Freeman v. Northwest Acceptance Corp.

• Decision Date: 04 March 1985
• Docket Number: No. 83-2739,83-2739
• Citation: 754 F.2d 553
• Parties: Ed FREEMAN and wife Sharon Freeman, Plaintiffs-Appellees Cross-Appellants, v. NORTHWEST ACCEPTANCE CORPORATION, Defendant-Appellant Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 553

754 F.2d 553

1 Fed.R.Serv.3d 1146

Ed FREEMAN and wife Sharon Freeman, Plaintiffs-Appellees Cross-Appellants, v. NORTHWEST ACCEPTANCE CORPORATION, Defendant-Appellant Cross-Appellee.

No. 83-2739.

United States Court of Appeals Fifth Circuit.

March 4, 1985.

Ross, Banks, May, Cron & Cavin, Clinton John Mayer, Houston, Tex., for defendant-appellant cross-appellee.

Elick & Elick, John V. Elick, Bellville, Tex., for plaintiffs-appellees cross-appellants.

Appeals from the United States District Court for the Southern District of Texas.

Before GEE, POLITZ and HIGGINBOTHAM, Circuit Judges.

GEE, Circuit Judge:

In August 1980, Sharon and Ed Freeman brought an action for conversion of gravel against Northwest Acceptance Corporation (Northwest). The Freemans filed their complaint in the United States District Court for the Southern District of Texas, premising jurisdiction on diversity of citizenship pursuant to 28 U.S.C. Sec. 1332(a)(1). They alleged themselves to be Texas citizens and Northwest to be an Oregon corporation with its principal place of business in Oregon. Although Northwest was the only named defendant, the conduct complained of was that of Northwest's wholly-owned subsidiary, First Commercial Credit Corporation (First Commercial), a Colorado corporation with its principal place of business in Colorado. The Freemans grounded Northwest's liability for First Commercial's conduct on the former's alleged status as alter ego of the latter.

The case was tried to a jury; it found for the Freemans on their theory of the case and assessed damages against Northwest as the alter ego of First Commercial. Both parties have appealed from the judgment entered by the trial court, which awarded the Freemans $43,910 but denied them punitive damages. Because, for reasons to be noted, we entertain serious doubts that the trial court had subject matter jurisdiction of the case, we vacate and remand the action for further proceedings.

Diversity under Sec. 1332(a)(1) ¹ must be complete; each plaintiff must have citizenship different from that of each defendant. Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806); Powell v. Offshore Navigation, Inc., 644 F.2d 1063 (5th Cir.), cert. denied, 454 U.S. 972, 102 S.Ct. 521, 70 L.Ed.2d 391 (1981). This rule applies fully to parties joined under Rule 19, Fed.R.Civ.P. Lowe v. Ingalls Shipbuilding, 723 F.2d 1173, 1177 (5th Cir.1984). When it appears from the record that diversity jurisdiction may have been lacking, it is the duty of the court of appeals to raise and consider the issue sua sponte. Id. In this circumstance, the "court of appeals has discretion to delve into the record in search of evidence establishing diversity jurisdiction" or lack thereof. Strain v. Harrelson Rubber Co., 742 F.2d 888, 889 n. 1 (5th Cir.1984) (per curiam). A search of the record in this case establishes a likely absence of complete diversity between the parties on either of two alternative theories. Both are grounded initially on our serious doubts regarding the Freemans' allegation of Texas citizenship. The evidence, including particularly that provided by the Freemans in their depositions, strongly suggests that they were Colorado citizens when they filed their complaint in 1980. ²

"For purposes of federal diversity jurisdiction 'citizenship' and 'domicile' are synonymous." Hendry v. Masonite Corp., 455 F.2d 955 (5th Cir.1972). The definition of 'domicile' has not changed from that set forth more than a century ago by the Supreme Court: " '[a] residence at a particular place accompanied with positive or presumptive proof of an intention to remain there for an unlimited time.' " Mitchell v. United States, 88 U.S. (21 Wall) 350, 352, 22 L.Ed. 584 (1875), quoting Guier v. O'Daniel, 1 Binn., 349, n. As stated more recently by this Court,

Residence in fact, and the intention of making the place of residence one's home, are essential elements of domicile. Words may be evidence of a man's intention to establish his domicile at a particular place of residence, but they cannot supply the fact of his domicile there. In such circumstances, the actual fact of residence and a real intention of remaining there, as disclosed by his entire course of conduct, are the controlling factors in ascertaining his domicile.

Stine v. Moore, 213 F.2d 446, 448 (5th Cir.1954). Domicile is thus evaluated in terms of objective facts, Wasson v. Northrup Worldwide Aircraft Service, Inc., 443 F.Supp. 400, 404 (W.D.Tex.1978); "statements of intent are entitled to little weight when in conflict with facts." Hendry, supra, 455 F.2d at 956. The objective facts to be evaluated in determining the Freemans' domicile are these.

Ed Freeman was born in Texas. He attended high school and college in Colorado, where he began his working life on a ranch owned by his family. He has had a Colorado driver's license "off and on" since attaining driving age. He has also, at times, had a Texas driver's license. The Freemans have owned residential and business property in Colorado since at least 1970. In 1973 they bought the Colorado property on which the gravel at issue here was kept; this gravel was to provide retirement income for them. They began building the Colorado house in which they now live in 1978; Mrs. Freeman moved into it in July 1980, the year their complaint was filed. She has had a Colorado driver's license since 1978. Between 1975 or 1976 and 1980, the Freemans rented property in Texas on a month-to-month basis; they also lived in Texas and New Mexico motels during this period. Ed Freeman has never listed his business in a Texas telephone directory; it has been listed only in Colorado, although he has had residential listings in both states. During the 1979-1980 school year, the Freemans' one school-age child attended school in Colorado. They have filed no tax returns of any kind whatever since 1974 and are not registered to vote in any state.

It is difficult to conclude from these facts that Sharon and Ed Freeman were ever anything but sojourners in Texas. That they could have had an intention to remain in Texas while building a house in Colorado--into which Mrs. Freeman actually moved before the filing of the complaint in this case--is very doubtful. They have never had any permanent ties to Texas; all of their permanent ties have been and remain with Colorado. For all of these reasons, it seems likely that the Freemans were citizens of Colorado in August 1980. On remand, the court should decide whether they were or not.

Should they be found to have been citizens of Colorado when their complaint was filed, it is obvious that diversity would be destroyed by the presence of a defendant with Colorado citizenship. There was, or should have been, such a defendant.

The complaint in this case alleged First Commercial to be the alter ego of Northwest. It is undisputed that the relationship between the two corporations was that of parent corporation (Northwest) and subsidiary corporation (First Commercial). It is also undisputed that the corporations were not formally merged; rather, each retained its status as an incorporated entity. Two lines of cases support the proposition that in these circumstances Northwest should be viewed as a citizen of Colorado for diversity purposes. The first is exemplified by John Mohr & Sons v. Apex Terminal Warehouses, Inc., 422 F.2d 638 (7th Cir.1970), in which the court stated that "a consolidated corporation may, under certain circumstances, be found to have the citizenship of each of the pre-consolidation, separate, corporate components." Id., 422 F.2d at 641. Cases in which diversity has been defeated on this theory include Williams v. New York Central Railroad Co., 125 F.Supp. 842 (N.D.Indiana 1954) ("settled that a plaintiff suing a corporation which is incorporated in more than one state may not invoke the [diversity] jurisdiction of the Federal courts in the state of his citizenship where one of the states of the defendant's incorporation is that same state") (citing Jacobson v. New York, N.H. & H.R. Co., 206 F.2d 153 (1st Cir.1953), aff'd 347 U.S. 909, 74 S.Ct. 474, 98 L.Ed. 1067 (1954); Starke v. New York, Chicago & St. Louis R. Co., 180 F.2d 569 (7th Cir.1950) (where one corporation formed by consolidation of two or more corporations, consolidated corporation is citizen of each state in which any constituent corporation was citizen); Smith v. Cleveland, C., C. & St. L. Ry. Co., 170 Ind. 382, 81 N.E. 501 (1907).

These cases are not directly on point, grounded as they are on statutes pursuant to which the defendant railroads were consolidated. Their logic, however, is fully applicable to the facts of today's case. Northwest and First Commercial operated as a consolidated corporation in Colorado. Although each retained its own articles of incorporation and its own accounts, those accounts were kept in the same office by the same employees, who may have worn two hats but who received their salaries from one payroll. Despite the absence of statutory consolidation, Northwest and First Commercial were no less consolidated in fact than were the railroads in the cases cited above.

We are not required to ignore the reality of this situation. The Supreme Court has stated (in a different but not unrelated context) that "[i]n such a case the courts will not permit themselves to be blinded or deceived by mere forms of law, but, regardless of fictions, will deal with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require." Chicago, Milwaukee, & St. Paul Railway Co. v. Minneapolis Civic & Commerce Assoc., 247 U.S. 490, 501, 38 S.Ct. 553, 557, 62 L.Ed. 1229 (1918); accord, Bangor Punta Operations v. Bangor & A.R. Co., 417 U.S. 703, 713, 94 S.Ct. 2578, 2584, 41 L.Ed.2d 418 (1974) (citing, inter alia, Chicago, supra ).

Our Court has similarly refused to elevate form over substance. In Toms v. Country...