The opinion of the court was delivered by: RYAN
Plaintiff, a contractor, seeks to recover damages for breach of contract and detention of materials, as well as for the value of services rendered in the construction of a school.
Plaintiff is a Connecticut corporation; defendants are the Board of Education, Central School District No. 2 of the Towns of Bedford, New Castle, North Castle and Pound Ridge, New York, and a joint venture composed of Mars Associates, Inc., and Normel Construction Corp., both New York corporations. Jurisdiction is predicated on diversity of citizenship.
The complaint pleads six counts or causes of action. The answer of defendant Board alleges seven affirmative defenses and two counterclaims.
Defendant Board now moves for summary judgment dismissing all plaintiff's causes of action and granting it the relief sought in the two counterclaims. Judge McLean, in a motion by defendant Board to compel arbitration, held on July 6, 1967 that the contract pleaded was void and unenforceable. Plaintiff consents to the dismissal of the first, third and fourth causes of action, based on that contract, leaving for determination the second, fifth and sixth causes of action.
Although before Judge McLean defendant Board defended the legality of the contract and, in fact, precipitated his decision by moving to compel arbitration under it (which was denied by reason of the finding of the invalidity of the contract), it now moves to dismiss the entire complaint and for judgment in its favor upon the ground that this Court lacks jurisdiction over the subject matter because defendant is an agency of the State not suable in the federal court under the Eleventh Amendment save on a federal claim and because defendant Board is not a citizen of the State of New York and diversity of citizenship is not present. The defendant also has pleaded this in its Third Affirmative Defense, which was filed after Judge McLean's decision. If, as defendant alleges, there is no jurisdiction in this Court, then all prior proceedings, including the decision of Judge McLean, are a nullity. It is, therefore, imperative that this be our first determination, irrespective of the merits of the claims or defenses.
The first objection to jurisdiction is to be found in the Eleventh Amendment, which divests the Courts of the United States of jurisdiction of suits against any state by citizens of another state. The second objection is that a State is not a citizen, and that, therefore, a suit between a citizen of one state against another state is not a suit between citizens of different states (Highway Comm. of Wyoming v. Utah Construction Co., 278 U.S. 194, 49 S. Ct. 104, 73 L. Ed. 262; Krisel v. Duran, 386 F.2d 179 (2nd Cir.)). If defendant Board is found to be a civil division of the state, so that in reality the suit is against the state though not named as such, it may not be maintained in this Court. The Eleventh Amendment and Section 1332, U.S.C., Title 28, are clear that the federal court is without jurisdiction if the Board in law is the alter ego of the state; this is so quite independent of the question of its consent or lack of consent to be sued, which affects its sovereign immunity. Where jurisdiction is alleged on diversity of citizenship, consent cannot confer jurisdiction where it does not exist (State Highway Comm. of Wyoming v. Utah Construction Co., supra; Krisel v. Duran, supra). Although the question of the applicability of the Eleventh Amendment and Section 1332, U.S.C., Title 28, is a federal question, its resolution must turn in part at least on "the characteristics, capacities, powers and immunities of such agency as they are defined by the law of the State." (Fleming v. Upper Dublin Public School District (D.C.), 141 F. Supp. 813.)
Whether the Board of Education of Central School District No. 2 is an independent, separate corporate entity, capable of citizenship like any other public corporation, or a political subdivision of the State, is to be decided under the New York Education Law creating defendant and the New York decisions defining its status and nature. This but answers part of the problem, for even though for state jurisdiction purposes the Board may be sued and exposed to liability in the State courts as a corporate entity, for purposes of federal jurisdiction the federal test goes one step further and requires that the Court look behind the corporate structure and the claim being asserted to see whether it is the Board or the State who is the real party and whose pocketbook will be affected. (O'Neill v. Early, 208 F.2d 286, (4th Cir. 1953); School Board of City of Charlottesville v. Allen, 240 F.2d 59, (4th Cir., 1956) cert. den. School Board of Arlington County v. Thompson, 353 U.S. 910, 77 S. Ct. 667, 1 L. Ed. 2d 664; De Levay v. Richmond County School Board, (4th Cir. 1960) 284 F.2d 340; Wihtol v. Crow (8th Cir. 1963), 309 F.2d 777; Fleming v. Upper Dublin Public School District (E.D.Pa.1956), 141 F. Supp. 813; Thurman v. Consolidated School District No. 128 (D.C.Kan.1950) 94 F. Supp. 616.)
We must be mindful that the question of diversity is distinct from that of sovereign immunity. The fact that numerous actions on claims against the Board of Education have been entertained by the State courts not in the Court of Claims which is the only forum in which the State is amenable to suit, while most persuasive, is not determinative of diversity jurisdiction in the action before us.
We also find that the character and nature of the activities the Board carries on are not determinative of the question for, as this Circuit said in Krisel v. Duran, supra:
"A state may, in its own name or through an alter ego, carry on activities which are traditionally regarded as proprietary functions but neither the state nor its alter ego thereby becomes a citizen for the purpose of diversity jurisdiction" (386 F.2d 181) (citing State Highway Commission of Wyoming v. Utah Construction Co., supra).
Here, concededly, the activities out of which this claim arose were governmental.
To sustain jurisdiction, we must find that a Board of Education of a Central School District is a corporate entity sufficiently independent and separate from the State as to carry its own citizenship, and not by this suit, expose the State to financial or other detriment.
The status of the defendant is defined in the New York statutes:
School districts are not municipal corporations. (General Municipal Law § 2, McKinney's Consol.Laws of New York, c. 24.)
The Education Law, Sections 1501 et seq. (McKinney's Consolidated Laws of New York, c. 16), exempts all school property from taxation. It also provides that money obtained from the sale of school property shall be applied for the benefit of the district as directed by the district voters. It then treats of the formation and dissolution of Common School Districts and Union Free School Districts by a district superintendent, and provides for Common School Districts, and the election of trustees who shall constitute a Board as a "body corporate", holding "as a corporation" all property for the use of the school in the district.
Central School Districts, of which the defendant is one, are treated separately in Sections 1801 et seq., of the New York Education Law. They are formed by order of the Commissioner of Education, who is authorized to lay out Central School Districts for the establishment of Central Schools to give instruction in elementary and high school subjects within stated boundaries defined by the Commissioner. After entry of the Commissioner's order, the Central School Districts and the Central Schools therein are established by petition and vote of the qualified voters, conducted under the supervision of the Commissioner of Education (Sec. 1802). The Central School District is managed by a Board of Education, whose members are elected, have the same powers and duties as Boards of Education in Union Free School Districts (see Section 1709, New York Education Law), and, where not inconsistent, are subject to all the provisions of the Education Law or any other general law relating to or affecting Union Free School Districts (Section 1804).
While the Central School District is not declared a body corporate, as is the Union Free School District, it is clothed specifically with all the powers and subject to the same limitations as the Union Free School, which includes authority to pay judgments against the school district by the levying of taxes. The recognition of exposure to judgment and the means with which to satisfy a judgment is recognition of the fact that it is exposed to suit.
It appears conclusively that, although a Central School District engages in the carrying out of a particularly important governmental function which traditionally is the responsibility of the state, it does so as an autonomous agency, at least with respect to the establishment, support, fiscal and business management and control of its schools. The most significant query put by the federal courts to determine who is the real party affected is answered in favor of the Central School District since its funds are used to pay judgments and all operational expenses. The powers and duties which the statute confers upon it recognizes its almost total freedom from State restraint in these matters. Under this test, the Central School District is the real party in interest.
As early as 1922, we find the defendant Board of Education had the power and duty to superintend, manage and control the school (See Section 310 of the New York Education Law, now Section 1709, supra), and was subject to suit in the State Supreme Court for its acts. The language of Pound, Judge of the New York Court of Appeals, rejecting the contention that defendant ...