Fowler v. Coals, Civ. No. 3-76-125.

• Decision Date: 07 June 1976
• Docket Number: Civ. No. 3-76-125.
• Citation: 418 F. Supp. 909
• Parties: John B. FOWLER, Jr. v. Arnold COALS et al.
• Court: U.S. District Court — Eastern District of Tennessee

418 F. Supp. 909

John B. FOWLER, Jr. v. Arnold COALS et al.

Civ. No. 3-76-125.

United States District Court, E. D. Tennessee, N. D.

June 7, 1976.

D. Bruce Shine, Shelburne Ferguson, Jr., Kingsport, Tenn., for plaintiff.

Robert S. Young, Knoxville, Tenn., for defendants.

MEMORANDUM

ROBERT L. TAYLOR, District Judge.

This matter is before the Court on the motion to dismiss of defendants in which they allege, among other things, that the Court lacks subject matter jurisdiction. A hearing was held at which proof was presented and arguments were heard on the question of jurisdiction. The sole issue before the Court is whether the transaction which plaintiff claims gave him the right to maintain this action falls within the scope of 28 U.S.C. § 1359.

Plaintiff is an officer, director and shareholder of Sturkie Coal Co., Inc., hereinafter Sturkie a Kentucky corporation organized in November of 1973 for the purpose of acquiring the Hazard, Kentucky, mining operations of Arnold Coals, a Kentucky partnership. The complaint alleges that defendants breached a contract executed in May of 1974 by which Sturkie agreed to buy and defendants agreed to sell certain coal leases, coal supply contracts, mining equipment and other assets for a price of $7,000,000.00.

Sturkie filed a complaint in this Court on December 17, 1975, which, in respect to the claims for relief asserted against defendants, is virtually identical to the present complaint.¹ Sturkie's Kentucky citizenship, however, was the same as that of four of the defendants. When this became apparent to Sturkie, it took a voluntary nonsuit.

Plaintiff filed the present complaint on April 26, 1976, some four months after the nonsuit was taken. He alleges that he is a citizen of Pennsylvania and that the Court has jurisdiction pursuant to 28 U.S.C. § 1332. None of the defendants are citizens of Pennsylvania.

Plaintiff contends that the Court should look to his citizenship alone because in March of 1976 Sturkie assigned to him as trustee for the benefit of Sturkie's shareholders any claim that it had against defendants. The allegations of the complaint pertaining to the alleged assignment are as follows:

"In March of 1976, Sturkie assigned, transferred and set over to John B. Fowler, Jr., a citizen and resident of Carlisle, Pennsylvania, as Trustee for the benefit of all stockholders in Sturkie, the claims of the corporation against the defendants herein.

The assignment by Sturkie was motivated by reason of the dormant condition of the corporation, its lack of funds to prosecute the action; its failure to be able to provide assistance in the prosecution of this lawsuit; and the availability, personal knowledge of all various aspects of and the desire of Fowler to proceed. Fowler was given `the full power in his absolute discretion to dispose of the contemplated litigation at any time without notice to assignors.'

In consideration of accepting the assignment, Sturkie agreed to pay Fowler a bonus of $25,000 out of the proceeds of the litigation should he be successful.

Fowler had been the key figure in Sturkie since its inception and had conducted all negotiations with the defendants, which culminated in the execution of the May 25, 1974, agreement." Complaint at 2

Plaintiff and his wife together own 200,000 shares of Sturkie's 564,000 shares of outstanding capital stock.² At the time the contract was negotiated, the late D. S. Sturkie and his wife each owned 125,000 shares. D. S. Sturkie was the president and treasurer of the corporation and plaintiff was its executive vice-president and secretary. D. S. Sturkie died on July 17, 1975, and his shares are now held by the administrator of this estate, R. L. Goodman, who is now a director of the corporation.

Plaintiff testified that the corporation has not been "fluid" since D. S. Sturkie's death, and that he has handled the corporate affairs without remuneration and has spent his own funds without reimbursement. It was stated at the hearing that the claim against defendant is Sturkie's only substantial asset.

After the action brought by Sturkie was nonsuited because diversity of citizenship was wanting, Sturkie's Board of Directors met to discuss the position it would take in future litigation against defendants. It was at this time that the alleged assignment to plaintiff was made.

Plaintiff testified at the hearing that the assignment was motivated by legitimate business reasons. He stated that he was a leading force in the organization of Sturkie and handled the contract negotiations with defendants on behalf of the corporation. He further stated that, while the corporation was adequately funded in the beginning of its operation, it is now without funds to prosecute this action, and that no other party in the corporation has the time to proceed against defendants.

The Applicability of Section 1359

The Court notes at the outset that when jurisdiction is challenged by a motion to dismiss based on § 1359, the burden is on the party seeking to invoke the Court's jurisdiction to prove facts that will sustain it. Green v. Hale, 433 F.2d 324, 329 (5th Cir. 1970); Green & White Construction Co. v. Cormat Construction Co., 361 F.Supp. 125 (N.D.Ill.1973); Dickson v. Tattnall County Hospital Authority, 316 F.Supp. 531 (S.D. Ga.1970). It should also be noted that § 1359 was enacted to prevent diversity jurisdiction from being manufactured when none existed, and Federal courts should approach § 1359 cases with this purpose in mind.

Section 1359 provides as follows:

"A district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court."

In Kramer v. Caribbean Mills, 394 U.S. 823, 89 S.Ct. 1487, 23 L.Ed.2d 9 (1969), the Supreme Court considered the scope of § 1359 in regard to assignments. A Panamanian corporation assigned its interest in a contract to an American attorney for the purpose of collection. The factors which the Court considered significant in holding that the assignment was "improperly or collusively" made pursuant to § 1359 are as follows: (1) the assignor retained a substantial interest in the outcome of the suit since the assignee, in a later transaction, reassigned ninety-five per cent of the proceeds of the suit to the corporation; (2) the assignee lacked an independent and legitimate interest in the suit which predated the assignment; (3) the assignee stood to lose little more than his time and fee if the suit proved unsuccessful since he gave only one dollar as consideration for the assignment; and (4) the assignee admitted that the assignment was motivated in substantial part by a desire to create diversity of citizenship.

In holding that the District Court lacked subject matter jurisdiction, the Court stated:

"If federal jurisdiction could be created by assignments of this kind, which are easy to arrange and involve few disadvantages to the assignor, then a vast quantity of ordinary contract and tort litigation could be channeled into the federal courts at the will of one of the parties. Such `manufacture of Federal jurisdiction' was the very thing which Congress intended to prevent when it enacted § 1359 . . .." 394 U.S. at 828-29, 89 S.Ct. at 1490.

Justice Harlan left no doubt that the application of § 1359 was capable of even broader application:

"In short, we find that this assignment falls not only within the scope of § 1359 but within its very core. . . ." (emphasis added) 394 U.S. at 830, 89 S.Ct. at 1491.

Several district courts, relying on Kramer, have adopted a two-pronged test for determining whether an assignment falls within the scope of § 1359. First, it must be determined whether the assignment is real or colorable. If the assignment is deemed colorable, then it must further be determined whether the assignment was motivated by or designed to acquire diversity of citizenship.³ Prudential Oil Corporation v. Phillips Petroleum Co., 398 F.Supp. 233 (S.D.N.Y.1975); J. F. Pritchard Co. v. Dow Chemical of Canada, Ltd., 331 F.Supp. 1215 (W.D.Mo.1971); Farrell v. Ducharme, 310 F.Supp. 254 (D.Vt.1970).

Plaintiff relies primarily upon Bradbury v. Dennis, 310 F.2d 73 (10th Cir. 1962), for the proposition that the assignment in the present case is not colorable and thus does not fall within the scope of § 1359. Bradbury marked somewhat of a departure from the well-settled rule that an assignment is colorable if the...