Kramer v. Caribbean Mills, Inc.
Headline: Court bars a lawyer’s sham purchase of a claim to create federal diversity jurisdiction, blocks the federal suit, and sends the dispute back to state court, limiting assignments used to reach federal court.
Holding: The Court held that the assignment to a Texas lawyer was improperly and collusively made to create federal diversity jurisdiction, so the federal district court lacked jurisdiction and the plaintiff must pursue relief in state court.
- Prevents using sham assignments to shift contract cases into federal court.
- Requires such disputes to be litigated in state court rather than federal court.
- Discourages assigning claims solely to create federal diversity jurisdiction.
Summary
Background
A Haitian company (Caribbean Mills, Inc.) agreed in 1959 to buy stock from a Panamanian company (Panama and Venezuela Finance Company) for $85,000 down and $165,000 in annual installments. Payments were never made. In 1964 Panama assigned its claim to a Texas lawyer, Kramer, for $1, with a separate promise that Panama would receive 95% of any net recovery. Kramer sued Caribbean in federal court in Texas, claiming diversity of citizenship; the district court tried the case and a jury returned a $165,000 verdict. The Court of Appeals reversed, finding the assignment collusive under 28 U.S.C. §1359, and the Supreme Court granted review.
Reasoning
The central question was whether the assignment was “improperly or collusively made” to invoke federal court power. The Court examined the statute’s purpose and precedents, notably Farmington v. Pillsbury, and found the assignment was a device to manufacture federal jurisdiction. Kramer had no prior connection to the claim, would keep only about 5% while Panama retained 95%, would lose only $1 if unsuccessful, and candidly admitted the assignment was motivated to create diversity. The Court rejected the idea that state-law validity controls federal jurisdiction and held §1359 applies to alienage diversity as well.
Real world impact
The Court concluded the district court lacked jurisdiction, affirmed the Court of Appeals, and directed that Kramer seek relief in state court. The opinion makes clear that buying a claim mainly to get into federal court will not work, and it notes a Texas tolling statute that appears to preserve Kramer’s ability to press his claim in state court.
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