orange Light Rail transit project that would have connected parts of Durham and Chapel Hill over its 17.7 mile line. The Light Rail line would have located alongside NCRR lines in downtown Durham, but NCRR’s refusal to enter a cooperative agreement to further the project proved to be one of several unconquerable obstacles.  Id. at ¶¶ 4, 6-7.  SELC, which had advocated for the project, sought NCRR records related to these public transit issues.

The General Assembly incorporated the NCRR in 1849 to build a railroad from Wayne County to Charlotte, and the State was its majority shareholder. In 1997, the legislature approved a buy-out of remaining private shares “to help promote trade, industry, and transportation within the State of North Carolina and to advance the economic interests of the State.” Today, NCRR controls but does not operate 317 track miles; it leases its right-of-way to a private operator, Norfolk Southern.  Id. at ¶¶ 12-15, 18.

The SELC decision has important stakes for government accountability advocates given NCRR’s involvement with transit and development issues.  On the other hand, private developmental interests that might work with NCRR on so-called “megasites” – economic development projects located near NCRR’s right of ways – may have a countervailing interest in the privacy of their work.

To resolve those conflicting viewpoints, the Business Court had to determine whether NCRR was the type of entity whose activities are “so intertwined with the State that it is, in effect, an agency of North Carolina government for purposes of the Public Records Act.” 2020 NCBC at ¶ 35.  See News & Observer Pub. Co. v. Wake Cty. Hosp. Sys., Inc., 284 S.E.2d 542, 549 (N.C. Ct. App. 1981). As the Business Court observed, the Court of Appeals has held that “the nature of the relationship between a corporate entity and the government is the dispositive factor in determining whether the corporate entity is governed by the Public Records Law.” The Court notes this inquiry as directed to discerning the “`supervisory responsibility and control’ the government has over the entity.” Id. at ¶ 37.

The News & Observer court examined nine (!) factors to “ascertain[] the degree of supervisory responsibility and control the government” has over a private entity.  Id. at ¶ 38. SELC argued that many of those factors likewise applied here, including:

“the State selects all of the NCRR’s directors; the State approves all substantive amendments to NCRR’s Articles of Incorporation; the NCRR must transfer its assets to the State on dissolution; any revenue generated by the NCRR is taxpayer money; the NCRR’s books and records are subject to audit by the State; and the Governor exercises considerable control over the NCRR, through his Board appointments and through communications from his office to both Directors and staff of the NCRR.

Id. at ¶ 42.

The Business Court declined to give those factors dispositive weight however, drawing inspiration from a later Court of Appeals decision, Chatfield v. Wilmington Hous. Fin. & Dev., Inc., 603 S.E.2d 837 (N.C. Ct. App. 2004). The Chatfield court recited the nine News & Observer factors, but instead suggested that “each new arrangement . . . be examined anew and in its own context.” Id. at 840; 2020 NCBC at ¶ 41. Here, the Business Court decided the facts of neither case were a suitable template for resolving “the unique situation . . . [of] a private corporation whose sole shareholder is the State of North Carolina[.]” Id. at ¶ 45. Instead, the Court focused on a legislative intent analysis, and determined that the General Assembly – through positive action and deliberate inaction – showed that it did not intend for the Public Records Act to apply to NCRR.

The Court noted, for example, that until amendment in 2013, N.C. Gen. Stat. § 124-6 allowed NCRR’s board of directors access to “coverage under the State’s liability insurance policy” with the caveat that the benefit “shall not be construed as defining the North Carolina Railroad Company as a public body[.]” 2020 NCBC at ¶ 47. The Court was also influenced by legislative choices that include:

  • A State-owned railroad’s condemnation powers are characterized as those of a “private condemnor” like a utilities provider (N.C. Gen. Stat. § 40A-3(a)(4)); and
  • The General Assembly provided enhanced reporting obligations for NCRR to a joint legislative commission and a joint legislative committee that would have been unnecessary if the information was “already [ ] subject to public disclosure pursuant to [the Public Records Act].” See N.C. Gen. Stat. § 124-17.

The Court’s focus on this legislative backdrop dealt a significant blow to “government in sunshine” advocates. For example, they may have thought the General Assembly’s enhanced reporting obligations in § 124-17 were a victory for oversight of an entity that acts in a largely public capacity, only to find it later used as evidence that NCRR was not subject to public records laws in the first place. Indeed, SELC and other public interest organizations may view the statutory requirement that NCRR, upon request, must “provide all additional information and data within its possession or ascertainable from its records” to the Governor or any legislative committee as evidence of the government’s “supervisory responsibility and control” over NCRR. Id. at § 124-17(b).

In any event, the Business Court deemed it important not to overstate the significance of the State’s identity as the sole shareholder of NCRR:

“Indeed, the Court is concerned that equating majority, or sole, ownership with degree of supervisory control would, in effect, collapse the NCRR’s corporate personhood.

2020 NCBC at ¶ 59.

There is, of course, some tension between this concern and the News & Observer factors, many of which could be said to follow naturally from that sole ownership. But, as the Court noted, “[r]egardless of who owns the NCRR, the fact remains that it operates as an independent corporate entity.” Id. at ¶ 60.

Takeaways:

  • The Court’s ruling suggests a perceptible shift away from the “intertwinement” analysis that has guided judicial evaluation of whether a private entity should be covered by the Public Records Act.
  • The Court wrestled with possibly conflicting messages from two Court of Appeals decisions. The North Carolina Supreme Court may get an opportunity to sort all of that out on appeal, and provide a workable standard for when entities like NCRR – which has extensive government ties and notable influence over public transportation development across the state – are subject to public records oversight.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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