OPINION AND ORDER GRANTING DEFENDANT KHESLC’S MOTION TO DISMISS AND DENYING AS MOOT ITS MOTION TO STAY DISCOVERY PENDING RESOLUTION OF THE MOTION TO DISMISS
In this action, filed August 4, 2014, Plaintiff Daniel Skidmore (“Plaintiff’) claims that Defendants violated state and federal law by failing to properly process payments made toward his student loans and then by reporting the loans as unpaid to credit reporting agencies. Specifically with respect to Defendant Kentucky Higher Education Student Loan Corporation (“KHESLC”), Plaintiff alleges one count of negligence in an eight-count First
KHESLC seeks dismissal of Plaintiffs claim against it, arguing first that as an arm' of the State of Kentucky, it is entitled to sovereign immunity under the Eleventh Amendment to the U.S. Constitution. KHESLC also argues that it is entitled to governmental immunity under Kentucky law. Plaintiff argues that KHESLC’s motion is procedurally improper because sovereign immunity is an affirmative défense that cannot be addressed without discovery. If the motion is addressed, Plaintiff contends that the Kentucky legislature waived KHESLC’s sovereign immunity by creating the entity as an “independent de jure municipal corporation and political subdivision” and by granting it the power “[t]o sue and be sued.” See Ky. Rev. Stat. Ann. §§ 164A.030.060. Alternatively, Plaintiff argues that- the relevant factors for determining whether an entity is an arm of the state weigh in favor of finding that KHESLC in fact is not an arm of Kentucky entitled to sovereign immunity. Plaintiff contends that Michigan law rather than Kentucky law governs this dispute and that Michigan’s governmental immunity statute does not shield KHESLC from liability.
A claim of sovereign immunity challenges the court’s subject matter jurisdiction and, as such, is properly raised under Federal Rule of Civil. Procedure 12(b)(1). See, e.g., O’Bryan v. Holy See,
A Rule 12(b)(1) motion to dismiss an action for lack of subject matter jurisdiction may be premised on a facial attack or a factual attack. See United States v. Ritchie,
A facial attack is a challenge to the sufficiency of the pleading itself. On such motion, the court must take the material allegations of the petition as true and construed in the light most favorable to the nonmoving party.. .A factual attack, on the other hand, is not a challenge to the sufficiency of the pleading’s allegations, but a challenge to the factual existence of subject matter jurisdiction. On such a motion, no presumptive truthfulness applies to the factual allegations.. .and the court is free to weigh the evidence and satisfy itself as to the existence of its power to hear the case.
Id. (internal citations. omitted) (emphasis in original). As matters outside the complaint may be considered in deciding a
The party opposing dismissal and requesting discovery has the burden of demonstrating the need for it. Davila v. United States,
In an amended declaration submitted in response to KHESLC’s motion to dismiss, Plaintiff states that he needs to conduct discovery on “several critical issues” which include:
under authority KHESLC claims to engage in servicing non-Kentucky loans, why KHESLC itself classifies its activities as proprietary if it does not view them as such; why K[H]ESLC activities are not classified as ‘governmental’ in KHESLC’s view, what percentage of revenues and profits came from servicing non-Kentucky loans, different types of student lending, support to other Kentucky entities, collections activities, and other activities —
(ECF No. 39 ¶ 11.)' Plaintiff further indicates that he seeks through discovery to “identify documents, insurance contracts, admissions, information about operational activities and the value-of those activities .... ” (Id. ¶ 12.) Much of this information, however, is not . relevant to the four-factor analysis used to determine whether KHESLC is entitled to sovereign immunity.
“[S]tate governments, and their arms, officers, and instrumentalities, are generally immune from private lawsuit in federal court by virtue of the Eleventh Amendment to the United States Constitution.” Mumford v. Basinski,
The Supreme Court has set forth several factors for courts to consider when deciding whether an entity is ah “arm of the State” or a “political subdivision.” Ernst,
(1) the State’s' potential liability for a judgment against the entity; (2) the language by which state statutes and state courts refer to the entity and the degree of state control 'and veto power over the entity’s actions; (3) whether state or local officials appoint the board members of the entity; and (4)- whether the entity’s functions fall within' the traditional purview of state or local government.
Id. (emphasis added, internal citations omitted); see also Regents of the Univ. of Cal. v. Doe,
As an initial matter, Plaintiff argues that the Kentucky General Assembly’s creation of KHESLC as “an independent de jure municipal corporation and political subdivision of the Commonwealth of Kentucky.Ky. Rev. Stat. Ann. §§ 164A.020(3), .030 (West 2014), is. determinative of whether KHESLC is a municipal corporation as opposed to an arm of the State. The language by which the state’s statutes rpfer to an entity is only one part of one factor considered by the courts when making the arm-of-the-state determination, however. See Ernst, supra. Plaintiff also argues that Kentucky waived KHESLC’s immunity by legislating that it may “[s]ue and be sued.” Key. Rev. Stat. Ann. § 164A.060(11) (emphasis added). But as the Supreme Court explained in Sossamon v. Texas,
. “[0]ur test for .determining whether a State has waived its, immunity .from federal-court jurisdiction is a stringent one.” College Savings Bank v. Florida Prepaid Postsecondary Ed. Expense Bd.,527 U.S. 666 , 675,119 S.Ct. 2219 ,144 L.Ed.2d 605 (1999) (internal quotation marks omitted). A State’s consent to suit must be “unequivocally, expressed” in the text of the relevant statute. Pennhurst State School and Hospital, [ 465 U.S. 89 ], 99,104 S.Ct. 900 [79 L.Ed.2d 67 (1984) ]; see Atascadero State Hospital v. Scanlon,473 U.S. 234 , 238, n. 1, 239-240,105 S.Ct. 3142 ,87 L.Ed.2d 171 (1985). Only by requiring this “clear declaration” by the State can we be “certain that the State in fact consents to suit.” College Savings Bank,527 U.S. at 680 ,119 S.Ct. 2219 . Waiver may not be implied. Id., at 682,119 S.Ct. 2219 .
For these reasons, a waiver of sovereign immunity “will be strictly construed, in terms of its scope, in favor of the sovereign.” Lane v. Peña,518 U.S. 187 , 192,116 S.Ct. 2092 ,135 L.Ed.2d 486 (1996). So, for example, a State’s consent to suit in its own courts is not a waiver of its immunity from suit in federal court. College Savings Bank, supra, at 676,119 S. Ct. 2219 ....
Id.,
As to the first factor — Kentucky’s potential liability for a judgment against KHESLC — the enabling statute specifically exempts the State’s liability for student loan and bond obligations, only. Ky. Rev. Stat. Ann. § 164A.070. The fact that the statute disavows Kentucky’s liability for student loan and bond obligations and says nothing about liability for other obligations is significant. See United States ex rel. Oberg v. Penn. Higher Educ. Assistance Agency,
The above discussion leads this Court to conclude that Kentucky is potentially liable for any judgment against KHESLC. Thus, the first arm-of-the-state factor weighs in favor of finding that KHESLC is an arm of Kentucky.
The second arm-of-the-state factor focuses on the language Kentucky’s statutes and its state courts use to refer to
In Comair, the Kentucky Supreme Court had to decide whether the Lexin-gon-Fayette Urban Airport Corporation (“airport corporation”) and the Lexington-Fayette Urban County Airport Board (“airport board”) were arms of the State, entitled to sovereign immunity. Id. at 92-93. The Comair Court identified two factors for deciding “what makes one corporate entity municipal and thus not-immune, and another a state- agency that is immune[.]” Id. at 97, 99. The first factor focuses on “the origins of the- entity. . .which can be -as simple as looking at the ‘parent’ of the entity in question, was it created by the state or a county, or a city?” Id. at 99. The second factor focuses on “whether the entity exercises a governmental function” which “means a ‘function integral to state government.’ ” Id.. The Comair Court elaborated:
The focus...is on state level -governmental concerns that are common to all of the citizens of this state... Such concerns include, but are not limited to, police, public education, corrections, tax collection, and public highways.
Id.
With respect to the first factor, the Court concluded that the airport board was a creature of the county. Id. at 100. While the origin of the board was not evident to the .Court, it looked to who appoints the board’s member, the fact that the county government retains significant control over the airport board, and that the board is required to submit a detailed annual, report to the legislative body. Id, As to the second factor, the Comair Court concluded that the airport .board “carries out a function integral to state government in that it exists solely to provide and maintain part of the Commonwealth’s air transportation infrastructure (i.e., the airport).” Id. at 101, In reaching this conclusion, the Court expressly rejected the plaintiffs argument that the airport board was engaged in a proprietary function and thus should not be entitled to immunity. Id. at 101. As the Court explained:
Comair argues that the Airport Board is “engaged in a proprietary venture, i.e., transportation.” This, however, km putes too much function and -activity to the Board, which does not actually provide transportation services, .for example, by operating an airplane to transport people. Instead, it provides the runways, -terminals, and other infrastructure that private airline companies like Comair use (admittedly for a fee) toprovide those transportation services. Comair’s reasoning is akin to saying that the Transportation Cabinet is engaged in the business of transportation because it facilitates private and commercial transportation (e.g., by trucking companies) by building roads and highways (and even charges a fee for their use at times with toll booths). But the Cabinet (like the Board) is actually in the “business” of providing transportation infrastructure, which is a quintessential state concern and function, one that is very, different from, the business of transportation itself.
The fact that the Board has substantial revenue from fees charged while operating the airport also does not make the activity proprietary. Partly this is because fees, authorized by KRS 183.33, are but one of many ways an airport board can generate revenue. An airport board can also receive money froni its local government, including counties and urban-county governments, which may impose taxes and appropriate money from their general funds to support the creation, expansion, and operation of airports. Seé KRS 183.134. Most importantly, however, an airport board can issue' revenue bonds, KRS 183.136, which, as noted above, is a legislative function.
Id. at 101-02.
In, Comair, the Kentucky Supreme Court also concluded that the airport corporation is an arm of the State. Id. at 102-03. The Court reached this conclusion despite the fact that this defendant “is a true corporation that was created by filing Articles of Incorporation with the Secretary of State.” Id. The Court relied on the fact that the.airport corporation “has the same governmental function ¡and parent as the [airport bjoarcj.” Id. at.103. ■
Based on Comair, this Court finds that the Kentucky courts would conclude that KHESLC is an arm of the State, despite its statutory classification as “an independent de jure municipal corporation and political subdivision.” First, it is important to note that the Kentucky General Assembly did not simply identify KHESLC as a “political subdivision”, but expressly provided that it is “a political subdivision of the Commonwealth of Kentucky.” Ky. Rev. Stat. Ann. §§ 164A.020(3), .030 (emphasis added). As to its origin, KHESLC Was created by the State. Lastly, the Governor appoints its board members and it must submit annual reports to the Governor, the General Assembly, and the secretary of the Finance and Administration Cabinet. Id. §§ 164A.050, .170.
With respect to the second Comair factor, KHESLC’s enabling statute expressly states that it was created to further “a public purpose of statewide import of the Commonwealth” — that being, • “providing higher education assistance to needy, qualified students” which “is in the best interest of the Commonwealth[.]” Id. § 164A.010(1), (2). Plaintiff argues, like the plaintiff did in Comair, that KHESLC is not entitled to sovereign immunity because it is engaged in a proprietary function. For the reasons the Kentucky Supreme Court rejected the plaintiffs argument there, this Court does not find that KHESLC’s function is proprietary.
KHESLC is not in the business of education; rather, it .is in the “business”, of making higher education available for Kentucky residents, which the State has ■ declared to be a.-state concern and function. See supra. Like , the airport board in .Co-mair, KHESLC also uses the revenues it generates to operate and thus to further that state concern and function; To the éxtent KHESLC’s revenues may be otherwise used, such use is limited by, the state
For these reasons, the Court finds that the language by which Kentucky’s statutes refer to KHESLC and how the Kentucky courts analyze such language weigh in favor of concluding that KHESLC is an arm of Kentucky. However, the second arm-of-the-state factor also requires the Court-to consider the degree to which Kentucky controls and retains veto power' over KHESLC. The Court already has identified some facts suggesting that the State controls KHESLC, but will elaborate on the matter now.
As suggested earlier, the Governor of Kentucky retains significant control over KHESLC. KHESLC-is governed by a fifteen-member board of directors, appointed by the governor. Ky. Rev. Stat. Ann. § 164A.050(3)(a), (4). “Such an arrangement frequently indicates state control.” United States ex. rel. Oberg v. Penn. Higher Educ. Assistance Agency,
KHESLC must obtain approval from the Kentucky General Assembly prior to issuing bonds under certain circumstances. Id. § 164A.080. As an agency authorized to issue bonds, it is accountable to the State for “all money received and disbursed during each fiscal year.” See Ky. Rev. Stat. Ann. §§ 42.545, 45A.840(3), 164A.080. Thus, KHESLC must submit an annual report and audit of its expenditures and investments to the State Governor, General Assembly, and-the Secretary of the Finance. and Administration Cabinet. Id. §§ 164A.170, 42.545, 45A.840(3). Finally, upon KHESLC’s termination or dissolution, all of its rights and properties vest in the State. Id. § 164A.230. While there is an exception to this provision if. the board has directed the distribution of certain property elsewhere, the legislature has placed limitations on where the property may be distributed. Id. .
As Plaintiff points out, KHESLC is granted numerous powers in its enabling statute including the power to: make, purchase, sell, and modify loans; collect and service. loans; procure insurance; borrow money; make and publish rules and regulations;. and enter into contracts. Id. § 164A.055(5). However, these actions are necessary for KHESLC to. carry out its function as defined in the enabling statute
For the above reasons, the Court concludes that the second arm-of-the-state factor also weighs in favor of finding that KHESLC is an arm of Kentucky. The third factor considers “whether state or local officials appoint the board members of the entity.” Ernst, supra. As the above analysis indicates, the Governor of Kentucky has that authority with respect to KHESLC. Thus this factor also weighs in favor of finding that KHESLC is an arm of the State.
As suggested by the Court’s earlier discussion, the final factor — whether KHESLC’s functions fall within the traditional purview of state or local government — also weighs in favor of finding that it is an arm of Kentucky. The Kentucky General Assembly expressly created KHESLC to effectuate “a public purpose of statewide import of the Commonwealth.” Ky. Rev. Stat. Ann. § 164A.010(1) (emphasis added). The legislature stated that “the corporation will be performing vital public purposes in improving and promoting the public welfare and prosperity of the people of the Commonwealth of Kentucky by promoting the availability of higher educational opportunities.” Id. § 164A.030 (emphasis added). Plaintiff argues that KHESLC’s functions fall outside of traditional government functions because its activitiés generate a substantial profit.
KHESLC’s profits, however, are generated “by a program of financing, making, and purchasing of insured student loans”— i.e., the activities it was granted the power to perform in order to “promot[e] the educational opportunities of the citizens and inhabitants of the Commonwealth of Kentucky and other qualified students.” Ky. Rev. Stat. Ann. § 164A.050(2). As the Fourth Circuit reasoned when rejecting the same argument asserted by the plaintiff in Oberg with respect to the Pennsylvania Higher Education Assistance Agency (“PHEAA”), an entity similar to KHESLC:
Pennsylvania created PHEAA to finance, make, and guarantee loans for higher education, and “higher education is an area of quintessential state concern and a traditional state government function.” Md. Stadium Auth. [v. Ellerbe Becket Inc.], 407 F.3d [255] at 265 [ (4th Cir.2005)]. PHEAA does not provide higher education directly, but it nonetheless facilitates the attainment of education by supplying student financial aid services. This work is clearly of legitimate state concern.
United States ex rel. Oberg,
Relying on documents published by KHESLC, Plaintiff estimates that KHESLC derives more than half of its
Thus even assuming that Plaintiff is correct and could obtain further support to show that KHESLC earns more revenue from servicing loans to non-Kentucky citizens than from its lending activities to Kentucky citizens, this does not undermine KHESLC’s primary function of helping finance higher education for Kentucky residents. As such, this last factor also weighs in favor of concluding that KHESLC is an arm of Kentucky.
Having found that each of the four factors set forth in Ernst counsels in favor of holding that KHESLC is an arm of the state, the Court concludes that it is entitled to sovereign immunity. .The Court therefore finds it unnecessary to decide whether KHESLC is entitled to governmental immunity under Kentucky or Michigan law. Because Plaintiff is precluded from suing KHESLC in federal court and his claim against KHESLC must be dismissed, KHESLC’s motion to stay discovery is denied as moot.
Accordingly,
IT IS ORDERED, that KHESLC’s motion to dismiss is GRANTED ‘ and KHESLC is DISMISSED AS A PARTY to this lawsuit;
IT IS FURTHER ORDERED, that KHESLC’s motion for stay of discovery is DENIED AS MOOT.
. As set forth below, the Court concludes that KHESLC’s motion to dismiss can be decided only on sovereign immunity grounds. The Court finds it unnecessary to decide whether Kentucky’s or Michigan’s governmental immunity law applies and whether KHESLC is entitled to immunity under’ the applicable state’s law,
. At least one Circuit Court has noted that cases decided by the Supreme Court -since Hess• suggest "that the first factor does not deserve such preeminence,” Oberg v. Ky. Higher Educ. Student Loan Corp.,
. Plaintiff additionally argues that KHESLC is not entitled to immunity as a result of having engaged in "ultra vires” activity — i.e., servicing and collecting on the loans of non-Kentucky residents. Nothing in the legislative materials reflects such a limitation on KHESLC’s activities, however. In fact, the Kentucky General Assembly specifically granted KHESLC the authority "to perform essential governmental and public functions and purposes in improving and otherwise promoting the educational opportunities of the citizens and inhabitants of the Commonwealth of Kentucky and other qualified students by a program of financing, making, and purchasing of insured student loans.” Ky. Rev. Stat. Ann. § 164A.050(2) (emphasis added).
. The .statute provides that "[u]pon resignation or expiration of the term of an appointed member of the board.. .the member’s posi- ' tion shall be abolished to reduce the c'om- . bined number of appointed members ’of. the board[]...to ten (10) members.” Ky..Rev. Stat. Ann. § 164A.050(3)(b). Once that ten-member minimum is met, however, the governor chooses the members to fill vacancies. Id. § 164A.050(5).
. Pointing out the "rigorous” “efforts [KHESLC] went to in pursuing the award of the contract to service federal student loans[,]” Plaintiff argues-that "KHESLC essentially overhauled its entire organization and manner of doing business in pursuit of a contract to service loans to non-Kentucky citizens.” (ECF No. 36 at Pg ID 373.) Putting aside the question of whether it is an overstatement to assert that KHESLC “overhauled its entire organization and manner of doing business” in this pursuit, the Court must ask whether KHESLC’s activities related to non-Kentucky citizens better enables it to make higher education affordable for Kentucky citizens.