# Lehigh Nin Manufacturing Company v. Kelly/Opinion of the Court

* Court Documents
* Case Syllabus
* Opinion of the Court
* Dissenting Opinion Shiras
United States Supreme Court
160 U.S. 327
Lehigh Nin Manufacturing Company v. Kelly
Some of the paragraphs of the agreed statement of facts are so drawn as to leave in doubt the precise thought intended to be expressed in them. But it is clear that the individual stockholders and officers of the Virginia corporation, in February, 1893, organized the Pennsylvania corporation; that immediately thereafter, on the 1st day of March, 1893, the lands in controversy, which the Virginia corporation had for many years claimed to own, and which, during all that period, were in the possession of and claimed by the present defendants, who are citizens of Virginia, were conveyed by it in fee simple to the Pennsylvania corporation so organized; and that the only object, for which the stockholders and officers of the Virginia corporation organized the Pennsylvania corporation, and for which the above conveyance was made, was to create a case cognizable by the circuit court of the United States for the Western district of Virginia. In order to accomplish that object, the present action was commenced on the 2d day of April, 1893. Although the parties have agreed that the above conveyance passed 'all of the right, title, and interest' of the Virginia corporation to the corporation organized under the laws of Pennsylvania, it is to be taken, upon the present record, and in view of what the agreed statement of facts contains, as well as of what it omits to disclose, that the conveyance was made without any valuable consideration; that, when it was made, the stockholders of the two corporations were identical; that the Virginia corporation still exists, with the same stockholders it had when the conveyance of March 1, 1893, was made; and that, as soon as this litigation is concluded, the Pennsylvania corporation, if it succeeds in obtaining judgment against the defendants, can be required by the stockholders of the Virginia corporation, being also its own stockholders, to reconvey the lands in controversy to the Virginia corporation without any consideration passing to the Pennsylvania corporation.
Was the circuit court bound to take cognizance of this action, as one that involved a controversy between citizens of different states, within the meaning of the constitution and the acts of congress regulating the jurisdiction of the courts of the United States? This question can be more satisfactorily answered after we shall have adverted to the principal cases cited in argument. The importance of the question before us, to say nothing of the ingenious and novel mode devised to obtain an adjudication of the present controversy by a court of the United States, justifies a reference to those cases.
The first case is that of Maxfield v. Levy, 2 Dall. 381, Fed. Cas. No. 9,321, decided in the circuit court of the United States for the Pennsylvania district. That was an action of ejectment. The lessor of the plaintiff was a resident and citizen of Maryland, the defendant being a resident and citizen of Pennsylvania. A bill of discovery was filed against the lessor of the plaintiff, in which it was alleged that the conveyance of the premises in controversy was made by one Morris, a citizen of Pennsylvania, for no other purpose than to give jurisdiction to the circuit court. The answer to that bill admitted that 'the lessor of the plaintiff had given no consideration for the conveyance; that his name had been used by way only of accommodation to Morris.' Upon a rule to show cause why the action of ejectment should not be stricken from the docket, Mr. Justice Iredell held that the conveyance was 'colorable and collusive; and, therefore, incapable of laying a foundation for the jurisdiction of the court.' The full opinion is reported in 4 Dall. 330, Fed. Cas. No. 9,321.
In Hurst v. McNeil, 1 Wash. C. C. 70, 82, Fed. Cas. No. 6,936,-which was ejectment in a circuit court of the United States, the parties being alleged to be citizens of different states,-one of the questions was as to the jurisdiction of the circuit court. Mr. Justice Washington said: 'By the deed of the 15th January, 1774, from Timothy Hurst, Charles, Thomas, and John became entitled to the land therein conveyed, as tenants in common. The deed from Charles Hurst to Biddle, and the reconveyance to Charles, vested the legal estate in this land in Charles, but John and Thomas, it is admitted, were not thereby divested of their rights in equity, though they might be in law. Now, the deed to John Hurst was meant to be a real deed, or was merely fictitious, and intended to enable John Hurst to sue in this court. If the former, it was void, as the assent of the grantee was not given at the time, nor has it ever been since given; for, though the assent of a grantee to a deed, clearly for his benefit, may be presumed, yet, if a consideration is to be paid, as in this ( 1,000 is mentioned), the assent must be proved, or nothing passes by the deed. If it was not meant as a real conveyance, then it may operate to pass to John Hurst a legal title to his own third, which had become vested in Charles, but to which John still retained an equitable title. As to anything more, the deed cannot be supported; because, as to the rights of Charles and Thomas Hurst and John Baron, they remain unaffected by the deed to John; and being merely a fictitious thing, to give jurisdiction to this court, it will not receive our countenance.'
McDonald v. Smalley, 1 Pet. 620, 624, was a suit in equity in the circuit court of the United States for the district of Ohio to obtain a conveyance of a tract of land situated in that state, the plaintiff McDonald being a citizen of Alabama, and deriving title under one McArthur, a citizen of Ohio, and the defendants, Smalley and others, being citizens of Ohio. The circuit court dismissed the case for want of jurisdiction, and the judgment was reversed by this court. Chief Justice Marshall, speaking for the court, said: 'This testimony, which is all that was laid before the court, shows, we think, a sale and conveyance to the plaintiff, which was binding on both parties. McDonald could not have maintained an action for his debt, nor McArthur a suit for his land. His title to it was extinguished, and the consideration was received. The motives which induced him to make the contract, whether justificable or censurable, can have no influence on its validity. They were such as had sufficient influence with himself, and he had a right to act upon them. A court cannot enter into them when deciding on its jurisdiction. The conveyance appears to be a real transaction, and the real as well as nominal parties to the suit are citizens of different states. * * * The case depends, we think, on the question, whether the transaction between McArthur and McDonald was real or fictitious; and we perceive no reason to doubt its reality, whether the deed be considered as absolute or as a mortgage.'
In Smith v. Kernochen, 7 How. 198, 216, which was ejectment brought in the circuit court of the United States for the Southern district of Alabama, the plaintiff, a citizen of New York, was the assignee for value of a mortgage upon the premises executed by the owner in fee to an Alabama corporation to secure a sum of money. It was charged that the motive of the corporation in making the assignment was to obtain a decision of the federal courts upon certain matters in dispute between it and the owner in fee of the premises. One of the questions to be determined was whether any title passed to the plaintiff which the circuit court could enforce, if it appeared that the transfer of the mortgage was for the purpose of giving jurisdiction to that court, and to enable the company to prosecute its claim therein, and if it also appeared that the plaintiff was privy to such purpose when he took the assignment. This court, speaking by Mr. Justice Nelson, said: 'But the charge [to the jury], we think, may also be sustained upon the ground on which it was placed by the court below. For, even assuming that both parties concurred in the motive alleged, the assignment of the mortgage, having been properly executed and founded upon a valuable consideration, passed the title and interest of the company to the plaintiff. The motive imputed could not affect the validity of the conveyance. This was so held in McDonald v. Smalley, 1 Pet. 620. The suit would be free from objection in the state courts. And the only ground upon which it can be made effectual here is that the transaction between the company and the plaintiff was fictitious and not real, and the the suit, in contemplation of law, between the original parties to the mortgage. The question, therefore, is one of proper parties to give jurisdiction to the federal courts; no of title in the plaintiff. That would be a question on the merits, to decide which the jurisdiction must first be admitted. The true and only ground to objection in all these cases is that the assignor, or grantor, as the case may be, is the real party in the suit, and the plaintiff on the record but nominal and colorable, his name being used merely for the purpose of jurisdiction. The suit, is, then, in fact a controversy between the former and the defendants, notwithstanding the conveyance; and if both parties are citizens of the same state, jurisdiction, of course, cannot be upheld. McDonald v. Smalley, 1 Pet. 625; Maxfield v. Levy, 2 Dall. 381, 4 Dall. 330, Fed. Cas. No. 9,321; Hurst v. McNeil, 1 Wash. C. C. 70, 80, Fed. Cas. No. 6,936; Briggs v. French, 2 Sumn. 251, Fed. Cas. No. 1,871.'
The next case is Jones v. League, 18 How. 76, 81. The plaintiff, League, claimed to be a citizen of Maryland. The defendants were citizens of Texas. The action, which was trespass to try title to land, was brought in the district court of the United States for the district of Texas, in which state the land was situated. League claimed under a deed by one Power, a citizen of Texas. This court, speaking by Mr. Justice McLean, said: 'In this case jurisdiction is claimed by the citizenship of the parties. The plaintiff avers that he is a citizen of Maryland, and that the defendants are citizens of Texas. In one of the pleas, it is averred that the plaintiff lived in Texas 12 years and upwards, and that, for the purpose of bringing this suit, he went to the state of Maryland, and was absent from Texas about 4 months. The change of citizenship, even for the purpose of bringing a suit in the federal court, must be with the bona fide intention of becoming a citizen of the state to which the party removes. Nothing short of this can give him a right to sue in the federal courts, held in the state from whence he removed. If League was not a citizen of Maryland, his short absence in that state, without a bona fide intention of changing his citizenship, could give him no right to prosecute this suit. But it very clearly appears from the deed of conveyance to the plaintiff by Power, that it was only colorable, as the suit was to be prosecuted for the benefit of the grantor, and the one-third of the lands to be received by the plaintiff was in consideration that he should pay one-third of the costs, and superintend the prosecution of the suit. The owner of a tract of land may convey it in order that the title may be tried in the federal courts, but the conveyance must be made bona fide, so that the prosecution of the suit shall not be for his benefit. The judgment of the district court is reversed, for want of jurisdiction in that court.'
In Barney v. Baltimore City, 6 Wall. 280, 288, which was a suit in equity in the circuit court of the United States for Maryland for a partition of real estate and for an account of rents and profits, etc., it appeared that certain persons, citizens of the District of Columbia, conveyed their interest in the property to a citizen of Maryland. It was admitted that the conveyance was made for the purpose of conferring jurisdiction, was without consideration, and that the grantee, on the request of the grantors, would reconvey to the latter. Mr. Justice Miller, speaking for the court, said: 'If the conveyance by the Ridgeleys of the District to S.C.. Ridgeley of Maryland had really transferred the interest of the former to the latter, although made for the avowed purpose of enabling the court to entertain jurisdiction of the case, it would have accomplished that purpose. McDonald v. Smalley, and several cases since, have well established this rule. But in point of fact that conveyance did not transfer the real interest of the grantors. It was made without consideration, with a distinct understanding that the grantors retained all their real interest, and that the deed was to have no other effect than to give jurisdiction to the court. And it is now equally well settled, that the court will not, under such circumstances, give effect to what is a fraud upon the court, and is nothing more.'
None of these cases sustain the contention of the plaintiffs. All of them concur in holding that the privilege of a grantee or purchaser of property, being a citizen of one of the states, to invoke the jurisdiction of a circuit court of the United States for the protection of his rights as against a citizen of another state,-the value of the matter in dispute being sufficient for the purpose,-cannot be affected or impaired merely because of the motive that induced his grantor to convey, or his vendor to sell and deliver, the property, provided such conveyance or such sale and delivery was a real transaction, by which the title passed without the grantor or vendor reserving or having any right or power to compel or require a reconveyance or return to him of the property in question. We adhere to that doctrine.
In harmony with the principles announced in former cases, we hold that the circuit court properly dismissed this action. The conveyance to the Pennsylvania corporation was without any valuable consideration. It was a conveyance by one corporation to another corporation,-the grantor representing certain stockholders, entitled collectively, or as one body, to do business under the name of the Virginia Coal & Iron Company, while the grantee represented the same stockholders, entitled collectively, or as one body, to do business under the name of the Lehigh Mining & Manufacturing Company. It is true that the technical legal title to the lands in controversy is, for the time, in the Pennsylvania corporation. It is also true that there was no formal agreement upon the part of that corporation 'as an artificial being, invisible, intangible, and existing only in contemplation of law,' that the title should ever be reconveyed to the Virginia corporation. But when the inquiry involves the jurisdiction of a federal court,-the presumption in every stage of a cause being that it is without the jurisdiction of a court of the United States, unless the contrary appears from the record (Grace v. Insurance Co., 109 U.S. 278, 283, 3 Sup. Ct. 207; B ors v. Preston, 111 U.S. 252, 255, 4 Sup. Ct. 407),-we cannot shut our eyes to the fact that there exists what should be deemed an equivalent to such an agreement, namely, the right and power of those who are stockholders of each corporation to compel the one holding the legal title to convey, without a valuable consideration, such title to the other corporation. In other words, although the Virginia corporation, as such, holds no stock in the Pennsylvania corporation, the latter corporation holds the legal title, subject at any time to be divested of it by the action of the stockholders of the grantor corporation who are also its stockholders. The stockholders of the Virginia corporation,-the original promoters of the present scheme, and, presumably, when a question of the jurisdiction of a court of the United States is involved, citizens of Virginia,-in order to procure a determination of the controversy between that corporation and the defendant citizens of Virginia, in respect of the lands in that commonwealth, which are here in dispute, assumed, as a body, the mask of a Pennsylvania corporation for the purpose, and the purpose only, of invoking the jurisdiction of the circuit court of the United States, retaining the power, in their discretion, and after all danger of defeating the jurisdiction of the federal court shall have passed, to throw off that mask and reappear under the original form of a Virginia corporation; their right, in the meantime, to participate in the management of the general affairs of the latter corporation not having been impaired by the conveyance to the Pennsylvania corporation. And all this may be done, if the position of the plaintiffs be correct, without any consideration passing between the two corporations.
It is not decisive of the present inquiry that, under the adjudications of this court, the stockholders of the Pennsylvania corporation-the question being one of jurisdiction-must be conclusively presumed to be citizens of that commonwealth. Nor is it material, if such be the fact, that the Pennsylvania corporation could not have been legally organized, under the laws of that commonwealth, in February, 1893, unless some of the subscribers to its charter were then citizens of Pennsylvania. We cannot ignore the peculiar circumstances which distinguish the present case from all others that have been before this court. The stockholders who organized the Pennsylvania corporation were, it is agreed, the same individuals who, at the time, were the stockholders of the Virginia corporation. And under the rule of decision adverted to, the stockholders of the Virginia corporation, just before they organized the Pennsylvania corporation, as well as when the Virginia corporation conveyed the legal title, were presumably citizens of Virginia. If the rule which has been invoked be regarded as controlling in the present case, the result, curiously enough, will be that immediately prior to February, 1893, before the Pennsylvania corporation was organized, the stockholders of the Virginia corporation were, presumably, citizens of Virginia; that, a few days thereafter, in February, 1893, when they organized the Pennsylvania corporation, the same stockholders became, presumably, citizens of Pennsylvania; and that, on the 1st day of March, 1893, at the time the Virginia corporation conveyed to the Pennsylvania corporation, the same persons were presumably citizens, at the same moment of time, of both Virginia and Pennsylvania.
It is clear that the record justifies the assumption that there was no valuable consideration for the conveyance to the Pennsylvania corporation. Why should a valuable consideration have passed at all, when the stockholders of the grantor corporation and the stockholders of the grantee corporation were, at the time of the conveyance, the same individuals? Could it be expected that those stockholders, acting as one body, under the name of the Virginia Coal & Iron Company, would take money out of one pocket for the purpose of putting it into another pocket, which they had and used only while acting under the name of the Lehigh Mining & Manufacturing Company? A valuable consideration cannot be presumed merely because the agreed statement of facts recites that the Virginia corporation executed and delivered a deed of 'bargain and sale' conveying all its right, title, and interest to the Pennsylvania corporation. In view of the admitted facts, that recital must be taken as meaning nothing more than that the deed was, in form, one of bargain and sale, conveying the technical legal title. The deed cannot be regarded even as a deed of gift, unless we suppose that a body of stockholders, acting under one corporate name, solemnly made a gift of property to them selves acting under another corporate name. When it is remembered that the plaintiff in error stipulates that all that was done had for its sole object to create a case cognizable in the federal court, which would otherwise have been cognizable only in a court of Virginia, it is not difficult to understand why the agreed statement of facts failed to state, in terms, that a valuable consideration was paid by the grantee corporation.
The arrangement by which, without any valuable consideration, the stockholders of the Virginia corporation organized a Pennsylvania corporation and conveyed these lands to the new corporation for the express purpose-and no other purpose is stated or suggested-of creating a case for the federal court, must be regarded as a mere device to give jurisdiction to a circuit court of the United States, and as being, in law, a fraud upon this court, as well as a wrong to the defendants. Such a device cannot receive our sanction. The court below properly declined to take cognizance of the case.
This conclusion is a necessary result of the cases arising before the passage of the act of March 3, 1875, c. 137 (18 State. 470). The fifth section of that act provides that if, in any suit commenced in a circuit court, it shall appear to the satisfaction of that court, at any time after such suit is brought, that it 'does not really and substantially involve a dispute or controversy properly within the jurisdiction of said circuit court, or that the parties have been improperly or collusively made or joined, either as plaintiffs or defendants, for the purpose of creating a case cognizable * * * under this act, the said circuit court shall proceed no further therein, but shall dismiss the suit.' This part of the of 1875 was not superseded by the act of 1887, amended in 1888 (25 Stat. 434, c. 866). Its scope and effect were determined in Williams v. Nottawa Tp., 104 U.S. 209, 211, and Morris v. Gilmer, 129 U.S. 315, 9 Sup. Ct. 289. In the first of those cases the court, referring to the act of 1875, said: 'In extending a long way the jurisdiction of the courts of the United States, congress was specially careful to guard against the consequences of collusive transfers to make parties, and imposed the duty on the court, on its own motion, without waiting for the parties, to stop all further proceedings and dismiss the suit the moment anything of the kind appeared. This was for the protection of the court as well as parties against frauds upon its jurisdiction.'
The organization of the Pennsylvania corporation and the conveyance of it by the Virginia corporation, for the sole purpose of creating a case cognizable by the circuit court of the United States, is, in principle, somewhat like a removal from one state to another with a view only of invoking the jurisdiction of the federal court. In Morris v. Gilmer, just cited, the court said: 'Upon the evidence in this record, we cannot resist the conviction that the plaintiff had no purpose to acquire a domicile or settled home in Tennessee, and that his sole object in removing to that state was to place himself in a situation to invoke the jurisdiction of the circuit court of the United States. He went to Tennessee without any present intention to remain there permanently or for an indefinite time, but with a present intention to return to Alabama as soon as he could do so without defeating the jurisdiction of the federal court to determine his new suit. He was, therefore, a mere sojourner in the former state when this suit was brought. He returned to Alabama almost immediately after giving his deposition. The case comes within the principle announced in Butler v. Farnsworth, 4 Wash. C. C. 101, 103, Fed. Cas. No. 2,240, where Mr. Justice Washington said: 'If the removal be for the purpose of committing a fraud upon the law, and to enable the party to avail himself of the jurisdiction of the federal courts, and that fact be made out by his acts, the court must pronounce that his removal was not with a bona fide intention of changing his domicile, however frequent and public his declarations to the contrary may have been." 129 U.S. 328, 329, 9 Sup. Ct. 289.
Other cases in this court show the object and scope of the above provision in the act of 1875. In Farmington v. Pillsbury, 114 U.S. 138, 139, 145, 5 Sup. Ct. 807,-which was a suit upon coupons of bonds issued in the name of Farmington, a municipal corporation of Maine, the bonds themselves being owned by citizens of that state,-it appeared that the bonds were purchased and held by such citizens while a suit was pending in one of the courts of Maine to test their validity. The state court decided that they were void and inoperative. After that decision coupons of the same amount, gathered up and held by citizens of Maine, were transferred, by their agent, to Pillsbury, a citizen of Massachusetts, under an arrangement by which he gave his promissory note for $500, payable in two years from date, with interest, and agreed, 'as a further consideration for said coupons,' that if he succeeded in collecting the full amount thereof he would pay the agent, as soon as the money was gotten from the corporation, 50 per cent. of the net amount collected above the $500. Pillsbury then brought his suit on these coupons, he being a citizen of Massachusetts, against the town of Farmington, in the circuit court of the United States for the district of Maine. Here was, in form, a sale and delivery of coupons for a valuable consideration. This court regarded the whole transaction as a sham, and, speaking by Chief Justice Waite, said: 'It is a suit for the benefit of the owners of the bonds. They are to receive from the plaintiff one-half of the net proceeds of the case they have created by their transfer of the coupons gathered together for that purpose. The suit is their own in reality, though they have agreed that the plaintiff may retain one-half of what he collects for the use of his name and his trouble in collecting. It is true the transaction is called a purchase in the papers that were executed, and that the plaintiff gave his note for $500, but the time for payment was put off for two years, when it was, no doubt, supposed the result of the suit would be known. No money was paid, and, as the note was not negotiable, it is clear the parties intended to keep the control of the whole matter in their own hands, so that if the plaintiff failed to recover the money he could be released from his promise to pay.' The court, adopting the language of Mr. Justice Field, in City of Detroit v. Dean, 106 U.S. 537, 541, 1 Sup. Ct. 560, adjudged the transfer of the coupons to be 'a mere contrivance, a pretense, the result of a collusive arrangement to create,' in favor of the plaintiff, 'a fictitious ground of federal jurisdiction.' Referring to the above provision in the act of 1875, the court, after declaring it to be a salutary one, said that 'it was intended to promote the ends of justice, and is equivalent to an express enactment by congress that the circuit courts shall not have jurisdiction of suits which do not really and substantially involve a dispute or controversy of which they have cognizance, nor of suits in which the parties have been improperly or collusively made or joined for the purpose of creating a case cognizable under the act.' 114 U.S. 144, 5 Sup. Ct. 807.
These principles were reaffirmed in Little v. Giles, 118 U.S. 596, 603, 7 Sup. Ct. 32, in which Mr. Justice Bradley, speaking for the court, said that, under the act of 1875, where the interest of the nominal party is 'simulated and collusive, and created for the very purpose of giving jurisdiction, the court should not hesitate to apply the wholesome provisions of the law.'
The case before us is one that congress intended to exclude from the cognizance of a court of the United States. The Pennsylvania corporation neither paid nor assumed to pay anything for the property in dispute, and was invested with the technical legal title for the purpose only of bringing a suit in the federal court. As we have said, that corporation may be required, by those who are stockholders of its grantor, and who are also its own stockholders, at any time, and without receiving therefor any consideration whatever, to place the title where it was when the plan was formed to wrest the judicial determination of the present controversy from the courts of the state in which the land lies. It should be regarded as a case of an improper and collusive making of parties for the purpose of creating a case cognizable in the circuit court. If this action were not declared collusive, within the meaning of the act of 1875, then the provision making it the duty of the circuit court to dismiss a suit, ascertained at any time to be one in which parties have been improperly or collusively made or joined, for the purpose of creating a case cognizable by that court, would become of no practical value, and the dockets of the circuit courts of the United States will be crowded with suits of which neither the framers of the constitution nor congress ever intended they should take cognizance.
The judgment is affirmed.

## Notes

This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).
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