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Feuchtwanger Corp. v. Lake Hiawatha Federal Credit Union

decided: November 20, 1959.


Author: Hastie

Before GOODRICH, STALEY and HASTIE, Circuit Judges.

HASTIE, Circuit Judge.

This is an appeal from a judgment denying the demand of the assignee of a seller of certain machinery for a sum of money held in escrow for release to the assignee on compliance with conditions stated in the escrow agreement. Federal jurisdiction is based upon diversity of citizenship and all relevant transactions occurred in New Jersey.

A doubt concerning federal jurisdiction must be resolved before the merits of the controversy can be reached. This suit is by a New York corporation against a federally incorporated credit union. Does the diversity jurisdiction of the federal courts extend to such a case?

Lake Hiawatha Federal Credit Union is a corporation created under and in accordance with the provisions of the Federal Credit Union Act. 12 U.S.C.A. §§ 1751-1772. Such a credit union is a membership corporation described by the statute as "a cooperative association * * * for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes". § 1752. Membership in an individual credit union is by statute "limited to groups having a common bond of occupation, or association, or to groups within a well-defined neighborhood, community, or rural district". § 1759. Consistent with the statute, the federal charter of the present credit union specifies and limits its place of business and its membership. Section 2 of the charter provides that "[this] credit union will maintain its office at Lake Hiawatha, New Jersey and will operate in the following territory Lake Hiawatha, New Jersey". Section 5 stipulates that "[the] field of membership will be limited to those having the following common bond of association, occupation or residence: permanent residents of and those working in Lake Hiawatha, New Jersey; employees of this credit union; members of their immediate families; and organizations of such persons".

Thus, the statute and the charter combined to make this a peculiarly local institution of a single community in the state of New Jersey. However, the Federal Credit Union Act itself says nothing about the citizenship of corporations created under it. The judge-made rule which for diversity purposes attributes to a corporation citizenship in the state of its incorporation simply does not apply to a corporation not chartered by any state. In these circumstances, it is suggested that localization of a federal corporation is in itself and without more an acceptable basis for finding citizenship for diversity purposes.

Insofar as the citizenship concept is applicable at all to a corporation, its invocation to relate such a membership corporation as we have here to the place where its members live or work and its business is required to be transacted is logical. Moreover, local bias in favor of local persons and institutions in controversies with strangers, a principal justification for diversity jurisdiction, is more likely to be present in the case of a corporation thus localized in fact than one which is connected with the state only in the formal sense of having been incorporated there. If citizenship is to be attributed to any corporation for diversity purposes, it makes sense to apply it in this situation.

In early cases which involved federally chartered banks federal courts were disposed to find two separate bases of federal jurisdiction. First, federal question jurisdiction was thought to attach merely because a corporation was federally chartered. Second, a notional bank was regarded as a citizen of the place where it did business for purposes of diversity jurisdiction. As the Supreme Court put it in Petri v. Commercial National Bank, 1892, 142 U.S. 644, 648, 12 S. Ct. 325, 326, 35 L. Ed. 1144, "[suits] by or against national banks might therefore be brought or removed upon the ground of diverse citizenship, or of subject-matter". However, in the 1880's concern to reduce the unmanageable and rapidly growing jurisdiction of the federal courts*fn1 resulted in legislation eliminating federal question jurisdiction based merely on federal incorporation and, at the same time, making certain that diversity jurisdiction remained possible by expressly providing, as the courts had already held,*fn2 that such a corporation should be deemed a citizen of the state of its location. 24 Stat. 552, now substantially reenacted in 28 U.S.C. § 1348. In brief, "[so] far as the mere source of its incorporation rendered suits to which a national bank might be a party, cognizable by the * * * [federal courts], that was taken away, but the jurisdiction which those courts might exercise in such suits when arising between citizens of different states * * * remained unchanged". See Petri v. Commercial National Bank, supra, 142 U.S. at page 649, 12 S. Ct. at page 326. This history was recognized and respected in Bankers' Trust Co. v. Texas & Pacific R. Co., 1916, 241 U.S. 295, 36 S. Ct. 569, 60 L. Ed. 1010, where the Supreme Court held that an interstate railroad chartered by the United States was not a citizen of any state for diversity purposes, but at the same time was careful to distinguish this situation from that of a federal corporation, the activities and operations of which were confined to a single state.

Recently, a district court, facing in the case of a federal savings and loan association the very jurisdictional problem we have here with a federal credit union, concluded that localization of activity within a particular state sufficed to make a federal corporation a citizen of that state. Elwert v. Pacific First Federal Savings & Loan Ass'n, D.C.D.Or. 1956, 138 F.Supp. 395. Several earlier cases involving joint stock land banks seem to look the other way. Dallas Joint Stock Land Bank v. American Employers' Ins. Co., D.C.N.D.Tex.1940, 35 F.Supp. 927; First Carolinas Joint Stock Land Bank of Columbia, S. C. v. Page, D.C.M.D.N.C.1932, 2 F.Supp. 529; First Carolinas Joint Stock Land Bank of Columbia v. New York Title & Mortgage Co., D.C.E.D.S.C.1932, 59 F.2d 350. However, the foregoing analysis persuades us that the position of the Elwert case is sound.

In addition to the considerations already advanced, we are mindful that the present direction of public policy is toward greater recognition of local corporate activity as equivalent to citizenship for diversity purposes, albeit the principal aim of legislation reflecting that policy is to restrict federal jurisdiction. Specifically, the most recent amendment of Section 1332 of Title 28, approved July 25, 1958, too late to affect this suit which was filed October 31, 1957, makes a corporation for diversity purposes a citizen not only of the place of its incorporation but also of the state where its principal place of business is located. 28 U.S.C. § 1332(c). Thus, for the future, localization less extreme than we have in this case will suffice to establish corporate citizenship in the administration of diversity jurisdiction.

All circumstances considered we are satisfied that the court below was right in accepting this suit as within diversity jurisdiction. This brings us to the merits of the case.

The controversy arose out of a sale of machinery consisting of a four color offset press, a gluing attachment, and trimming and die-cutting units, all to be combined in a single structure which would, in an integrated operation, print and glue sheets, punch holes in them and cut them to size so that the finished product would duplicate a submitted sample of "V-Mail". The sample was a printed, shaped and glued sheet designed to serve as a mail order form for the purchase of merchandise and also to fold into an envelope addressed to the mail order seller and ready for sealing. Holes, like those in sheets for use in ring binders, also appeared near one margin. The particular size and somewhat irregular shape of the sheet adapted it to its special purpose.

The buyer paid the greater part of the price upon the delivery of the press alone. The unpaid balance, $11,000, was covered by an escrow agreement in which a third-party, the defendant Lake Hiawatha Federal Credit Union, promised the plaintiff, as assignee of the seller, as follows:

"We hereby certify that we are holding in escrow the sum of $11,000.00, the balance of the money due * * * [seller] for the Milton-4-color press, serial No. 175-035, until such time that the above press produces the V-Mail attached herto with ...

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