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JMB GROUP TRUST IV v. PENNSYLVANIA MUN. RETIREMENT

December 19, 1997

JMB GROUP TRUST IV, an Illinois Trust, HEITMAN/ JMB INSTITUTIONAL ADVISORS, an Illinois partnership, JEROME L. CLAEYS III, CHARLES H. WURTZEBACH, RICHARD J. KATELY, STEPHEN PERLMUTTER, and NORMAN PERLMUTTER, not individually but as Trustees of JMB GROUP TRUST IV, Plaintiff,
v.
PENNSYLVANIA MUNICIPAL RETIREMENT SYSTEM, Defendant.



The opinion of the court was delivered by: LINDBERG

 I. BACKGROUND

 Defendant Pennsylvania Municipal Retirement System (PMRS) is a pension fund system set up by the Commonwealth of Pennsylvania to provide retirement benefits for municipal employees spread throughout the Commonwealth who voluntarily choose to participate in the system. Plaintiff JMB Group Trust IV (JMB) is a trust in which the Defendant has invested some of its funds for the benefit of its pensioners. The complaint alleges a wrongful effort by Defendant to obtain a secret agreement from Plaintiff Heitman/ JMB Institutional Advisors (Heitman/ JMB) which would require Heitman/ JMB and the Trustees of JMB Group Trust IV (the Trustees) to breach their fiduciary duties to the Trust's other beneficiaries. Plaintiffs are requesting declaratory relief concerning the rights and liabilities of the parties and the propriety of certain past actions by the Trustees under the trust agreement and management agreement, as well as a declaration of the fair value of the Trust's real property.

 In its Notice of Removal, Defendant claims that the federal district court may exercise jurisdiction over this action under the diversity statute, 28 U.S.C. § 1332. Defendant claims that all Plaintiffs are citizens of Illinois, which is undisputed. Defendant also claims Plaintiffs are all citizens of a different state than Defendant. On December 23, 1996, Plaintiffs filed a motion to remand or dismiss the action. Plaintiffs claim that the parties are not diverse because Defendant is an agency of the Commonwealth of Pennsylvania, and therefore not a citizen of any state, defeating diversity. They also argue that the Eleventh Amendment *fn1" prevents this court from exercising jurisdiction over Defendant because the PMRS is allegedly a state agency. From these assertions, they argue that the district court has no jurisdiction over the subject matter of the case, requiring the court to remand or dismiss the action entirely.

 II. DISCUSSION

 The removal statute provides that "any civil action brought in a State court of which the district courts of the United States have original jurisdiction" may be removed to the district court. 28 U.S.C. § 1441(a) (1997). The diversity statute states in pertinent part that "the district courts shall have original jurisdiction of all civil actions . . . between--(1) citizens of different states . . ." 28 U.S.C. § 1332(a) (1997). Defendant claims it may remove this case to federal court because the parties are diverse--Plaintiffs are citizens of Illinois and Defendant is allegedly a citizen of Pennsylvania. The Plaintiffs claim that no diversity exists--Plaintiffs are citizens of Illinois and the Defendant is not a citizen of any state because it is allegedly a state agency.

 The Seventh Circuit has found it to be "well settled" that a state is not a citizen for purposes of diversity. Indiana Port Commission v. Bethlehem Steel Corporation, 702 F.2d 107, 109 (7th Cir. 1983) (quoting Postal Telegraph Cable Co. v. Alabama, 155 U.S. 482, 39 L. Ed. 231, 15 S. Ct. 192 (1891)). The court goes on to explain how subdivisions of a state should be treated for purposes of diversity:

 
It is equally well established law that "a political subdivision of a state, unless it is simply 'the arm or alter ego of the state,' is a citizen of the state for diversity purposes." Moor v. County of Alameda, 411 U.S. 693, 717, 93 S. Ct. 1785, 1799, 36 L. Ed. 2d 596 (1973) (citation omitted). The "alter ego" status of a political subdivision is generally determined by examining state law. 411 U.S. at 718-20, 93 S. Ct. at 1800. Thus, diversity jurisdiction is present here only if the [Indiana Port Commission] is an entity which is separate and distinct from the state of Indiana.

 Id. The court then discussed the posture of the Indiana Port Commission under Indiana law to determine whether it was separate and distinct from the State of Indiana. In the instant case, the court is not fortunate enough to have found decisions from the Pennsylvania courts which give guidance on the status of the PMRS under Pennsylvania law.

 The Seventh Circuit found itself in a similar quandary in the case of Adden v. J.D. Middlebrooks, 688 F.2d 1147 (7th Cir. 1982), involving the question of whether the Louisiana Department of Corrections (the Department) and the Louisiana Correctional and Industrial School (LCIS) were separate and distinct from the State of Louisiana. In that case, the parties presented the court with the question of whether the Department and the LCIS were considered to be the State both for the purpose of defeating diversity and also for purposes of the Eleventh Amendment (as in the instant case). The court, however, combined its analysis of these two issues, applying the same test to both of them: That is, whether the LCIS and the Department were "alter-egos" of the State of Louisiana. See Adden, 688 F.2d 1147 at 1153, 1154. This court shall also address both issues together, as they require the court to answer the same question: That is, whether the PMRS is an "alter-ego" of the Commonwealth of Pennsylvania. Eleventh Amendment cases are generally more profuse than those dealing with the question for diversity purposes, therefore the court will look to these cases to answer the question at hand.

 The Eleventh Amendment "prohibits federal courts from entertaining suits by private parties against States and their agencies." Alabama v. Pugh, 438 U.S. 781, 782, 57 L. Ed. 2d 1114, 98 S. Ct. 3057 (1978). Previously, courts looked to a host of factors to determine whether a political subdivision of a state was an agency of the state and thereby immune from suit in federal court. One of these factors was whether a judgment against the entity would have to be paid out of the state treasury. See Adden, 688 F.2d at 1153. Subsequent cases have altered that analysis, however, by determining that the effect of a judgment on the state treasury is irrelevant if other factors weigh in favor of finding that a certain entity is an agency or "alter-ego" of the state. Thiel v. State Bar of Wisconsin, 94 F.3d 399, 401 (7th Cir. 1996) (quoting Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S. Ct. 1114, 134 L. Ed. 2d 252 (1996)). The two other factors which a district court must weigh in order to determine whether an entity is entitled to Eleventh Amendment immunity are: (1) the extent of control exercised over the entity by the state, and (2) whether the entity has a role which is completely defined by the state, i.e. whether it acts as an agent of the state. Crosetto v. State Bar of Wisconsin, 12 F.3d 1396, 1402 (7th Cir. 1993), cited with approval in Thiel, 94 F.3d at 401. The Seventh Circuit ultimately found in Thiel, after examining the extent of control wielded by the Wisconsin Supreme Court over the State Bar, as well as examining the factors which establish the State Bar as an agent of the supreme court, that the State Bar was entitled to Eleventh Amendment immunity. In order to answer the same question in the instant case, this court must therefore examine the extent of control the Commonwealth of Pennsylvania exercises over the PMRS under Pennsylvania law, and also whether the PMRS acts as an agent of the Commonwealth in providing retirement benefits for municipal employees. Both of these questions may be answered by looking to a common set of factors, which the court will now examine.

 The board of the PMRS consists of the State Treasurer, the Secretary of the Commonwealth, and nine other members who are all appointed by the Governor of the Commonwealth. Pa. Stat. Ann. tit. 53, § 881.103 (West 1997). Pennsylvania law further provides that each member of the board shall take an oath of office which includes an oath that he will not "knowingly violate or willingly permit to be violated any of the provisions this act." Id. The compensation of the board members is fixed by the board consistent with the "standards established by the Executive Board of this Commonwealth[.]" Pa. Stat. Ann. tit. 53, § 881.104(1) (West 1997). The Pennsylvania statutes also provide that "all moneys and securities in the fund shall be placed in the custody of the State Treasurer for safekeeping . . ." Pa. Stat. Ann. tit. 53, § 881.109 (West 1997). The board must "prepare and approve a budget covering the administrative expenses of this act." Pa. Stat. Ann. tit. 53, § 881.112 (West 1997). The administration of the PMRS must also be audited annually, and a report of the audit must be made to the General Assembly. Id. The secretary of the board is required to submit a proposed budget to the Senate and House Local Government Committees for every fiscal year, at which time the respective committees, according to the statute, meet to review the budget document. Id. The budget is only approved if the committees take no action on the proposed budget within sixty days of November 1, the date on which the proposed budget is due. Id. Furthermore, "the retirement allowance and the contributions of members to the fund, all contributions returned to contributors under the provisions of this act and the moneys in the fund created by this act, shall be exempt from any State or municipal tax . . ." Pa. Stat. Ann. tit. 53, § 881.115 (West 1997). Finally, the PMRS may adopt rules and regulations with the advice of the Attorney General which "may be required for the proper administration of the fund created by this act and the several accounts thereof, and for the transaction of the business of the board[.]" Pa. Stat. Ann. tit. 53, § 881.104(10) (West 1997).

 Even though the court finds that the board of the PMRS is entitled to sue in its own name to recover sums which are due to the fund, Pa. Stat. Ann. tit. 53, § 881.111 (West 1997), its duties and responsibilities are otherwise totally defined and limited by the Commonwealth of Pennsylvania under the provisions of the Pennsylvania Code, as shown above. Furthermore, it clearly acts as an agent of the Commonwealth since all of the board's members are either Commonwealth officials acting ex officio, or appointees of the Governor. The sole purpose of the PMRS is to carry out its mandate as it is defined in the enacting legislation which created the PMRS. Notably, the Seventh Circuit found in Thiel that the State Bar of Wisconsin was entitled to Eleventh ...


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