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Mason v. American Express Co.

July 2, 1964

FLORENCE W. MASON AND WILLARD M. MASON, PLAINTIFFS-APPELLANTS,
v.
AMERICAN EXPRESS COMPANY AND HOWARD L. CLARK, AS PRESIDENT OF AMERICAN EXPRESS COMPANY, DEFENDANTS-APPELLEES.



Before Waterman and Kaufman, Circuit Judges, and Dimock, District Judge*fn*

Author: Waterman

WATERMAN, Circuit Judge.

This appeal presents the important question of whether an unincorporated joint stock association, organized and existing under the laws of the State of New York, should, like a corporate body which has been incorporated there, be deemed a citizen of New York for the purpose of determining whether the diversity of citizenship requirements of Article III, Section 2 of the United States Constitution and 28 U.S.C. § 1332 have been met; or whether such an association is incapable of possessing citizenship for diversity purposes, so that the citizenship of its member shareholders must be looked to in order to determine the existence or absence of the requisite diversity of citizenship. We hold such an association to be a citizen of New York for the purposes of federal diversity jurisdiction.

Plaintiffs, citizens of New Jersey, brought suit against defendant, an express company organized as an unincorporated joint stock association under the laws of the State of New York*fn1, in the United States District Court for the Southern District of New York. As the suit was a simple personal injury action, federal jurisdiction could only have been based upon diversity of citizenship. The question whether such jurisdiction in fact existed was raised below by Judge Wyatt, on his own motion, during a separate trial before the court without a jury on one of two substantive defenses raised by defendant in its answer. After careful consideration of the problem, Judge Wyatt, in a thoughtful and scholarly opinion, 224 F.Supp. 288, concluded "[with] great reluctance and with equal regret" that the rule laid down in the 1889 U.S. Supreme Court case of Chapman v. Barney, 129 U.S. 677, 9 S. Ct. 426, 32 L. Ed. 800 (1889), required a determination that defendant joint stock association was itself incapable of possessing citizenship for diversity purposes; and, because some of defendant's more than 20,000 members were shown to be citizens of plaintiffs' home state of New Jersey, Judge Wyatt dismissed the case for want of complete diversity of citizenship between the parties. It is our considered judgment, however, that the Supreme Court has abandoned the artificial and mechanical rule of Chapman v. Barney in favor of a more flexible test for capacity for citizenship, a test which demands that consideration be given to whether an organization's essential characteristics sufficiently invest it, like a corporation, with a complete legal personality distinct from that of the members it represents. And as we are convinced that a New York joint stock association such as this defendant has been legally endowed with essential characteristics that make it resemble a corporate entity much more than a mere aggregation of individuals, we reverse.

An essential preliminary to a meaningful analysis of the problem presented by this case is a discussion of the reasons underlying the now firmly established principle that a corporation, for diversity purposes, is deemed to be a citizen of the state of its incorporation. That principle was finally definitely settled in 1853, in the case of Marshall v. Baltimore & O.R.R., 57 U.S. (16 How.) 314, 14 L. Ed. 953 (1853)*fn2 The Court in that case, desiring to prevent the avoidance of federal diversity jurisdiction through the use of the corporate device, noted that diversity jurisdiction had been conferred on federal courts "in order to the inviolable maintenance of that equality of privileges and immunities" accorded to the citizens of the several states*fn3, and averred that such a privilege could not legitimately be taken away from the citizens of one state because another state had permitted other citizens to act through the corporate business form. 57 U.S. at 326. The Court countered the argument that a corporation was a mere artificial person incapable of possessing citizenship with the observation that citizens who have become involved in a controversy with a corporation have not dealt with a mere metaphysical abstraction but with real persons. Although the Court rounded out its analysis with the establishment of a conclusive presumption that all stockholders are citizens of the state of their corporation's incorporation, it is clear that, as stated by another Court some years later, "those who formulated the rule found its theoretical justification only in the complete legal personality with which corporations are endowed."*fn4 Puerto Rico v. Russell & Co., 288 U.S. 476, 479, 53 S. Ct. 447, 448, 77 L. Ed. 903 (1933).

Thirty-five years after its decision in Marshall v. Baltimore & O.R.R., the Supreme Court handed down Chapman v. Barney, supra, in which it refused, in a brief opinion, to expand the rule which accorded separate citizenship to corporations so as also to embrace a New York joint stock association. As we have already indicated, and as we will explain more fully later in this opinion, our refusal to regard Chapman v. Barney as controlling law today stems primarily from our belief that the Supreme Court, some forty years after Chapman v. Barney, decided to depart from it. In addition, however, we think it advisable to note now several characteristics of the Chapman v. Barney decision which could well have forewarned of an eventual abandonment of it by the Court which handed it down, despite reaffirmation of it twice within the fifteen years following that decision, Thomas v. Board of Trustees, 195 U.S. 207, 25 S. Ct. 24, 49 L. Ed. 160 (1904); Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 20 S. Ct. 690, 44 L. Ed. 842 (1900), and despite a faithful adherence to it in the lower federal courts. See, e.g., in this Circuit, Levering & Garrigues Co. v. Morrin, 61 F.2d 115 (2 Cir. 1932), aff'd with grant of certiorari limited to another question, 289 U.S. 103, 53 S. Ct. 549, 77 L. Ed. 1062 (1933); Ex parte Edelstein, 30 F.2d 636 (2 Cir.), cert. denied, Edelstein v. Goddard, 279 U.S. 851, 49 S. Ct. 347, 73 L. Ed. 994 (1929)*fn5

The first point of significance about the Chapman v. Barney decision is that the jurisdictional question there dealt with, because of the peculiar combination of circumstances attending the appeal in the case, was neither briefed nor argued by either party. The case was submitted instead of argued, no appearance was entered for the appellee, and the appellant did not assign as error any lack of jurisdiction by the court below. The jurisdictional issue was raised by the Court on its own motion, and, after discussing briefly the three assignments of error set forth by the appellant, the Court in a brief, four-sentence paragraph discussed and resolved the question of whether the appellee joint stock corporation could have capacity for citizenship separate from the citizenships of its members. Of course this litigation history in no way detracts from the holding in that case, but it should, nevertheless, make a court today hesitant to follow the rule spawned by this 1889 decision if significant present-day reasons for not doing so exist. Secondly, the Court in Chapman v. Barney simply stated flatly that the appellee joint stock company could not "be a citizen of New York * * * unless it be a corporation," 129 U.S. at 682, 9 S. Ct. at 428 (emphasis in original), without making any effort to analyze the rationale of Marshall v. B. & O.R.R. in order to determine whether the reasons for extending citizenship to a corporation might apply with equal force to a joint stock association. This use of labels in place of a careful analysis was particularly ironic in view of the admonition in the Marshall opinion that "it is not reasonable that those who deal with such persons [persons doing business through corporations] should be deprived of a valuable privilege by a syllogism, or rather sophism, which deals subtly with words and names, without regard to the things or persons they are used to represent." 57 U.S. at 327-28. Thirdly, the Court failed even to mention its prior decision in Liverpool Insurance Co. v. Massachusetts, 77 U.S. (10 Wall.) 566, 19 L. Ed. 1029 (1870), where it had concluded that an English insurance company doing business in this country, though organized in England as a joint stock company, was, because of its essential characteristics, to be treated as if it were a corporation for purposes of the privileges and immunities clause of the United States Constitution and the Treaty of 1815 between this country and Great Britain*fn6 Finally, the Court in Chapman v. Barney appears to have directed so much of the little discussion it devoted to this general issue to emphasizing that New York could not make a joint stock association subject to the jurisdiction of a federal court merely by investing it with the capacity to sue in the name of its president that it failed to consider whether other legal characteristics accorded to a joint stock association under New York law might not have required that it be treated like a corporation for diversity of citizenship purposes*fn7

That a change from the Chapman v. Barney approach toward the status of a joint stock association was not too far off was indicated by the decision in United States v. Adams Express Co., 229 U.S. 381, 33 S. Ct. 878, 57 L. Ed. 1237 (1913), in which the Court held that a New York joint stock association was subject to the provisions of a federal statute regulating interstate commerce rates and was indictable and punishable as a separate entity, like a corporation, for violations of that statute. While that decision was primarily based on the interpretation accorded the relevant regulating statute, and while the Court cited Chapman v. Barney and cases following it in explanation of the unsuccessful appellant's argument and did not either explicitly approve or disapprove them, the characterization of a joint stock association under New York law which the Court in Adams Express used to bolster its decision is extremely significant when compared with Chapman v. Barney's appraisal of the same type of organization.Justice Holmes, writing for a unanimous Court, reviewed the basic characteristics with which joint stock associations had been endowed under New York law, and concluded that these "characteristics of separate being" showed "the semicorporate standing that these companies already had locally as well as in the popular mind." 229 U.S. at 390, 33 S. Ct. at 879.This was a far cry indeed from Chapman v. Barney's earlier description of a joint stock association as "a mere partnership." 129 U.S. at 682, 9 S. Ct. 426.

In 1933 the Supreme Court, in Puerto Rico v. Russell & Co., supra, decided to treat a Puerto Rican business organization as a citizen for jurisdictional purposes despite the fact that it was not a corporation; and although the break with the past there achieved was not as clean as it might otherwise have been, since the Court cited Chapman v. Barney without explicitly overruling it, we are nevertheless satisfied that the break was a clear one. Puerto Rico had brought suit in its Insular District Court against a business organization called a sociedad en comandita, which was organized under the laws of Puerto Rico but whose members were all domiciled outside of the island.The sociedad removed the case to the United States District Court for the District of Puerto Rico, which had jurisdiction over controversies involving federal questions and over those involving a requisite amount of money in which all of the parties on one side were either citizens of a foreign state or citizens of the United States not domiciled in Puerto Rico. It was on the question of the propriety of the removal that the case reached the United States Supreme Court. As the Court found that the case involved no federal question, and as all of the individual members of the sociedad were domiciled outside of Puerto Rico, the presence or absence of jurisdiction of the Puerto Rican Federal District Court over the case, and hence the propriety of the removal, depended upon whether the sociedad was, like a corporation, to be treated as a citizen and domiciliary of Puerto Rico.

The Court, citing Marshall v. Baltimore & O.R.R., supra, and cases following it, first stated that corporations had been treated as citizens for diversity purposes because "treatment of the aggregate for other purposes as a person distinct from its members, with capacity to perform all legal acts, made it possible and convenient to treat it so for purposes of federal jurisdiction as well," 288 U.S. at 480, 53 S. Ct. at 448, and then moved to a consideration of whether the essential characteristics of a sociedad under Puerto Rican law demanded that it, like a corporation, be considered capable of possessing a separate citizenship.

Among the characteristics of the sociedad under Puerto Rican law which the Court listed as important indicia of that organization's status as a distinct legal person were the following: its creation by articles of association filed as public records; its capacity to contract, own property, transact business, and sue and be sued in its own name and right; its ability to endure for a prescribed period regardless of the death or withdrawal of individual members; the preference granted its creditors to reach its property and assets ahead of the creditors of its individual members; and the vesting of the powers of management over its affairs in the hands of managers who alone could perform acts legally binding on it. The Court recognized that a sociedad differed from a corporation in that its members were personally liable for the debts of the sociedad in the event that the organization's assets were insufficient to satisfy such debts, and the Court proceeded to reject this as a legitimate reason for refusing to accord a sociedad the capacity for citizenship possessed by a corporation, stating that "this liability is of no more consequence for present purposes than that imposed on corporate stockholders by the statutes of some states." 288 U.S. at 481, 53 S. Ct. at 449. The Court completed its analysis of the nature of the sociedad by concluding that it was a "juridical person" with a personality "so complete in contemplation of the law of Puerto Rico that we see no adequate reason for holding that the sociedad has a different status for purposes of federal jurisdiction than a corporation organized under that law." 288 U.S. at 482, 53 S. Ct. at 449*fn8 This systematic appraisal of an organization's essential features under the law of its creation, in order to determine whether these features entitled it to the same treatment as a separate juridical person for diversity purposes as that accorded a corporation, must be regarded as representing a clear departure from Chapman v. Barney's basic assumption that only corporations were entitled to treatment as separate citizens for diversity purposes, and a departure from that case's consequent mechanical determination of the issue of capacity for citizenship on the basis of whether a state had or had not pinned on an organization the corporate label.

While Puerto Rico v. Russell & Co.'s citation of Chapman v. Barney without explicitly overruling that decision, coupled with certain language from the Puerto Rico v. Russell & Co. opinion, has led at least one other court than the court below to conclude that the decision in Puerto Rico v. Russell & Co. left the rule of Chapman v. Barney intact, Brocki v. American Express Co., 279 F.2d 785, 788-789 (6 Cir.), cert. denied, 364 U.S. 871, 81 S. Ct. 113, 5 L. Ed. 2d 92 (1960), we are not so persuaded*fn9 There are two portions of the Puerto Rico v. Russell & Co. opinion which have been used to support the argument that the rule of Chapman v. Barney was there left undisturbed. One is the statement, made in connection with a discussion of the general reasons for treating an organization as a separate entity for diversity purposes, that "status as a unit for purposes of suit alone, as in the case of a joint-stock company [citing Chapman v. Barney and a case from this Circuit following it], or a limited partnership, not shown to have the other attributes of a corporation [citations], has been deemed a legal personality too incomplete; what was but an association of individuals for so many ends and a juridical entity for only a few was not easily to be treated as if it were a single citizen." 288 U.S. at 480, 53 S. Ct. at 448. The other is the two-sentence introduction to the paragraph immediately following the above: "The tradition of the common law is to treat as legal persons only incorporated groups and to assimilate all others to partnerships. [Citing Chapman v. Barney and Great Southern Fire Proof Hotel Co. v. Jones, supra.] The tradition of the civil law, as expressed in the Code of Puerto Rico, is otherwise." Ibid. There are a number of reasons why we cannot regard these two statements plucked out of the Puerto Rico v. Russell & Co. opinion as reasonably supporting to our satisfaction the position that that case did not really represent a break with the tradition of Chapman v. Barney.

First, the very sharp contrast between the exclusive mechanical rule of label denomination adopted in Chapman v. Barney and the detailed analysis of essential legal characteristics which was the very heart of the decision in Puerto Rico v. Russell & Co. should serve to point up the unwisdom of concluding, on the basis of language spotlighted in the latter, that these two cases are in harmony. Moreover, the very nature of the citation to Chapman v. Barney indicates that, while the Court in Puerto Rico v. Russell & Co. did not explicitly overrule the decision, it did effectively confine within rather narrow limits the declared scope of the holding in the older case. Chapman v. Barney and cases following it were cited for the proposition that "status as a unit for purposes of suit alone * * * has been deemed a legal personality too incomplete," thus highlighting that portion of Chapman v. Barney which was concerned with emphasizing that one of the states, by granting an organization the capacity to sue and be sued, could not make that state-created organization subject to federal diversity jurisdiction*fn10 This limitation upon the scope of Chapman v. Barney leaves a court free - as indeed, it left the Court in Puerto Rico v. Russell & Co. free - to consider, in a fashion completely contrary to the spirit of Chapman v. Barney, the other essential characteristics of an organization under review to see whether those characteristics make it a complete enough legal personality to warrant treating it as a separate entity for diversity jurisdiction purposes. Furthermore, this analysis of essential legal characteristics also demonstrates the unreasonableness of concluding that Puerto Rico v. Russell & Co. was in tune with the label denominating tradition of Chapman v. Barney because of the Court's reference to the "tradition of the civil law" as expressed in the Code of Puerto Rico.What the Court in Puerto Rico v. Russell & Co. demonstrated it was concerned with was not the label which Puerto Rican civil law had affixed to a sociedad, but rather the nature of the collection of meaningful legal characteristics with which that law had endowed a Puerto Rican sociedad*fn11 Finally, as will be presently demonstrated, the remarkable extent to which a New York joint stock association resembles the sociedad which was subject to review in Puerto Rico v. Russell & Co. makes it impossible for us to adopt the position that the Court in Puerto Rico v. Russell & Co., in ruling that a sociedad was to be treated as a separate entity for diversity purposes, did not really undercut the holding of Chapman v. Barney. Having thus rather laboriously set to rest the matter of the vitality of Chapman v. Barney, we move now to a discussion, under the test set out in Puerto Rico v. Russell & Co., of the treatment to be accorded the New York joint stock association in the case before us.

Under New York law an unincorporated joint stock association, such as this defendant, is created pursuant to written articles of association which must be filed, like a certificate of incorporation, as a public record. New York General Associations Law, §§ 2-4. The association may, like this defendant which has more than 20,000 shareholders, have capital stock divided into shares, and provision may be made in the articles of association that upon the death of a shareholder or the transfer of his shares no dissolution is to be worked on the association. New York General Associations Law, §§ 2, 3, 5.A dissolution may take place, however, as it may with a corporation, through group shareholder action or judicial order. Compare New York General Associations Law, § 5 with New York Business Corporation Law, §§ 1001-02, 1101-04. Powers of management over the association's affairs may be concentrated in the sole hands of directors, who may number as few as three. New York General Associations Law, § 3. The association may purchase, take, hold, and convey real property in the name of its president under a variety of circumstances, New York General Associations Law § 6, and an action may be maintained by or against such an association in the name of its president or treasurer, without joining as parties the shareholder members. New York Constitution, art. 10, § 4; New York General Associations Law, §§ 12, 13*fn12 Moreover, shareholder members of a joint stock company may themselves bring suit against the association. Westcott v. Fargo, 61 N.Y. 542 (1875); Gillette v. Allen, 184 Misc. 424, 53 N.Y.S.2d 920 (S. Ct., Monroe Cty.), rev'd on other grounds, 269 App.Div. 441, 56 N.Y.S.2d 307 (4th Dep't 1945). Shareholders of a joint stock association are personally liable for the debts of the association, e.g., People ex rel. Winchester v. Coleman, 133 N.Y. 279, 31 N.E. 96, 16 L.R.A. 183 (1892); National Bank v. Van Derwerker, 74 N.Y. 234 (1878), but once an action has been brought against the association the individual shareholders may not be sued on the same cause unless a final judgment against the association has been returned wholly or partially unsatisfied. New York General Associations Law, § 16. On the basis of these and similar statutory provisions, New York's decisional law has for many years consistently recognized the corporate characteristics of joint stock associations. See, e.g., Hibbs v. Brown, 190 N.Y. 167, 82 N.E. 1108 (1907); Matter of Jones' Estate, 172 N.Y. 575, 65 N.E. 570, 60 L.R.A. 476 (1902); People ex rel. Winchester v. Coleman, supra; Jones v. Healy, 184 Misc. 923, 55 N.Y.S.2d 349 (Sup.Ct.N.Y.Cty.1945), aff'd mem., 270 App.Div. 895, 62 N.Y.S.2d 605 (1st Dep't 1946). In Hibbs v. Brown, supra, New York's leading case on the nature of the joint stock association, the Court of Appeals, holding that, ...


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