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All opinions are subject to modification and technical correction prior to official publication in the North Carolina Reports and North Carolina Court of Appeals Reports. In the event of discrepancies between the electronic version of an opinion and the
print version appearing in the North Carolina Reports and North Carolina Court of Appeals Reports, the latest print version is to be considered authoritative.
LESSIE J. DUNN and ERWIN W. COOK, JR., individually and on behalf
of a class of all others similarly situated, Plaintiffs, v. THE
STATE OF NORTH CAROLINA, THE NORTH CAROLINA DEPARTMENT OF REVENUE
and E. NORRIS TOLSON, AS SECRETARY OF THE NORTH CAROLINA
DEPARTMENT OF REVENUE, Defendants
Filed: 17 October 2006
1. Appeal and Error--appealability--interlocutory order--class certification--
substantial right--sovereign immunity
Although defendants' appeal from an order certifying a class of taxpayers and appointing
the named plaintiffs as class representatives is an appeal from an interlocutory order, the order is
subject to immediate review because: (1) appeals raising issues of governmental or sovereign
immunity affect a substantial right warranting immediate appellate review; and (2) defendants'
rights will be adversely affected including the potential injury to defendants of their inability to
avoid a budget exigency.
2. Class Actions--certification--taxpayers who paid income tax--subject matter
The trial court did not lack subject matter jurisdiction over the claims added by class
certification of taxpayers who paid income taxes on interest earned or accrued on obligations of
states other than North Carolina and their political subdivisions even though defendants contend
none of the plaintiffs thereby added complied with the notice requirement of N.C.G.S. § 105-267,
because: (1) once the State is put on notice that a tax provision is being challenged, not every
taxpayer seeking restitution under N.C.G.S. § 105-267 must comply with the statute; (2) when
the State has impermissibly collected taxes from a group of individuals, public policy makes it
unjust to limit recovery only to those taxpayers with the advantage of technical knowledge and
foresight to have filed a formal protest and demand for refund; (3) the notice requirement was
met when defendants received the named plaintiffs' written demands for a tax refund on 4
November 2003; (4) notice instead of exact knowledge of the total potential liability is the goal
of N.C.G.S. § 105-267, and thereafter the burden is on the State to determine its potential
exposure and to plan accordingly when the information is within its control; (5) had the General
Assembly wanted to modify the notice requirements of N.C.G.S. § 105-267 and thus weaken the
Bailey II decision, it would have specifically and directly done so rather than leaving it to
litigants and courts to speculate that by increasing a taxpayer's protest period, the legislature also
changed the statutory notice requirement as defined by our Supreme Court; and (6) the named
plaintiffs may represent taxpayers who were subject to the contested tax but failed to comply
with N.C.G.S. § 105-267 by individually requesting a refund since sovereign immunity has been
partially waived by the enactment of N.C.G.S. § 105-267.
3. Class Actions--certification_-representation of taxpayers who are not individuals--
subject matter jurisdiction--personal interest
The trial court did not lack subject matter jurisdiction over taxpayers who are not
individuals such as corporations or estates and trusts that pay income taxes under N.C.G.S. §§
105-130.3 and 105-160.2 when the named plaintiffs paid only individual income taxes under
N.C.G.S. § 105-134.2, because: (1) N.C.G.S. § 1A-1, Rule 23 provides that if persons
constituting a class are so numerous as to make it impracticable to bring them all before the
court, such of them, one or more, as will fairly insure the adequate representation of all may, onbehalf of all, sue or be sued in order to help eliminate repetitious litigation and possible
inconsistent adjudications involving common questions, related events, or request for similar
relief; (2) although individuals, estates and trusts, and corporations pay tax under different
statutory provisions, in this litigation, each group is contesting the adjustment to taxable income
under N.C.G.S. §§ 105-134.6(b)(1)b and 134.6(c)(1); and (3) the named plaintiffs have more
than a technical or official interest in the subject matter of this lawsuit affecting corporations or
estates and trusts, and their interest is personal.
4. Class Actions--certification_-sufficiency of findings of fact
While the trial court did not make numbered findings of fact in its order certifying a class
action by taxpayers against the State and the N.C. Department of Revenue, a section of the order
entitled Discussion included sufficient findings of fact to permit meaningful appellate review
under the abuse of discretion standard.
Appeal by Defendants from order entered 14 June 2005 by Judge
Lindsay R. Davis, Jr. in Forsyth County Superior Court certifying
a class of taxpayers and appointing the named Plaintiffs as class
representatives. Heard in the Court of Appeals 19 April 2006.
Smith James Rowlett & Cohen L.L.P., by Norman Smith; Jack E.
; and Susman, Watkins & Wylie, LLP, by John R.
Wylie, pro hac vice, for Plaintiffs-Appellees.
Attorney General Roy Cooper, by Assistant Attorney General
Gregory P. Roney
, for Defendants-Appellants.
In this appeal, Defendants challenge, on grounds of sovereign
immunity and standing, the trial court's order certifying, for
purposes of pursuing a class action lawsuit, a class of taxpayers
who paid income tax on interest earned or accrued on obligations of
states other than North Carolina and their political subdivisions
(non-State obligations). We affirm the trial court.
On 4 November 2003, Defendants received written demands for a
refund of taxes paid on non-State obligations for tax years 2001and 2002
from Plaintiffs Lessie J. Dunn and Erwin W. Cook, Jr.
Defendants declined to make the requested refunds, and pursuant to
N.C. Gen. Stat. § 105-267, Dunn and Cook pursued refunds through
further legal action. By a complaint filed 9 February 2004,
Plaintiffs alleged that Defendants unconstitutionally burdened
interstate commerce by imposing and collecting state income tax
under N.C. Gen. Stat. §§ 105-130.5(a)(4),
134.6(b)(1)b, and 105-134.6(c)(1). Specifically, they alleged that
the State impermissibly imposed tax on individual and corporate
taxpayers on interest received on municipal bonds issued by non-
North Carolina state and local governments, while not taxing
interest received on municipal bonds issued by North Carolina state
and local governments. Moreover, the named Plaintiffs sought to
bring the action on behalf of a class of individual and corporate
taxpayers pursuant to Rule 23 of the North Carolina Rules of Civil
Procedure. In an answer dated 7 September 2004, Defendants denied
(1) that the tax structure unlawfully burdened interstate commerce,
and (2) that relief through class certification was appropriate.
Following a hearing on 21 February 2005, the Honorable Lindsay
R. Davis, Jr. allowed Plaintiffs' Motion for Class Certification
and directed Plaintiffs' counsel to prepare a proposed order. When
the parties were unable to agree on the form of such order, Judge
Davis conducted a second hearing on 6 June 2005. By order filed 14
June 2005, Judge Davis certified a class, pursuant to Rule 23,
consisting of [a]ll persons or entities who have paid required
North Carolina state income tax on interest or accruals derivedfrom bonds or obligations of states other than North Carolina and
their political subdivisions and agencies from October 29, 2000,
through the date of final judgment. He appointed the named
Plaintiffs as representatives of all members of the certified
class. From this order, Defendants appeal.
 As a threshold matter, we address the interlocutory nature
of this appeal. An order entered by a trial court is either
interlocutory or the final determination of the rights of the
parties. N.C. Gen. Stat. § 1A-1, Rule 54(a) (2003). A class
certification order is not a final judgment disposing of the cause
as to all parties; the appeal of such orders is thus
interlocutory. Frost v. Mazda Motor of Am., Inc., 353 N.C. 188,
192, 540 S.E.2d 324, 327 (2000) (citing Perry v. Cullipher, 69 N.C.
App. 761, 318 S.E.2d 354 (1984)). However, immediate appeals from
an interlocutory order are allowed if they involve a matter of law
or legal inference that affects a substantial right of the
appellant[.] Frost, 353 N.C. at 192, 540 S.E.2d at 327 (citations
omitted). The moving party must show that the affected right is
a substantial one, and that deprivation of that right, if not
corrected before appeal from final judgment, will potentially
injure the moving party. Flitt v. Flitt, 149 N.C. App. 475, 477,
561 S.E.2d 511, 513 (2002) (citation omitted). The decision of
whether an interlocutory appeal affects a substantial right is made
on a case-by-case basis. Milton v. Thompson, 170 N.C. App. 176,
611 S.E.2d 474 (2005). In this case, Defendants argue the substantial rights they
seek to protect through immediate appellate review are the
preservation of sovereign immunity and the protection of the fiscal
stability of the State. Moreover, Defendants
assert that if this
Court does not allow this appeal, these rights will be adversely
affected, including the potential injury to Defendants of their
inability to avoid a budget exigency. We agree. Further, this
Court has repeatedly held that appeals raising issues of
governmental or sovereign immunity affect a substantial right to
warrant immediate appellate review. Price v. Davis, 132 N.C. App.
556, 558-59, 512 S.E.2d 783, 785 (1999)(citations omitted).
thus allow this interlocutory appeal.
 By their assignments of error brought forward on this
appeal, Defendants first contend that the trial court lacked
subject matter jurisdiction over the claims added by class
certification because none of the plaintiffs thereby added complied
with the notice requirement of N.C. Gen. Stat. § 105-267. This
Court employs de novo review when it evaluates questions of subject
matter jurisdiction. Harper v. City of Asheville, 160 N.C. App.
209, 585 S.E.2d 240 (2003).
North Carolina law provides in pertinent part that
[w]henever a person has a valid defense to the
enforcement of the collection of a tax, the
person shall pay the tax to the proper
officer, and . . . may demand a refund of the
tax paid in writing from the Secretary and if
the tax is not refunded within 90 days
thereafter, may sue the Secretary in the
courts of the State for the amount demanded. . . . . The protest period . . . is three
years after payment.
N.C. Gen. Stat. § 105-267 (2003). In Bailey v. State, 348 N.C.
130, 166, 500 S.E.2d 54, 75 (1998)(Bailey II), our Supreme Court
the purpose underlying the requirements of
section 105-267 is to put the State on notice
that a tax, or a particular application
thereof, is being challenged as improper so
that the State might properly budget or plan
for the potential that certain revenues
derived from such tax have to be refunded.
. . . . While claims of improper or illegal
taxation . . . are subject to the procedural
requirements of section 105-267, this is only
to the extent necessary to provide the State
with the notice sufficient to protect fiscal
Therefore, once the State is put on notice that a tax provision is
being challenged, not every taxpayer seeking restitution under N.C.
Gen. Stat. § 105-267 must comply with the statute. Moreover, when
the State has impermissibly collected taxes from a group of
individuals, public policy makes it
unjust to limit recovery only to those
taxpayers with the advantage of technical
knowledge and foresight to have filed a formal
protest and demand for refund. Such a result
would clearly elevate form over substance.
This is especially untenable . . . where the
matter is of constitutional import and where,
in practical consequence, the purpose of the
statute was realized. Further, this more
expansive, inclusive determination would seem
to comport with the language and spirit of
section 105-267, which provides: If upon the
trial it is determined that all or part of the
tax was levied or assessed for an illegal or
unauthorized purpose, . . . judgment shall be
rendered therefor, with interest, and the
judgment shall be collected as in other cases. The amount of taxes for which judgment is
rendered in such an action shall be refunded
by the State.
Id. at 166-67, 500 S.E.2d at 75 (quoting N.C.G.S. § 105-267).
Based on the holding in Bailey II, we are persuaded here that the
notice requirement of N.C. Gen. Stat. § 105-267 was met when
Defendants received the named Plaintiffs' written demands for a tax
refund on 4 November 2003. We thus reject Defendants' argument
that, to assert a valid claim, all class members must comply with
the statute by individually demanding a refund of taxes paid.
Under the plain holding of Bailey II, this argument has no merit.
Defendants further contend, however, that Bailey II does not
control under the factual circumstances presented here. They argue
that Bailey II is distinguishable because (1) in Bailey II, the
State knew the potential class members and the potential refund
amount; (2) Bailey II was decided under a previous version of N.C.
Gen. Stat. § 105-267 that gave taxpayers only thirty days to
contest a potentially illegal tax, while the current version
provides taxpayers with a three-year window; and (3) Bailey II does
not address the limits on class membership imposed by sovereign
immunity. While Defendants do raise legitimate distinctions, we
believe that the holding in Bailey II and the rationale underlying
that holding govern our decision for the following reasons:
At issue in the line of Bailey cases was the validity under
the North Carolina Constitution of a repealed tax exemption for
vested participants in state and local government retirement
plans[,] and the necessity for the individual class members in theBailey litigation to comply with the notice requirements of N.C.
Gen. Stat. § 105-267. Bailey v. State, 330 N.C. 227, 231, 412
S.E.2d 295, 298 (1991), cert. denied, 504 U.S. 911, 118 L. Ed. 2d
547 (1992), overruled in part by Bailey v. State, 348 N.C. 130, 500
S.E.2d 54 (1998). The Bailey II Court determined that [t]he
purpose of the statute [N.C. Gen. Stat. § 105-267] was realized
because the State was or should be fully aware of . . . the amount
of benefits paid . . . and had the opportunity to budget[.]
Bailey II, 348 N.C. at 166, 500 S.E.2d at 75. It does not follow,
however, that the State must be aware of the exact number of
potential plaintiffs or the exact amount of its potential liability
to receive sufficient notice to enable the State to protect fiscal
stability. While we agree with Defendants that [n]otice for
fiscal planning purposes is the touchstone of the section 105-267
requirements[,] Id., we are persuaded by our Supreme Court's
elaboration of the definition of notice for section 105-267
purposes: As of the first protest received in accordance with
section 105-267, not to mention the first lawsuit filed thereafter,
the State has been aware of a constitutional challenge to the
validity of the Act. Id. (Emphasis added). Therefore, notice,
not exact knowledge of the total potential liability, is the goal
of N.C. Gen. Stat. § 105-267. Once notice is received, the burden
is on the State to determine its potential exposure and to plan
We note further that, by affidavit, Margaret M. Barnes,
Assistant Secretary for Information Technology at the NorthCarolina Department of Revenue, acknowledged that, although it
would take time and effort, Defendants could review tax returns and
obtain an understanding of North Carolina's potential liability
through the use of electronic means and manual labor. Therefore,
the information that Defendants claim they need to plan for the
State's fiscal stability as a consequence of this lawsuit is
clearly within Defendants' control. As in Bailey II, then, the
purpose of N.C. Gen. Stat. § 105-267 has been achieved.
Accordingly, we hold that the named Plaintiffs' compliance with
N.C. Gen. Stat. § 105-267 is sufficient to put Defendants on
notice of the claims of all members of the class.
Defendants also contend, however, that Bailey II does not
control this case because, since the opinion in Bailey II, the
General Assembly has modified N.C. Gen. Stat. § 105-267 to provide
three years in which a taxpayer can challenge the legality of a
tax. This is an increase over the original thirty days that the
statute provided for such a challenge when it was evaluated by the
Bailey II Court. We are not persuaded by this argument. Had the
General Assembly wanted to modify the notice requirements of N.C.
Gen. Stat. § 105-267 and thus weaken the Bailey II decision, we
believe it would have specifically and directly done so, rather
than leaving it to litigants and Courts to speculate that, by
increasing a taxpayer's protest period, the Legislature also
changed the statutory notice requirement as defined by our Supreme
Court. Other than argument, Defendants offer no evidence that this
is what the Legislature intended, and we decline to make this leap. Bailey II thus continues to guide our determination. Defendants'
argument is without merit.
Finally, Defendants contend that because the opinion in Bailey
II does not address the limits on class membership imposed by
sovereign immunity, it does not control the resolution of this
case. We disagree.
The Bailey II Court recognized that the General Assembly
partially waived the State's sovereign immunity by enacting N.C.
Gen. Stat. § 105-267. See id. at 158, 500 S.E.2d at 70. In
addition, our Supreme Court concluded that [i]t would be unjust to
limit recovery only to those taxpayers with the advantage of
technical knowledge and foresight to have filed a formal protest
and demand for refund. Id. at 166, 500 S.E.2d at 75. In so
concluding, the Court allowed individual taxpayers who complied
with N.C. Gen. Stat. § 105-267 by timely requesting a refund to
represent other individuals who paid the tax, but did not comply
with the statute. It follows that, in this case, since sovereign
immunity has been partially waived, the named Plaintiffs may
represent taxpayers who were subject to the contested tax, but
failed to comply with N.C. Gen. Stat. § 105-267 by individually
requesting a refund. Under our Supreme Court's resolution of this
question, Defendants' position has no merit. Accordingly, this
assignment of error is overruled.
 Defendants next argue that the trial court lacked subject
matter jurisdiction over taxpayers who are not individuals. Specifically, Defendants argue that the named Plaintiffs lacked
standing to represent anyone other than individual taxpayers.
Defendants contend that because the named Plaintiffs pay only
individual income tax under N.C. Gen. Stat. § 105-134.2, they may
not represent non-individual taxpayers, such as corporations or
estates and trusts that pay tax under N.C. Gen. Stat. § 105-130.3
and N.C. Gen. Stat. § 105-160.2 respectively.
It is clear that the named Plaintiffs have standing to
represent themselves and other individual taxpayers, and Defendants
do not challenge their ability in this regard. However, to
determine if they may represent non-individual taxpayers, we must
evaluate the rule governing class certification.
Under Rule 23 of the North Carolina Rules of Civil Procedure,
[i]f persons constituting a class are so numerous as to make it
impracticable to bring them all before the court, such of them, one
or more, as will fairly insure the adequate representation of all
may, on behalf of all, sue or be sued. N.C. Gen. Stat. § 1A-1,
Rule 23 (2003). The goal of Rule 23 is to help eliminate
'repetitious ligation and possible inconsistent adjudications
involving common questions, related events, or requests for similar
relief.' English v. Holden Beach Realty Corp., 41 N.C. App. 1, 9,
254 S.E.2d 223, 230-31 (quoting 7 Wright and Miller, Federal
Practice and Procedure: Civil § 1754, p. 543), disc. review denied,
297 N.C. 609, 257 S.E.2d 217 (1979), overruled on other grounds by
Crow v. Citicorp Acceptance Co., 319 N.C. 274, 354 S.E.2d 459
(1987). Those purporting to represent the class must show thatthey have a personal, and not just a technical or official,
interest in the action. English, 41 N.C. App. at 7, 254 S.E.2d at
230 (citing Hughes v. Teaster, 203 N.C. 651, 166 S.E. 745 (1932)).
In this case, although the named Plaintiffs paid only
individual income tax under N.C. Gen. Stat. § 105-134.2, they are
also attempting to contest the imposition of the same income tax on
corporations under section 105-130.3 and estates and trusts under
105-160.2. While each entity is subject to a unique statutory
provision that governs taxation, a closer examination reveals that
all three provisions are strikingly similar. For example, the
estates and trusts income tax provision uses tax rates from the
individual income tax provision, and the corporate tax statute
differs only in the rate of taxation imposed. Most significantly,
however, although individuals, estates and trusts, and corporations
pay tax under different statutory provisions, in this litigation,
each group is contesting the adjustment to taxable income under
N.C. Gen. Stat. § 105-134.6(b)(1)b and N.C. Gen. Stat. § 105-
134.6(c)(1), that is, each group is alleging that the same law,
which taxes non-State but not State obligations, is
unconstitutional. Therefore, the named Plaintiffs have more than
a technical or official interest in the subject matter of this
lawsuit affecting corporations or estates and trusts; their
interest is personal. Accordingly, once the named Plaintiffs
established standing to proceed on the individual claims, they were
entitled, under Rule 23, to represent not only other individuals,but also non-individual taxpayers, specifically, estates and
trusts, and corporations.
 By their final argument, Defendants attack the trial
court's order certifying the class, arguing that the order contains
erroneous assumptions and lacks sufficient findings of fact to
support class certification. We find no merit in this argument.
The decision to grant or deny class certification rests within
the discretion of the trial court and will not be overturned absent
an abuse of that discretion. Nobles v. First Carolina
, 108 N.C. App. 127, 423 S.E.2d 312 (1992),
disc. review denied
, 333 N.C. 463, 427 S.E.2d 623 (1993). On
appeal, an appellate court is bound by the court's findings of
fact if they are supported by competent evidence. Id.
at 132, 423
S.E.2d at 315 (citing Howell v. Landry
, 96 N.C. App. 516, 386
S.E.2d 610 (1989), disc. review denied
, 326 N.C. 482, 392 S.E.2d 90
(1990)). Although not mandated by the language of Rule 23, this
Court has determined that findings of fact are required by the
trial court when rendering a judgment granting or denying class
certification in order for the appellate courts to afford
meaningful review under the abuse of discretion standard. Nobles
108 N.C. App. at 133, 423 S.E.2d at 316 (citation omitted).
Defendants first allege that the trial court's order contains
an assumption not supported, and even contradicted, by the evidence
presented. In particular, Defendants object to the portion of the
court's order that asserts [t]he State must have assessed thelikely revenue from the various sources, including taxes, and has
had sufficient opportunity to assess the likely effect on the
treasury if refunds to all who have paid an unlawful tax is [sic]
required. We believe this statement merely indicates that the
State was put on sufficient notice that the income tax structure
was being questioned. Once it was determined that the State
received sufficient notice, what the trial court believes the State
must have done is irrelevant. Therefore, including this
statement in the order certifying the class did not amount to an
abuse of discretion by the trial court.
Next, Defendants generally object to the failure of the trial
court to enumerate findings of fact in the order certifying the
class. While we agree with Defendants that the trial court did not
findings of fact, upon a thorough review of the trial
judge's detailed order certifying the class, we are satisfied that
the section entitled Discussion in the order includes sufficient
findings of fact for this Court to afford meaningful review under
the abuse of discretion standard. Id
. For example, the trial
court found that (1) all putative class members share common
issues, including whether the State's tax provision in question
violates the Commerce Clause, (2) [t]he issues which are common to
the plaintiffs and members of the putative class are likely to
predominate over distinctly separate issues[,] (3) there is no
disabling conflict between the interests of the plaintiffs and the
interests of other taxpayers in the putative class, and the claims
of the plaintiffs are typical of the claims of other putative classmembers[,] and (4) [i]t is apparent . . . that potential
recoveries by putative class members if they were to pursue their
claims separately, would not likely be sufficient in amount to be
economically justifiable. The court further found that although
corporations, individuals, and estates and trusts are taxed under
separate statutory provisions, the only substantial difference
among them is the tax rate, which is actually the same for
individuals and trusts and estates[,] and that the taxation
mechanisms are substantially the same. Most importantly, the
trial court found that the State was put on notice in 2003 when
the plaintiffs filed for refund, . . . and was on notice [because
of ongoing similar litigation involving intangibles taxation] that
revenue provisions that treat income differently depending on its
connection to the State are constitutionally suspect. Based on
the sufficiency of the trial court's findings of fact, we find
Defendants' argument without merit.
The order of Judge Lindsay certifying a class for purposes of
pursuing this action is
Judges McGEE and GEER concur.
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