Grassi v. Ciba-Geigy, Ltd., CIBA-GEIG

• Decision Date: 16 February 1990
• Docket Number: No. 89-2284,LTD,CIBA-GEIG,89-2284
• Citation: 894 F.2d 181
• Parties: Alexander GRASSI, Sr., and Karen S. Grassi, individually and as Next Friends of Alexander Grassi, Jr., Wendi Lu Grassi and Kristen Suzanne Grassi, Minors; and I.R.I. Internacional Limitada, Plaintiffs-Appellants, v., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 181

894 F.2d 181

58 USLW 2496

Alexander GRASSI, Sr., and Karen S. Grassi, individually and

as Next Friends of Alexander Grassi, Jr., Wendi Lu Grassi

and Kristen Suzanne Grassi, Minors; and I.R.I.

Internacional Limitada, Plaintiffs-Appellants, v. CIBA-GEIGY, LTD., Defendant-Appellee.

No. 89-2284.

United States Court of Appeals, Fifth Circuit.

Feb. 16, 1990.

Rehearing and Rehearing En Banc Denied Feb. 16, 1990.

Russell H. McMains, McMains & Constant, Corpus Christi, Tex. and Norton A. Colvin, Jr., Rodriguez, Colvin & Chaney, Brownsville, Tex., for plaintiff-appellant.

Gordon Briscoe, Harlingen, Tex. and Neil E. Norquest, Ewers & Toothaker, McAllen, Tex., for Alexander Grassi, Jr., et al.

Charles C. Murray, Atlas & Hall, McAllen, Tex. and Paul M. Dodyk, and Lisa L. Lang, Cravath, Swaine & Moore, New York City, for defendant-appellee.

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

Before GEE, JONES and SMITH, Circuit Judges.

GEE, Circuit Judge:

Today's case presents the issue of whether a federal district court, in denying a plaintiff's motion to remand, may disregard a partial assignment made for the purpose of destroying diversity jurisdiction. Although this issue has been addressed by a number of district courts in this and other circuits, it is one of first impression in our court.

I. FACTS

The Grassi family, appellants here, obtained a default judgment in Texas state court against Ciba-Geigy PLC ("PLC") for personal injuries which they sustained following the release of formaldehyde gas from urethane foam insulation, manufactured by PLC, which had been installed in their home. PLC is incorporated in the United Kingdom, which does not allow the enforcement of foreign default judgments against British corporations not maintaining an office in the foreign country. Unable to enforce its judgment against PLC, the Grassis instituted a collection suit against PLC's parent corporation, Ciba-Geigy, Ltd. ("Limited"), a Swiss Corporation, alleging that PLC was its "alter ego."

On the same day that they brought the collection action, the Grassis assigned a 2% interest in their claim to I.R.I. Internacional Limitada ("IRI"), a Costa Rican corporation with its principal place of business in San Jose, Costa Rica. IRI was incorporated approximately eighteen months after the Grassis obtained their default judgment against PLC and less than six months prior to the filing of the present collection action. The Grassis allege that the assignment was in consideration for investigative and collection work to be performed by IRI in relation to the judgment and award. Limited removed the action to Federal District Court, alleging diversity of citizenship between the Grassis and Limited. The Grassis then filed a motion to remand alleging that IRI's interest in the suit destroyed diversity jurisdiction between the Grassis and Limited, as there is no diversity where there are foreign parties on both sides. See Giannakos v. M/V Bravo Trader, 762 F.2d 1295, 1298 (5th Cir.1985) (per curiam).

The district court denied the motion to remand, finding that IRI had no legitimate and independent interest in the litigation, but was simply providing litigation support services on a contingent fee arrangement at the behest of the appellants' attorney (the Grassis' attorney was also the attorney for IRI). After filing a notice of substitution of attorney-in-charge for IRI, the Grassis filed a joint motion for reconsideration of the order denying their motion to remand. The district court denied this motion also.

Following the denial of their second motion to remand, the Grassis sought immediate appeal of the ruling. Acknowledging that the issue presented in this appeal is a close one involving a controlling question of law, the district court granted the Grassis leave to appeal pursuant to 28 U.S.C. Sec. 1292(b).

II. DISCUSSION

A. Provident & Company

The Grassis contend that standing Supreme Court precedent prohibits inquiry into the motives behind assignments which defeat diversity. In a line of cases, beginning with Provident Service Life Assurance Society v. Ford, 114 U.S. 635, 5 S.Ct. 1104, 29 L.Ed. 261 (1885), the Supreme Court held the colorable assignment of a complete cause of action to defeat removal effective to give the state court exclusive jurisdiction. Id. at 641, 5 S.Ct. at 1107; see also Oakley v. Goodnow, 118 U.S. 43, 6 S.Ct. 944, 30 L.Ed. 61 (1886); Leather Manufacturers' National Bank v. Cooper, 120 U.S. 778, 7 S.Ct. 777, 30 L.Ed. 816 (1887). In concluding that colorable assignments could not be scrutinized by federal courts, the Court looked to the 1875 Act of Congress, ¹ which authorized federal courts to disregard colorable assignments creating diversity jurisdiction, but was silent as to such assignments which destroyed jurisdiction. See Oakley, 118 U.S. at 44, 6 S.Ct. at 944. The Court interpreted the statutory silence as indicating Congress's indifference to the collusive destruction of diversity jurisdiction, and concluded that as "no authority has as yet been given [federal courts] to take jurisdiction of a case by removal from state court when a colorable assignment has been made to prevent such a removal ... resort can only be had to the state courts for protection against the consequences of such an encroachment on the rights of a defendant." ² Id.

Provident and its progeny thus stand, where assignments of a complete cause are concerned, for two propositions: First, that federal courts lack the power to look beyond the pleadings in determining the existence of diversity jurisdiction absent specific statutory authorization; and second, that state law and the state court systems will adequately defend a defendant's right to removal jurisdiction against devices designed to defeat it. These propositions have not fared well since 1887.

The first was largely abandoned in subsequent decisions of the Court, decisions which recognized that federal courts do possess some inherent authority to look beyond the pleadings in order to protect a litigant's right to diversity jurisdiction. In Wecker v. National Enamelling & Stamping Co., 204 U.S. 176, 27 S.Ct. 184, 51 L.Ed. 430 (1907), for example, the Court held that diversity jurisdiction was not defeated by joinder of a nondiverse defendant who could not conceivably be liable. The Court declared that

the Federal courts should not sanction devices intended to prevent a removal to a Federal court where one has the right, and should be equally vigilant to protect the right to proceed in the Federal court as to permit the state courts, in proper cases, to retain their own jurisdiction.

Id. at 185-86, 27 S.Ct. at 188; see also Covington v. Indemnity Ins. Co., 251 F.2d 930 (5th Cir.), cert. denied, 357 U.S. 921, 78 S.Ct. 1362, 2 L.Ed.2d 1365 (1958).

Similarly, in In the Matter of the State of Nebraska, 209 U.S. 436, 28 S.Ct. 581, 52 L.Ed. 876 (1908), the Court upheld a circuit court's refusal to remand a case solely because the State of Nebraska was listed on the record as a plaintiff. The Court held that it was the duty of the federal court to determine whether the state of Nebraska was an actual party plaintiff, and to determine that question by consideration of the nature of the case presented by the whole record, and not simply by a reference to the nominal parties. Id. at 444-45, 28 S.Ct. at 584.

The second proposition for which Provident and its progeny stand--that state law and the state court systems will adequately defend diversity jurisdiction--has proved untrue in practice. For example, in Schepman v. Mutual Benefit Health & Acc. Ass'n., 231 Mo.App. 651, 104 S.W.2d 777 (1937), a personal injury defendant alleged that the assignment of a claim for collection purposes was a mere sham used to defeat diversity jurisdiction. Noting that the Missouri Supreme Court recognized a litigant's right to select a forum by indirect means, the court held that, even if a sham, the assignment would be respected so long as the defendant was fully protected from multiple liability. ³

Reliance upon state law for the determination of federal court jurisdiction was ultimately rejected by the Supreme Court in the watershed case, Kramer v. Caribbean Mills, 394 U.S. 823, 89 S.Ct. 1487, 23 L.Ed.2d 9 (1963). In Kramer, a creditor attempting to create diversity jurisdiction assigned its entire interest in a debt to an attorney, who in turn agreed to convey 95% of any net recovery back to the creditor. The assignee contended that, because the assignment was valid under state law, federal courts were bound to respect it. The Court rejected this argument, holding that "[t]he existence of federal jurisdiction is a matter of federal, not state law." Id. Finding the assignment collusive, the Court disregarded it for jurisdictional purposes.

Although the Court expressly declined to review its earlier holdings, Kramer's reliance on federal law has been seen as a significant departure from the Court's past decisions which held that the motives behind a complete assignment would not be scrutinized so long as it was valid under state law. ⁴ Courts in a number of circuits, including our own, have viewed Kramer as authorizing, for example, the scrutiny of administrator appointments, indubitably valid under state law, to determine the extent of their duties and the reasons for their appointments. See, e.g., Miller v. Perry, 456 F.2d 63 (4th Cir.1972); Bass v. Texas Power & Light Co., 432 F.2d 763 (5th Cir.1970), cert. denied, 401 U.S. 975, 91 S.Ct. 1194, 28 L.Ed.2d 324 (1971); O'Brien v. Avco Corp., 425 F.2d 1030 (2d Cir.1969). In Miller v. Perry, the Fourth Circuit read Kramer very broadly, viewing it as "injecting a new note of realism into the determination of diversity jurisdiction." Id. at 67. The court in Perry, which applied Kramer to disregard an administrator appointment which destroyed diversity, held that the difference between devices creating...