Caribbean Mills, Inc. v. Kramer

• Citation: 392 F.2d 387
• Decision Date: 05 March 1968
• Docket Number: No. 24090.,24090.
• Parties: CARIBBEAN MILLS, INC., Appellant, v. Clayton S. KRAMER, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

392 F.2d 387 (1968)

CARIBBEAN MILLS, INC., Appellant, v. Clayton S. KRAMER, Appellee.

No. 24090.

United States Court of Appeals Fifth Circuit.

January 26, 1968.

Rehearing Denied March 5, 1968.

Morris Harrell, Stan McMurry, Rain, Harrell & Emery, Dallas, Tex., for appellant.

Jack Banner, Banner & McIntosh, Wichita Falls, Tex., for appellee.

Before BROWN, Chief Judge, and BELL and THORNBERRY, Circuit Judges.

Rehearing En Banc Denied March 5, 1968.

THORNBERRY, Circuit Judge:

Because we conclude that the requisite diversity of citizenship does not exist in this case, it will not be necessary to recite the facts in great detail. Appellant, Caribbean Mills, Inc., is a foreign corporation organized under the laws of Haiti where it operates a flour mill. On May 30, 1959, it entered into a written agreement with a man named Kelly from Washington, D. C. and the Panama and Venezuela Finance Company, a foreign corporation organized under the laws of Panama. Under the terms of the agreement, appellant was to purchase from Panama 125 shares of corporate stock for a down payment of $85,000 plus installment payments amounting to an additional $165,000. Because of subsequent developments and appellant's interpretation of the contract in light of these developments, the installment payments were never made.

On September 21, 1964, Panama and Kelly assigned their interests under the 1959 contract to Clayton Kramer, an attorney in Wichita Falls, Texas and appellee here. The consideration was $1.00. By separate instrument executed on the same day, Mr. Kramer reassigned 95% of his newly acquired interest to Panama.¹ Thereafter, he filed suit against Caribbean Mills for $165,000 in the United States District Court for the Northern District of Texas.² The trial judge overruled appellant's motion to dismiss on jurisdictional grounds and proceeded to trial. The question of contract interpretation was submitted to a jury, which returned a verdict in favor of appellee for $165,000. In appealing the judgment entered on this verdict, Caribbean Mills urges, inter alia, that the sole purpose of the assignment from Panama to Kramer was to create diversity of citizenship under 28 U.S.C. § 1332(a) (2) (suit between citizen of a state and citizen of a foreign state) and that such a tactic brings into play 28 U.S.C. § 1359, which says that a federal court shall not have jurisdiction where a party "by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court." On oral argument before this Court, counsel for appellee made no particular effort to deny that Mr. Kramer is simply an assignee for purposes of collecting Panama's claim in federal court, but he argued that the assignment from Panama is valid on its face and that under the decided cases the motives for making it are of no import. Because we believe that 28 U.S.C. § 1359 has more force than appellee is willing to admit, we must reverse and remand with directions to dismiss for want of jurisdiction. While it may seem wasteful to divest the federal courts of jurisdiction after judgment has been entered on a jury verdict, there are deeper considerations which compel this result. In construing the very statute before us, the Tenth Circuit said,

But, after all, it is the words of a federal statute we construe in the context of an historical purpose to deny diversity jurisdiction when it would operate to serve a purpose which is unsuited to the good order of federal court administration.

Bradbury v. Dennis, 10th Cir. 1962, 310 F.2d 73, 76.

I.

By assigning its interest under the contract and obtaining a reassignment of 95% of that interest on the same day, Panama obviously intended to designate Kramer as a collection agent with the capacity to sue in federal court. To construe these transactions in another way would require serious departure from any traditional notion of reality. The question presented, then, is whether under Section 1359 an assignee for collection purposes can properly invoke federal jurisdiction. In our view, he cannot do so because the assignment to him was made for the purpose of creating federal jurisdiction without divesting the assignor of his interest in the lawsuit. To support this conclusion, we must delve into the history of Section 1359 and some of the old cases.

Broadly speaking, Section 11 of the Judiciary Act of 1789 denied federal jurisdiction to an assignee of a cause of action if it was unavailable to his assignor, i. e., if his assignor could not have brought the same suit in federal court. With changes in language, the "assignee clause" remained a part of the law until 1948. Wright, Federal Courts § 31, at 85 (1963 ed.). Section 37 of the Judicial Code of 1911, which stemmed from the Act of 1875, commanded the dismissal or remand of an original or removed action when the parties had been "improperly or collusively made or joined, either as plaintiffs or defendants, for the purpose of creating a case cognizable or removable." 3 J. Moore, Federal Practice ¶ 17.05, at 1319 (1967 ed.). In the 1948 Judicial Code, the Reviser condensed these two sections into Section 1359, the statute we have today. The Reviser's Notes indicate that the purpose of condensing the two sections into one was twofold: To eliminate confusing and unnecessary exceptions to the assignee clause and to eliminate the effect of that clause on bona fide assignees. Under the original clause, a bona fide assignee could not sue in federal court unless his assignor could have; under Section 1359, any assignee can sue in federal court so long as he was not improperly or collusively made a party in order to invoke federal jurisdiction. The Reviser's Notes do not suggest any other change in law or policy.

With this legislative background in mind, we turn to the pre-revision cases. These cases clearly reveal that the device employed by Panama would not have passed muster under pre-revision statutes. Williams v. Nottawa, 1881, 104 U.S. 209, 26 L.Ed. 719, involved an action against a township upon township bonds payable to bearer. Williams, the plaintiff, sued on three of the bonds as owner; but the rest of them had been transferred to him for collection purposes by citizens of Michigan, the state in which the township was located. The Supreme Court held that the transfer was colorable in the sense that it was never intended to change the ownership and was made only for the purpose of "creating a cause cognizable in the courts of the United States." The suit was therefore dismissed as being in contravention of the policy of the Act of 1875. The Reviser's Notes do not indicate that the policy of dismissing under these circumstances was changed by the enactment of Section 1359.

Two later cases following Williams v. Nottawa lend further support to the principle that a federal court has no jurisdiction over an action brought by a collection agent to whom an assignment or transfer has been made for the purpose of creating diversity. In Southern Realty Investment Co. v. Walker, 1909, 211 U.S. 603, 29 S.Ct. 211, 53 L.Ed. 346, some Georgia attorneys had created a dummy corporation in South Dakota that was used as an agent to collect the claims of Georgia citizens against Georgia citizens in federal court. The Supreme Court held that under the Act of 1875 a diversity suit could not be maintained by the corporation in behalf of Georgia citizens. In Central Paper Co. v. Southwick, 6th Cir. 1932, 56 F.2d 593, Southwick had been assigned four claims for $1.00 each so that he could bring suit in federal court. He, like Mr. Kramer in the case at bar, appears to have arranged a fee for his efforts to collect. While it is not clear from the opinion that the reason for the assignments was to create diversity of citizenship, the court observed that the Act of 1875 and cases like Williams v. Nottawa prohibited "assignments of the technical legal titles to claims to plaintiffs for the purpose of permitting them to bring suits in federal courts for the purpose of collecting the same." 56 F.2d, at 596. It found the four assignments to be colorable or fictitious and hence improperly made to invoke federal jurisdiction.

The three cases just discussed are factually similar to the instant case and serve to demonstrate that courts interpreting the Act of 1875 considered an assignment for the purpose of enabling collection in federal court to be improper within the meaning of the statute. Three other cases, which are not so similar factually but perhaps more well-known, are illustrative of the same proposition. In Lehigh Mining & Mfg. Co. v. Kelly, 1895, 160 U.S. 327, 16 S.Ct. 307, 40 L.Ed. 444 and in Miller & Lux, Inc. v. East Side Canal & Irrigation Co., 1908, 211 U.S. 293, 29 S.Ct. 111, 53 L.Ed. 189, stockholders of one corporation transferred fee title in land to a sham corporation in another state without valuable consideration for the purpose of creating federal jurisdiction. In Miller & Lux, the Court summarized the transaction as follows:

* * * the transfer of the property of the California corporation to the Nevada corporation was merely formal, — only a device by which to have the rights asserted by the California corporation in a state court determined by the Federal court rather than by the state court. The agreement that all the property of the California corporation should be transferred to the Nevada corporation was attended by the condition that all the capital stock of the new corporation should be issued — and it was issued — to the California corporation, which remained in existence with full power, as the owner of such stock, to control the operations of the Nevada corporation.

211 U.S., at 304, 29 S.Ct., at 114. The Court held that the Nevada corporation was collusively made plaintiff in the suit for the purpose of creating federal jurisdiction and therefore that jurisdiction failed under the Act of 1875. The reason jurisdiction failed...