United Pac. Ins. Co. v. Capital Development Bd.

• Decision Date: 13 December 1979
• Docket Number: No. 79 C 874.,79 C 874.
• Citation: 482 F. Supp. 541
• Parties: UNITED PACIFIC INSURANCE COMPANY, Plaintiff, v. CAPITAL DEVELOPMENT BOARD OF the STATE OF ILLINOIS and Arrow General Contractors, Inc., an Illinois corporation, Defendants.
• Court: U.S. District Court — Northern District of Illinois

482 F. Supp. 541

UNITED PACIFIC INSURANCE COMPANY, Plaintiff, v. CAPITAL DEVELOPMENT BOARD OF the STATE OF ILLINOIS and Arrow General Contractors, Inc., an Illinois corporation, Defendants.

No. 79 C 874.

United States District Court, N. D. Illinois, E. D.

December 13, 1979.

Randall L. Marmor of Gilmartin, Wisner & Hallenbeck, Chicago, Ill., for plaintiff.

Paul C. Sheils, Chicago, Ill., for defendant Arrow Gen. Contractors, Inc.

Michael J. Hayes, Asst. Atty. Gen., State of Illinois, Chicago, Ill., for defendant Capital Development Bd. of state of Illinois.

MEMORANDUM OPINION

GRADY, District Judge.

Plaintiff, United Pacific Insurance Co. ("United"), brings this diversity action against the Illinois Capital Development Board ("CDB") and Arrow General Contractors, Inc. ("Arrow"), seeking a declaratory judgment as to the parties' rights and obligations under two construction performance bonds. Plaintiff is a Washington corporation with its principal place of business in the State of Washington. CDB identifies itself as an agency of the State of Illinois. Arrow is an Illinois corporation with its principal place of business in Illinois. CDB has filed a motion to dismiss based upon two jurisdictional objections: (1) CDB is an agency of the State of Illinois and the State of Illinois is not a citizen for purposes of diversity jurisdiction under 28 U.S.C. § 1332; and (2) this action is barred by the Eleventh Amendment to the United States Constitution. While agreeing that we lack diversity jurisdiction over CDB, we will deny CDB's motion and exercise pendent jurisdiction.

The relevant facts are as follows. Plaintiff is in the business of selling performance bonds to entities engaged in various phases of the construction industry. CDB is responsible for the construction of the many capital facilities required by the State of Illinois in performing its governmental functions. Arrow is a private general contracting firm which is currently under contract to construct several such capital facilities. In the normal course of awarding construction contracts, the State of Illinois, through the Capital Development Board, requires and receives from each contractor a performance bond issued by a reputable commercial surety. Arrow tendered two performance bonds to the state in connection with the two contracts Arrow is now performing. These two bonds, which total about $2,500,000.00 and at least facially name United as surety, are the subject of the underlying dispute.

On or about November 15, 1978, CDB notified Arrow that it was dissatisfied with Arrow's performance on one of the two construction projects. CDB said that Arrow's failure to remedy the situation could result in termination of the contract, and that CDB would then look to the surety, United, for performance. CDB sent a copy of this notification to United, which thereupon requested the state to provide it with copies of the bond in question. Upon receipt of those copies, United informed CDB that the bonds were forged and disavowed any obligation to CDB under them. CDB advised United that it would continue to look to United for performance under the bonds. United filed the action before us seeking a resolution of the question of the alleged forgery and a declaration of the parties' rights and obligations.

Title 28 U.S.C. § 1332 provides, in relevant part:

(a) The district courts shall have original jurisdiction of all civil actions where the matter in controversy . . . is between â

(1) citizens of different States;

The rule is well established that neither a state nor its alter ego is a "citizen" for purposes of diversity jurisdiction. Postal Telegraph Cable Co. v. Alabama, 155 U.S. 482, 15 S.Ct. 192, 39 L.Ed. 231 (1894); Illinois v. City of Milwaukee, 406 U.S. 91, 92 S.Ct. 1385, 31 L.Ed.2d 712 (1972). The central issue before us, then, is whether the Capital Development Board is the alter ego of the State of Illinois, thus making the state the real party in interest. State Highway Commission v. Utah Construction Co., 278 U.S. 194, 49 S.Ct. 104, 73 L.Ed. 262 (1929); Krisel v. Duran, 386 F.2d 179 (2d Cir. 1967). For the following reasons, we conclude that CDB is an alter ego of the State of Illinois.

We turn first to an examination of the state statute under which the Capital Development Board was created and now functions. The CDB's creation and purpose is set forth in Ill.Rev.Stat. ch. 127, §§ 774.01-774.05 (1977). Its purposes include the building of capital facilities for the State of Illinois with funds appropriated by the Illinois General Assembly. § 774.01. The Members of the Board are appointed by the Governor, by and with the consent of the Senate. § 775. All employees of CDB (other than technical or engineering personnel) are hired under the Illinois Personnel Code, are members of the Illinois retirement system, are civil servants under the state civil service code, and are governed by all other laws relating to state employment. § 778. The Board is empowered to acquire land or interests therein for the building of capital facilities for the State of Illinois, as authorized by the General Assembly and with funds appropriated to it by the legislature. § 779.01. The CDB is authorized to enter into contracts on behalf of the State of Illinois, and all such contracts and purchases are governed by the Illinois Purchasing Act. §§ 779.02, .07.

In addition to appropriations from the General Assembly, some of the funds administered by the CDB in fulfilling its purpose are acquired through the sale of bonds under the Capital Development Bond Act, Ill.Rev.Stat. ch. 127, §§ 751 et seq. The CDB does not administer or control those funds as an entity separate and apart from the State of Illinois. Rather, the bonds are used for specific purposes formulated by the General Assembly, and it is the State of Illinois that is authorized to issue, sell and provide for the retirement of the bonds. § 753. The Governor controls the issuance of the Bond and executes them on behalf of the state. §§ 754, 755. The proceeds from the sale of the bonds are at all times subject to the General Assembly's control and appropriation. § 757. The proceeds are held in the Capital Development Fund of the State Treasury. § 758. The bonds are the general obligations of the State of Illinois and the full faith and credit of the state is pledged in support of each bond. § 760.

From the foregoing review of the controlling statute, it is clear that the CDB is not independent of the State of Illinois in either its operation or funding. The decision as to whether an agency is an alter ego of a state for diversity purposes depends, however, not only upon an analysis of the controlling statute, but also upon the opinions of state courts bearing upon the status of the agency. See Miller-Davis Co. v. Illinois State Highway Authority, 567 F.2d 323, 330 (7th Cir. 1977). In People ex rel. Resnik v. Curtis & Davis, 58 Ill.App.3d 28, 15 Ill.Dec. 426, 373 N.E.2d 772 (4th Dist. 1978), the court held that the Capital Development Board Act, §§ 757, 773, made the Illinois Building Authority ("IBA") a state agency rather than a legal entity separate and apart from the state. In so deciding, the court emphasized that the Capital Development Board under the Act "is to assume functions previously delegated to the IBA, and is to oversee the IBA and other state agencies in their performance of other functions." 58 Ill.App.3d 28, 30, 15 Ill.Dec. 426, 428, 373 N.E.2d 772, 774. The Capital Development Board would clearly be unable to confer such state agency status upon IBA if the Board were not a state agency and alter ego itself. See also, Talandis Construction Co. v. Illinois Building Authority, 60 Ill. App.3d 715, 18 Ill.Dec. 84, 377 N.E.2d 237 (1st Dist. 1978).

In support of its argument that CDB is not the alter ego of the State of Illinois, the plaintiff places primary reliance upon the decision of the Seventh Circuit in Miller-Davis Co. v. Illinois State Toll Highway Authority, 567 F.2d 323 (7th Cir. 1977). In that case, the court concluded that the Illinois State Toll Highway Authority was not the alter ego of the state, and that a suit against the Authority was therefore not barred by the Eleventh Amendment. We believe that Miller-Davis is distinguishable from the case before us. The court found in Miller-Davis that the Illinois Toll Highway Authority Fund â the account from which the Authority drew its monies â was sufficiently segregated from the general public funds in the Illinois State Treasury, that any judgment against the fund would not be a judgment against the state for Eleventh Amendment purposes. The Authority was required to repay the state the initial appropriations given to create the Authority. The Authority issued bonds to make those repayments. The state expressly disclaimed any liability for the bonds issued by the Authority. Ill.Rev.Stat. ch. 121, § 100-17 (1975). In the case before us, however, the bonds which contribute to the Capital Development Fund are issued by the State of Illinois rather than CDB, and the bonds are the general obligations of the state, not CDB. Such facts indicate a much closer nexus between agency funds and the general public funds in the State Treasury than was present in Miller-Davis.

A further basis for distinguishing Miller-Davis is the Seventh Circuit's reliance upon a decision by the Illinois Supreme Court, holding that the Authority's predecessor, the Illinois Toll Highway Commission, was not a state agency but an independent legal entity. People v. Illinois Toll Highway Commission, 3 Ill.2d 218, 120 N.E.2d 35 (1954). The court in Miller-Davis emphasized the significance of that state court opinion:

Especially when a state supreme court does not extend immunity but, rather, holds that an entity is not to be deemed the state for purposes of sovereign immunity, we think the federal courts must pay careful attention to the state opinion.

567 F.2d...