Court Opinion

ID: 2963748
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:14:40.757079+00
Date Added: 2024-06-11T11:42:45.569941
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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.

                                ______________________
        No. 95-1544

                           TOSTE FARM CORPORATION, ET AL.,

                               Plaintiffs, Appellants,

                                          v.

                                HADBURY, INC., ET AL.,

                                Defendants, Appellees.

                                 ____________________

                    APPEALS FROM THE UNITED STATES DISTRICT COURT
                           FOR THE DISTRICT OF RHODE ISLAND

                [Hon. Raymond J. Pettine, Senior U.S. District Judge]
                                          __________________________

                                 ____________________

                                        Before

                                 Lynch, Circuit Judge,
                                        _____________
                     Aldrich and Campbell, Senior Circuit Judges.
                                           _____________________
                                 ____________________

            John Blish  with whom Stephen J.  Reid, Jr.,  Raymond A. Marcaccio
            __________            _____________________   ____________________
        and Blish & Cavanagh were on brief for plaintiffs. 
            ________________
            John William Ranucci for defendants.
            ____________________
                                 ____________________
                                   December 4, 1995
                                 ____________________

                      CAMPBELL,   Senior  Circuit  Judge.    These  cross
                                  ______________________

            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

                                
            ____________________

            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.

                                         -2-

            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

                                
            ____________________

            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

                                
            ____________________

            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.

                                
            ____________________

                      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,
            ______________                                  ____________

            Desarrollos Metropolitanos, Inc.  v. Taber  Partners, I,  ___
            ________________________________     __________________

            U.S.  ___, 114 S. Ct.  82 (1993);   Rodriguez-Diaz v. Sierra-
                                                ______________    _______

            Martinez, 853 F.2d 1027, 1029 (1st Cir. 1988).  The burden of
            ________

            proof  is  on  the  party  attempting  to  sustain  diversity

                                         -6-

            jurisdiction.  Thomson v. Gaskill, 315  U.S. 442, 446 (1942);
                           _______    _______

            Media  Duplication Servs.,  Ltd. v.  HDG Software,  Inc., 928
            ________________________________     ___________________

            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.  
                                       __________

                      For   over   a   century,   Congress   has   denied

            jurisdiction  of  suits  where  a  party  is  "improperly  or

            collusively  made or  joined to  invoke . . . jurisdiction."6

                                
            ____________________

            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

                                         -7-

            The Supreme Court in  Williams v. Nottawa, 104 U.S.  209, 211
                                  ________    _______

            (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.
                                                               _______

            AVCO Corp., 425 F.2d 1030, 1034 (2d Cir. 1969); 14 Charles A.
            __________

            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
               _______________                                     ______

            v.  Mafnas, 973 F.2d 803,  809 (9th Cir.  1992) ("The federal
                ______

            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,
                                                              __________

            882 F. Supp. at 247.

                      In its most recent pronouncement, the Supreme Court

            has construed   1359 in a similarly broad manner.  In  Kramer
                                                                   ______

            v. Caribbean  Mills,  Inc., 394  U.S. 823  (1969), the  Court
               _______________________

            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
                                     ______

            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;
                          ________ __________________

            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

                                
            ____________________

            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
            _______
            for  "facially  valid  business  purpose"  not  collusive  or
            improper);  AmeriFirst Bank v. Bomar, 757 F. Supp. 1365, 1372
                        _______________    _____
            (S.D.  Fla. 1991);    Blythe Indus.,  Inc.  v.   Puerto  Rico
                                  ____________________     ______________
            Aqueduct and Sewer Auth., 573 F. Supp. 563, 564 (D.P.R. 1983)
            ________________________
            (diversity   jurisdiction   denied  where   "[n]o  legitimate
            commercial interest  is apparent from the  assignment").  But
                                                                      ___
            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").

                                         -10-

            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  &
                                               __________________________

            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

                                
            ____________________

            8.  When Black  & White Taxicab was decided a corporation was
                     ______________________
            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 &
                                                                  _______
            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.

                                         -11-

            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).
                     _____    _____

                      Black & White  Taxicab has been sharply  criticized
                      ______________________

            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]").  
                    _____________________

                      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
                                   ________________     _______

            338 (1st Cir. 1973)  (per curiam).  In Amelung,  the district
                                                   _______

            court  dismissed  the  original  claim  of  a   Massachusetts

                                
            ____________________

            

                                         -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
                                                          _____
                      &   White,   see  Kramer   . . . to  this
                      _________    ___  ______
                      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  
                   _____________________

                      In the  instant case, the  district court concluded

            that  the factual  situation "approximates that  in Amelung."
                                                                _______

            Toste  Farm, 882 F. Supp. at 246.   We agree.  As in Amelung,
            ___________                                          _______

            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
            _______

                                
            ____________________

            9.  Another court  has taken  a similar  approach to  that in
            Amelung.   In Piermont Heights, Inc. v. Dorfman, 820 F. Supp.
            _______       ______________________    _______
            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
            _______
            contrary to  the objectives of Section  1359 and inconsistent
            with  the principle that federal courts are courts of limited
            jurisdiction") (footnotes omitted).

                                         -14-

            from the legal claim.  Had TFCI assigned its  interest in the

            claim to TFC in New York,   1359 would plainly, under Kramer,
                                                                  ______

            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,

                                         -15-

            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
                                    __________

            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
            _______

            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
            ______

            controlled    as the district court correctly found    by our

                                         -16-

            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).  
            ____

                                
            ____________________

            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.  

                                         -17-

                      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.  

                                
            ____________________

            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.  

                                         -18-

                      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

                                
            ____________________

            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.

                                         -19-

            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.
                      __________________________________________

                                
            ____________________

            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. 

                                         -20-