The opinion of the court was delivered by: MCCURN
MEMORANDUM-DECISION AND ORDER
During a period of internal strife at North Country Legal Services, Inc., the plaintiff Christopher Knauth received a letter terminating his employment as a Senior Attorney. He had been with NCLS just under six months at the time and, under the terms of the NCLS Personnel Manual, was considered a probationary employee. Having moved his large family some 200 miles to AuSable Forks, New York in reliance on employment with NCLS, Knauth was exposed to great hardship by the termination.
In April of 1981, Knauth commenced an Article 78 proceeding in New York State Supreme Court, Essex County. The lengthy petition contains nine causes of action. The first three assert that Knauth was deprived of property without due process and denied equal protection of the law; the fourth is a claim, under Title VII, that Knauth was discriminated against "on the ground of his age and experience in the legal profession," Petition P122(d); the fifth is a breach of contract claim; the sixth is a claim that defendant Gregory intentionally interfered with Knauth's contract by deliberately slandering and libelling his character; the last three causes of action seek damages on grounds that various defendants' acts were "unacceptable", "uncivilized", "improper", or "illegal". Petition PP125-27.
Knauth also included in his petition certain allegations of "state action", in support of his claim that the defendants were subject to constitutional restraints. Knauth states that NCLS "is a grantee supported entirely by federal monies which emanate from the Legal Services Corporation, which in turn is funded by the U.S. Congress to fund local legal services corporations. . . ." Petition P110.He further alleges that NCLS is subject to regulations promugated by the Legal Services Corp. Petition P112.
The defendants initially accepted this theory, at least for purposes of removal. Contending that they were persons acting under an officer of the United States, i.e., the Legal Services Corporation, defendants removed the action to this court pursuant to 28 U.S.C. § 1442(a)(1).
Over the next two years discovery was conducted but there was little other activity in the case. In June of 1983, defendants moved to dismiss the action pursuant to Rules 12(b)(1) and (6), Fed. R. Civ. P., or alternatively for summary judgment pursuant to Rule 56(b), Fed. R. Civ. P. In support of their motion, defendants now argue, contrary to their previous stance, that their acts are not under color of federal law, despite their relationship with the Legal Services Corporation. In addition, the defendants contend that Knauth possessed neither a liberty nor a property interest in continued employment; that Knauth did not meet the jurisdictional preconditions for asserting a claim under Title VII; that under New York law Knauth's employment was terminable at will.
For the reasons discussed herein, the court finds that it lacks subject matter jurisdiction over this lawsuit, and therefore remands the case to state court pursuant to 28 U.S.C. § 1447(c).
The Legal Services Corporation is a nonprofit corporation formed pursuant to the Legal Services Corporation Act of 1974, 42 U.S.C. § 2996 et seq., to provide legal services to those denied equal access to the judicial system because of inadequate income. Gerena v. Puerto Rico Legal Services, Inc., 538 F. Supp. 754, 763 n.2 (D. P.R. 1982).
The defendant NCLS is a not-for-profit corporation organized for the purpose of providing free legal services in civil cases to individuals and organizations in the counties of Essex, Hamilton, Franklin, Clinton and St. Lawrence. NCLS is mainly funded by federal monies made available through Legal Services Corporation grants to qualified legal aid organizations. In order to receive such funding, NCLS must adhere to certain federal regulations to insure that the funds will not be diverted to unauthorized purposes.
Presumably, Knauth's due process and equal protection claims are based upon the fifth, rather than the fourteenth amendment. Since the allegations are of federal, as opposed to state, involvement in NCLS. The fifth amendment restricts only the government, and not private persons. Public Utilities Comm'n v. Pollak, 343 U.S. 451, 96 L. Ed. 1068, 72 S. Ct. 813 (1952). Thus, it is applicable to the conduct of NCLS only if there is sufficient federal control, regulation, and interference with NCLS to warrant characterizing that conduct "federal action." Lefcourt v. Legal Aid Society, 445 F.2d 1150, 1155 (2d Cir. 1971).
Federal funding alone does not transform private conduct into federal action; nor do government regulations, imposed as a condition attached to funding, mandate a finding of federal action. United States v. Orleans, 425 U.S. 807, 48 L. Ed. 2d 390, 96 S. Ct. 1971 (1974) (the torts of community action agencies are not federal torts due to funding by the Office of Economic Opportunity and federal regulations); Lefcourt v. Legal Aid Society, supra, 445 F.2d 1150 (the dismissal of an attorney by the Legal Aid Society is not state action despite financial benefits from, and contractual obligations owed to New York City); Weise v. Syracuse University, 553 F. Supp. 675 (N.D.N.Y. 1982) (alleged employment discrimination by private university is not state action despite financial assistance and regulation by government). Moreover, to support a finding of federal action, the plaintiff must generally show not only a significant federal intrusion, but a nexus between the governmental intrusion and the challenged activity. See Jackson v. Metropolitan Edison Co., 419 U.S. 345, 351, 42 L. Ed. 2d 477, 95 S. Ct. 449 (1974); Powe v. Miles, 407 F.2d 73, 83 (2d Cir. 1968); Weise v. Syracuse University, supra, 553 F. Supp. at 679.
In Gerena v. Puerto Rico Legal Services, 538 F. Supp. 754 (D. P.R. 1982), the district court carefully considered the precise question posed here: whether the dismissal of an attorney by a legal services nonprofit corporation constitutes federal action by virtue of federal funding through the Legal Services Corporation, and by virtue of federal regulations. After examining the Legal Services Corporation Act, the court concluded as follows:
[T]he LSC's regulation does not impair the independence of PRLS to such a degree as to transform the conduct of the latter into conduct of the federal government. Although the LSC is the primary funding source of PRLS, it "does not have the power to supervise the everyday activities of the recipients of its monetary grants." . . . PRLS is not an agent of the LSC . . . PRLS must, of course, meet certain restrictions and limitatios if it wishes to receive federal funding. . . . Plaintiff has cited some of those restrictions. They are, however, relatively insignificant and do not intrude upon the everyday activities and decisions of PRLS. The restrictions are designed only to ...