Facts
- Caribbean Mills, Inc., a Haitian corporation, agreed in 1959 to purchase stock, paying $85,000 down and $165,000 in 12 annual installments.
- Caribbean made no installment payments despite demands by Panama and Venezuela Finance Company, a Panamanian corporation that held the contractual rights.
- In 1964, Panama assigned its entire interest in the contract claim to Clayton S. Kramer, a Texas attorney, for stated consideration of $1.
- In a separate agreement, Kramer promised to remit 95% of any net recovery to Panama as a “bonus,” leaving Panama with nearly all economic benefit.
- Kramer sued Caribbean in the U.S. District Court for the Northern District of Texas, alleging diversity jurisdiction based on the assignment.
- The district court denied a jurisdictional motion under 28 U.S.C. § 1359, tried the case, and a jury awarded Kramer $165,000.
- The Fifth Circuit reversed, holding the assignment was improperly or collusively made to invoke federal jurisdiction, so the district court lacked jurisdiction.
Issues
- Whether Panama’s assignment of its claim to Kramer—on terms preserving to Panama 95% of any recovery—was “improperly or collusively made” to invoke federal jurisdiction under 28 U.S.C. § 1359.
- Whether the federal jurisdictional analysis turns on the assignment’s validity under state law.
- Whether § 1359 applies when the asserted jurisdiction is based on alienage as well as when it is based on different state citizenship.
Decision
- The Supreme Court affirmed the Fifth Circuit.
- The Court held the assignment was “improperly or collusively made” within the meaning of 28 U.S.C. § 1359.
- Because the assignment manufactured federal jurisdiction, the federal courts lacked subject-matter jurisdiction over the action.
Legal Principles
- 28 U.S.C. § 1359 bars jurisdiction where a party has been improperly or collusively made or joined to invoke federal jurisdiction, including through assignments designed to create diversity.
- Courts evaluate the practical economic substance of an assignment, not merely its formal validity, to determine whether it was used to manufacture jurisdiction.
- The existence of federal subject-matter jurisdiction is a question of federal law; a transaction’s validity under state law does not control the § 1359 inquiry.
- Section 1359 applies to alienage-based diversity jurisdiction as well as diversity based on different state citizenship.
Conclusion
An assignment that transfers formal title for nominal consideration while leaving the assignor with the overwhelming economic interest, and is arranged to create diversity, is collusive under § 1359; federal courts must dismiss for lack of subject-matter jurisdiction.