Smith v. Kansas City Title Trust Co 1920, 199
| Decision Date | 26 April 1920 |
| Docket Number | No. 199,199 |
| Citation | 255 U.S. 180,41 S.Ct. 243,65 L.Ed. 577 |
| Parties | SMITH v. KANSAS CITY TITLE & TRUST CO. et al. Argued Jan. 6, 7, and 8, 1920. Restored to the Docket for Reargument |
| Court | U.S. Supreme Court |
Messrs. Wm. Marshall Bullitt, of Louisville, Ky., and Frank Hagerman, of Kansas City, Mo., for appellant.
[Argument of Counsel from pages 181-192 intentionally omitted]
Messrs. Charles E. Hughes and George W. Wickersham, both of New York City, for appellees.
[Argument of Counsel from pages 192-195 intentionally omitted]
A bill was filed in the United States District Court for the Western Division of the Western District of Missouri by a shareholder in the Kansas City Title & Trust Company to enjoin the company, its officers, agents and employees, from investing the funds of the company in farm loan bonds issued by Federal Land Banks or Joint-Stock Land Banks under authority of the Federal Farm Loan Act of July 17, 1916, 39 Stat. 360 (Comp. St. §§ 9835a-9835z), Act Jan. 18, 1918, 40 Stat. 431 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 9835w).
The relief was sought on the ground that these acts were beyond the constitutional power of Congress. The bill avers that the board of directors of the company are
about to invest its funds in the bonds to the amount of $10,000 in each of the classes described, and will do so unless enjoined by the court in this action. The bill avers the formation of 12 Federal Land Banks, and 21 Joint-Stock Land Banks under the provisions of the act.
As to the Federal Land Banks, it is averred that each of them has loaned upon farm lands large amounts secured by mortgage, and, after depositing the same with the Farm Loan Registrar, has executed and issued collateral trust obligations, called 'farm loan bonds,' secured by the depositing of an equivalent amount of farm mortgages and notes, and that each of said Federal Land Banks has sold, and is continuing to offer for sale, large amounts of said farm loan bonds. The bill also avers that various persons in different parts of the United States have organized 21 Joint-Stock Land Banks the capital stock of which is subscribed for and owned by private persons; that the Joint-Stock Land Banks have deposited notes and mortgages with the Farm Loan Registrar, and issued an equivalent amount of collateral trust obligations called 'farm loan bonds,' which have been sold and will be continued to be offered for sale to investors in large amounts in the markets of the country. A statement is given of the amount of deposits by the Secretary of the Treasury with the Federal Land Banks, for which the banks have issued their certificates of indebtedness bearing interest at 2 per cent. per annum. It is averred that on September 30, 1919, Federal Land Banks owned United States bouds of the par value of $4,230,805, and the Joint-Stock Land Banks owned like bonds of the par value of $3,287,503 on August 31, 1919; that pursuant to the provisions of the act the Secretary of the Treasury has invested $8,892,130 of the public funds in the capital stock of the Federal Land Banks, and that on July 1, 1919, the Secretary of the Treasury, on behalf of the United States, held $8,265,809 of the capital stock of the Federal Land Banks;
that pursuant to the provisions of section 32 of the act as amended, the Secretary of the Treasury has purchased farm loan bonds issued by the Federal Land Banks of the par value of $149,775,000; that up to September 30, 1919, bonds have been issued under the act by the Federal Land Banks to the amount of $285,600,000, of which about $135,000,000 are held in the Treasury of the United States purchased under the authority of the amendment of January 19, 1918; that up to September 30, 1919, 27 Joint-Stock Land Banks have been incorporated under the act, having an aggregate capital of $8,000,000, all of which has been subscribed, and $7,450,000 paid in; that bonds have been issued by Joint-Stock Land Banks to the amount of $41,000,000, which are now in the hands of the public; that the Secretary of the Treasury up to the time of the filing of the bill has not designated any of the Federal Land Banks nor the Joint-Stock Land Banks as depositaries of public money nor, except as stated later in the bill, has he employed them or any of them as financial agents of the government, nor have they or any of them performed any duties as depositaries of public money, nor have they or any of them accepted any deposits or engaged in any banking business. The bill avers that during the summer of 1918 the Federal Land Banks at Wichita, St. Paul, and Spokane were designated as financial agents of the government for making seed grain loans to farmers in drought-stricken sections; the President having at the request of the Secretary of Agriculture set aside $5,000,000 for that purpose out of the $100,000,000 war funds. The three banks mentioned made upwards of 15,000 loans of that character aggregating a sum upwards of $4,500,000, and are now engaged in collecting these loans all of which are secured by crop liens; that these banks act in that capacity without compensation, receiving only the actual expenses incurred.
Section 27 of the act provides that farm loan bonds
issued under the provisions of the act by Federal Land Banks or Joint-Stock Land Banks shall be a lawful investment for all fiduciary and trust funds, and may be accepted as security for all public deposits. The bill avers that the defendant Trust Company is authorized to buy, invest in and sell government, state and municipal and other bonds, but it cannot buy, invest in or sell any such bonds, papers, stocks or securities which are not authorized to be issued by a valid law or which are not investment securities, but that nevertheless it is about to invest in farm loan bonds; that the Trust Company has been induced to direct its officers to make the investment by reason of its reliance upon the provisions of the Farm Loan Acts, especially sections 21, 26 and 27, by which the farm loan bonds are declared to be instrumentalities of the government of the United States, and as such, with the income derived therefrom, are declared to be exempt from federal, state, municipal and local taxation, and are further declared to be lawful investments for all fiduciary and trust funds. The bill further avers that the acts by which it is attempted to authorize the bonds are wholly illegal, void and unconstitutional, and of no effect, because unauthorized by the Constitution of the United States.
The bill prays that the acts of Congress authorizing the creation of the banks, especially sections 26 and 27 thereof, shall be adjudged and decreed to be unconstitutional, void and of no effect, and that the issuance of the farm loan bonds, and the taxation exemption feature thereof, shall be adjudged and decreed to be invalid.
The First Joint-Stock Land Bank of Chicago and the Federal Land Bank of Wichita, Kan., were allowed to intervene and became parties defendant to the suit. The Kansas City Title & Trust Company filed a motion to dismiss in the nature of a general demurrer, and upon hearing the District Court entered a decree dismissing the bill. From this decree appeal was taken to this court.
No objection is made to the federal jurisdiction, either original or appellate, by the parties to this suit, but that question will be first examined. The company is authorized to invest its funds in legal securities only. The attack upon the proposed investment in the bonds described is because of the alleged unconstitutionality of the acts of Congress undertaking to organize the banks and authorize the issue of the bonds. No other reason is set forth in the bill as a ground of objection to the proposed investment by the board of directors acting in the company's behalf. As diversity of citizenship is lacking, the jurisdiction of the District Court depends upon whether the cause of action set forth arises under the Constitution or laws of the United States. Judicial Code, § 24 (Comp. St. § 991).
The general rule is that, where it appears from the bill or statement of the plaintiff that the right to relief depends upon the construction or application of the Constitution or laws of the United States, and that such federal claim is not merely colorable, and rests upon a reasonable foundation, the District Court has jurisdiction under this provision.
At an early date, considering the grant of constitutional power to confer jurisdiction upon the federal courts, Chief Justice Marshall said:
'A case in law or equity consists of the right of the one party, as well as of the other, and may truly be said to arise under the Constitution or a law of the United States, whenever its correct decision depends upon the construction of either,' Cohens v. Virginia, 6 Wheat. 264, 379 (5 L. Ed. 257); and again, when 'the title or right set up by the party, may be defeated by one construction of the Constitution or law of the United States, and sustained by the opposite construction.' Osborn v. Bank of the United States, 9 Wheat. 738, 822 (6 L. Ed. 204).
These definitions were quoted and approved in Patton v. Brady, 184 U. S. 608, 611, 22 Sup. Ct. 493, 46 L. Ed. 713, citing Gold Washing Co. v. Keyes, 96 U. S. 199, 201, 24 L. Ed. 656; Tennessee v. Davis, 100 U. S. 257, 25 L. Ed. 648; White v. Greenhow, 114 U. S. 307, 5 Sup. Ct. 923, 962, 29 L. Ed. 199; Railroad Co. v. Mississippi, 102 U. S. 135, 139, 26 L. Ed. 96.
This characterization of a suit arising under the Constitution or laws of the United States has been followed in many decisions of this and other federal courts. See Macon Grocery Co. v. Atlantic Coast Line, 215 U. S. 501, 506, 507, 30 Sup. Ct. 184, 54 L. Ed. 300; Shulthis v. McDougal, 225 U. S. 569, § 3, 32 Sup. Ct. 704, 56 L. Ed. 1205. The...
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