ERROR TO THE CIRCUIT COURT OF THE UNITED STATES FOR THE WESTERN DISTRICT OF VIRGINIA.
MR. JUSTICE HARLAN, after stating the facts as above reported, delivered the opinion of the court.
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 Maxwell's Lessee v. Levy, 2 Dall. 381, 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.
In Hurst's Lessee v. McNeil, 1 Wash. C.C. 70, 82 -- 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, ($: 1000 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 justifiable 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 suit still, 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; not 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 of 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. 1 Pet. 625; 2 Dall. 381; 4 Dall. 330; 1 Wash. C.C. 70, 80; 2 Sumner, 251."
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. 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 twelve 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 four 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 Ridgelys of the District to S. C. Ridgely 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 vendee 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 and 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 and 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. American Central Insurance Co., 109 U.S. 278, 283, Bors v. Preston, 111 U.S. 252, 255 -- 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 and 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 ...