Galette v. New Jersey Transit Corp.

Sovereign immunity protects states from being sued in other states' courts without their consent. But that protection is personal to the state itself. It does not automatically extend to every entity the state creates. The question is whether the entity is really part of the state, or whether the state set it up as a legally separate thing.

The Court traced two centuries of cases answering this question. The earliest cases focused on the corporate form. At common law, a "corporation" was an artificial person that could sue and be sued on its own. In 1824, the Court held a state-chartered bank was not Georgia's arm because it was a corporation liable for its own debts. That principle held even when states were sole shareholders, appointed all officers, and managed the bank's affairs.

By the mid-20th century, the Court looked at additional factors but kept the same focus: did the state structure the entity as legally separate? In Moor v. County of Alameda (1973), a county created as a "body corporate and politic" was not an arm of California. In Hess (1994), the Port Authority -- despite massive state control -- was not an arm because it was a separate entity that generated its own revenue and paid its own debts.

The Court distilled three considerations from its precedents. First and most important: whether the state structured the entity as a legally separate corporation liable for its own judgments. The corporate form is the "clearest evidence" of separateness. Second: whether the state is formally liable for the entity's debts. If the state treasury is on the hook, the entity looks more like an arm. Third: the degree of state control -- but courts should treat this factor with caution, because the state retains "ultimate control" over every entity it creates.

Applying this framework, every factor pointed the same direction. New Jersey created NJ Transit as a "body corporate and politic with corporate succession." It can sue and be sued, enter contracts, acquire property, make bylaws, raise its own funds, and exercise eminent domain. The statute expressly says NJ Transit's debts are not the State's debts. And while the Governor can appoint and remove Board members and veto Board actions, the statute also says NJ Transit is "independent of any supervision or control" by the Department of Transportation. The Court had never found a corporation liable for its own judgments to be an arm of the State -- not even when the State was sole shareholder with full appointment power.

NJ Transit and its amici tried several counterarguments. They pointed to the statutory label "instrumentality," but the Court found this term carries less historical weight than "body corporate" and is undercut by other NJ statutes that exclude sue-and-be-sued entities from the definition of "State." They argued NJ Transit serves "public and essential governmental functions," but the Court noted that cities and counties serve public functions too without becoming arms of the state. The real question is not what the entity does, but how the state structured it.

NJ Transit also pushed the Court to weigh its practical financial relationship with the state -- pointing to state funding that has ranged from 15% to 46% of its operating budget over 35 years. But neither Lake Country nor Hess supported making state funding dispositive. Subsidizing an entity does not make it part of the state, "even when the funding is a 'significant amount.'" The amici States urged a rule making the State's own characterization dispositive, but this would let states have it both ways -- calling an entity an "instrumentality" while simultaneously structuring it as an independent corporation. States remain free to amend their laws if they want corporate entities to share in sovereign immunity.