Toste Farm Corp. v. Hadbury, Inc.

• Decision Date: 04 December 1995
• Docket Number: 95-1544,Nos. 95-1506,s. 95-1506
• Citation: 70 F.3d 640
• Parties: TOSTE FARM CORPORATION, et al., Plaintiffs, Appellees, v. HADBURY, INC., et al., Defendants, Appellants. TOSTE FARM CORPORATION, et al., Plaintiffs, Appellants, v. HADBURY, INC., et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 640

70 F.3d 640

TOSTE FARM CORPORATION, et al., Plaintiffs, Appellees, v. HADBURY, INC., et al., Defendants, Appellants.

TOSTE FARM CORPORATION, et al., Plaintiffs, Appellants, v. HADBURY, INC., et al., Defendants, Appellees.

Nos. 95-1506, 95-1544.

United States Court of Appeals First Circuit.

Heard Dec. 4, 1995.

Decided Sept. 7, 1995.

John Blish with whom Stephen J. Reid, Jr., Raymond A. Marcaccio and Blish & Cavanagh, Providence, RI, were on brief, for plaintiffs.

John William Ranucci, Providence, RI, for defendants.

Before LYNCH, Circuit Judge, ALDRICH and CAMPBELL, Senior Circuit Judges.

LEVIN H. CAMPBELL, Senior Circuit Judge.

These cross appeals are from orders of the United States District Court for the District of Rhode Island dismissing the respective claims of plaintiffs and defendants for lack of subject matter jurisdiction. Toste Farm Corp. v. Hadbury, Inc., 882 F.Supp. 240 (D.R.I.1995). Plaintiffs are two entities wholly controlled by Carl Acebes, namely, Toste Farm Corporation ("TFC") and PaineWebber, Inc. Custodian/Trustee of IRA FBO Carl Acebes, account numbered JG12642-69 ("PaineWebber IRA"). Defendants are Richard N. Morash and his corporation Hadbury, Inc. ("Hadbury"). ¹ At issue is whether the court below correctly concluded that diversity jurisdiction over the plaintiffs' claim failed for violation of 28 U.S.C. Sec. 1359, and whether, in the circumstances, diversity jurisdiction over defendants' counterclaim also failed. We affirm the district court's dismissal of both claims.

I. Factual Background

In June of 1991, Richard Morash obtained the exclusive right to acquire 417 acres of land in Rhode Island known as Toste Farm. Intending to purchase and develop the property, Morash and Carl Acebes, on November 4, 1991, formed the Toste Farm Limited Partnership composed of the "Morash Partners" and the "Acebes Partners." The Morash Partners consisted of Hadbury, an entity incorporated under the laws of Rhode Island with a principal place of business in Massachusetts, and Morash, a Massachusetts citizen. The Acebes Partners consisted of PaineWebber IRA, an entity incorporated under the laws of Delaware with a principal place of business in New York, and Toste Farm Corporation, Inc. ("TFCI"), a corporation newly formed under the laws of Rhode Island with a principal place of business in Rhode Island. ²

According to Carl Acebes, TFCI was formed "for a single purpose--to act as a general partner of the Toste Farm Limited Partnership." Acebes' attorney stated that TFCI's "principal asset" was its partnership interest and added that TFCI "may have had an incidental bank account as well." TFCI was capitalized with a bank account valued at a little over $200,000, of which about $12,000 was invested in the partnership. Acebes gave two reasons for overfunding TFCI. First, he wanted to avoid having to request additional funds from PaineWebber IRA in the event the thinly capitalized partnership required cash. Second, the extra funds were available for "other business opportunities ... quite outside of the ... partnership." ³

During 1992, Acebes announced his intention to retire from the partnership. Pursuant to the partnership agreement, Morash and Acebes conducted a buy-sell procedure in which each party bid to purchase the partnership interests of the other. This procedure ended in a dispute with each party claiming to have purchased the other's interests.

In November of 1992, the Acebes Partners brought an action against the Morash Partners and Raymond Holland, the attorney for the partnership, in the District Court for the District of Rhode Island seeking a declaration of the parties' rights and duties under the partnership agreement. See 28 U.S.C. Secs. 2201-2202; Fed.R.Civ.P. 57. They asserted diversity jurisdiction pursuant to 28 U.S.C. Sec. 1332, but later voluntarily dismissed the suit when the Morash Partners pointed out that the parties were not fully diverse because plaintiff TFCI, like defendants Hadbury and Holland, was a citizen of Rhode Island. ⁴

In December of 1992, TFCI was merged into TFC, a New York corporate shell that had been created earlier in the year. Presumably, TFC's principal place of business also became New York, rather than Rhode Island where TFCI was based, although the record is not absolutely clear. ⁵ Pursuant to the merger, TFC received all of TFCI's assets. Plaintiffs concede that one purpose of creating TFC and dissolving TFCI was to manufacture diversity for this action, although they also contend, without specifics, that the merger served the administrative convenience of Acebes whose residence and other business activities were in New York. Defendants allege that the merger was effected solely to create diversity in this action.

Having created diversity via the merger, TFC and PaineWebber IRA refiled their action in January of 1993. Defendants filed a counterclaim. During the trial, defendants moved to dismiss for lack of jurisdiction. The district court dismissed both the claim and the counterclaim for lack of subject matter jurisdiction after the trial on the merits.

II.

This court reviews de novo the legal question of whether the district court had subject matter jurisdiction over the parties' claims. Murphy v. United States, 45 F.3d 520, 522 (1st Cir.1995). However, the district court's factual findings made in conjunction with its jurisdictional determination receive deference unless clearly erroneous. Dweck v. Japan CBM Corp., 877 F.2d 790, 792 (9th Cir.1989).

The district courts have original jurisdiction over civil actions between citizens of different states in which the amount in controversy exceeds $50,000. 28 U.S.C. Sec. 1332(a). Diversity must be complete: the citizenship of each plaintiff must be shown to be diverse from that of each defendant. Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365, 373-74, 98 S.Ct. 2396, 2402-03, 57 L.Ed.2d 274 (1978). For purposes of diversity jurisdiction, a corporation is deemed to be a citizen of both the state where it is incorporated and the state where it maintains its principal place of business, 28 U.S.C. Sec. 1332(c)(1), and citizenship is determined as of the date of the commencement of the lawsuit. See, e.g., Taber Partners, I v. Merit Builders, Inc., 987 F.2d 57, 59 n. 1 (1st Cir.), cert. denied, Desarrollos Metropolitanos, Inc. v. Taber Partners, I, --- U.S. ----, 114 S.Ct. 82, 126 L.Ed.2d 50 (1993); Rodriguez-Diaz v. Sierra-Martinez, 853 F.2d 1027, 1029 (1st Cir.1988). The burden of proof is on the party attempting to sustain diversity jurisdiction. Thomson v. Gaskill, 315 U.S. 442, 446 62 S.Ct. 673, 675, 86 L.Ed. 951 (1942); Media Duplication Servs., Ltd. v. HDG Software, Inc., 928 F.2d 1228, 1235 (1st Cir.1991).

It is undisputed that plaintiffs satisfied the requirements of Sec. 1332. By the time this action was brought, TFCI had effectively merged into TFC, a New York corporate citizen. Defendants, however, sought dismissal of plaintiffs' claim under 28 U.S.C. Sec. 1359, which provides:

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.

The district court held that Sec. 1359 barred jurisdiction--not only over plaintiffs' claim but over the entire action including defendants' counterclaim. The court reasoned that although "[t]he merger was real enough, ... it did not create diversity jurisdiction" because there was "a manufactured assignment." Toste Farm, 882 F.Supp. at 247.

For over a century, Congress has denied jurisdiction of suits where a party is "improperly or collusively made or joined to invoke ... jurisdiction." ⁶ The Supreme Court in Williams v. Nottawa, 104 U.S. 209, 211, 26 L.Ed. 719 (1881), described transfers to create diversity jurisdiction as "frauds upon the court." Commentators and courts have construed "improper or collusive" as "confer[ring] jurisdiction not justified by aims of diversity." O'Brien v. AVCO Corp., 425 F.2d 1030, 1034 (2d Cir.1969); 14 Charles A. Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure: Jurisdiction 2d Sec. 3637, at 93 (1985 & Supp.1995). See also Airlines Reporting Co. v. S and N Travel, 58 F.3d 857, 862 (2d Cir.1995) ("[W]e construe section 1359 broadly to bar any agreement whose 'primary aim' is to concoct federal diversity jurisdiction"); Amoco Rocmount Co. v. Anschutz Corp., 7 F.3d 909, 916 (10th Cir.1993); Yokeno v. Mafnas, 973 F.2d 803, 809 (9th Cir.1992) ("The federal anti-collusion statute is aimed at preventing parties from manufacturing diversity jurisdiction to inappropriately channel ordinary business litigation into federal courts"); Nolan v. Boeing Co., 919 F.2d 1058, 1067 (5th Cir.1990), cert. denied, 499 U.S. 962, 111 S.Ct. 1587, 113 L.Ed.2d 651 (1991). The district court in the present case found that "Section 1359's policy against improper or collusive manufacture of diversity jurisdiction would be completely undermined if a corporate merger involving a transfer of the chose in action and some amount of money could create diversity jurisdiction." Toste Farm, 882 F.Supp. at 247.

In its most recent pronouncement, the Supreme Court has construed Sec. 1359 in a similarly broad manner. In Kramer v. Caribbean Mills, Inc., 394 U.S. 823, 89 S.Ct. 1487, 23 L.Ed.2d 9 (1969), the Court noted that "Kramer candidly admits that the 'assignment was in substantial part motivated by a desire ... to make diversity jurisdiction available.' " Id. at 828, 89 S.Ct. at 1490. Holding that the otherwise valid assignment of the claim to a diverse party was improper or collusive under Sec. 1359, the Court reasoned that the mere legality of an assignment cannot make it valid for purposes of federal jurisdiction because such a ruling "would render Sec. 1359 largely incapable of accomplishing its purpose." Id. at 829, 89 S.Ct. at 1491. The Court was concerned that ...