Alliance of Schools for Cooperative Insurance Programs v. Munich Reinsurance America, Inc.

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL

Case No. 2:24-cv-06664-MCS-JC Date November 20, 2024

Title Alliance of Schools for Cooperative Insurance Programs v. Munich

Reinsurance America, Inc.

Present: The Honorable Mark C. Scarsi, United States District Judge

Stephen Montes Kerr Not Reported

Deputy Clerk Court Reporter

Attorney(s) Present for Plaintiff(s): Attorney(s) Present for Defendant(s):

None Present None Present

Proceedings: (IN CHAMBERS) ORDER RE: MOTION TO REMAND (ECF No. 10)

(JS-6)

Plaintiff Alliance of Schools for Cooperative Insurance Programs (“ASCIP”)

filed this case in California state court. Defendant removed it to federal court on the

basis of diversity jurisdiction. (Notice of Removal, ECF No. 1.) Plaintiff moved to

remand, which was fully briefed. (Mot, ECF No. 10; Opp’n, ECF No. 14; Reply,

ECF No. 15). The Court heard argument on the motion on November 4, 2024, and

took it under submission. (Mins., ECF No. 21.)

In its motion, ASCIP argues that diversity jurisdiction 1s improper because, as

a California joint powers authority (“JPA”) organized by California public school

districts and educational agencies, ASCIP is an arm of the state and therefore is not

a citizen of California or any other state. (Mot. 2.) For the reasons below, the Court

agrees and remands the case.

I. BACKGROUND

Plaintiff is a JPA composed of public school districts and public educational

agencies whose primary purpose is to expend state-provided funds of its members

on a risk-sharing basis where all members contribute to indemnify each member

Page 1 of 6 CIVIL MINUTES — GENERAL Initials of Deputy Clerk SMO

against lawsuits. (Birgel Decl. Ex. C, ECF No. 10-3.) Defendant provides

reinsurance coverage to Plaintiff. (Compl. ¶ 1, ECF No. 1-1.) Plaintiff filed an action

in Los Angeles County Superior Court alleging that Defendant failed to provide full

coverage to Plaintiff for its losses, and therefore violated the parties’ reinsurance

agreement. (Id. ¶¶ 36–47.)

Defendant removed the action to this Court claiming that complete diversity

exists because the amount in controversy exceeds $75,000 and because Defendant

is a citizen of Delaware and New Jersey while Plaintiff is a citizen of California.

(Notice of Removal ¶¶ 5–7.) Plaintiff then filed the present motion.

The narrow issue in front of the Court is whether, for the purposes of diversity

jurisdiction, ASCIP is an arm of the state and, therefore, not a citizen for the purpose

of diversity jurisdiction.

II. LEGAL STANDARD

“Federal courts are courts of limited jurisdiction” and “possess only that

power authorized by Constitution and statute.” Kokkonen v. Guardian Life Ins. Co.

of Am., 511 U.S. 375, 377 (1994). A defendant may remove an action to federal court

if the federal court could exercise original jurisdiction over the action. 28 U.S.C.

§ 1441(a). “The removal statute is strictly construed against removal jurisdiction,”

and “[t]he defendant bears the burden of establishing that removal is proper.”

Provincial Gov’t of Marinduque v. Placer Dome, Inc., 582 F.3d 1083, 1087 (9th Cir.

2009). If a defendant fails to meet its burden of establishing subject-matter

jurisdiction, the suit is remanded. 28 U.S.C. § 1447(c); see also Gaus v. Miles, Inc.,

980 F.2d 564, 566 (9th Cir. 1992) (stating that there is a “strong presumption” against

removal jurisdiction, and that “[f]ederal jurisdiction must be rejected if there is any

doubt as to the right of removal in the first instance”).

To invoke diversity jurisdiction, a party must demonstrate that there is

complete diversity of citizenship between the parties and that the amount in

controversy exceeds the sum or value of $75,000, exclusive of interest and costs. 28

U.S.C. § 1332(a).

Regarding citizenship, states are immune from suit in federal court and

therefore are not “citizens” for the purposes of diversity jurisdiction. Moor v. County

of Alameda, 411 U.S. 693, 717 (1973). This immunity extends to state entities that

are considered “arm[s] of the [s]tate.” Mt. Healthy City Sch. Dist. Bd. of Educ. v.

Doyle, 429 U.S. 274, 280 (1977).

The Ninth Circuit has instructed courts to employ a three-factor test to

determine whether an entity is an arm of the state. Kohn v. State Bar of Cal., 87 F.4th

1021, 1030 (9th Cir. 2023). These factors are: “(1) the [s]tate’s intent as to the status

of the entity, including the functions performed by the entity; (2) the [s]tate’s control

over the entity; and (3) the entity’s overall effects on the state treasury.” Id.

(alterations in original) (quoting P.R. Ports Auth. v. Fed. Mar. Comm’n, 531 F.3d

868, 873 (D.C. Cir. 2008)).

III. ANALYSIS

ASCIP argues that it is an arm of the state because (1) ASCIP’s members are

considered arms of the state under Ninth Circuit precedent; and (2) a weighing of

the Kohn factors show that ASCIP is an arm of the state. The Court addresses each

issue in turn.

A. Educational Entities as Arms of the State

JPAs are entities formed pursuant to California Government Code section

6500 et seq. They can only be created by two or more public agencies and may only

exercise powers that are common to the contracting parties. Cal. Gov’t Code § 6502.

In this case, ASCIP is a JPA created by and consisting of California public school

districts and public educational entities. (Birgel Decl. Ex. B (“Bylaws”), arts. II–III,

ECF No. 10-4.)

ASCIP contends that the Ninth Circuit has deemed its members to be arms of

the state, and therefore ASCIP is also an arm of the state. (Mot. 9); see Belanger v.

Madera Unified Sch. Dist., 963 F.2d 248, 253 (9th Cir. 1992); see also Sato v. Orange

Cnty. Dep’t of Educ., 861 F.3d 923, 926 (9th Cir. 2017) (reaffirming that public

school districts as well as public educational agencies like county departments of

education are entitled to sovereign immunity). Defendant disagrees on two grounds:

first, it argues that the Court should only consider the status of ASCIP itself, not its

members; and second, it avers that ASCIP has not met its burden1 of establishing

1 Plaintiff cites no authority that Defendant bears the burden of proof for this. Since

Defendant does not contest the burden issue, the Court only notes that it has not

endorsed Plaintiff’s characterization that Defendant bears the burden on this issue.

that its members are arms of the state because the Ninth Circuit overruled the test it

used in its Belanger ruling. (Opp’n 5–6.)

The Court rejects Defendant’s first contention that the citizenship of ASCIP’s

members does not inform whether ASCIP itself is an arm of the state. Admittedly,

Ninth Circuit courts have not assessed the citizenship of JPAs in depth, but when

they have, they have typically considered the citizenship of the members. Notably,

in Mag US Lounge Management, LLC v. Ontario International Airport Authority,

the Ninth Circuit reversed a district court’s ruling that a JPA was an arm of the state,

in part because the JPA was formed by two entities that were not arms of the state.

No. 22-55230, 2022 U.S. App. LEXIS 34478, at *6–7 (9th Cir. Dec. 14, 2022). While

not binding, the panel’s analysis teaches that the nature of constituent entities of a

JPA informs the arm-of-the-state inquiry. As a result, although the issue is not

dispositive, the Court will certainly consider the citizenship of ASCIP’s members

when assessing if ASCIP is an arm of the state.

The Court also rejects Defendant’s second argument that ASCIP has not

proved that its members are arms of the state. For context, the court in Belanger

employed a multi-factor test from Mitchell v. Los Angeles Community College

District, 861 F.2d 198 (9th Cir. 1988), to conclude that public school districts are

arms of the state. Belanger, 963 F.2d at 254. However, in Kohn, the Ninth Circuit

“reshape[d]” the Mitchell test in favor of the three-factor Kohn test. Kohn, 87 F.4th

at 1027. Therefore, Defendant argues that ASCIP must re-establish that public school

districts are arms of the state for jurisdictional purposes. However, Defendant

overlooks the Ninth Circuit’s commentary in Kohn that the new “framework is

unlikely to lead to different results in cases that previously applied the Mitchell

factors and held an entity entitled to immunity.” Id. at 1031.2 In fact, aside from dicta,

there are no cases that this Court is aware of since Kohn that have overturned the

citizenship status of public school districts or public educational entities.

Accordingly, the Court considers ASCIP’s members to be arms of the state.

2 For this reason, the Court continues to look to cases that predate the Kohn test for

guidance. Mag US Lounge Management, LLC is one of these cases. While Kohn

provides the appropriate test, the Court is not convinced that cases using the Mitchell

test are irrelevant. Indeed, in addition to the Ninth Circuit’s commentary regarding

the validity of precedent under the Mitchell test, a comparison of the Mitchell factors

and the Kohn factors suggests that the Ninth Circuit merely shifted the weight that

different aspects of the arm-of-the-state analysis are to be given.

B. Kohn Factors

As a starting point, the mere fact that ASCIP consists entirely of arms of the

state supports a finding that ASCIP is also an arm of the state. This is likely why

Defendant spills much ink casting doubt over the immunity status of public school

districts. However, even an analysis of the Kohn factors demonstrates ASCIP is an

arm of the state.

Since the Court presumes that ASCIP’s members are arms of the state,

consistent with decades of precedent, the Court analyzes the Kohn factors from the

perspective of ASCIP’s members rather than the State of California or its

government. It makes little sense to assess California’s intent or control regarding

the creation of ASCIP because the state government itself played virtually no role in

creating ASCIP. And, while California did endow its public agencies with the power

to create JPAs more broadly, the Court does not find it necessary to consider whether

the state intended all JPAs to be arms of the state or not. Relevantly, in Mag US

Lounge Management, the Ninth Circuit did not expressly reject the possibility that a

JPA could be an arm of the state. Instead, the panel conducted an individualized

inquiry into the relevant characteristics and formation of the JPA in question. See

2022 U.S. App. LEXIS 34478, at *5–8. Therefore, the Court finds it proper to view

Kohn factors from the perspective of ASCIP’s members rather than the state itself.

The first factor, which looks at the members’ intent in creating ASCIP and

ASCIP’s governmental functions, leans slightly toward ASCIP being an arm of the

state. First, California law only permits JPAs like ASCIP to exercise power common

to the contracting parties. Cal. Gov’t Code § 6502. Therefore, ASCIP’s powers are

limited to the functions of its members. In this case, ASCIP’s members are

considered arms of the state, so whatever functions ASCIP exercises are, at

minimum, derivative of governmental functions. Logically, since ASCIP’s powers

are the same as those of its members, ASCIP’s members intended for ASCIP to

possess the same powers and status as they do.

The second factor, which assesses who controls and supervises ASCIP, also

weighs in favor of finding ASCIP an arm of the state. While ASCIP is a legally

distinct entity, it is firmly controlled by its members. ASCIP’s bylaws clearly provide

that ASCIP “shall be under the direction and control of, and shall be governed by, an

Executive Committee.” (Bylaws art. IV(1).) ASCIP’s members elect the Executive

Committee from its constituent agencies’ full-time employees, and those who sit on

the committee are unpaid. (Id. art. IV(2)–(3), (5)–(8).) The Bylaws further state the

Committee “shall have the authority to exercise the powers of ASCIP as set forth in

the Joint Powers Agreement.” (Id. art. V.) These are hardly the characteristics of an

independent entity. Instead, a reasonable interpretation of these provisions suggests

that ASCIP operates at the discretion of its members and is subject to oversight and

control by its members, which are arms of the state.

The third factor, which considers ASCIP’s financial relationship to its

members and the treasury, also suggests that ASCIP is an arm of the state. California

law states that any “debts, liabilities, and obligations of the [JPA] shall be the debts,

liabilities, and obligations of the parties to the agreement.” Cal. Gov’t Code

§ 6508.1(a). The parties to the agreement, in this case, are entities that are funded by

the state. ASCIP, in turn, is entirely funded by its members, and while it is strictly

accountable for all funds received and disbursed, if the total liabilities of ASCIP

exceed the total assets in a given year, its members are assessed a pro rata share of

the additional contribution required. (Bylaws art. VIII(1)–(2), (7).) The financial

structure of ASCIP is perhaps the strongest indicator that ASCIP is an entity whose

powers and finances are derivative of its members.

Therefore, the Court concludes that the balance of the Kohn factors leans in

favor of ASCIP being an arm of the state. The Court again looks to Mag US Lounge

Management for further support. There, the Ninth Circuit concluded that a JPA was

not an arm of the state because (1) it was formed and controlled by entities that were

not arms of the state and (2) there was no indication that the JPA’s debts or liabilities

passed through to its members, so the JPA was solely responsible for its debts and

liabilities. 2022 U.S. App. LEXIS 34478, at *6–8. Here, unlike in Mag US Lounge

Management, ASCIP is formed and controlled by entities that are arms of the state,

and there is evidence that ASCIP’s debts and liabilities pass through to its members,

who are solely responsible for its funding and financial operations.

IV. CONCLUSION

Accordingly, the Court finds that it does not have subject-matter jurisdiction

over the case because ASCIP is not a citizen of any state for the purpose of diversity

jurisdiction. Remand is therefore appropriate. 28 U.S.C. § 1447(c). The motion is

granted. The case is remanded to Los Angeles County Superior Court, Case No.

24NWCV02052. The Court directs the Clerk to effect the remand immediately and

close the case.

IT IS SO ORDERED.