KRAMER v. CARIBBEAN MILLS
Legal provision: 28 U.S.C. 1359
Argument of Eugene Gressman
Chief Justice Earl Warren: Caribbean Mills, Incorporated.
Mr. Eugene Gressman: Mr. Chief Justice and may it please the Court.
This case is here on a Writ of certiorari to the Court of Appeals for the Fifth Circuit and raises the general question of whether federal diversity jurisdiction can be created by a lawful assignment of a contract or a money claim to a plaintiff.
More specifically, the question is whether the assignment of a contract or a money claim is improper or collusive within the meaning of Section 1359 of the Judicial Code where the assignment itself is legal under state law, where one motive or the assignment is to gain access to the federal court like creating diversity of citizenship specified in Section 1330 (a) (2).
And thirdly, where part of the consideration or the transaction was a percentage of the recovery obtained on the assigned claim.
Now counsel --
Argument of Unk
Unk: I don't really know if it's a federal question.
Rebuttal of Eugene Gressman
Mr. Eugene Gressman: Yes, Your Honor.
It's solely a federal question as to whether the court itself has jurisdiction or whether it has lost jurisdiction.
Rebuttal of Unk
Unk: Well, is it the meaning of the federal statute?
Rebuttal of Eugene Gressman
Mr. Eugene Gressman: Yes, Your Honor.
Now counsel as candidly conceded and the court below and we repeated to this Court while it is not a matter of the record but one of the major motives in the establishment of this transaction was a desire or the to create the basis for invoking the diversity jurisdiction of the Federal District Court.
Now that motivation however, has to be viewed in light of the realities of the situation that was confronting the various parties in this case.
Now the brief where the respondent has sought to paint a rather bleak and sinister picture of the events in this case that I suggest are not justified by the record and certainly not by the facts as we know them, there was no senator or secret efforts made to defraud any party or to secrete any documents from the court or from anyone else.
What happened in this case of course as we see it is a classic illustration of a desire to avoid what one of these parties the Panama and Venezuela Finance Company viewed as prejudice in the state courts and to avoid that prejudice or possibility of prejudice is really the constitutional raise on debtor of federal diversity jurisdiction.
The major, indeed the sole justification that has ever been suggested for diversity jurisdiction is to permit state causes of action to bid, tried and heard in the federal courts where the parties have any choice in the matter for one reason or another may fear or some degree or some element of prejudice may follow them if they invoke the jurisdiction of the state court rather than the Federal Court.
Justice Potter Stewart: Your client is a citizen a resident of Texas?
Mr. Eugene Gressman: That is right, Your Honor.
Justice Potter Stewart: The defendant is a corporation of Haiti, is that right?
Mr. Eugene Gressman: Right, it's an alien corporation.
Justice Potter Stewart: Why would there be more prejudice in the federal courts than the state court vis-à-vis the parties of that derivation.
Mr. Eugene Gressman: Well, I think you have first to look back to the original situation under which this arose.
The original situation you will recall was essentially a contract entered into in 1959 between two alien corporations in effect whereby the Caribbean Mills the respondent here agreed to pay over a period of years $165,000.00 to Panama and Venezuela Finance Company which was also an alien corporation having been incorporated in Panama.
Now, when several years later Caribbean Mills defaulted on that contract and indeed repudiated the contract, Panama Finance Company was faced with a situation out of which this whole transaction arose to with Panama could not have sued Caribbean Mills in the federal court by virtue of the fact that both were aliens.
Now, the only recourse Panama had to a court action was to sue presumably in Haiti or in the Texas State Court.
Justice Potter Stewart: I guess suppose, it go apparently there the defendant is personally present in Texas --
Mr. Eugene Gressman: That is right, Your Honor more --
Justice Potter Stewart: -- into a sufficient extent you get personal service --
Mr. Eugene Gressman: That is right, it is more than that Your Honor it actively doing business in the State of Texas and they raise this point and it was decided against them that they had adequate contacts with the state to permit service and a suit in the jurisdiction of the federal court in Texas.
Justice Potter Stewart: Well then, I should perhaps in the light of what you said change my question a little bit but I still would have a question as to why would the Texas state courts be more prejudice against two foreign corporations than with the federal court be?
Mr. Eugene Gressman: Well --
Justice Potter Stewart: I mean against either one of those foreign corporation?
Mr. Eugene Gressman: Yes.
Your Honor this was the practical situation facing them as I say the defendant corporation the Caribbean Mills Corporation while it was technically and legally a citizen of Haiti, an alien was also owned a dominated by the Murchison Family in Dallas, Texas.
Most of the officers of the company resided in Dallas and did -- it actively did corporate business there, Clint Murchison was one of the witnesses in this case testified and frankly they feared that this was more than simply an alien defendant, this was one of the classic instances of where they feared that a -- it would been impossible to overcome the local kind of prejudice that does ensue in these situations where you have a dominant local interest involved on the defendant side.
Plus the fact that they were a finance companies in addition to being an alien here are notoriously poorer risk as a plaintiff attempting to secure a money judgments.
Justice Potter Stewart: Poorer risks in the state courts than in the federal court?
Mr. Eugene Gressman: I think they feared that, yes.
Justice Potter Stewart: And it's going to be a jury case, I guess.
Mr. Eugene Gressman: Yes, it was Your Honor.
Justice Potter Stewart: Jury drawn, jury will be --
Mr. Eugene Gressman: Drawn from the --
Justice Potter Stewart: -- citizens of Texas.
Mr. Eugene Gressman: Right.
Justice Potter Stewart: Whichever court is in.
Mr. Eugene Gressman: Right.
But you have a broader selection in the federal court I suppose and you -- not 17 counties I think are involved in the federal court whereas the state court would have been the local precinct or local city anyway.
But in any event they tried to realize that in their own hands this claim wasn't worth very much and they were actively seeking to sell this claim to a various numbers of persons at a discount.
I think at one time they tried to sell it for $25,000.00 and nobody would take and they eventually came to Mr. Banner, an attorney in Texas and ask him if he would be interested in purchasing this and he said no.
Looking into it he then contacted another attorney, Mr. Kramer the plaintiff in this case and ask if he would be interested in purchasing or arranging to take over this claim.
Now, the respondent claims that somehow Mr. Banner was sort of a double agent here acting as an attorney for Panama as well as for Mr. Kramer.
Far from that he has never acted at anytime as the attorney for Panama has never receive a cent from it and has treated them at arm's-length at all time so that whatever concern or connection Mr. Banner had with the case does not reflect upon Panama's interest or lack of interest in this situation.
In any event when Mr. Kramer became interested in this and purely for profit motives frankly, the problem arose just to, how they could arrange a transaction that would be lawful and that would permit adequate consideration and what have you to be arranged.
Now, the testimony that Mr. Kramer gave at the trial to be frankly said he didn't have a $165,000.00, he didn't have a hundred thousand dollars to pay for this claim, nor did he have the facilities to obtain a bank loan for this.
So after discussing this at some length with his then Attorney Mr. Banner they came to a conclusion that maybe we can have some sort of the deferred type of consideration let's call it a bonus.
Let's call it anything else to be payable out of whatever you may be able to get from a lawsuit recovered as a result of an assignment of the claim to Mr. Kramer and that is exactly what happened.
It was then arranged to have --
Rebuttal of Unk
Unk: That was the lawyer's fee?
Rebuttal of Eugene Gressman
Mr. Eugene Gressman: Pardon?
Rebuttal of Unk
Unk: The lawyers?
Rebuttal of Eugene Gressman
Mr. Eugene Gressman: Well that was part of it, yes but that was not --
Rebuttal of Unk
Unk: That 5% covered?
Rebuttal of Eugene Gressman
Mr. Eugene Gressman: That was not in Mr. Kramer was not receiving that as a lawyer, he -- in fact, he is a lawyer but he was not acting as a lawyer in this case Mr. Banner was his lawyer at all times but they did arrange this through first of all an assignment in a piece of paper which in unequivocal terms stated that Panama Finance Company hereby assigns, conveys, transfers all of its interests including causes of action and claims under this 1959 contract to Mr. Clayton S. Kramer for $1.00 and other adequate or valuable consideration receipt whereof is hereby acknowledged.
Now, that by concession and by all applicable law universally recognized was a complete bona fide and unexceptional transfer of all of Panama's interest in this contract.
Standing by itself it was adequate under state law to permit the cause of action to be brought by Mr. Kramer as the complete and full assignee of this contract and of this cause of action.
It was unnecessary to have anything else proved or shown or executed in order to create a complete and lawful assignment but to arrange more of this deferred -- lucky considered being deferred consideration if you will that entered into simultaneously without any secret, without any collusion or devious motivations or actions into the so-called collateral agreement.
It wasn't pleaded in the case because it didn't have to be.
All he had to plead in the complaint was that he was an assignee under this first and original document of assignment.
The assignment or the collateral agreement completely reaffirmed the assignment and made claim what was already implicit that Panama had given up complete control over the lawsuit or any lawsuit that Kramer might bring.
Kramer had complete control and management of that suit and it also provided for this provision for the so-called bonus or the consideration of 95% of the net recovery which would then go back out of any recovery Mr. Kramer might receive from his lawsuit.
Justice Thurgood Marshall: Mr.Gressman, did I understand your correctly to say the same lawyer who represented Caribbean and Kramer?
Mr. Eugene Gressman: No, Your Honor.
No, there is no identity of lawyers among any of these parties.
Justice Thurgood Marshall: The court has said there was one lawyer who persuaded Mr. Kramer to do this.
Mr. Eugene Gressman: That was Mr. Banner who --
Justice Thurgood Marshall: Did he represent Caribbean?
Mr. Eugene Gressman: No, he only has represented Mr. Kramer.
Justice Thurgood Marshall: Who represented Caribbean at the trial?
Mr. Eugene Gressman: Mr. Harrell I believe who was counsel for the Caribbean Mills, yes.
Justice Thurgood Marshall: Well, how can you say that Kramer had full control of the case when he had Caribbean's lawyer?
Mr. Eugene Gressman: He did not have Caribbean's lawyer, he did not have Panama's lawyer.
He had his own lawyer.
Justice Thurgood Marshall: I misunderstood.
Mr. Eugene Gressman: The suggestion has been made by the respondent but is completely aside from the facts and not accurate to say that because Mr. Banner who is Mr. Kramer's Attorney was somehow acting on behalf of Panama and all this but that is not true.
Panama had a lawyer, a firm New York City all times.
They never got into this litigation of course but they had their separate lawyers and Mr. Banner dealt at arm's-length with that law firm in the execution of these documents.
Now it seems to me that it becomes crystal clear that the critical fact therefore in this case is that the assignment itself was absolute, complete, and bona fide and indeed there's no dispute about that as I see it that all of Panama's interest were thereby transferred and as a result of the assignment instrument, Panama had no claim, no right under that contract, no cause of action, no control over the lawsuit that ensued and concededly this was proper under the applicable law of Texas and that the law of any other state in the United States to effectuate a complete transfer of all of Panama's interest.
Now, the Court of Appeals read however, the collateral agreement provision of the 95% bonus as indicated that somehow Panama retained some sort of a beneficial interest to our in this cause of action or in the contract claim.
Now, while this was conceded by the parties as a legitimate forum or deferred consideration, it is I suppose possible to read this as some sort of a beneficial interest of one sort of another or perhaps an assignment or collection on behalf of Panama.
But the worst or the least can be said about this transaction with respect to the 95% interest which was to be returned to Panama was that this was an assignment or collection which is one of the most common transactions lawful transactions that is performed almost everyday in the business world which gives the assignee complete control, complete domination, complete title of whatever is assigned to him for collection and makes the assignee the real per diem interest to bring the suit and despite the fact that he is suppose to return part of that recovery or all of the recovery even in some cases back to the assignor, it does not make the assignment itself any less complete, any less lawful and is certainly does not make the transaction itself collusive under any recognized meaning of those phrases.
It is well-established in the law that an assignment that shows an action constitutes the assignee, the proper party an interest to sue even though the instrument of assignment recites, which this one did not, that the transfer is merely for purposes of suit and obligates the assignee to account for the proceeds to another person and indeed this Court's decision in Titus versus Wallick in 306 volume of the United States reports at 282, is the leading authority on the validity of this kind of an arrangement and the Court there said that under the, it happen to be in New York transaction there that the repeated decisions of New York and it could be said of any other state, it is long been settled that an assignment which purports to assign or transfer or shows of action confers upon the transferee such title and ownership as will enable him to sue upon it.
This is true even though the assignment is for the purpose of suit only and the transferee is obligated to account for the proceeds of the suit to his assignor.
And more importantly, and this was the opinion written by Justice Stone.
It is evident that through to this kind of a transaction no fraud was perpetrated upon the other party or upon the New York courts if the assignment of the claim operated to this in the assignee, such ownership or interest in the claim was it would enable him to maintain the suit upon it there.
Rebuttal of Unk
Unk: On the diversity case?
Rebuttal of Eugene Gressman
Mr. Eugene Gressman: No that -- well not truly a diversity case in that sense but it was a full faith in credit they had made a -- the assignee had obtained a judgment in New York, which was subsequently attack in Ohio as being fraudulently obtained.
And this Court says, “Not at all that there had been no fraud perpetrated by virtue of making an assignment for collection only and that this was a perfectly legitimate and lawful transaction.”
Now we have to therefore apply the language of 259 to this arraignment which I have described.
And I think it's very instructive to note that 1359 of course was created as a part of the 1948 revision of the judicial code.
And prior to 1948 we had on the books from the beginning of our statutes as a matter in 1789.
The so-called anti-assignment statute which was very simple in its concept and that was that if the original parties doing the transaction did not have adequate diversity or did it, were unable to bring suit in the federal court.
You could not by assignment create any different result in other words the assignee was absolutely bound by the jurisdictional situation created by the original parties and you could not change that.
That became incrusted with a lot of exceptions and a legislative jargon which made it and also barred the good assignments and the bad assignments as long as the original parties couldn't sue and the assignee could never bring an action.
So they decided to eliminate that provision completely and to adopt rather the concept developed under the 1875 statute have bind any kind of a transfer or device which would collusively or improperly make as a party plaintiff any individual where the intent was to create or invoke federal court jurisdiction.
And the revisers of the Judicial Code made it very plain that they were cutting down on the assignment scope of the -- what you might call the anti-assignment statute by confining its application to cases wherein the assignment is improperly or collusively made to invoke jurisdiction.
And they made it clear that there was no dispute about this that the revisers meant to apply the long established principles of the 1875 statute to assignments and what are those principles.
Well, the first place it's clear that not all assignments and not all transfers designed to evoke diversity jurisdiction are outlawed nor do they divest the federal court of jurisdiction.
Only those that result from a collusive or improper action in establishing the party plaintiff, many people including many commentators seemed to think that in 1359 bars all assignments that create diversity jurisdiction.
That simply is not the way the statute agrees.
Justice Thurgood Marshall: Mr.Gressman, could I look at this as being in the assignment of 5% of this?
Mr. Eugene Gressman: That's one way it could has an absolute assignment of 5% to Mr. Kramer.
Justice Thurgood Marshall: Wouldn't that be quote “improper” for the purpose of getting federal jurisdiction or for 100%.
Mr. Eugene Gressman: No, I don't know if there's any that you'd define impropriety or collusiveness in terms of the percent of what is absolutely conveyed or what is beneficially conveyed.
If it's conceded once that you can sign simply for collection only which is done all the time and makes it --
Justice Thurgood Marshall: And you make federal jurisdictions on that?
Mr. Eugene Gressman: Yes, Your Honor.
Justice Thurgood Marshall: It's gone for the whole 100%.
Mr. Eugene Gressman: Because it's for collection only as I understand that that has consistently been held to make the assignee for the collection only as distinguished from an agent for collection only.
Justice Thurgood Marshall: Do you have any of those cases cited?
Mr. Eugene Gressman: Well I think that the leading case that that cited continuously is the Titus v. Wallick which is not a 1359 case.
Justice Thurgood Marshall: Well, that's all I'm talking about.
Mr. Eugene Gressman: I don't think there is any leading authority that that mentions this in terms of 1359 although there are some, Your Honor that do -- the lower courts to having made that point that this makes the assignee for collection only a proper party and interest also says it is not collusive under 1359 there are some now those are not cited.
I would be glad to submit those too, Your Honor.
There all lower court opinions and I'm simply saying there is no leading authority and certainly this Court in fact has never had occasion to deal with the problem of assignments under 1359 since it was revised in 1948.
But I would be glad to submit that just a list of the cases to, Your Honor where that has been held by lower courts.
Now, the basic doctrine that was established and created by these pre-revision cases and other types of transfers then assignments was that a transfer was not improper or collusive if it was real rather than a colorable one.
And in fact operated to transfer all the transferors interest and we submit that by concession and that by law and by fact that requirement has here been satisfied by the absolute character of the assignment to Mr. Kramer regardless of whether you conceal -- conceive of that assignment as one for collection of all or some or an absolute assignment period.
If the transfer was lawful and complete as it was here then we submit that the cases in this Court make it absolutely clear that the fact that the transaction was motivated and designed by a desire to create or to utilize federal diversity jurisdiction becomes completely irrelevant.
This Court has said time and again and this pre-revision cases that motive per se cannot invalidate or make collusive or improper a transaction that is lawful and bona fide and result in a complete transfer of legal title to whatever is being transferred.
Justice Potter Stewart: What do you supposed, collusive means in the statute generally speaking I thought that collusive imparts an idea of collusion between the purportedly adverse parties between the plaintiffs and the defendant to make the same lawsuit.
Mr. Eugene Gressman: That idea has been expressed by Chief Judge Biggs in the Corabi decision in the Third Circuit which is cited in our brief.
And it's been criticized by others that it may not necessarily have to be between the plaintiff and defendant.
It may be many people claim and this is what the court here and this circuit here held it was a collusion, I assume, between the assignor and the assignee in order to permit the assignees to bring --
Justice Potter Stewart: Does it imply that it's a sham assignment because as you --
Mr. Eugene Gressman: Well that is it, Your Honor it seems to me that you have to give some content and meaningful content to the words collusion or impropriety.
Congress didn't use these words inadvisably they didn't mean to say every time there is a motive to create jurisdiction you have a collusive arrangement.
Those are not equivalents and it seems to me that Chief Judge Biggs in the seeking to define and he has done the major work judicially in trying to give definition to this.
In terms of some kind of a fraud or a deceit this Court and some of the early cases said in speaking of the term collusion it means a fraud upon the court and nothing more.
Now that imply something bad, something deceitful, there are cases, Your Honor where people have come in to court and said, “I'm here by an assignment” and of this cause of action and the question has been put where is the assignment and you refused to produce it.
And the court said, “This must have be a sham because you refuse to produce the assignment, we don't think there ever was one.”
There are many cases where there are people have deliberately lied to court, had brought in a false set of acts.
If we could have said for example, if by assignment it might have said that between the citizens of different states that the assignment was here made to a citizen, the State of Oklahoma when in fact the assignee was not a citizen of the State of Oklahoma, I think that is pure fraud, pure collusion and many cases approach that type of situation --
Justice Potter Stewart: Well, that's just perjury that's not collusion.
I mean your case.
Mr. Eugene Gressman: Well, not in this case.
Certainly not, this was --
Justice Potter Stewart: Collusion to me rightly or accurately of inaccurately implies the idea of purported adverse parties actually being cooperating parties.
Is that what it generally means in the law?
Mr. Eugene Gressman: That is what -- that is the way Chief Judge Biggs define it.
And the -- that is generally way I think in any people conceive a collusion.
And there are cases where there may be collusion, there is collusion between a plaintiff and defendant, solely in order to have a federal court determined their case, their controversy.
Justice Potter Stewart: Or any court.
I mean just generally and there is proof.
Mr. Eugene Gressman: And if that is found out it's usually --
Justice Potter Stewart: Sham lawsuit.
Mr. Eugene Gressman: Thrown out and if I may borrow one of Your Honors' prior remarks, it may be somewhat difficult to define the concept of collusion but I know collusion when I see it and I don't think this is it in this case.
Chief Justice Earl Warren: Mr.Lyons.
Argument of Dennis G.lyons
Mr. Dennis G.lyons: Mr.Chief Justice, may it please the Court.
To restate the facts of somewhat greater length, in the summer of 1964 there were two lawyers in Wichita Falls, Texas, one was Mr. Jack Banner, one was Mr. Clayton Kramer.
Mr. Banner according to the record was briefing a legal point in connection with a contract that contract was the contract between Panama and Venezuela Finance Company and Caribbean Mills, Inc. both of those are alien corporations.
Neither of them could have sued the other in federal court.
The contract under Panama's view of it was already two years in default.
There were annual installment payments an under Panama's view three annual installment payments have already gone by without payment having been made.
One day, Mr. Kramer and Mr. Banner met as they had many times in the past and Mr. Banner said to Mr. Kramer that there was a claim which might be acquired obviously Mr. Banner must have gotten the claim from somewhere and that conversation which is in the record evidently indicates an authority on Mr. Banner's part to offer the claim to Mr. Kramer.
Well, one thing led to another Mr. Kramer by the way knew nothing about the claim, he was a perfect stranger to the transaction, didn't know any of the parties involved.
Somewhere in the shuffle, Mr. Banner became Mr. Kramer's lawyer and the parties sat down and they prepared not one but two legal documents.
One of them was an assignment of claim which assignment did not refer to the second document.
The assignment reflected that the consideration was $1.00 and other good and valuable considerations.
The record is clear that the only money that change hands was the $1.00.
The other agreement is the agreement which the petitioner calls the collateral agreement for which we called the side agreement but actually the two words means the same thing.
And in that agreement which unlike the first agreement referred to the other document, in that agreement there was covenant on the part of Mr. Kramer to prosecute the claim to final judgment and there was a promise on Mr. Kramer's part to pay 95% of the net recovery on the claim back to the assignor, Panama.
Now, even though Mr. Kramer in his somewhat difficult testimony in the transcript never admitted that the motive for this transaction was to create federal jurisdiction.
Counsel has admitted various times that the motive and another times a motive was to create federal jurisdiction and the record suggests no other motive brought by it.
The parties then, Mr. Kramer and Mr. Banner entered into a contingent fee agreement the side agreement that Mr. Kramer in Panama had entered into permitted Mr. Kramer to enter into contingent fee agreements up to 33 of the 30% and that sort of arrangement was in fact entered into Mr. Banner's firm and six weeks later, there was a suit filed in Kramer's name in the federal court.
Rebuttal of Unk
Unk: That brings (Inaudible)?
Rebuttal of Dennis G.lyons
Mr. Dennis G.lyons: Yes, that comes of the top and then the 5% slice comes out from Mr. Kramer and then the other 95% goes back to Panama.
Justice Potter Stewart: 5% of 100% or the 5% of 67 and two-thirds?
Mr. Dennis G.lyons: Of the 66 and two-thirds.
Justice Potter Stewart: 66 and two-thirds.
Mr. Dennis G.lyons: (Inaudible)
Chief Justice Earl Warren: Up to that time, was there any impropriety in this arrangement?
Mr. Dennis G.lyons: I would think that no impropriety had occurred at this time up to the time that the complaint was filed.
Now, when you take single unitary transaction and put it in two pieces of paper rather than one that ended up itself is not fraudulent or improper.
But it certainly gives you the means to commit an impropriety or to commit a fraud.
Chief Justice Earl Warren: Gives what?
Mr. Dennis G.lyons: Gives you the means to commit an impropriety or to commit a fraud because it creates a situation in which you can refer to one document and keep the other document in your desk drawer.
And in the complaint --
Chief Justice Earl Warren: And that is whatever -- is that impropriety under federal law or under state --
Mr. Dennis G.lyons: I would say that was.
Chief Justice Earl Warren: Thank you.
Mr. Dennis G.lyons: It is our position that it is, Your Honor.
Indeed, it's our position that even if this was openly done and of course once the discovery procedures start working the facts came out in the open.
But even if this was openly done that this amounts to under the teachings of the cases in this Court to an improper and collusive assignment.
The complaint was then filed in the federal court.
The complaint alleged that Panama had assigned, sold, and delivered its entire interest and rights in the agreement to Clayton S. Kramer.
It didn't say a word about the fact that Panama has a beneficial interest in 95% of the net recovery.
Not unexpectedly the defense of the lawsuit wondered somewhat is to how this claim turned up in the hands of the lawyer from Wichita Falls and Mr. Kramer's deposition was taken and he was asked on deposition series of questions which are in the record as to how he came to be the owner of the claim and he declined to answer all those questions.
He declined to answer questions as to the existence of agreements between him and Panama apart from the face of the assignment.
And finally, an order of the court was obtained and the collateral agreement was produced in response to the order of the court.
Rebuttal of Unk
Unk: Upon advice?
Rebuttal of Dennis G.lyons
Mr. Dennis G.lyons: Simply on the advice of counsel.
The central question in this case is whether Section 1359 of the Judicial Code bars the manufacturer.
The manufacture then said religiously, the petitioners were not ours.
It bars the manufacturer of the diversity jurisdiction of the case like this.
This report held no that the only relevant consideration was to look to the face of the assignment and not to look to the other factors.
The Court of Appeals said yes.
The essentials as we see it of the arrangement or scheme that was employed here are four in number.
You of course start with two parties.
It could not sue each other in the federal court, sometimes two aliens, sometimes its two citizens of the same state.
And the four factors as we see them or first that you have a voluntarily assignment of the claim, this is not a case involving an executor or a guardian where you have to have fiduciary in order to prosecute a claim.
This is a voluntarily assignment of the claim.
It's an assignment made after the dispute arose.
Here, there were three annual payments which allegedly under the plaintiff's theory were in default.
The third factor is that a motive is to create or manufacture diversity jurisdiction.
And the fourth factor is the assign -- that the assignor retains a beneficial ownership in the claim.
Now, in 1875 when the diversity of citizenship, the jurisdiction of the federal courts was enlarged there was enacted by Congress a protective statute which provided in substantially the same language as present Section 1359 that the federal courts would not have jurisdiction where a party was made or added through assignment or otherwise, improperly or collusively in order to create federal jurisdiction.
And in the 35 years after that statute was passed, there was a whole string of cases, which came before this Court which involved these four elements.
They involved the assignment, the assignment made after the dispute arose, the motive to create federal jurisdiction, and the retention of the beneficial interest in the claim by the assignor.
That last is of course an important factor.
There are another line of cases uphold that where the assignment is in fact absolute where a party buys a claim, pays money for it, and the assignor has no further interest in the outcome of a litigation that you may then look at the assignee's citizenship for the purpose of determining diversity jurisdiction but this case is not on that side of the line.
Mr. Kramer here had been willing to make an evaluation of the claim, pay money for it and in effect be quits with Panama and leave Panama with no interest whatsoever in this claim.
The case has seem to teach that that sort of assignment is not improper or collusive but this line of cases which we review at pages 14 to 18 of our brief, which were decided in the years immediately after the passage of this statute hold that where the assignor has retained the beneficial interest in the claim and the beneficial interest in these cases vary some cases.
It's a 100% other cases it was a less than a 100% and the assignee like Mr. Kramer here was given a percentage for the use of his name.
But these cases hold that that constitutes an improper or collusive assignment and they used the words improper or collusive and applied this concept of collusion to this arrangement between at least two parties even though these are not two parties on different sides of the lawsuits.
Justice Byron R. White: Mr.Lyons, Mr. Kramer did undertake some obligations in connection with the assignment, didn't he?
Mr. Dennis G.lyons: He undertook to prosecute the claim.
Justice Byron R. White: He promised?
Mr. Dennis G.lyons: Yes.
Justice Byron R. White: He just didn't say, “If I do obviously.”
Mr. Dennis G.lyons: No, he didn't.
He couldn't walk away from this.
Justice Byron R. White: So he promised?
And if he had paid some money for the claim, he would have -- do you suggest that it might not have been collusive?
Mr. Dennis G.lyons: Well, if he had acquired full title to the claim, there'd be no reason for him to promise to --
Justice Byron R. White: Well, he did acquire full title except if he was successful?
Mr. Dennis G.lyons: Well, that's true.
In full title to a zero claim is not a --
Justice Byron R. White: That's right, but nevertheless, the question is jurisdiction not how much the claim is worth?
And he did acquire full title to the claim based on the promise to do something and if his efforts weren't successful, he would go on owning the whole claim worth nothing.
Mr. Dennis G.lyons: That's right.
There is --
Justice Byron R. White: But if he was successful, he would still own 5%?
Mr. Dennis G.lyons: There's no reason of partition an empty five place.
It's only for five up here in this place in the form of a judgment that there'd be any reason to cut it up.
Justice Byron R. White: But in any event, no matter what happened he'd have 5%.
Mr. Dennis G.lyons: He'd have 5% percent of the net recovery.
Justice Byron R. White: So at least, he should have been able to sue for 5% of the claim in the federal court?
Mr. Dennis G.lyons: Well, if he and the assignor had joined together and sued, they wouldn't have been in diversity because the statute does not cover that, that sort of a suit.
The petitioner seeks to distinguish this line of cases in this Court, which construed the statute.
On the three bases, first they point to the effect of the 1948 Codification.
They -- Mr. Justice, I believe Mr. Gressman might have this morning that the assignee clause from the 1789 statute have something to do with this.
Actually, it did not.
The statute that's presently on the books, according to the Reviser's Notes and according to its language, a codification to bring forward of the 1875 statute which is the statute under which this line of cases was decided, and the Reviser's Notes, even though they dropped certain of the language, the language that was dropped was not the language relied upon by the court in this old line of cases.
And the Reviser's Notes indicate that the desire was to carry forward the 1875 Act.
Under those circumstances, we submit that the revision does not change the value of prior cases.
The statute always have said on proper or collusive and this has been construed to cover caces where the only collusion is this relationship between the assignor and the assignee in which the assignor still has the interest in the claim.
Then, the cases that sought to be distinguished on the grounds that here, there was a transfer of title which was good under state law.
Well, this is not a state law issue.
The question here is not whether Mr. Kramer could have brought this suit in a state court, I assume he couldn't.
I sometimes wonder why he didn't.
The question here is whether the federal standards of improper or collusive if the clause had been put on them by the earlier cases on what that standard means.
In fact, in a number of those cases, the court seems to have commented or to have assumed that the assignment was good under state law.
Finally, there is a lengthy suggestion in the brief that somehow even though this might not be good in the case of an assignment where the real parties and interest are citizens of the same state, that the court should be more lenient or more tolerant with respect to this matter where the real party and interests are two aliens.
I must confess I'm somewhat unable to follow this --
Justice William O. Douglas: Mr.Lyons, may I just get back a moment to your colloquy with Justice White.
Did I understand you correctly to say that, the test here of collusion should be their attention of an economic interest in this instance is 95% of the 66 and two-thirds but the assignor?
Mr. Dennis G.lyons: That's certainly one of the tests, Your Honor.
Justice William O. Douglas: Well, it's s not -- I thought you also suggested to Justice White that if he lost when he had nothing to return --
Mr. Dennis G.lyons: That's right.
Justice William O. Douglas: Then what?
Mr. Dennis G.lyons: Well, if he lost there was nothing to return.
He owned the whole claim of the loss but --
Justice William O. Douglas: But could you concede that in that circumstance, there would be jurisdiction?
Mr. Dennis G.lyons: No, I say you have at the Your Honor that you have to look at the matter as the suit is brought and as the suit is brought, he might win, he might lose the reason he is bringing the suit was with the desire to win.
Justice William O. Douglas: Well, but the point is, do I understand you correctly that because under this arrangement, we ask not on paper that a 95% it was in 66 and two-thirds per cent of any recovery if there was a recovery.
Mr. Dennis G.lyons: That's right.
Justice William O. Douglas: Does that factor in and of itself establishes collusion?
Mr. Dennis G.lyons: That factor with the other factors, the motive to create federal jurisdiction --
Justice William O. Douglas: That's what I wanted to get.
Mr. Dennis G.lyons: -- which --
Justice William O. Douglas: So in addition to that --
Mr. Dennis G.lyons: Which when taken with other factors this Court has held are to involve impropriety and collusion.
The -- none of these factors standing alone might give us a case of impropriety and collusion but I think from the analysis of the early cases that the early cases all have these four factors.
They have a motive, they have the assignment, they have the fact that the assignment is made after the parties have fallen into dispute and it appears that there will be litigation, and they have the retention of the interest by the assignor.
Justice William O. Douglas: Now, what did you say would be the answer if this suit had only been for 5% of the 66 and two-thirds percent? If that's all what Mr. Kramer --
Mr. Dennis G.lyons: I don't know if Caribbean brought for the 5%.
I think probably, I have been barred by the rule against splitting a cause of action.
What you have here is the unitary claim and I think the defendant is entitled not to be sued piecemeal by a number of --
Justice William O. Douglas: Why Mr. Lyons does that splitting cause of action, if there's an outright assignment of 5% of something, that means that someone else own this 95% but he owns 5%?
Why wouldn't he been able just to bring this lawsuit just 4% or 5% over it?
Mr. Dennis G.lyons: Well, Your Honor I think there is a rule of law under state law that, if you have the unitary obligation to pay money for someone that that person can't break it up into a 150 bits and then face you with a hundred plaintiffs in the lawsuits.
And I think this unitary cause of action and one party has to sue on it and these papers purport to vest the legal title in him and interstate court, he could brought this suit.
And Titus v. Wallick holds that one state –- if a state permits this sort of suit to be brought under this sort of this assignment, I supposed most state courts would but another state has to give a full faith in credit to that judgment that is all the Titus v. Wallick holds, there's nothing to do with the (Voice Overlap).
Justice Thurgood Marshall: If he did file for the 5%, couldn't you insist that the other party to join and then he lose the verdict?
Mr. Dennis G.lyons: I think we could either move in the alternative that it be dismissed on the basis that it's the splitting of the cause of action or that unnecessary party is not been joined and of course once the necessary parties joined the case is no longer within the diversity statute.
Justice William O. Douglas: Impose rejoinder kind of approach?
Justice Thurgood Marshall: Well, I would think -- so I think unless the -- two of them sue, if you assume that there is an assignment of only 5% of the legal title, the -- you'd have to join it up.
Now, in some ways this case is unique.
People have not tried to this sort of thing recently to put it normally.
The -- there were a lot of cases in the first 35 years after the passage of the staff until this Court, there was a whole line of cases and there was a development of the law that discourage doing this sort of thing.
And this is a rather unique case, there are no other cases holding that an assignee for collection only may sue in its own name in the federal court and thereby create diversity.
This is the first page to reach this court after 1948 revision but the pre-revision cases teach that this is an improper and collusive assignment.
Chief Justice Earl Warren: Mr. Lyons, you use -- you always use the words “collusive and impropriety.”
Are those terms interchangeable?
Do they mean one on the same thing or do they have different meanings?
Mr. Dennis G.lyons: I think they are -- they may have different meanings Your Honor, courts have use them both that they have held that where you have a -- these factors that the assignment is collusive and improper.
The statute uses them in the disjunction instead it has an “or” in it.
But we would say that this was both collusive in the sense of involving this relationship between the two parties to the assignment whereby the assignor was ousted of his interest and it is improper in the sense that it is not a proper way to create federal jurisdiction.
Justice Potter Stewart: Improper in the sense of being a criminal or even unethical let's say, it's a -- it could be a valid assignment under state law as I understand.
Mr. Dennis G.lyons: I supposed so and whether making assertion that complaint was made --
Justice Potter Stewart: Not immoral, not criminal, or unethical or anything else in that sense of improper?
Mr. Dennis G.lyons: Well then I suspect that the -- if there hadn't been any effort to conceal it here, I would agree.
But I think the result is the same whether or not there had been the effort to conceal it.
Justice Potter Stewart: So, improper, in your submission means whether that is in the statute?
Mr. Dennis G.lyons: That it means a device which is made from the motive of creating federal jurisdiction and which does not oust the assignor of his interest of the claim.
Chief Justice Earl Warren: Where did you get that definition?
Mr. Dennis G.lyons: I've studied, Your Honor from the prior cases of the Court which involved assignments where there was a retention of the interest in the assignor and there's only been one appellate decision that I know of that is restricted, the meaning of the word collusion to collusion between the two sides of lawsuit, and that was Judge Biggs' opinion for the Third Circuit in the Corabi case which was later overruled.
Now, if this practice is sanctioned here --
Chief Justice Earl Warren: Have there been any to the contrary in this quarter in the federal statute?
Mr. Dennis G.lyons: Yes the whole line of cases from 1875 through 1910.
I think, I was flatly --
Chief Justice Earl Warren: The same context, the same thing?
Mr. Dennis G.lyons: I believe they are, Your Honor.
And there was no collusion between the two sides of the lawsuit but the Court held that the practice that the assignor and the assignee got into was collusive.
Justice Hugo L. Black: May I ask in your argument that leads us to (Inaudible)?
Mr. Dennis G.lyons: I don't believe it does, Your Honor.
I think the cases hold -- the prior cases of this Court, that if the parties are willing to actually deal in this claim to sell them from one party to the other so that the party who acquires that is the master and the owner of the claim and the party who transfers no longer has an interest in that claim.
But that is not collusive, that's an ordinary economic transaction and the cases draw the line at that point.
The board of itself to create the federal jurisdiction isn't conclusive and we admit that --
Justice Hugo L. Black: Mr.Lyons, what you would say then, maybe I'm wrong, you would say that a transfer or the purpose of letting somebody else file a claim -- an assignor purposely letting somebody else file a claim in federal court from the division is there?
Mr. Dennis G.lyons: No, it's not Your Honor.
If the assignor parts with the interest in the claim, the assignor --
Justice Hugo L. Black: But it couldn't do it for the purpose of collection only?
Mr. Dennis G.lyons: That's correct if they -- if what he has meant, that he has to remit the proceedings about to the assignor.
If the assignment here created federal jurisdiction, any cause of action involving $10,000.00 or more which is capable of being transferred under state law and all contract claims are all in the lot of non-contract claims are, any such cause of action can be brought to the federal courts.
Simplicity itself, the two pieces of paper that will be in the record in this case can be use as they form guide, all you have to do is to find another state assignee, assign the claim to him, take his covenant back to prosecute the lawsuit in his covenant to pay --
Justice Thurgood Marshall: Indeed, all you would need would be some clerk in the law office that lived in Oklahoma?
Mr. Dennis G.lyons: I would think so, you probably want someone who was under your thumb and someone who you knew and you wouldn't have to pay him 5%.
I think you could pay him if consideration is required you can pay him 1% or half of 1%, there would be a competition in this matter, I supposed as in all economic matters and what we would have would be a universally available instant diversity jurisdiction.
Anyone could do it.
Every lawyer who had a claim between two parties of the same state, I believe would duty-bound to consider whether he shouldn't create federal jurisdiction by dredging up the clerk of out of state citizenship and assign the claim to him with set of papers like that here.
We submit that there maybe some fussiness perhaps in the outer limits of what constitutes an improper and collusive assignment but we claim that this assignment falls within the heart of the statute.
If any practice is condemned by the statute, this practice must be.
If it's not condemned by the statute, the only restriction on the jurisdiction of the federal courts in contract matters or in matters involving assignable tort claims or other assignable claims, the only limitations on the federal court jurisdiction will be the jurisdictional amount.
The considered --
Justice William J. Brennan: What do you think about Black and White Taxicab & Transfer Co.?
Mr. Dennis G.lyons: Well, I think that is probably still the law there.
You had a case of the assignor having been dissolved and to the assignor was no longer in existence and the Court held that since the assignor had been dissolved that that was conclusive.
There are early cases which the Court distinguished in Black and White which hold that if the assignor is not dissolved, where you transfer the claim to a corporate of another state where the assignor is not dissolved, and remains in existence, there the predecessor of 1359 is violated and there is no federal court jurisdiction.