Client Advisory

Gerald T. Ford, Jolanis A. Alexandre

In a unanimous decision the Supreme Court of the United States held that New Jersey Transit Corporation (“NJT”) is not an arm of the State of New Jersey (“NJ”) and thus is not entitled to share in NJ’s sovereign immunity from lawsuits in the courts of other States. The decision arose from two negligence actions, one filed in New York state court, and one filed in Pennsylvania state court, involving accidents with NJT buses. The Pennsylvania Supreme Court held that NJT was an arm of the State, while the New York Court of Appeals held it was not.

In ruling against NJT, the Court explained that: (1) sovereign immunity is personal to the State itself; (2) it extends to other entities only if they are an arm of the State; and (3) whether an entity is an arm of the State is a question of federal law that can be answered only after considering the provisions of State law that defines the entity’s character. Slip op. at 6. The Court concluded that NJT was not an arm of NJ for the following reasons.

First, NJ structured NJT as a legally separate corporation. Slip op. at 15-16. Specifically, the NJ statute creating NJT describes it as a “body corporate and politic with corporate succession,” N.J.S.A. 27:25-4(a), and grants it corporate powers, including the power to sue and be sued, hold property, enter contracts, adopt bylaws, raise funds, and own corporate entities. See N.J.S.A. 27:25-5. The Court explained that these facts show that NJT’s corporate form is legally separate from NJ itself. The Court also looked to its earlier decisions, which have recognized that separately incorporated entities created by a State usually do not share the State’s sovereign immunity. That NJT’s organic statute labels NJT as an “instrumentality of the State,” N.J.S.A. 27:25-4(a), did not change this conclusion. “The term ‘instrumentality’ . . . lacks the historical weight the corporate form does and says little about whether an entity is an arm of the State.” Slip op. at 16.

Second, NJ is not legally liable for NJT’s debts and liabilities. Slip op. at 16. Specifically, N.J.S.A. § 27:25-17 provides that “no debt or liability of the corporation shall . . . constitute a debt, liability, or a loan or pledge of the credit of the State.” Further, NJT conceded before the Court that the State is not formally liable for NJT’s debts. This point was central to the Court’s opinion, because one of the main purposes of sovereign immunity is to protect a State’s ability to make its own decisions about the allocation of scarce resources. Slip op. at 12. The Court observed that it “has never once found a corporation that was liable for its own judgments to be an arm of the State.” Slip op. at 13.

Third, NJ’s substantial control over NJT was not enough to overcome the factors discussed above. Slip op. at 16-17. The Court acknowledged that NJT is considered to be part of the NJ Department of Transportation. N.J.S.A. 27:25-4(a). In addition, the Governor has the power to appoint and remove NJT Board members and may veto Board actions; a State cabinet member chairs the Board; and the Legislature may veto certain NJT eminent domain decisions. On the other hand, the Court noted, NJ law states that NJT “shall be independent of any supervision or control by the [transportation] department or by any body of officer thereof,” N.J.S.A. 27:25-4(a), and requires that NJT “exercise independent judgment.” N.J.S.A. 27:25-4.1(b)(2)(d). In any event, the Court described the control factor as less reliable to the inquiry of whether an entity is an arm of the State because States retain authority over many entities that are still legally separate. Slip op. at 12-13.

The Court also rejected various arguments put forth by NJT. NJT first argued that NJ intended it to be an arm of NJ by describing it as serving “public and essential government functions,” N.J.S.A. 27:25-4(a), and delegating to NJT plenary public powers, such as the power to operate a police force, exercise eminent domain power, and promulgate regulations. N.J.S.A. 27:25-5. The Court, however, stated that the relevant inquiry was not whether an entity performs an important governmental function, but whether the State chose to perform that function through the State itself or a separate legal entity. Slip op. at 18-20.

The Court similarly concluded that the amount of State funding of an entity or whether the State is likely to voluntarily pay the entity’s liabilities does not determine whether an entity shares the State’s immunity. The Court stated that the more appropriate inquiry is whether the State is formally obligated to pay the entity’s judgment. Slip op. at 20-21.

The Court also rejected NJT’s request for an arm-of-the State inquiry that places more weight on the State’s control over, and practical financial relationship with, the entity. In this regard, NJT relied on, among other cases, Lebron v. National Railroad Passenger Corp., 513 U.S. 374 (1995). The Court disagreed, noting that cases like Lebron recognize that an entity can count as part of the State or federal government for one purpose, but not another purpose. Slip op. at 22 (Lebron held that Amtrak “is part of the Government for purposes of the First Amendment” but lacks the Government’s “sovereign immunity”).

The Court also declined a request from 23 other States as amicus curiae to adopt a rule where a State’s own description of an entity should control. The Court said that this rule: (1) would focus on the label a State placed on an entity, rather than assessing whether the State structured the entity as legally separate; (2) would be hard to apply because States often use multiple descriptors to describe an entity and courts would still have to decide which one should control; and (3) would not provide predictability in the treatment of state-created entities. Slip op. at 22-23.

The Court acknowledged a separate doctrine where a case against a state-created entity may be barred if a State is the real party in interest. The Court, however, noted that NJT did not argue NJ State was the real party in interest in either of the negligence suits, so that issue was not before the Court.

In sum, the Galette decision shows that the arm-of-the-State analysis primarily turns on whether the State has: (1) formed the entity as legally separate; and (2) whether the State is legally liable for the entity’s judgments. This is not an exhaustive list of factors to consider, but they now are the two most important factors.