Gross v. Hougland

• Decision Date: 11 July 1983
• Docket Number: No. 81-5818,81-5818
• Parties: Kevin GROSS, as receiver for Hougland Barge Line, Inc., a dissolved Delaware corporation, Plaintiff-Appellant, v. Frances M. HOUGLAND, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1034

712 F.2d 1034

Kevin GROSS, as receiver for Hougland Barge Line, Inc., a dissolved Delaware corporation, Plaintiff-Appellant, v. Frances M. HOUGLAND, et al., Defendants-Appellees.

No. 81-5818.

United States Court of Appeals,

Sixth Circuit.

Argued Dec. 6, 1982.

Decided July 11, 1983.

James G. Apple, Bruce M. Reynolds, Stites, McElwain & Fowler, John Bartlett (argued), Louisville, Ky., for plaintiff-appellant.

Earle T. Shoup, Paducah, Ky., for Grimes.

W. David Denton, Denton & Keuler, Paducah, Ky., for Hougland.

Richard C. Roberts, Whitlow, Roberts, Houston & Russell, Paducah, Ky., for Allen and Kleet.

Before KENNEDY and WELLFORD, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.

CELEBREZZE, Senior Circuit Judge.

The plaintiff-appellant, Kevin Gross, appeals from an order dismissing his diversity action for failure to state a claim upon which relief can be granted. Gross, a resident of Delaware, was appointed receiver for Hougland Barge Line, Inc., a dissolved Delaware corporation and was authorized to prosecute this lawsuit pursuant to Sec. 279 of the Delaware Corporation Code. The complaint alleges that diversity of citizenship exists and, thus, that the district court has jurisdiction based upon 28 U.S.C. Sec. 1332. The district court assumed that it had subject matter jurisdiction, but dismissed the action for failure to state a claim upon which relief could be granted. We reverse.

Hougland Barge Line was a closely held corporation doing business in Kentucky. On March 1, 1977, the corporation filed a certificate of dissolution with the Secretary of State of Delaware and filed documents with the Secretary of State of Kentucky which indicated that it was no longer transacting business in Kentucky. The corporation sold its assets and paid the applicable state and federal taxes. On March 14, 1980, the dissolved corporation paid an additional $150,240.06 in taxes, interest and penalties assessed by the United States and an additional $23,378.11 in taxes and penalties assessed by the Commonwealth of Kentucky.

Robert W. Hougland, Jr., a shareholder ¹ of the dissolved corporation, petitioned the Delaware Court of Chancery for appointment of a receiver to bring an action on behalf of the dissolved corporation. In early March, 1981, the Court of Chancery appointed the plaintiff as receiver and authorized him to bring this action. ² On March 11, 1981, the plaintiff filed an action naming four Kentucky citizens as defendants. The complaint alleges that the corporation's majority shareholder, its accountants, and its attorney were negligent in liquidating the corporation's assets and, consequently, that the corporation was required to pay additional taxes, penalties, lawyer's fees, and accountant's fees. The complaint also alleged that complete diversity of citizenship existed between the plaintiff, a Delaware citizen, and the defendants, all of whom are citizens of Kentucky.

Several defendants jointly moved to dismiss, asserting alternate grounds for dismissal. First, the defendants argued that the district court lacked subject-matter jurisdiction because diversity of citizenship was manufactured by the appointment of the plaintiff as receiver. See 28 U.S.C. Sec. 1359. Second, the defendants asserted that the complaint failed to state a claim upon which relief could be granted because Kentucky law did not allow a dissolved corporation to bring suit in Kentucky beyond two years after its dissolution. KRS 271A.515; See KRS 271A.525. The district court dismissed the complaint for failure to state a claim upon which relief could be granted, Fed.R.Civ.P. 12(b)(6), concluding that the plaintiff was "asserting a cause of action not recognized in Kentucky." The district court did not decide whether it had subject-matter jurisdiction.

On appeal, the plaintiff addresses both branches of the motion to dismiss. He asserts that Kentucky is bound to give full faith and credit to the judgment of the Delaware courts which specifically appoints him as receiver and authorizes him to bring the suit under Sec. 279 of the Delaware Corp. Code; in the alternative, he argues that Kentucky law permits the suit to be maintained. Finally, the plaintiff asserts that as the statutory receiver for the dissolved corporation, his citizenship is controlling for purposes of determining whether diversity of citizenship exists. The plaintiff asserts that he is a citizen of Delaware and that the defendants are all citizens of Kentucky; thus, the plaintiff concludes that the district court had subject-matter jurisdiction based upon the parties' diverse citizenship. ³

Initially, we state our disapproval of the district court's decision to dispose of this action on the merits without first resolving the question of subject-matter jurisdiction. The federal courts are courts of limited jurisdiction; they have only such jurisdiction as is defined by Article III of the Constitution and granted by Congress. See Owen Equipment and Erection Co. v. Kroger, 437 U.S. 365, 372, 98 S.Ct. 2396, 2401, 57 L.Ed.2d 274 (1978); Graves v. Sneed, 541 F.2d 159, 161 (6th Cir.1976); In re Carter, 618 F.2d 1093, 1098 (5th Cir.1980) ("[D]ue regard for the constitutional allocation of powers between the state and federal systems requires a federal court scrupulously to confine itself to the jurisdiction conferred on it by Congress and permitted by the Constitution"). A federal court is not a general repository of judicial power; thus, it must satisfy itself that it has subject-matter jurisdiction over the dispute before it addresses the merits of the claims. Memphis American Fed. of Teachers Local 2032 v. Board of Education, 534 F.2d 699, 701 (6th Cir.1976) ("Without a finding that there is federal jurisdiction over a particular claim for relief, the federal courts are without power to proceed") (emphasis added). We believe that the proper practice is to resolve all questions regarding subject matter jurisdiction prior to ruling upon the merits of the claim. Consistent with these principles, we first consider whether the district court, and thus this court, has subject-matter jurisdiction.

Normally, a representative may rely upon his citizenship, rather than the citizenship of the party he represents, when he asserts federal jurisdiction based upon diversity of citizenship. See Mecom v. Fitzsimmons Drilling Co., Inc., 284 U.S. 183, 52 S.Ct. 84, 76 L.Ed. 233 (1931). Deposit Guaranty Bank and Trust v. Burton, 380 F.2d 346, 348 (6th Cir.1967). When a fiduciary asserts federal jurisdiction under 28 U.S.C. Sec. 1332(a)(1), he may rely upon his citizenship if he can establish that he is the real party in interest by demonstrating that the law of the appointing authority permits him to sue in his own name, without joining any of the persons that he represents. Burton, 380 F.2d at 347-48. See also C. Wright, A. Miller & Cooper, Federal Practice and Procedure, Sec. 3606 at 628-29.

This principle is limited, however, by 28 U.S.C. Sec. 1359. ⁴ By enacting Sec. 1359, Congress sought to assure that ordinary contract and tort litigation is not diverted to the federal courts by litigants using devices to create the appearance, but not the substance, of federal diversity jurisdiction. Kramer v. Caribbean Mills, 394 U.S. 823, 838-39, 89 S.Ct. 1487, 1490, 23 L.Ed.2d 9 (1969) (assignment of a claim). The courts of appeal have interpreted Sec. 1359 to limit the scope of Sec. 1332 in cases involving administrators and guardians appointed for the apparent purpose of creating diversity of citizenship. See e.g. O'Brien v. Avco Corp., 425 F.2d 1030 (2nd Cir.1969); McSparran v. Weist, 402 F.2d 867 (3rd Cir.1968) cert. denied, 395 U.S. 903, 89 S.Ct. 1739, 23 L.Ed.2d 217 (1969) (guardian); Messer v. American Gems, 612 F.2d 1367, 1373-74 (4th Cir.1980) cert. denied, 446 U.S. 956, 100 S.Ct. 2927, 64 L.Ed.2d 815 (1980); Bass v. Texas Power & Light Co., 432 F.2d 763, 766 (5th Cir.1970) cert. denied, 401 U.S. 975 (1971); Betar v. DeHavilland Aircraft of Canada, Ltd., 603 F.2d 30 (7th Cir.1979) cert. denied, 444 U.S. 1098, 91 S.Ct. 1194, 28 L.Ed.2d 324 (1980); Rogers v. Bates, 431 F.2d 16 (8th Cir.1970) (conservator); Hackney v. Newman Memorial Hospital, 621 F.2d 1069, 1070-71 (10th Cir.) cert. denied, 449 U.S. 982, 101 S.Ct. 397, 66 L.Ed.2d 244 (1980). These courts have concluded that the appointment of an administrator with diverse citizenship is not dispositive of the jurisdictional question, even if the representative has the power to sue in his own name. See e.g., Betar v. DeHavilland Aircraft of Canada, Ltd., 603 F.2d at 35; Messer v. American Gems, 612 F.2d at 1374-75. These decisions are premised upon the need to assure that the federal courts consider only those "cases that 'really and substantially' involve a dispute within the jurisdiction of the federal courts" by assuring that the federal courts do not assume jurisdiction when the dispute is local, rather than interstate, in character. Betar, 603 F.2d at 351; Bishop v. Hendricks, 495 F.2d 289, 294 (4th Cir.) cert. denied, 419 U.S. 1056, 95 S.Ct. 639, 42 L.Ed.2d 653 (1974); O'Brien v. AVCO Corp., 425 F.2d at 1032. Finally, several courts have noted that no meaningful distinction exists between an assignment of a claim to a disinterested party for the purpose of creating diversity of citizenship and the appointment of a disinterested fiduciary to create diversity of citizenship; in either event, the party has attempted to create diversity of citizenship merely by complying with the formalities of state law. E.g. McSparran v. Weist, 402 F.2d at 874; O'Brien v. AVCO Corp., 425 F.2d at 1036. Cf. Kramer v. Caribbean Mills, 394 U.S. at 828-29, 89 S.Ct. at 1490 (creation of diversity of citizenship by assignment is a "manufacture of jurisdiction" and thus, "improperly or collusively made"). Thus, these courts have concluded that a "party ... has been improperly or collusively made or joined ..." 28 U.S.C. Sec. 1359, when the...