Bankers Trust Co. v. Texas & Pacific Railway Co.
The Supreme Court affirmed the dismissal of a lawsuit seeking to foreclose a mortgage on the Texas and Pacific Railway, ruling that a 1915 federal law stripped federal courts of jurisdiction over suits against railroads that rested only on the fact that Congress had chartered them.
The Court also held that the railway's federal charter did not itself grant a right to sue in federal court, and that a corporation created by Congress is not a citizen of any state for purposes of suing across state lines, closing off both possible paths to federal jurisdiction.
“A corporation is never merely created. Being artificial, possessing no faculties or powers save such as are conferred by law, and having in legal contemplation no existence apart from them, its incorporation consists in giving it individuality and endowing it with the faculties and powers which it is to possess.”
Explaining why a railroad's federally granted powers could not be used to sidestep the 1915 jurisdiction-stripping law.
How it got here: The trustee sued in federal district court in Texas; the court dismissed for lack of jurisdiction, and the trustee took a direct appeal to the Supreme Court.
The Case in Depth
What happened
A New York trust company, acting as mortgage trustee, sued to foreclose a railroad mortgage covering properties of the Texas and Pacific Railway Company, a corporation originally chartered by acts of Congress, and the New Orleans Pacific Railway Company, a Louisiana corporation. The trustee claimed the railroads had defaulted on the mortgage's terms and sought foreclosure and related relief in federal court.
The question before the Court
Could a bondholders' trustee sue in federal court to foreclose a mortgage on a railroad that Congress had chartered, even though a 1915 law barred federal jurisdiction based solely on federal incorporation?
Why it matters
Bondholders and other parties dealing with the handful of railroads originally chartered by Congress could no longer assume they had an automatic path into federal court based on that charter alone. They would need an independent basis — such as true diversity of citizenship or a claim genuinely arising under federal law — to sue those railroads in federal court.
What changes now
The dismissal for lack of jurisdiction was affirmed, meaning the trustee could not pursue the foreclosure suit in this federal court on the grounds asserted. This is a final decision on the jurisdictional question, though nothing in the opinion prevents the trustee from pursuing foreclosure remedies in a court that does have proper jurisdiction, such as a state court or federal court on some other valid jurisdictional basis.
What this does not decide
The Court did not decide the merits of the foreclosure claim itself, only whether the federal district court had jurisdiction to hear it. It also left open whether some other jurisdictional basis, apart from federal incorporation or the claimed diversity of citizenship, might support a suit against this railroad in federal court.
Concurrences and dissents
How the Justices voted
Majority (1). Justice Van Devanter (author).
How the Court got there
The legal reasoning, step by step
- The Court first considered whether the railway's federal charter clause allowing it to 'sue and be sued... in all courts of law and equity within the United States' itself granted federal jurisdiction, concluding it did not — such language merely gives a corporation legal capacity to appear in whatever court would otherwise have authority over the case, rather than creating a special jurisdictional shortcut.
- The Court explained that under long-standing precedent, a lawsuit by or against a corporation chartered by Congress normally counts as a case 'arising under' federal law, because the corporation's very existence and all its powers come from that federal charter.
- The Court then turned to a 1915 amendment to the Judicial Code, which specifically declared that no federal court has jurisdiction over a suit against a railroad company merely because that company was incorporated under an act of Congress; the Court read this as a deliberate change stripping away the traditional basis for federal jurisdiction described above.
- The Court rejected the trustee's argument that the 1915 law only barred relying on the bare fact of incorporation while still permitting reliance on specific powers granted by the same federal charter (such as the power to execute the mortgage), reasoning that incorporation itself consists precisely of the grant of all such powers, so relying on any charter-derived power was equally barred.
- Finally, the Court held that a corporation chartered by Congress, whose operations span multiple states, is not a citizen of any single state for diversity purposes, so the suit could not proceed as one between citizens of different states either.
Doctrinal impact
Cases affected by this decision
Reaffirms Osborn v. Bank of the United States (9 Wheat. 738)
Relied on for the rule that suits by or against a federally chartered corporation arise under federal law.
Reaffirms Bank of the United States v. Deveaux (5 Cranch 61)
Used to confirm that a 'sue and be sued' charter clause gives capacity to sue, not special jurisdiction.
Distinguishes Male v. Atchison, Topeka & Santa Fe Ry. (240 U.S. 97)
Held not controlling because it did not involve a congressionally chartered railroad and predated the 1915 law.