The N.C. Court of Appeals recently awarded limited damages to a Montgomery County property owner who sued a state agency and county health department for improperly issuing a septic-system permit on land he subsequently purchased and developed.

In 1999, Kerry Watts entered into a contract to buy an undeveloped lakefront lot in Montgomery County. The sale was conditional upon the lot being able to support a septic system for a three-bedroom house.

On July 30, 1999, David Ezzell, an agent of the Montgomery County Health Department and the N.C. Department of Environment and Natural Resources, inspected the lot, preformed a “perk” test, and issued an improvement permit allowing construction of the house. Watts completed the purchase of the $118,000 lot and added a $29,000 boat dock.

In 2002, Watts concluded that the property would work better if the driveway were on the other side of the lot. This change required that he apply for a new improvement permit. With the new permit application came a new perk test — which showed the lot couldn’t support a simple septic system.

The application for the new improvement permit was denied and the original permit canceled. Watts was ultimately forced to buy an adjoining lot for $70,000 to support the septic system and obtain the necessary permit. During the resulting delay in construction, interest rates also went up considerably, making the house more expensive for Watts to finance.

Watts sued. In late 2004, the Industrial Commission ruled against the NCDENR and the Montgomery County Health Department and awarded Watts nearly $300,000 in damages, costs, and lawyer’s fees. NCDENR and the county appealed the case to the Court of Appeals, contending that the commission reached the wrong conclusion and, in any case, awarded Watts too much money.

A three-judge panel of the N.C. Appeals Court heard the case in November 2006. Two of the three judges agreed that the government agencies should compensate Watts for the cost of the extra land he had to buy to support the septic system. The judges substantially reduced the amount of damages to which Watts was entitled. Of the $300,000 awarded, nearly $175,000 was in compensation for a higher interest rate on Watts’ loans on the property as a result of delayed construction.

“The future interest damages included in the Commission’s award are uncertain, speculative, and too remote to be recoverable,” Chief Judge Martin wrote.

“The figure for future interest damages was calculated based on financial data about projected interest rates, the anticipated number of years over which the loan would accrue interest, and the type of loan (fixed, as opposed to variable). The numbers further depend on plaintiff completing construction of the home on time and according to schedule. In sum total, these factors make the figure of $174,745.54 uncertain and speculative,” Martin wrote.

Even if it were not speculative and unrecoverable, Martin noted that the commission had in any case calculated the amount incorrectly. The proper method, as recognized by the state’s appellate courts, would have been to calculate the present value of the amount.

The appeals court also held that the Industrial Commission did not have the authority to award lawyer’s fees in this case.

Judge John Tyson thought it was inappropriate to award Watts anything. He based his conclusion upon the public duty doctrine, which “provides that governmental entities and their agents owe duties only to the general public, not to individuals, absent a ‘special relationship’ or ‘special duty’ between the entity and the injured party.”

“Even if NCDENR admitted Ezzell was negligent in issuing the original permit, Ezzell’s statutory duty to inspect was owed to the public generally and not to any individual,” Tyson wrote.

“The purpose of the inspection and issuance of permits to install septic tank systems is for the protection and benefit of public health, safety, and welfare,” he wrote.

Tyson also found that Watts had not relied upon the original permit issued in 1999, and thus in any event should not be entitled to damages.

“Three years after purchasing the lot, plaintiff changed his site plan and sought an entirely new permit. Plaintiff failed to challenge or appeal the revocation of the original 1999 Permit 99291 and never sought to construct improvements in reliance of that permit. Plaintiff could have, but failed to, assert available administrative and judicial remedies,” Tyson wrote.

The Court of Appeals majority specifically addressed Tyson’s points, noting the parties had stipulated to facts supporting a special duty exception.

N.C. Court of Appeals rulings are binding interpretations of state law unless overruled by the N.C. Supreme Court. Because of Tyson’s dissent, the high court is required to take the case if the NCDENR further appeals.

The case is Watts v. North Carolina Department of Environment and Natural Resources, (06-299).

Michael Lowrey is associate editor of Carolina Journal.