Opinion ID: 474501
Heading Depth: 3
Heading Rank: 3

Heading: The Substantial Stake Test

Text: 27 The difficulties inherent in the motive/function test have led some courts to apply the substantial stake test, under which, if a representative has more than a nominal interest in the litigation, his appointment in not proscribed by [section 1359], id. at 1034 (footnote omitted). Thus, in Bishop v. Hendricks, 495 F.2d 289 (4th Cir.1974), cert. denied, 419 U.S. 1056, 95 S.Ct. 639, 42 L.Ed.2d 653 (1975), the Fourth Circuit noted that the courts should evaluate the reasons for the appointment in order to determine whether the fiduciary sustains more than a nominal relationship to the litigation, id. at 294 (footnote omitted), or possesses 'no stake in the litigation,'  id. at 295 (footnote omitted) (citing Dougherty v. Oberg, 297 F.Supp. 635, 639 (D.Minn.1969)). The administrator in Bishop had nothing to gain by the suit save a fee for the use of his name if successful, and, if the suit is lost, nothing to lose. Id. (footnote omitted). The court added that the beneficiaries chose counsel to try the wrongful death claim, that this choice was substantially the only function the administrator in a case such as this would perform, and that the administrator was therefore no more than a straw party whose appointment could not support diversity jurisdiction. Id. at 296. 28 In Bettin v. Nelson, 744 F.2d 53 (8th Cir.1984), the court upheld diversity jurisdiction where the decedent's out-of-state parents were appointed as co-administrators. The Eighth Circuit, while citing McSparran, found that the parents, although not the beneficiaries of the court actions, are interested persons entitled to have their appointments respected in determining diversity jurisdiction. Id. at 56 (emphasis added). This conclusion rested on (1) the possibility that the parents could recover, from the proceeds of the wrongful death actions, burial expenses they had advanced and (2) the existence of the parental relationship. Id. 18 29 Hackney v. Newman Memorial Hospital, Inc., 621 F.2d 1069, 1071 (10th Cir.), cert. denied, 449 U.S. 982, 101 S.Ct. 397, 66 L.Ed.2d 244 (1980), observed that courts had found appointment of straw parties collusive but had, in dictum, left open the possibility that jurisdiction would exist if the representative had a substantial relationship to the litigation. Hackney accepted the dictum and found that the appointment of plaintiff, out-of-state daughter of the decedent and successor to her in-state sister as administratrix, did not violate section 1359. The court noted that Oklahoma law gave full control over the suit to the administratrix, as opposed to the beneficiaries, id. at 1071, and that plaintiff was to be a beneficiary of the suit, id. The Tenth Circuit characterized plaintiff as having a real, substantive stake in the litigation, id., and held immune from challenge, for diversity purposes, an appointment of a fiduciary who has a substantial beneficial interest in the litigation being conducted, id. 30 To the same effect is Betar v. De Havilland Aircraft of Canada, Ltd., 603 F.2d 30 (7th Cir.1979), cert. denied, 444 U.S. 1098, 100 S.Ct. 1064, 62 L.Ed.2d 785 (1980). There, the Seventh Circuit ordered remand to state court of an action removed by defendant on diversity grounds. Plaintiff, a public administrator diverse from the defendant, objected to removal, arguing that the test is not his citizenship but that of the statutory beneficiaries of the action. Id. at 32. Although Betar does not construe section 1359, because plaintiff argued against diversity rather than for it, language in the opinion of the court indicates that the court looked to the substantiality of the named plaintiff's stake in the outcome. Id. at 35. The court concluded that since the plaintiff lacked the requisite stake in the outcome to invoke diversity jurisdiction when he commenced the action, the defendant was similarly not entitled to remove the action. Id. at 36. 19 31 It should not be surprising that cases applying the substantial stake test have cited McSparran, since one way to determine whether a party has a substantial stake in an action is to inquire into the motives for appointing that party as a fiduciary. Likewise, cases applying the motive/function test may examine a party's stake in the outcome as a clue to the reasons for his appointment. Thus, the two subjective tests that have been applied by the courts of appeals may often be blended into an ad hoc balancing approach. Usually, it will make no difference which test is applied, because there usually will be a proper, non-collusive motive for appointment of a fiduciary who has a substantial stake in the outcome. But it is possible that in some cases a party might pass the motive/function test while failing the substantial stake test, or vice versa. See Bianca v. Parke-Davis Pharmaceutical Division of Warner-Lambert Co., 723 F.2d 392, 398-99 (5th Cir.1984) (although it is apparent that Bianca has no substantial stake in the outcome of the wrongful death action, dismissal is reversed and district court is instructed on remand to test for motive with substantiality of stake a relevant but not controlling indicator). 20 32 Professor Mullenix has summarized the criticism of the substantial stake test: 33 Critics of the substantial stake test argue that it is philosophically unsound and inconsistent with [section 1359]. Under this approach, a court may sustain diversity jurisdiction when an administrator has a substantial stake in the litigation, even if the court finds that he was chosen in order to create diversity. Conversely, jurisdiction can be denied when a fiduciary was not appointed to manufacture diversity, if the administrator lacks the requisite substantial stake required to prosecute the wrongful death action. These critics characterize the substantial stake test as judicially-created control over diversity jurisdiction that intrudes on the congressional prerogative to determine the scope of diversity jurisdiction. Thus, they argue, a court cannot prohibit an administrator's access to a federal court just because he lacks a certain interest, that is, whether or not he has a substantial stake in the outcome of the litigation. 34 In addition, the critics argue that the substantial stake jurisdictions incorrectly emphasize the substantive validity of an appointment, ignoring inquiries into motive. The plain language of [section 1359] suggests that the motives underlying a representative's appointment must govern the jurisdictional inquiry. If the representative is not appointed solely to manufacture diversity, then his lack of stake in the litigation alone cannot trigger the prohibition against manipulatively-created jurisdiction. The substantial stake test therefore improperly engrafts a jurisdictional requirement on parties that is not mandated by statute or the Constitution. As such, the test is an impermissible exercise of judicial power. 35 Mullenix, 70 Cornell L.Rev. at 1036-37 (footnotes omitted). 21