Airlines Reporting Corp. v. S and N Travel, Inc.

• Decision Date: 27 June 1995
• Docket Number: D,No. 1301,1301
• Citation: 58 F.3d 857
• Parties: AIRLINES REPORTING CORPORATION, Plaintiff-Counter-Defendant-Appellant, v. S AND N TRAVEL, INC., doing business as Superior Travel, Efraim Schwartz, and Walter Newmark, Defendants-Counter-Claimants-Appellees. ocket 94-9062.
• Court: U.S. Court of Appeals — Second Circuit

Page 857

58 F.3d 857

AIRLINES REPORTING CORPORATION, Plaintiff-Counter-Defendant-Appellant, v. S AND N TRAVEL, INC., doing business as Superior Travel Efraim Schwartz, and Walter Newmark Defendants-Counter-Claimants-Appellees.

No. 1301, Docket 94-9062.

United States Court of Appeals Second Circuit.

Argued March 14, 1995.

Decided June 27, 1995.

Thomas F. Cullen, Jr., Washington, DC (Harold K. Gordon, Jones, Day, Reavis & Pogue, New York City, Kathryn M. Fenton, Jones, Day, Reavis & Pogue, Washington, DC, of counsel), for appellant.

Barry Roberts, Chevy Chase, MD (Roberts & Hundertmark, Chevy Chase, MD, of counsel), for appellees.

Before: MESKILL, CARDAMONE and ALTIMARI, Circuit Judges.

MESKILL, Circuit Judge:

Airlines Reporting Corporation (ARC) brought this diversity action in its capacity as representative of numerous air carriers, seeking to collect from appellees approximately $375,000 owed to those carriers for the purchase of airline tickets. On appeal ARC challenges the decision of the United States District Court for the Eastern District of New York, Weinstein, J., to dismiss its complaint pursuant to Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction. The principal questions we must address are whether ARC, representing the air carriers, may maintain this action independent of the assignments obtained by ARC from the carriers to prosecute this action, and if not, whether the assignments were collusively made for the purposes of manufacturing federal jurisdiction in violation of 28 U.S.C. Sec. 1359. ¹ We answer the first question in the negative and the second in the affirmative. We agree with the district court that it lacked subject matter jurisdiction over this suit and, therefore, we affirm the district court's decision to dismiss the complaint.

BACKGROUND

Appellant ARC is a not-for-profit corporation, incorporated in Delaware, which maintains its principal place of business in Arlington, Virginia. ARC was created in 1984 by a consortium of domestic air carriers, its sole shareholders, to function as a clearinghouse and collection agent for transactions between the air carriers and travel agents.

ARC essentially acts as an intermediary in the air transportation industry. Travel agents accredited by ARC are furnished with standard form traffic documents, which the agents issue to their customers as airline tickets for travel on particular air carriers. The carriers honor these tickets as if issued by themselves directly. In turn the travel agents report their sales and remit the money due for the tickets, minus commissions, to the carriers through ARC. ARC then is responsible for forwarding the sales proceeds to the appropriate air carrier.

One hundred and forty-three air carriers have agreed to participate in this ticket distribution system by executing a "Carrier Services Agreement" (CSA) with ARC. Section XVIII of the CSA grants ARC the power of attorney to enter into contracts with travel agents on behalf of the carriers and to institute legal proceedings against any agent to collect funds owed to the carriers on transactions involving ARC ticket stock. Pursuant to that power of attorney, ARC enters into an "Agent Reporting Agreement" (ARA) with travel agencies on behalf of itself and the carriers. In signing the ARA travel agents explicitly agree to sell tickets on behalf of participating air carriers in the specific manner outlined in the ARA, and to conduct business with these carriers solely through ARC.

In October 1989 ARC and S & N Travel, Inc. (S & N) executed the ARA, entitling S & N to be listed as an ARC-accredited travel agency. S & N is a New York corporation with its principal place of business in New York City, and is owned and operated by co-defendants Ephraim Schwartz and Walter Newmark, also citizens of New York. On September 7, 1990 S & N voluntarily requested that it be deleted from ARC's list of accredited travel agencies. In response ARC notified all participating carriers of the request in order to determine if S & N owed any money for tickets ordered and issued. ARC discovered that S & N owed $374,711.68 to a total of twenty-nine air carriers for tickets issued by S & N during the period from December 1988 to September 1990. ²

After attempts to collect this sum failed, ARC, invoking federal diversity jurisdiction, instituted this action against S & N, Schwartz and Newmark (herein collectively S & N) in the Eastern District of New York on behalf of the twenty-nine air carriers. The complaint alleged claims of breach of contract, breach of fiduciary duty, conversion, fraud and negligence under New York common law.

S & N immediately moved to dismiss the complaint, asserting that the district court lacked subject matter jurisdiction over the action. See Fed.R.Civ.P. 12(b)(1). Specifically, S & N contended that ARC was acting solely as a collection agent for the individual air carriers pursuant to the power of attorney contained in the CSA and, therefore, the citizenship of the individual air carriers, rather than that of ARC, controlled for the purposes of diversity jurisdiction. S & N argued that complete diversity thus was lacking, as at least one of the air carriers, Pan American World Airways (Pan Am), maintained its principal place of business in New York. Further, as Pan Am was the only carrier with a claim in excess of $50,000, S & N argued that with respect to the other carriers ARC's complaint failed to satisfy the threshold amount in controversy required by 28 U.S.C. Sec. 1332.

Following the filing of the motion to dismiss ARC obtained assignments of the claims against S & N from all but three of the twenty-nine carriers. ³ The assignments stated in pertinent part:

For value received assignor hereby transfers, assigns, and sets over to assignee, for collection ... all of assignor's right, title and interest, legal and equitable, in and to any and all claims submitted to the assignee which arise from the default of [S & N] pursuant to the [ARA] and [CSA].

ARC concedes that the CSA, in turn, requires that any money recovered by ARC, less the costs of prosecuting this lawsuit, must be remitted to the individual air carriers.

ARC thus asserted that the assignments made it, and not the air carriers, the real party-in-interest for the purposes of determining diversity jurisdiction. Relying on the presence of the assignments the district court agreed, and denied S & N's motion to dismiss without prejudice. S & N renewed its motion following the completion of discovery, arguing that ARC collusively obtained the assignments from the air carriers and thereby manufactured diversity jurisdiction in violation of 28 U.S.C. Sec. 1359. The district court agreed, finding the assignments "suspicious" for several reasons:

First, the assignments were made only after the jurisdiction of this court was challenged by the defendants. Second, while the assignments on their face transfer all right, title and interest in the claims to ARC, in reality, the carriers retain the primary interest in the claims because ARC has agreed to transfer to the carriers any money obtained from the litigation, less the cost of prosecuting the case. Third, ARC paid no meaningful consideration for the assignments.

Airlines Reporting Corp. v. S & N Travel, 857 F.Supp. 1043, 1049 (E.D.N.Y.1994). Accordingly, the district court held that the air carriers, rather than ARC, were the real parties to this controversy. As Pan Am was not diverse to the defendants and, without Pan Am, the other air carriers could not satisfy the requisite jurisdictional amount in

controversy without aggregating their claims, the district court concluded that it lacked diversity jurisdiction over the case and granted S & N's motion to dismiss. ARC now appeals.

DISCUSSION

Diversity of citizenship jurisdiction is conferred on "all civil actions where the matter in controversy exceeds the sum or value of $50,000, exclusive of interest and costs, and is between ... citizens of different States." 28 U.S.C. Sec. 1332(a). We review the district court's dismissal of ARC's complaint for lack of subject matter jurisdiction de novo. See Rent Stabilization Ass'n of the City of New York v. Dinkins, 5 F.3d 591, 594 (2d Cir.1993).

I.

We first must consider whether ARC independently satisfies the jurisdictional requirements imposed by section 1332(a). If, as ARC suggests, it was the "real party" in this action, we would have no cause for addressing the propriety of the assignments. See Bradbury v. Dennis, 310 F.2d 73, 74 (10th Cir.1962), cert. denied, 372 U.S. 928, 83 S.Ct. 874, 9 L.Ed.2d 733 (1963).

It is well established that for a case to come within the diversity statute there must be complete diversity among all parties; that is, no plaintiff and no defendant may be citizens of the same state. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806). ARC is a corporation, and courts treat corporations as entities having the status of citizens. See Marshall v. Baltimore & Ohio R. Co., 57 U.S. (16 How.) 314, 328-29, 14 L.Ed. 953 (1854); see also Carden v. Arkoma Assocs., 494 U.S. 185, 187-89, 110 S.Ct. 1015, 1017-18, 108 L.Ed.2d 157 (1990) (explaining development of the citizenship status of corporations in diversity cases). Thus, in maintaining an action grounded on diversity jurisdiction, ARC normally may assert its own citizenship, rather than that of its shareholders, to establish complete diversity. See 28 U.S.C. Sec. 1332(c)(1) (considering corporations citizens of the state in which they are incorporated and the state in which they maintain their principal place of business).

ARC's corporate status, however, does not end the jurisdictional inquiry in this case. The Supreme Court has established that the " 'citizens' upon whose diversity a plaintiff grounds jurisdiction must be real and substantial parties to the controversy." Navarro Savings Ass'n v. Lee, 446 U.S. 458, 460, 100 S.Ct. 1779,...