USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 95-1506
TOSTE FARM CORPORATION, ET AL.,
Plaintiffs, Appellees,
v.
HADBURY, INC., ET AL.,
Defendants, Appellants.
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No. 95-1544
TOSTE FARM CORPORATION, ET AL.,
Plaintiffs, Appellants,
v.
HADBURY, INC., ET AL.,
Defendants, Appellees.
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APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Raymond J. Pettine, Senior U.S. District Judge]
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Before
Lynch, Circuit Judge,
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Aldrich and Campbell, Senior Circuit Judges.
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John Blish with whom Stephen J. Reid, Jr., Raymond A. Marcaccio
__________ _____________________ ____________________
and Blish & Cavanagh were on brief for plaintiffs.
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John William Ranucci for defendants.
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December 4, 1995
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CAMPBELL, Senior Circuit Judge. These cross
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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. 1359, and whether, in the circumstances,
diversity jurisdiction over defendants' counterclaim also
failed. We affirm the district court's dismissal of both
claims.
I.
I.
Factual Background
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
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1. Raymond C. Holland, Jr., an attorney and Rhode Island
citizen, was also named as a defendant in the district court.
However, he has not appealed from the orders below.
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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
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2. TFCI was later merged into TFC, a plaintiff in this case.
The sole stockholder of both corporations was Acebes'
PaineWebber IRA account, which was itself a partner of Toste
Farm Limited Partnership and also a plaintiff in this action.
-3-
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. 2201-2202; Fed. R. Civ. P. 57. They
___
asserted diversity jurisdiction pursuant to 28 U.S.C. 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
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3. Acebes also asserted that TFC, the successor to TFCI,
"has bid on other real estate and has prepared to bid on real
estate located in Massachusetts."
4. The citizenship of a corporation is determined pursuant
to 28 U.S.C. 1332(c)(1), which provides:
"[A] corporation shall be deemed to be a
citizen of any State by which it has been
-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.
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incorporated and of the State where it
hasits principalplace ofbusiness . . . ."
TFCI and Hadbury were citizens of Rhode Island because they
were incorporated under the laws of Rhode Island.
5. TFC's certificate of incorporation states: "The office
of the Corporation in the State of New York is to be located
in the County of New York, State of New York."
-5-
II.
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.
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 (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. 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,
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Desarrollos Metropolitanos, Inc. v. Taber Partners, I, ___
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U.S. ___, 114 S. Ct. 82 (1993); Rodriguez-Diaz v. Sierra-
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Martinez, 853 F.2d 1027, 1029 (1st Cir. 1988). The burden of
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proof is on the party attempting to sustain diversity
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jurisdiction. Thomson v. Gaskill, 315 U.S. 442, 446 (1942);
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Media Duplication Servs., Ltd. v. HDG Software, Inc., 928
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F.2d 1228, 1235 (1st Cir. 1991).
It is undisputed that plaintiffs satisfied the
requirements of 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. 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 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.
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For over a century, Congress has denied
jurisdiction of suits where a party is "improperly or
collusively made or joined to invoke . . . jurisdiction."6
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6. Section 5 of the Act of March 3, 1875, a predecessor to
1359, stated:
. . . if in any suit commenced in a
circuit court [which then had original
diversity jurisdiction] . . . it shall
appear to the satisfaction of said
circuit court, at any time after such
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The Supreme Court in Williams v. Nottawa, 104 U.S. 209, 211
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(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.
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AVCO Corp., 425 F.2d 1030, 1034 (2d Cir. 1969); 14 Charles A.
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Wright, Arthur R. Miller & Edward D. Cooper, Federal Practice
and Procedure: Jurisdiction 2d 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
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v. Mafnas, 973 F.2d 803, 809 (9th Cir. 1992) ("The federal
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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 (1991). The district court in the
____________
present case found that "Section 1359's policy against
____________________
suit has been brought . . . that the
parties to said suit have been improperly
or collusively made or joined, . . . for
the purpose of creating a case cognizable
. . . under this act; the said circuit
court . . . shall dismiss the suit.
Act of March 3, 1875, c. 137, 5, 18 Stat. 470.
-8-
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,
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882 F. Supp. at 247.
In its most recent pronouncement, the Supreme Court
has construed 1359 in a similarly broad manner. In Kramer
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v. Caribbean Mills, Inc., 394 U.S. 823 (1969), the Court
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noted that "Kramer candidly admits that the 'assignment was
in substantial part motivated by a desire ... to make
diversity jurisdiction available.'" Id. at 828. Holding
___
that the otherwise valid assignment of the claim to a diverse
party was improper or collusive under 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 1359 largely incapable of
accomplishing its purpose." Id. at 829. The Court was
___
concerned that "the ease with which a party may 'manufacture'
federal jurisdiction" could lead to "a vast quantity of
ordinary contract and tort litigation . . . channeled into
the federal courts" which is "the very thing which Congress
intended to prevent when it enacted 1359 and its
predecessors." Id. at 828-29.
___
In applying Kramer, lower courts have often
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determined an improper or collusive assignment from whether
-9-
or not the parties have shown an independent business
justification for assigning the claim to a diverse party.7
Courts have also applied elevated scrutiny to assignments
between affiliated parties. In these situations, "[s]imply
articulating a business reason is insufficient; the burden of
proof is with the party asserting diversity to establish that
the reason is legitimate and not pretextual." Yokeno, 973
______
F.2d at 810. See also Airlines Reporting, 58 F.3d at 862-63;
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Nike, Inc. v. Comercial Iberica de Exclusivas Deportivas,
__________ _____________________________________________
S.A., 20 F.3d 987, 991-93 (9th Cir. 1994); Dweck, 877 F.2d
____ _____
at 792-93; Prudential Oil Corp. v. Phillips Petroleum Co.,
____________________ _______________________
546 F.2d 469, 475 (2d Cir. 1969) ("The scrutiny normally
applied to transfers or assignments of claims which have the
effect of creating diversity must be doubled in the case of
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7. See Western Farm Credit Bank v. Hamakua Sugar Co., 841 F.
___ ________________________ _________________
Supp. 976, 981 (D. Haw. 1994) ("[O]nce a party has stated a
legitimate business purpose for the assignment and has shown
the assignment is absolute, district courts need not explore
whether one motivating factor behind the assignment was to
create diversity jurisdiction"); Baker v. Latham Sparrowbush
_____ __________________
Assocs., 808 F. Supp. 992, 1002 (S.D.N.Y. 1992) (assignment
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for "facially valid business purpose" not collusive or
improper); AmeriFirst Bank v. Bomar, 757 F. Supp. 1365, 1372
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(S.D. Fla. 1991); Blythe Indus., Inc. v. Puerto Rico
____________________ ______________
Aqueduct and Sewer Auth., 573 F. Supp. 563, 564 (D.P.R. 1983)
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(diversity jurisdiction denied where "[n]o legitimate
commercial interest is apparent from the assignment"). But
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see Haskin v. Corporacion Insular de Seguros, 666 F. Supp.
___ ______ _______________________________
349, 354 (D.P.R. 1987) ("In examining a Section 1359 claim of
collusion . . . motive must be considered but given less
weight than the determinations of whether the assignment was
real or colorable and, most important, whether or not the
assignee has some independent, pre-existing legitimate
interest in the causes of action assigned to him").
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assignments between related or affiliated corporations since
common ownership . . . only serves to increase the
possibility of collusion and compound the difficulty
encountered in detecting the real purpose of the
assignment"); Western Farm Credit Bank v. Hamakua Sugar Co.,
________________________ _________________
841 F. Supp. 976, 981 (D. Haw. 1994); Blythe Indus., Inc. v.
___________________
Puerto Rico Aqueduct & Sewer Auth., 573 F. Supp. 563, 564
____________________________________
(D.P.R. 1983).
The above authorities, as well as the clear
language of 1359, are consistent with the district court's
analysis here. Plaintiffs rely, for a contrary view, upon a
Supreme Court case decided in the 1920s that seemingly points
in a different direction. In Black & White Taxicab &
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Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276
_____________ _______________________________________
U.S. 518 (1928), a Kentucky taxi company created diversity by
reincorporating in Tennessee. Otherwise, the company
continued its taxi business in Kentucky.8 The newly created
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8. When Black & White Taxicab was decided a corporation was
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considered a citizen of the state in which it was
incorporated, regardless of the location of its principal
place of business. This definition of citizenship allowed
corporations to change citizenship very easily, as Black &
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White Taxicab demonstrates. The enactment of 28 U.S.C.
_____________
1332(c) in 1958 redefined the citizenship of a corporation to
include the state where its principal place of business is
located, in addition to the state in which it is
incorporated. Thus, today, a corporation with its principal
place of business in Kentucky could not create diversity
jurisdiction with a Kentucky opposing party by merely
reincorporating in Tennessee. Its principal place of
business would also have to move away from Kentucky, a more
difficult feat for an active business.
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Tennessee company brought suit in federal court. The Supreme
Court upheld diversity jurisdiction stating: "The succession
and transfer were actual, not feigned or merely colorable.
In these circumstances, courts will not inquire into motives
when deciding concerning their jurisdiction." Id. at 524.
___
Cf. Mecom v. Fitzsimmons Drilling Co., 284 U.S. 183, 190
___ _____ _________________________
(1931); Cross v. Allen, 141 U.S. 528, 533 (1891).
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Black & White Taxicab has been sharply criticized
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for allowing the manufacture of diversity in conflict with
1359's purpose. Charles A. Wright, Law of Federal Courts 373
(1994) ("The reincorporation . . . to create diversity verged
on fraud, and it was not necessary to hold that diversity
jurisdiction could be so readily abused"); American Law
Institute, Study of the Division of Jurisdiction Between
State and Federal Courts 159 (1969) ("One of the most cited
examples of improper creation of diversity jurisdiction
involved a corporation which simply reincorporated in another
state for the purpose of creating diversity jurisdiction
[citing Black & White Taxicab]").
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This court has interpreted 1359 in light both of
Black & White Taxicab and Kramer in a case strikingly similar
_____________________ ______
to the one at hand. Greater Dev. Co. v. Amelung, 471 F.2d
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338 (1st Cir. 1973) (per curiam). In Amelung, the district
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court dismissed the original claim of a Massachusetts
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-12-
corporation for lack of jurisdiction. To create diversity,
the corporation's controlling stockholder formed a
Connecticut shell corporation which purchased the assets of
the Massachusetts corporation. The Connecticut corporation
then refiled the suit. The district court dismissed the
action relying on 1359, and this court summarily affirmed,
stating in part:
[W]e think . . . that when a corporation
conducting an on-going business transfers
all its assets and its business to
another corporation, and the transferor
is dissolved, diversity jurisdiction will
exist, even though the shareholders of
the two corporations are the same, and
the purpose of the transfer is to obtain
diversity of citizenship. Here
admittedly the transfer is real, the
transferor has been dissolved and the
shareholder is the same. However, the
claim which is the basis of this suit was
the only asset transferred, and, as far
as the record shows, the only asset of
the new corporation, which apparently has
no payroll and no other activities. To
extend an already eroded case like Black
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& White, see Kramer . . . to this
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situation would be to destroy the meaning
of this salutary and long-standing
statute [28 U.S.C. 1359].
-13-
Id. at 339.9 Amelung has been praised for refusing to
___ _______
extend Black & White Taxicab beyond its facts.10
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In the instant case, the district court concluded
that the factual situation "approximates that in Amelung."
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Toste Farm, 882 F. Supp. at 246. We agree. As in Amelung,
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the principal asset transferred was a legal claim. As the
district court found, TFCI had no employees nor did it have
ongoing activities beyond its interest in the Toste Farm
Limited Partnership. It was formed for the single purpose of
acting as a general partner in the partnership. After Acebes
determined to leave the partnership and the buy-sell
negotiations foundered, resulting in this lawsuit, TFCI and,
after the merger, TFC were left mainly with a legal dispute.
Unlike the transferred taxi business in Black & White
_______________
Taxicab, there was no ongoing business to operate separate
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9. Another court has taken a similar approach to that in
Amelung. In Piermont Heights, Inc. v. Dorfman, 820 F. Supp.
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99, 100 (S.D.N.Y. 1993), the District Court for the Southern
District of New York held: "If a plaintiff assigns a claim or
takes a similar action [in this case a merger] solely for the
purpose of manufacturing diversity jurisdiction, and without
a legitimate business purpose apart from the creation of such
jurisdiction, [section 1359] is violated."
10. 14 Charles A. Wright, Arthur R. Miller & Edward D.
Cooper, Federal Practice and Procedure: Jurisdiction 2d
3638, at 99 (1985) ("The approach taken in the Amelung case
_______
seems sound . . . . To ignore the obvious purpose behind
what had been done, as some language in the Black & White
______________
Taxicab case . . . could be read as requiring, would be
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contrary to the objectives of Section 1359 and inconsistent
with the principle that federal courts are courts of limited
jurisdiction") (footnotes omitted).
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from the legal claim. Had TFCI assigned its interest in the
claim to TFC in New York, 1359 would plainly, under Kramer,
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have overridden the existing diversity. We see no reason for
a different outcome merely because the merger route was used
to accomplish essentially the same result. Section 1359
proscribes the improper or collusive making of a party to
invoke jurisdiction, "by assignment or otherwise" (emphasis
____________
added).
It is true, as plaintiffs argue, that the assets
transferred to TFC included besides the partnership
interest a bank account containing under $200,000. While
plaintiffs concede that one purpose of the merger was to
manufacture diversity, they note the availability of the bank
account for possible future investments and contend that the
transfer to New York served Acebes' convenience, as his other
business activities were also in New York. But, on this
record, the district court could reasonably view these
assertions as make-weights. Acebes would scarcely be deeply
concerned as to where the state of incorporation and
principal office of this paper corporation were located,
given that there were no employees and no ongoing operations.
Nor does the placing of an amount of cash in TFC for possible
future use seem significant. The record does not indicate
the existence of active outside business investments at the
time of transfer. None of these factors, by themselves,
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suggests a likely reason for the move to New York. The
significant reason appears to be the improper one: "to invoke
the jurisdiction" of the federal court, 1359.
The district court justifiably concluded that there
was "a manufactured assignment concocted and designed by a
single individual using the diversity statute as a ploy to
create jurisdiction." Toste Farm, 882 F. Supp. at 247. To
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be sure, the court elsewhere said that creating diversity was
"at least one of the reasons for the merger," id. at 245, but
___
the tenor of the court's opinion, including the "manufactured
assignment" statement, indicates that the creation of
diversity was the principal indeed, one might suppose the
sole purpose for the merger. There was no error in this
factual analysis.
We recognize, as plaintiffs argue, that the Supreme
Court, in the circumstances of Black & White Taxicab,
________________________
declined to inquire into motives. Id. at 524. Black & White
___ _____________
Taxicab, however, involved the transfer of an ongoing taxi
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business, not a paper corporation whose single purpose had
been to act as a general partner in a partnership now
embroiled in litigation. Viewing cases of this nature on a
continuum defined by Kramer on one side, and Black & White
______ _____________
Taxicab on the other, the present case falls well to the
_______
Kramer side. And in this circuit the instant case is further
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controlled as the district court correctly found by our
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Amelung decision. We, therefore, affirm the district court's
_______
finding that 1359 bars jurisdiction over plaintiffs' claim.
III.
III.
We turn next to the issue of whether any portion of
defendants' counterclaim can survive the jurisdictional
failure of plaintiffs' claim.
There are two ways for district courts to acquire
jurisdiction over counterclaims: (1) pursuant to an
independent basis for federal jurisdiction present in the
counterclaim; or (2) pursuant to 28 U.S.C. 1367 which
provides supplemental jurisdiction over counterclaims that
are part of the same case or controversy as the original
claim. Only those counterclaims that have an independent
basis for jurisdiction can survive a dismissal of the
original claim for lack of jurisdiction.11 6 Charles A.
Wright, Arthur R. Miller, Mary K. Kane, Federal Practice and
Procedure: Civil 2d 1414, at 112 (1990). See also Scott
________ _____
v. Long Island Savings Bank, FSB, 937 F.2d 738, 743 (2d Cir.
______________________________
1991); Kuehne & Nagel (AG & CO) v. Geosource, Inc., 874 F.2d
________________________ _______________
283, 291 (5th Cir. 1989); DHL Corp. v. Loomis Courier Serv.,
_________ _____________________
Inc., 522 F.2d 982, 985 (9th Cir. 1975).
____
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11. Supplemental jurisdiction, 28 U.S.C. 1367, is, in
effect, derivative of the original claim's jurisdiction and
thus cannot survive the jurisdictional failure of the
original claim.
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Defendants urge this court to find that the
district court has mandatory jurisdiction over Count III of
their counterclaim because jurisdiction exists independently
within the scope of its allegation.12 Count III alleges
that the TFCI-TFC merger violated sections 11.2 and 11.3 of
the partnership agreement, which prohibit the transfer of a
partner's interest without giving notice and a right of first
refusal to the other partners.
Defendants argue that the district court has
mandatory jurisdiction over Count III because they have met
all the requirements of diversity under 1332. Section 1359
which destroyed diversity in plaintiffs' claim does
not apply to them, defendants say, because they themselves
did not engage in the collusive or improper acts that
defeated diversity jurisdiction over plaintiffs' claim. In
defendants' view, the district court's holding penalizes them
for losing "the race to the courthouse" since if they had
sued plaintiffs, instead of vice versa, jurisdiction would
exist.
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12. Defendants' counterclaim consists of three counts: Count
I requests a declaration of rights under the partnership
agreement; Count II requests injunctive relief instructing
the parties to abide by the rights and duties of the
partnership agreement; Count III requests damages for an
alleged breach of the partnership agreement. The parties
agree that Counts I and II must be dismissed because they are
not independent of plaintiffs' claim, and therefore do not
survive that claim's jurisdictional failure.
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We are not persuaded. Section 1359, by its terms,
destroys diversity not only for the original claim, but for
the entire action. Section 1359 provides: "A district court
shall not have jurisdiction of a civil action in which any
____________ ___
party . . . has been improperly or collusively made . . . to
_____
invoke [federal] jurisdiction" (emphasis added).13 The
district court's lack of jurisdiction is not limited to the
claim of a collusive plaintiff but extends to any portion of
the civil action whose jurisdictional basis depends in fact
upon the plaintiff's improper or collusive act.14 We can
see no reason not to construe the statute as written. It
could well be unfair, within the contours of the same
lawsuit, to find that diversity jurisdiction exists for
purposes of defendants' claim after dismissing plaintiffs'
claim for want of diversity. To bifurcate jurisdiction in
this manner would be to fragment the case. One aspect of the
partnership agreement here might have to be determined in
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13. The term "action" has been used in the Federal Rules of
Civil Procedure to include counterclaims. See Fed. R. Civ.
___
P. 54(b) ("When more than one claim for relief is presented
in an action, whether as a claim, counterclaim, cross-claim
______ ____________
or third party claim, ... the court may direct the entry of a
[partial] final judgement ...") (emphasis added).
14. We do not reach the question of whether 1359 would
require dismissal of a counterclaim supported by a
jurisdictional basis that would have existed even if
plaintiffs had not improperly manufactured jurisdiction.
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federal court and another in state court,15 causing
friction between state and federal courts, the wasting of
judicial resources, and a greater likelihood of unfair and
inconsistent outcomes. It could also be unfair to allow
defendants, who successfully challenged jurisdiction over
plaintiffs' claim, to use the same improperly achieved
jurisdictional basis for their counterclaim. In any case,
the statute seems clear. We affirm the district court's
refusal to assert jurisdiction over defendants' counterclaim.
Affirmed. Each party bears its own costs.
Affirmed. Each party bears its own costs.
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15. Defendants argue that it is not at all clear that the
case would be bifurcated because if they are successful in
Count III and the federal court awards them TFCI partnership
interest as a remedy, they would have control over the
partnership and plaintiffs' claim would be moot. We are not
persuaded by this argument because it is unclear whether
defendants would be successful and whether the district court
would award TFC's partnership interest to defendants as a
remedy in the event that they were successful.
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