When is a Corporation Also New Jersey?

The Supreme Court heard argument yesterday in Galette v. New Jersey Transit Corporation, a pair of consolidated cases asking whether the New Jersey Transit Corporation shares in the State of New Jersey’s sovereign immunity. The plaintiffs, who were hit by N.J. Transit buses in Pennsylvania and in New York, argue no. Sovereign immunity is for sovereigns, and New Jersey deliberately created the Corporation as a separate legal person—with separate capacity to sue and be sued, separate wins and losses in court, and separate assets and liabilities.

Will Baude and I agree, as we wrote in an amicus brief: States retain the immunity from suit they had at the Founding, and that immunity extended to the sovereign States themselves, not to their political subdivisions or public corporations. But there were four questions that came up at argument that deserve further attention.

The first question is whether corporate separateness needs to be assessed de jure or de facto. As a matter of law, the Corporation has its own assets and liabilities, and a loss for the Corporation in court doesn’t necessarily have any impact on the rights and obligations of the State of New Jersey. In practice, of course, New Jersey routinely subsidizes the Corporation and contributes to its budget. So if the Corporation has to pay Cedric Galette’s medical bills after its bus hits Galette’s car, that might eventually impose some minor burden on the state fisc. But whether an entity is amenable to judicial process and to being sued without its consent doesn’t depend on whether a sovereign government will eventually choose to bail you out. Everyone agrees that New York City lacks sovereign immunity and is a separate legal person from New York State, even though NYC going bankrupt would be a major headache for New York’s balance sheet; everyone agrees the “Greenspan put” or Fannie Mae’s implicit government guarantee doesn’t turn “too big to fail” banks and mortgage guarantors into sovereigns with immunity from suit. Another defendant here, N.J. Transit Bus Operations Inc. was created as a separate corporation even from N.J. Transit, with even less of an argument for immunity; yet if Bus Operations had to pay a plaintiff’s medical bills, the fact that the Corporation might bail it out rather than give up on running buses wouldn’t make subsidiary and parent the same legal person. (A de facto test might also create strange results in future cases, when the facto‘s might have changed. If NJ Transit ridership ​goes through the roof, turning it from a cost center into a major cash cow for New Jersey, will the courts then have to overrule any decisions finding the Corporation immune, depending on its budgetary prospects this year?)

A second question involved two civil procedure doctrines, the “real party in interest” doctrine and the required joinder of parties. Normally, under Civil Rule 17, a lawsuit has to be brought by or against the “real party in interest.” And when a remedy sought against Party A actually affects the rights and obligations of Party B—say, by rescinding a three-sided contract to which plaintiff, A, and B are all parties—Rule 19 sometimes requires that B be made a defendant too, as a necessary or indispensable party. And when B has sovereign immunity, as in Republic of the Philippines v. Pimentel, sometimes that might require dismissing the whole action at once. This can often muddy the sovereign-immunity waters, because arguing that “this lawsuit naming a separate legal person is really seeking relief against the State” sounds a lot like arguing that “the person who’s named here is really just the State, and not a separate legal person at all.” But as the Court has made clear in past cases—such as Hopkins v. Clemson Agricultural College of South Carolina, which was filed against a separate legal person but sought removal of a State-owned dyke on State land—these are two very different arguments: one concerns the named defendant’s amenability to process, and the other concerns the permissible types of relief. Fortunately, here these confusions don’t come up. By state law, the N.J. Transit Corporation’s liabilities aren’t liabilities of the State, so a money damage award against the Corporation can’t make New Jersey the real party in interest.

A third question was about the “blast radius” of the plaintiffs’ position. The Corporation noted that various States have labeled their agencies as corporations—especially some important parts of the government of Louisiana. We’re not experts in Louisiana law (which, being rooted in civil law rather than common law, is famously opaque to outsiders), but we’d be surprised to learn that Louisiana cabinet departments were really separate legal persons from the State, with their own separate capacities to sue and be sued, their own separate courtroom wins and losses not binding the State’s rights and obligations, and their own separate legal assets and liabilities. So the blast radius of a separate-legal-person test is likely smaller than it might appear. But suppose that for some reason Louisiana really did decide to set up its prison system (or what have you) as a separate corporation, with the corporation owning the prison buildings and such outright, and with the State not legally answering for its debts or being estopped by its courtroom losses—the way Fannie Mae might guarantee mortgages not guaranteed by the United States. That might seem a very strange thing to do, but if it’s what the State chose, would it be so strange to say that its choice might have consequences for the corporation’s suability too?

Finally, a fourth point concerned the Court’s decision in Biden v. Nebraska, which centered on the Missouri Higher Education Loan Authority, a Missouri public corporation. MOHELA has the independent capacity to sue and be sued, but the Court still found that a financial injury to MOHELA was enough of an injury to Missouri to support the State’s Article III standing. But Article III injury-in-fact is a different (and more capacious) concept than legal personhood; a parkgoer can be injured in her “[a]esthetic and environmental well-being” without having to be the same legal person as Sequoia National Park. As one of us noted in an amicus brief in Biden, the authorities were divided on whether MOHELA was an arm of the state for sovereign immunity purposes. But the Biden majority elected not to resolve such questions, instead responding that “a public corporation can count as part of the State for some but not ‘other purposes.'” If Biden decided that the arm-of-the-state inquiry didn’t determine the standing issue there, it’d be unusual (to say the least) for the Court to treat Biden‘s standing holding as determining the arm-of-the-state-inquiry here.

(cross-posted from Divided Argument)