Michael Sato v. Orange Cty. Dept. of Education

Citations: 861 F.3d 923; 42 I.E.R. Cas. (BNA) 58; 2017 U.S. App. LEXIS 11500; 101 Empl. Prac. Dec. (CCH) 45,834; 2017 WL 2784962Docket: 15-56402

Court: Court of Appeals for the Ninth Circuit; June 28, 2017; Federal Appellate Court

Original Court Document: View Document

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The Ninth Circuit affirmed the dismissal of Michael M. Sato's lawsuit against the Orange County Department of Education (OCDE), which he claimed violated his Fourteenth Amendment due process rights and constituted a breach of contract after his termination. The district court ruled that OCDE, as an arm of the state, was immune from suit under the Eleventh Amendment. Sato argued that California Assembly Bill 97 (AB 97), which aimed to reform public education financing and governance, nullified previous rulings establishing that California school districts are entitled to sovereign immunity. However, the panel concluded that AB 97 did not change the fundamental relationship between the Offices of Education and the state, thereby upholding the precedent set in Belanger v. Madera Unified School District, confirming that California school districts and County Offices of Education maintain their status as arms of the state. Sato was terminated shortly after being hired, without prior notice or opportunity for a hearing, leading him to assert that he could only be terminated for cause according to his employment contract.

Sato alleged that his termination violated his Fourteenth Amendment due process rights and constituted a breach of contract due to the lack of prior notice or hearings. OCDE filed a motion to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), claiming Eleventh Amendment immunity as an arm of the state, referencing the precedent set in Belanger. Sato contended that Assembly Bill 97, enacted in 2013, altered the legal landscape, stating that it redefined OCDE's status regarding sovereign immunity.

The district court granted OCDE's motion to dismiss Sato's constitutional claims but denied it concerning the breach of contract claim. The court noted that while AB 97 may have decentralized state control over school governance, Sato did not demonstrate that it contradicted the reasoning in Belanger. Consequently, recognizing that OCDE's sovereign immunity applied to both federal and state claims, Sato voluntarily dismissed his state breach of contract claim, leading to a final judgment in favor of OCDE.

The appellate court has jurisdiction under 28 U.S.C. 1291 and affirmed the district court's decision. The court reviewed the dismissal de novo, accepting Sato's allegations as true and considering whether AB 97 impacted the arm-of-the-state analysis established in Belanger. It noted previous cases did not address this specific issue, meaning they did not bind the current review. The Eleventh Amendment protects state agencies from being sued in federal court, confirming the established immunity against private damages or injunctive relief claims.

State sovereign immunity does not apply to county and municipal governments unless state law designates them as arms of the state. The central question is whether, post-AB 97, the Orange County Department of Education (OCDE) is categorized as an arm of the state with Eleventh Amendment immunity, or as a municipal corporation not entitled to such immunity. The determination involves a five-factor analysis from Mitchell v. Los Angeles Community College District, which includes: 1) if a money judgment would be paid from state funds; 2) whether the entity performs central government functions; 3) the entity's ability to sue or be sued; 4) its power to take property in its own name or only in the state's name; and 5) its corporate status.

AB 97 altered California's education funding by introducing the Local Control Funding Formula (LCFF), replacing previous funding mechanisms and increasing K-12 spending, particularly for underserved student populations. It also mandated the development of Local Control and Accountability Plans (LCAPs) for tracking progress on educational goals.

Under the Mitchell factors, it is concluded that AB 97 does not change previous rulings regarding immunity, affirming the dismissal of Sato’s complaint. The first factor—whether a judgment against the government entity would be paid from state funds—is deemed the most significant. The Eleventh Amendment aims to prevent federal judgments that would require payment from a state’s treasury, making the state’s financial vulnerability critical in determining immunity. The inquiry focuses on the legal obligation of the state to satisfy judgments against the district, rather than the actual source of funds. Previous cases indicated that California's revenue limits system resulted in the state taking legal responsibility for school districts’ debts, as the state and local revenues were intermingled under state control to meet funding limits, ensuring that local tax revenue lost to judgments would have to be compensated by state funds already within the district’s budget.

Local funds withdrawn from a school district's budget to satisfy a judgment are deemed unavailable for educational purposes, necessitating state funds to cover critical educational expenses that the local funds would have addressed. Consequently, the state becomes liable to backfill any funds used to resolve a judgment against a district or County Office of Education (COE), effectively making the state responsible for funding deficiencies created by such judgments. In contrast, in states with minimum per-pupil funding guarantees, such as Alaska and Nevada, school districts can raise additional revenue beyond the state's minimum funding, and judgments against districts do not obligate the state to replenish those funds. California's revenue limit system, however, imposes a constitutional obligation to equalize per-pupil spending, as established in the California Supreme Court cases Serrano v. Priest (Serrano I and II), which determined that disparities in funding violate equal protection guarantees. The enactment of AB 97, which replaced revenue limits with the Local Control Funding Formula (LCFF), does not amend these constitutional protections and retains the principle of equalization in funding. Under the LCFF, districts and COEs receive a base grant per student, with potential additional funding based on demographic factors, demonstrating the legislature's intent to maintain equitable funding rather than transitioning to a minimum funding model.

Sato argues that the term "base grant" in the legislature's language indicates an intention to allow districts and County Offices of Education (COEs) to increase local property tax revenues beyond the state's minimum support. He claims that the Orange County Department of Education (OCDE) receives substantial funding from local property taxes in addition to LCFF base grant funding. However, this argument overlooks constitutional constraints established in Serrano I and Serrano II, and it is normal for OCDE to receive local tax funding. Under California's revenue limits system, school districts and COEs have historically received a mix of local and state funding (Cal. Educ. Code. 42238.02; Belanger, 963 F.2d at 252).

The objectives of AB 97 were to enhance education funding—especially for low-income and English Language Learner (ELL) students—and to simplify an overly complex education finance system. The Local Control Funding Formula (LCFF) replaced the previous system's revenue limits and numerous categorical grants with base, supplemental, and concentration grants, allowing districts and COEs more flexibility in fund allocation. Although AB 97 increased budget flexibility, it did not dismantle the centralized control over local funding established by Proposition 13, which capped local property tax rates and transferred revenue control to the state. Proposition 13 increased the state’s responsibility for education funding and effectively turned local property taxes into state-administered taxes. 

AB 97 maintained the principles of funding equalization and centralized control as outlined in Belanger. Consequently, the LCFF retains a maximum per-pupil funding formula, ensuring that state and local funds remain interconnected, with changes in property tax revenue affecting state allocations. Thus, the first Mitchell factor supports Eleventh Amendment immunity.

The second Mitchell factor evaluates whether a government entity performs central government functions. California law recognizes public schooling as a statewide governmental function, as established in Belanger and buttressed by California Supreme Court rulings. The California Constitution mandates the state's responsibility for a public education system, with specific provisions ensuring funding and support for common schools and public higher education. 

Sato contends that AB 97, requiring school districts and county offices of education (COEs) to adopt Local Control and Accountability Plans (LCAPs), indicates a shift of control from the state to local entities. However, it is argued that LCAPs, which are three-year plans outlining goals for student achievement and actions to meet those goals across various state priority areas, do not signify a fundamental change in governance. While LCAPs allow for local priorities, they must align with state-determined areas of priority and adhere to state guidelines, including the use of state templates and submission of plans for state review.

Despite granting districts and COEs some autonomy, AB 97 does not alter the overarching state responsibility for public education, confirming that California's public schooling remains a central government function. Consequently, this factor supports Eleventh Amendment immunity for the Orange County Department of Education (OCDE). The analysis of the remaining Mitchell factors is unaffected by the passage of AB 97, with the third factor—whether the entity can sue or be sued—still favoring Sato.

California law permits County Offices of Education (COEs) and school districts to sue and be sued in their own name, as stated in Cal. Educ. Code § 35162. This capacity to engage in litigation suggests a lack of Eleventh Amendment immunity, but it does not guarantee that they can be sued for monetary damages. The fourth factor from the Mitchell analysis also supports Sato’s position, as COEs and school districts have the authority to hold property in their own name, although they hold it for the benefit of the state, which diminishes the weight of this factor. The fifth Mitchell factor considers the corporate status of the Orange County Department of Education (OCDE), which operates as an agent of the state for school administration. Despite Sato's argument that COEs are distinct from the state due to their ability to sue the state, California law still classifies COEs and school districts as state agents. Ultimately, considering all Mitchell factors, California school districts and COEs, including OCDE, retain their status as arms of the state, continuing to enjoy Eleventh Amendment immunity. The reforms introduced by AB 97 did not fundamentally change this relationship. Sato’s claims were appropriately dismissed, and each party will bear its own costs.