O'BRIEN v. Avco Corporation

• Decision Date: 13 November 1969
• Docket Number: Dockets 33576,No. 120,121,33577.,120
• Citation: 425 F.2d 1030
• Parties: Edward M. O'BRIEN, as Administrator c.t.a. of the Estate of Chester J. Barch, Deceased, Appellee, v. AVCO CORPORATION, the Bendix Corporation and Paul G. Badgley Company, Inc., Appellants.
• Court: U.S. Court of Appeals — Second Circuit

425 F.2d 1030 (1969)

Edward M. O'BRIEN, as Administrator c.t.a. of the Estate of Chester J. Barch, Deceased, Appellee, v. AVCO CORPORATION, the Bendix Corporation and Paul G. Badgley Company, Inc., Appellants.

Nos. 120, 121, Dockets 33576, 33577.

United States Court of Appeals Second Circuit.

Argued October 8, 1969.

Decided November 13, 1969.

Ernest Kennedy, New York City (Mendes & Mount, New York City, on the brief), for appellants AVCO and Bendix.

William G. Becker, Jr., Newark, N.J. (Donald A. Robinson, New York City, on the brief), for appellant Paul G. Badgley Co. Inc.

Alfred W. Gans, New York City (Frank H. Granito, Jr., Speiser, Shumate, Geoghan, Krauss & Rheingold, New York City, on the brief), for appellee.

Before WATERMAN, MOORE and KAUFMAN, Circuit Judges.

IRVING R. KAUFMAN, Circuit Judge.

The sole question for determination on appeal is whether appointment of an administrator c. t. a. of an estate for the purpose of invoking federal diversity jurisdiction is "improper" or "collusive" within the meaning of 28 U.S.C. § 1359 (1964).¹

Since the dispute is over the law alone, the facts may be stated briefly. In 1965, Chester J. Barch, John T. Schweitzer, and Harry T. Ditch were passengers in a small plane owned by the Paul G. Badgley Company, Inc. of New York, flown by its president, Paul G. Badgley, from its hangar in Syracuse. En route to Cleveland, Ohio the plane crashed, killing all four men. Mrs. Barch, executrix of her husband's estate, in 1967 instituted a wrongful death action in New York County Supreme Court against the Badgley Company, AVCO Corporation (which maintained the plane), and the Bendix Corporation (maker of the allegedly faulty component). Later in the month, Mrs. Badgley and the Badgley Company brought suit in Onondaga County against AVCO, Bendix, and Mooney Aircraft, Inc., maker of the plane. The Ditch estate also instituted an action in Onondaga County (where all plaintiffs resided) against AVCO, Bendix, and Mooney. In June, the Schweitzer estate also filed suit in Onondaga County, but shortly before, the Badgley Company moved to try all the actions jointly in the Onondaga County Supreme Court.

The Barch attorneys, faced with the prospect of an upstate court, took evasive action. Mrs. Barch requested permission of the Onondaga County Surrogate's Court to resign as administratrix, and to have Edward M. O'Brien, a New Jersey resident and member of the law firm representing her in the instant action, appointed as administrator in her stead "for the limited purpose" as she phrased it in her application to the Surrogate, "of prosecution of the wrongful death action against the defendants."

The Surrogate granted the request in July, and O'Brien, on behalf of the estate, brought suit in the United States District Court for the Southern District of New York on the same claim. Subsequently, the Supreme Court of Onondaga County ordered all four actions to be tried jointly in Onondaga County. AVCO, Badgley, Bendix, and the Badgley, Ditch, and Schweitzer estates moved before the Onondaga Surrogate to vacate O'Brien's appointment, which he did on the basis of failure "to disclose material facts." On September 14, 1967, Judge McLean dismissed the federal action for lack of diversity jurisdiction, based on the vacatur of O'Brien's appointment. O'Brien, however, succeeded in having the Appellate Division of the state Supreme Court reverse the vacatur. In re Barch's Will, 30 A.D.2d 241, 291 N.Y.S.2d 422 (4th Dept. 1968), appeal dismissed, 23 N.Y.2d 865, 298 N.Y.S.2d 73, 245 N.E.2d 805 (1969). On February 20, 1969, Judge McLean granted O'Brien's motion to set aside his original order, and reinstated the action. We granted leave for an interlocutory appeal of that order on May 1, 1969 pursuant to 28 U.S.C. § 1292(b).

I

AVCO's basic contention is that the appointment of O'Brien for the sole purpose of invoking federal diversity jurisdiction constitutes "manufactured diversity" of the sort prohibited by 28 U.S.C. § 1359. O'Brien, in response, relies on Lang v. Elm City Construction Co., 324 F.2d 235 (2d Cir. 1963), which permitted manufactured diversity when fiduciaries, such as administrators, were involved. See also Stephan v. Marlin Firearms Co., 325 F.2d 238 (2d Cir. 1963) (aff'd per curiam on the basis of Lang), cert. denied 384 U.S. 959, 86 S.Ct. 1584, 16 L.Ed.2d 672 (1966).

It seems well settled that for purposes of diversity jurisdiction the citizenship of the fiduciary, and not the beneficiary, usually controls. See Rice v. Houston, 80 U.S. (13 Wall.) 66, 21 L.Ed. 484 (1871); Dodge v. Tulleys, 144 U.S. 451, 12 S.Ct. 728, 36 L.Ed. 501 (1892); Mexican Central Railway v. Eckman, 187 U.S. 429, 23 S.Ct. 211, 47 L.Ed. 245 (1903); McSparren v. Weist, 402 F.2d 867, 869 (3d Cir. 1968), cert. denied sub nom. Fritzinger v. Weist, 395 U.S. 903, 89 S.Ct. 1739, 23 L.Ed.2d 217 (1969). "Manufactured" diversity, however, raises rather more serious problems. This requires us to scrutinize carefully the policy expressed in section 1359, a policy as old as the federal courts themselves. Section 11 of the Judiciary Act of 1789, 1 Stat. 78, provided that District Courts and Circuit Courts should not have

"cognizance of any suit to recover the contents of any promissory note or other chose in action in favour of an assignee, unless a suit might have been prosecuted in such court to recover the said contents if no assignment had been made * * *."

Something less than a hundred years later the section was amended, but to the end of broadening its prohibitions to "promissory notes negotiable by the law merchant and bills of exchange." Act of March 3, 1875, § 1, c. 137, 18 Stat. 470. Section 5 of the same Act, however, added what may be regarded as the direct predecessor of Section 1359:

"* * * if in any suit commenced in a circuit court which then had original diversity jurisdiction * * it shall appear to the satisfaction of said circuit court, at any time after such suit has been brought * * * that such suit does not really and substantially involve a dispute or controversy properly within the jurisdiction of said circuit court, or that the parties to said suit have been improperly or collusively made or joined, * * for the purpose of creating a case cognizable * * * under this act; the said circuit court * * * shall dismiss the suit * * *."

See Williams v. Nottawa, 104 U.S. 209, 26 L.Ed. 719 (1881).

With changes in language, the restrictive assignee clause in the 1789 Act remained until 1948, as did the provisions of the 1875 Act. As a part of the revision of the Judicial Code in 1948, the assignee clause was dropped, and a revision of the 1875 section adopted, in the belief that by seeking to "prevent the manufacture of jurisdiction" in a direct manner, some of the abstruse distinctions that had grown up could be avoided. Act of June 25, 1948, c. 646, 62 Stat. 935. See Reviser's Note to 28 U.S.C. § 1359; C. Wright, Federal Courts 85 (1963).

II.

The historical rationale for diversity jurisdiction was that out-of-state parties might be subjected to undue prejudice in state courts, and thus ought to be afforded the opportunity to have their cases tried in an impartial forum. See Bank of the United States v. Deveaux, 9 U.S. (5 Cranch) 61, 87, 3 L.Ed. 38 (1809) (Marshall, C.J.). The continued validity of Marshall's argument, in a mobile and urban society has been questioned by scholars. Several, however, still agree that the danger of prejudice — or merely the fear of it — remains the chief underlying support for diversity jurisdiction.²

Even under that rationale, however, there can be no excuse for engulfing the already over-burdened federal courts with cases involving controversies between citizens of the same state, who seek to invoke federal jurisdiction through sham transactions. Section 1359 is merely the last of a series of enactments embodying that clear and salutary principle.

III.

Despite the clear purpose of the amendment, some courts have continued to pay scant heed to its command, leading a commentator to remark, as late as 1963, that the section was "largely ineffective." C. Wright, Federal Courts 86 (1963). The principal reasons for this ineffectiveness were decisions holding that administrators, guardians, and the like, appointed expressly to confer jurisdiction, were effective to create diversity. Some of the cases are of ancient vintage; others more recent. See, e. g., Goff's Adm'r v. Norfolk & W. R.R., Co., 36 F. 299 (Cir.Ct. W.D.Va. 1888); Jaffe v. Philadelphia & Western R.R., Co., 180 F.2d 1010 (3d Cir. 1950); Corabi v. Auto Racing, Inc., 264 F.2d 784, 75 A. L.R.2d 711 (3d Cir. 1959).

In this Circuit the leading case is Lang v. Elm City Construction Co., 324 F.2d 235 (1963). See also Stephan v. Marlin Firearms Co., 325 F.2d 238 (2d Cir. 1963) (per curiam), cert. denied 384 U.S. 959, 86 S.Ct. 1584, 16 L.Ed.2d 672 (1966). Lang was a one paragraph per curiam opinion, without any rationale beyond a citation to Corabi.Corabi, then, becomes crucial. That case rested on two grounds. The first was that the result was controlled by Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518, 524-525, 48 S.Ct. 404, 72 L.Ed. 681 (1928) (Holmes, Brandeis, and Stone, JJ. dissenting), which held that if there were an "actual" transfer, then the assignment was not collusive regardless of the motive. The result would clearly be otherwise, where the transfer was solely for the purpose of collection. See Lehigh Mining & Manufacturing Co. v. Kelly, 160 U.S. 327, 16 S.Ct. 307, 40 L.Ed. 444 (1895); Miller & Lux v. East Side Canal & Irrigation Co., 211 U.S. 293, 29 S.Ct. 111, 53 L.Ed. 189 (1908); Kramer v. Caribbean Mills, Inc., 394 U.S. 823, 89 S.Ct. 1487, 23 L.Ed.2d 9 (1969). Black & White Taxicab has been "the target of universal condemnation, as the worst example of the abuses of diversity possible under the rule of Swift v. Tyson," C. Wright at 86-87 n....