Thomas Jefferson Classical Academy Charter School v. Cleveland County Board of Education

NO. COA13-893

NORTH CAROLINA COURT OF APPEALS

Filed: 3 June 2014

THOMAS JEFFERSON CLASSICAL ACADEMY
CHARTER SCHOOL, PIEDMONT COMMUNITY
CHARTER SCHOOL AND LINCOLN CHARTER
SCHOOL,
Plaintiffs,

v. Cleveland County
No. 12 CVS 41
CLEVELAND COUNTY BOARD OF
EDUCATION, D/B/A CLEVELAND COUNTY
SCHOOLS,
Defendant.

Appeal by defendant from Judgment entered on or about 13

February 2013 and Order and Judgment entered 2 April 2013 by

Judge Jesse B. Caldwell III, in Superior Court, Cleveland

County. Heard in the Court of Appeals 23 January 2014.

Robinson Bradshaw & Hinson, P.A., by Richard A. Vinroot and
Matthew F. Tilley, for plaintiffs-appellees.

Tharrington Smith, L.L.P., by Deborah R. Stagner, for
defendant-appellant.

Allison B. Schafer and Christine T. Scheef for N.C. School
Boards Association, for amicus curiae.

STROUD, Judge.

The Cleveland County Board of Education, d/b/a Cleveland

County Schools (“CCS” or “defendant”), appeals from the judgment
 -2-
entered by the trial court on or about 13 February 2013, wherein

it concluded that certain funds that CCS had placed in Fund 8

should have been placed into the local current expense fund and

distributed on a pro rata basis to the plaintiff charter schools.

CCS also appeals from an order awarding plaintiffs attorneys’

fees. We remand to allow the trial court to apply the correct

legal standard. We reverse the trial court’s order awarding

attorneys’ fees.

I. Background

On 9 January 2012, Thomas Jefferson Classical Academy

Charter School, Piedmont Community Charter School, and Lincoln

Charter School (“plaintiffs”) filed a complaint in superior

court, Cleveland County, alleging that CCS had failed to pay

them the proper per-pupil amount required by statute. Plaintiffs

specifically contended that CCS wrongfully moved approximately

$4.9 million from the local current expense fund, which must be

shared with the charter schools, to a “special revenue fund,”

which is not shared. Plaintiffs alleged that they were owed

approximately $102,480. Plaintiffs sought a declaratory judgment

that CCS must allocate the funds as plaintiffs contended the

statute required, recovery in the amount of $102,480, and

attorneys’ fees under N.C. Gen. Stat. § 6-19.1. CCS answered,
 -3-
denying that their transfer of the funds to the special revenue

fund violated any of the applicable statutes and that plaintiffs

were owed anything.

The case was tried by the superior court sitting without a

jury. The parties each presented evidence to support their

claims. Plaintiffs primarily relied on the testimony of David

Lee, financial director for CCS. Mr. Lee prepared an audit

report of CCS’ finances, which used various state budget codes

for different revenue sources. Many of the funding sources that

CCS had placed in the special revenue fund were classified by

Mr. Lee as “unrestricted.” Defendant presented a number of

witnesses who administered various programs within the CCS

system who testified about their funding sources and the use of

those funds. After two days of testimony, the trial court took

the matter under advisement.

The trial court entered its judgment on 21 February 2013,

wherein it found that defendant had misappropriated

approximately $2,781,281 that should have been placed in the

current expense fund rather than the special revenue fund. It

found that Mr. Lee had admitted that $2,109,377 of the funds,

called “Column A,” were “unrestricted.” It further found, based

on Mr. Lee’s testimony and that of the other CCS administrators,
 -4-
that $671,904 of the funds, listed under “Column B” and “Column

C” were “(a) part of ‘moneys made available to CCS for its

‘current operating expenses, (b) used by CCS to operate its

general K-12 programs and activities, and (c) not restricted to

purposes outside CCS’s general educational programs.” It

concluded that defendant owed plaintiffs $57,836 collectively

and entered judgment against CCS in that amount. Defendant

filed written notice of appeal from the 21 February 2013

judgment on 18 March 2013.

Plaintiffs then filed a petition for attorneys’ fees under

N.C. Gen. Stat. § 6-19.1(a). The trial court, by order and

judgment entered 2 April 2013, granted plaintiffs’ petition and

awarded them $47,195.90 in attorneys’ fees. Defendant filed

written notice of appeal from the 2 April 2013 judgment and

order on 30 April 2013.

II. “Restricted” Funds

Defendant argues that the trial court erred in finding that

various revenue sources were not “restricted” and concluding

that these funds were therefore subject to a per-pupil

distribution to the plaintiff charter schools. Recently the

Legislature has amended the statute the Judge applied below
 -5-
clarifying the definition of “restricted” funds, so we remand

for the trial court to apply this definition to the facts here.

A. Standard of Review

When the trial court sits without a jury,
the standard of review on appeal is whether
there was competent evidence to support the
trial court’s findings of fact and whether
its conclusions of law were proper in light
of such facts. . . . Evidence must support
the findings, the findings must support the
conclusions of law, and the conclusions of
law must support the ensuing judgment.

Jackson v. Culbreth, 199 N.C. App. 531, 537, 681 S.E.2d 813, 817

(2009) (citations, quotation marks, and brackets omitted).

B. Charter School Funding and the Uniform Budget Statute

The allocation of funds between local school administrative

units and charter schools is governed by N.C. Gen. Stat. § 115C-

238.29H (2009). That statute requires the local school

administrative unit to “transfer to the charter school an amount

equal to the per pupil local current expense appropriation to

the local school administrative unit for the fiscal year.” N.C.

Gen. Stat. § 115C-238.29H(b). This Court has interpreted the

phrase “local current expense appropriation” to be “synonymous

with the phrase ‘local current expense fund’ in the School

Budget and Fiscal Control Act, N.C.G.S. § 115C–426(e).” Francine

Delany New School for Children, Inc. v. Asheville City Bd. of
 -6-
Educ., 150 N.C. App. 338, 347, 563 S.E.2d 92, 98 (2002), disc.

rev. denied, 356 N.C. 670, 577 S.E.2d 117 (2003). We have

further held that charter schools “are entitled to an amount

equal to the per pupil amount of all money contained in the

local current expense fund.” Sugar Creek Charter School, Inc. v.

Charlotte-Mecklenburg Bd. of Educ., 188 N.C. App. 454, 460, 655

S.E.2d 850, 854 (Sugar Creek I), disc. rev. denied, ___ N.C.

___, 667 S.E.2d 460 (2008). It is immaterial that the school

board has earmarked particular funds for a specific purpose if

the funds have been deposited in the local current expense fund.

Sugar Creek Charter School, Inc. v. Charlotte-Mecklenburg Bd. of

Educ., 195 N.C. App. 348, 360-61, 673 S.E.2d 667, 676 (Sugar

Creek II) (holding, inter alia, that the trial court did not err

in concluding that funds designated for students affected by

Hurricane Katrina were subject to per-pupil distribution to

charter schools because they were placed in the current local

expense fund, as opposed to a separate fund), disc. rev. denied,

363 N.C. 663, 687 S.E.2d 296 (2009).

The local current expense fund is defined by N.C. Gen.

Stat. § 115C-426(e) (2009):

The local current expense fund shall include
appropriations sufficient, when added to
appropriations from the State Public School
Fund, for the current operating expense of
 -7-
the public school system in conformity with
the educational goals and policies of the
State and the local board of education,
within the financial resources and
consistent with the fiscal policies of the
board of county commissioners. These
appropriations shall be funded by revenues
accruing to the local school administrative
unit by virtue of Article IX, Sec. 7 of the
Constitution, moneys made available to the
local school administrative unit by the
board of county commissioners, supplemental
taxes levied by or on behalf of the local
school administrative unit pursuant to a
local act or G.S. 115C-501 to 115C-511,
State money disbursed directly to the local
school administrative unit, and other moneys
made available or accruing to the local
school administrative unit for the current
operating expenses of the public school
system.

N.C. Gen. Stat. § 115C-426(c) also permits the creation of

“other funds . . . to account for trust funds, federal grants

restricted as to use, and special programs.” Thus, we have held

that “the provisions of Chapter 115C . . . do not require that

all monies provided to the local administrative unit be placed

into the ‘local current expense fund’ (Fund Two).” Thomas

Jefferson Classical Academy v. Rutherford County Bd. of Educ.,

215 N.C. App. 530, 543, 715 S.E.2d 625, 633 (2011) (Thomas

Jefferson I), disc. rev. denied and app. dismissed, ___ N.C. ___,

724 S.E.2d 531 (2012). “Restricted funds” kept in a fund

separate from the local current expense fund are exempt from per-
 -8-
pupil distribution to the charter schools. Id. at ___, 715 S.E.2d

at 630 (“[I]f funds are placed in the ‘local current expense

fund’ and not held in a ‘special fund,’ they must be considered

as being part of the ‘local current expense fund’ used to

determine the pro rata share due to the charter schools.”). The

local school board has the authority to place such restricted

funds in a separate fund. Id. at ___, 715 S.E.2d at 634 (“Sugar

Creek I and II clearly indicate that it is incumbent upon the

local administrative unit to place restricted funds into a

separate fund.”); Sugar Creek I, 188 N.C. App. at 460-61, 655

S.E.2d at 855. However, we have never defined what “restricted

funds” are or who has the authority to make that determination.

Thus, there are two fundamental questions we must address

here: (1) does the local school board have discretionary

authority to allocate funds into the local current expense fund

or a separate fund as it sees fit?; and if not, (2) did

defendant here properly classify the funds at issue as

restricted?

N.C. Gen. Stat. § 115C-426(e) states that the local current

expense fund

shall be funded by revenues accruing to the
local school administrative unit by virtue
of Article IX, Sec. 7 of the Constitution,
moneys made available to the local school
 -9-
administrative unit by the board of county
commissioners, supplemental taxes levied by
or on behalf of the local school
administrative unit pursuant to a local act
or G.S. 115C-501 to 115C-511, State money
disbursed directly to the local school
administrative unit, and other moneys made
available or accruing to the local school
administrative unit for the current
operating expenses of the public school
system.

“It is well established that the word ‘shall’ is generally

imperative or mandatory.” Chandler ex rel. Harris v. Atlantic

Scrap & Processing, ___ N.C. App. ___, ___, 720 S.E.2d 745, 750

(2011) (citation and quotation marks omitted), aff’d and

remanded, ___ N.C. ___, 749 S.E.2d 278 (2013). Consistent with

this Court’s decisions in Sugar Creek I, Sugar Creek II, and

Thomas Jefferson I, as well as the plain language of N.C. Gen.

Stat. § 115C-426(e), we conclude that the local school

administrative unit may deposit any “restricted” funds into a

fund separate from the current expense fund. See Thomas

Jefferson I, 215 N.C. App. at 544, 715 S.E.2d at 634; Sugar

Creek I, 188 N.C. App. at 460, 655 S.E.2d at 855. By contrast,

any funds covered by N.C. Gen. Stat. § 115C-426(e) must be

deposited into the local current expense fund. We further

conclude that the determination of which funds may be placed in

a separate fund is not solely in the discretion of the local
 -10-
school board, given the mandatory language found in the budget

statute. See Chandler, ___ N.C. App. at ___, 720 S.E.2d at 750

(holding that the Industrial Commission has no discretion in

determining an interest award when the relevant statute employed

the word “shall”).

C. Defining “restricted” funds

“Restricted” is not a term found in any of the relevant

statutes. Rather, it is a gloss this Court has put on the

statutory definitions found in N.C. Gen. Stat. § 115C-426(c). It

was the Court’s shorthand for those monies that can be placed in

a separate fund, i.e. those from “trust funds, federal grants

restricted as to use, and special programs” which must be

accounted for separately. N.C. Gen. Stat. § 115C-426(c).

The guidance from the Department of Public Instruction that

we reviewed in Thomas Jefferson I indicated that Fund 8 was a

new, separate fund “to separately maintain funds that are

restricted in purpose and not intended for the general K–12

population in the LEA.” Thomas Jefferson I, 215 N.C. App. at

537, 715 S.E.2d at 630. Such funds included:

(a) State funds that are provided for a
targeted non–K–12 constituency such as More–
at–Four funds;
 -11-
(b) Funds targeted for a specific, limited
purpose, such as a trust fund for a specific
school within the LEA;

(c) Federal or other funds not intended for
the general K–12 instructional population,
or a sub-group within that population, such
as funds for a pilot program;

(d) Indirect cost, such as those associated
with a federal grant that represent
reimbursement for cost previously incurred
by the LEA.

Id.

After the extensive litigation over the definition of

“restricted” and “unrestricted” funds, the Legislature passed an

amendment to N.C. Gen. Stat. § 115C-426 in 2010 and again in

2013. N.C. Sess. Laws 2010-31, § 7.17(a); N.C. Sess. Laws 2013-

355, § 2(a). The statute now clarifies that:

other funds may be used to account for
reimbursements, including indirect costs,
fees for actual costs, tuition, sales tax
revenues distributed using the ad valorem
method pursuant to G.S. 105-472(b)(2), sales
tax refunds, gifts and grants restricted as
to use, trust funds, federal appropriations
made directly to local school administrative
units, and funds received for
prekindergarten programs. In addition, the
appropriation or use of fund balance or
interest income by a local school
administrative unit shall not be construed
as a local current expense appropriation
included as a part of the local current
expense fund.

N.C. Gen. Stat. § 115C-426 (c) (2013).
 -12-
In construing a statute with reference to an
amendment it is presumed that the
legislature intended either (a) to change
the substance of the original act, or (b) to
clarify the meaning of it. A clarifying
amendment, unlike an altering amendment, is
one that does not change the substance of
the law but instead gives further insight
into the way in which the legislature
intended the law to apply from its original
enactment.

Ray v. North Carolina Dept. of Transp., 366 N.C. 1, 8-9, 727

S.E.2d 675, 681 (2012) (citation and quotation marks omitted).

The 2010 amendment to § 115C-426 is fully consistent with

the 2009 definition of “restricted” funds used by the Department

of Public Instruction that we approved of in Thomas Jefferson I

and with this Court’s gloss on that statute. See Thomas

Jefferson I, 215 N.C. App. at 537, 715 S.E.2d at 630. In

addition to being consistent with the prior case law, the

amendment simply provided a more complete description of the

funds which may be excluded from the local current expense fund.

“To determine whether the amendment clarifies the prior law or

alters it requires a careful comparison of the original and

amended statutes. If the statute initially fails expressly to

address a particular point but addresses it after the amendment,

the amendment is more likely to be clarifying than altering.”

Ray, 366 N.C. at 10, 727 S.E.2d at 682. Therefore, we conclude
 -13-
that the 2010 amendments were clarifying amendments rather than

substantive changes. See id. at 11, 727 S.E.2d at 683

(concluding that an amendment was a clarifying one “[b]ecause

the legislature left essentially all our pre-amendment cases

intact”). “[S]uch amendments apply to all cases pending before

the courts when the amendment is adopted, regardless of whether

the underlying claim arose before or after the effective date of

the amendment.” Id. at 9, 727 S.E.2d at 681.

It is not clear what definition of “restricted” the trial

court applied, but it is clear that the definition used was not

that laid out by the 2010 amendments. In some instances it

followed the budget code assigned by Mr. Lee, but not in others.

It considered some reimbursements “restricted,” but others

“unrestricted.” Even some pre-K programs were considered

“unrestricted.”

The clarifying amendments provide the proper standard with

which to determine whether funds are “restricted.” “Restricted”

funds, i.e., monies that may be properly placed in a fund

separate from the local current expense fund, are those that

fall into one of the categories mentioned in N.C. Gen. Stat. §

115C-426(c) as amended. It is clear that the trial court did not

apply this standard. We therefore remand to allow the trial
 -14-
court to make appropriate findings of fact and to determine

whether the funds at issues are “restricted” under the correct

standard of law. See Powe v. Centerpoint Human Services, 215

N.C. App. 395, 396, 715 S.E.2d 296, 298 (2011) (remanding for

the fact finder to apply the correct legal standard).

On remand, the trial court should make findings about

whether the funds at issue here are “reimbursements, including

indirect costs, fees for actual costs, tuition, sales tax

revenues distributed using the ad valorem method pursuant to

G.S. 105-472(b)(2), sales tax refunds, gifts and grants

restricted as to use, trust funds, federal appropriations made

directly to local school administrative units, [or] funds

received for prekindergarten programs.” N.C. Gen. Stat. § 115C-

426(c) (2013). If the funds fall into any of these categories,

they may be properly considered “restricted,” placed into a

separate fund, and not shared on a pro rata basis with the

charter schools. See Thomas Jefferson I, 215 N.C. App. at 544,

715 S.E.2d at 633.

III. Attorneys’ Fees

Defendant next argues that the trial court erred in

awarding plaintiff attorneys’ fees under N.C. Gen. Stat. § 6-
 -15-
19.1 because a local school board is not a state agency. We

agree.

N.C. Gen. Stat. § 6-19.1 (2011) allows the trial court to

award attorney’s fees to a party prevailing over a state agency

in a civil action. This Court has held that the definition of

“agency” for the purposes of § 6-19.1 is the same as the

definition of an “agency” under the Administrative Procedures

Act (APA). Izydore v. City of Durham (Durham Bd. of Adjustment),

___ N.C. App. ___, ___, 746 S.E.2d 324, 326, disc. rev. denied,

___ N.C. ___, 749 S.E.2d 851 (2013). The APA defines an “agency”

as

an agency or an officer in the executive
branch of the government of this State and
includes the Council of State, the
Governor’s Office, a board, a commission, a
department, a division, a council, and any
other unit of government in the executive
branch. A local unit of government is not an
agency.

N.C. Gen. Stat. § 150B-2(1a) (2011) (emphasis added).

Accordingly, we have held that local governmental units, like

municipalities and counties, are not subject to the attorney’s

fees provisions of N.C. Gen. Stat. § 6-19.1. Izydore, ___ N.C.

App. at ___, 746 S.E.2d at 326 (holding that “local governmental

units—such as respondents—are not ‘agencies’ for purposes of §

6–19.1.”). Local school boards and local school administrative
 -16-
units are local governmental units, and, as such, are not

“agencies” for the purpose of the APA. See N.C. Gen. Stat. §

115C-5(5)-(6) (defining “local school board” as “a city board

of education, county board of education, or a city-county board

of education” and a “local school administrative unit” as “a

subdivision of the public school system which is governed by a

local board of education. It may be a city school administrative

unit, a county school administrative unit, or a city-county

school administrative unit.”); Coomer v. Lee County Bd. of

Educ., ___ N.C. App. ___, ___, 723 S.E.2d 802, 803 (observing

that “local boards of education are generally excluded from the

requirements of the APA.”), disc. rev dismissed, 366 N.C. 238,

731 S.E.2d 427, disc. rev. denied, 366 N.C. 238, 731 S.E.2d 428

(2012).

Plaintiffs contend that the local school boards are subject

to § 6-19.1 because we have held that they “are deemed agents

of the State for purposes of providing public education.” Kiddie

Korner Day Schools, Inc. v. Charlotte-Mecklenburg Bd. of Educ.,

55 N.C. App. 134, 140, 285 S.E.2d 110, 114 (1981), app.

dismissed and disc. rev. denied, 305 N.C. 300, 291 S.E.2d 150

(1982). Yet, our Supreme Court has noted that “[a]n agent of the

State and a state agency are fundamentally different . . . .”
 -17-
Meyer v. Walls, 347 N.C. 97, 107, 489 S.E.2d 880, 885 (1997);

see also Green v. Kearney, 203 N.C. App. 260, 272, 690 S.E.2d

755, 764 (2010) (noting the distinction between a state agent

and a state agency). In that same opinion, the Supreme Court

quoted a prior opinion for the proposition that “[i]n no sense

may we consider the [Local] Board of Education in the same

category as the State Board of Education . . . .” Meyer, 347

N.C. at 106, 489 S.E.2d at 885 (citation and quotation marks

omitted). Thus, local school boards are not state agencies for

purposes of the APA and N.C. Gen. Stat. § 6-19.1 simply because

they may be considered agents of the State in certain

circumstances.

We hold that the trial court erred in awarding plaintiff

attorney’s fees under N.C. Gen. Stat. § 6-19.1 because defendant

is not an agency for purposes of that statute. Therefore, we

reverse the trial court’s order allowing plaintiff’s petition

for attorneys’ fees.

IV. Conclusion

For the foregoing reasons, we remand for the trial court to

enter a revised judgment with appropriate findings of fact and

conclusions of law applying the correct standard as laid out in
 -18-
the 2010 amendments. We reverse the trial court’s order awarding

plaintiffs attorney’s fees.

REVERSED in part; REMANDED.

Judges HUNTER, JR., Robert N. and Judge DILLON concur.