Article III, Section 2, Clause 1:
The Judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;—to all Cases affecting Ambassadors, other public Ministers and Consuls;—to all Cases of admiralty and maritime Jurisdiction; to Controversies to which the United States shall be a Party;—to Controversies between two or more States; between a State and Citizens of another State; between Citizens of different States,—between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.
The records of the Federal Convention are silent on why the Framers included controversies between citizens of different states among the judicial power of the United States, 1 but Congress has given
diversity jurisdiction in one form or another to the federal courts since the Judiciary Act of 1789. 2 The traditional explanation remains that offered by Chief Justice Marshall.
However true the fact may be, that the tribunals of the states will administer justice as impartially as those of the nation, to parties of every description, it is not less true that the Constitution itself either entertains apprehensions on this subject, or views with such indulgence the possible fears and apprehensions of suitors, that it has established national tribunals for the decision of controversies between aliens and a citizen, or between citizens of different states. 3 Other explanations have been offered and controverted, 4 but diversity cases constitute a large bulk of cases on the dockets of the federal courts today, though serious proposals for restricting access to federal courts in such cases have been before Congress for some time. 5 The essential difficulty with this type of jurisdiction is that it requires federal judges to decide issues of local import on the basis of their reading of how state judges would decide them, an oftentimes laborious process, which detracts from the time and labor needed to resolve issues of federal import.
The Meaning of State and the District of Columbia Problem
In Hepburn v. Ellzey, 6 Chief Justice Marshall for the Court confined the meaning of the word
state as used in the Constitution to
the members of the American confederacy and ruled that a citizen of the District of Columbia could not sue a citizen of Virginia on the basis of diversity of citizenship. Marshall noted that it was
extraordinary that the courts of the United States, which are open to aliens, and to the citizens of every state in the union, should be closed upon them. But this is a subject for legislative, not for judicial consideration. 7 The same rule was subsequently applied to citizens of the territories of the United States. 8
Whether the Chief Justice had in mind a constitutional amendment or a statute when he spoke of legislative consideration remains unclear. Not until 1940, however, did Congress attempt to meet the problem by statutorily conferring on federal district courts jurisdiction of civil actions, not involving federal questions,
between citizens of different States, or citizens of the District of Columbia, the Territory of Hawaii, or Alaska and any State or Territory. 9 In National Mutual Ins. Co. v. Tidewater Transfer Co., 10 this act was upheld in a five-to-four decision but for widely divergent reasons by a coalition of Justices. Two Justices thought that Chief Justice Marshall's 1804 decision should be overruled, but the other seven Justices disagreed; however, three of the seven thought the statute could be sustained under Congress’s power to enact legislation for the inhabitants of the District of Columbia, but the remaining four plus the other two rejected this theory. The statute was upheld because a total of five Justices voted to sustain it, although of the two theories relied on, seven Justices rejected one and six the other. The result, attributable to
conflicting minorities in combination, 11 means that Hepburn v. Ellzey is still good law insofar as it holds that the District of Columbia is not a state, but is overruled insofar as it holds that District citizens may not use federal diversity jurisdiction. 12
Citizenship of Natural Persons
For purposes of diversity jurisdiction, state citizenship is determined by the concept of domicile 13 rather than of mere residence. 14 That is, while the Court's definition has varied throughout the cases, 15 a person is a citizen of the state in which he has his true, fixed, and permanent home and principal establishment and to which he intends to return whenever he is absent from it. 16 Acts may disclose intention more clearly and decisively than declarations. 17 One may change his domicile in an instant by taking up residence in the new place and by intending to remain there indefinitely and one may obtain the benefit of diversity jurisdiction by so changing for that reason alone, 18 provided the change is more than a temporary expedient. 19
If the plaintiff and the defendant are citizens of different states, diversity jurisdiction exists regardless of the state in which suit is brought. 20 Chief Justice Marshall early established that in multiparty litigation, there must be complete diversity, that is, that no party on one side could be a citizen of any state of which any party on the other side was a citizen. 21 It has now apparently been decided that this requirement flows from the statute on diversity rather than from the constitutional grant and that therefore minimal diversity is sufficient. 22 The Court has also placed some issues beyond litigation in federal courts in diversity cases, apparently solely on policy grounds. 23
Citizenship of Corporations
In Bank of the United States v. Deveaux, 24 Chief Justice Marshall declared:
That invisible, intangible, and artificial being, that mere legal entity, a corporation aggregate, is certainly not a citizen; and consequently cannot sue or be sued in the courts of the United States, unless the rights of the members, in this respect, can be exercised in their corporate name. Nevertheless, the Court upheld diversity jurisdiction in the case because the members of the bank as a corporation were citizens of one state and Deveaux was a citizen of another. The holding that corporations were citizens of the states where their stockholders lived was reaffirmed a generation later, 25 but pressures were building for change. While corporations were assuming an ever more prominent economic role, the Strawbridge rule, which foreclosed diversity suits if any plaintiff had common citizenship with any defendant, 26 was working to close the doors of the federal courts to corporations with stockholders in many states.
Deveaux was overruled in 1844, when, after elaborate argument, a divided Court held that
a corporation created by and doing business in a particular state, is to be deemed to all intents and purposes as a person, although an artificial person, an inhabitant of the same state, for the purposes of its incorporation, capable of being treated as a citizen of that state, as much as a natural person. 27 Ten years later, the Court abandoned this rationale, but it achieved the same result by
indulg[ing] in the fiction that, although a corporation was not itself a citizen for diversity purposes, its shareholders would be conclusively presumed citizens of the incorporating State. 28
State of incorporation remained the guiding rule for determining the place of corporate citizenship until Congress amended the jurisdictional statute in 1958. Concern over growing dockets and companies incorporating in states of convenience then led to a dual citizenship rule whereby
a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business. 29 The right of foreign corporations to resort to federal courts in diversity is not one that the states may condition as a qualification for doing business in the state. 30
Unincorporated associations, such as partnerships, joint stock companies, labor unions, governing boards of institutions, and the like, do not enjoy the same privilege as a corporation; the actual citizenship of each of its members must be considered in determining whether diversity exists. 31
A litigant who, because of diversity of citizenship, can choose whether to sue in state or federal court, will properly consider where the advantages and disadvantages balance, and if diversity is lacking, a litigant who perceives the balance to favor the federal forum will sometimes attempt to create diversity. In the Judiciary Act of 1789, Congress exempted from diversity jurisdiction suits on choses of action in favor of an assignee unless the suit could have been brought in federal court if no assignment had been made. 32 One could create diversity by a bona fide change of domicile even with the sole motive of creating domicile. 33 Similarly, one could create diversity, or defeat it, by choosing a personal representative of the requisite citizenship. 34 Most attempts to manufacture or create diversity have involved corporations. A corporation cannot get into federal court by transferring its claim to a subsidiary incorporated in another state, 35 and for a time the Supreme Court tended to look askance at collusory incorporations and the creation of dummy corporations for purposes of creating diversity. 36 But, in Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 37 it became highly important to the plaintiff company to bring its suit in federal court rather than in a state court. Thus, Black & White, a Kentucky corporation, dissolved itself and obtained a charter as a Tennessee corporation; the only change made was the state of incorporation, the name, officers, shareholders, and location of the business remaining the same. A majority of the Court, over a strong dissent by Justice Holmes, 38 saw no collusion and upheld diversity, meaning that the company won whereas it would have lost had it sued in the state court. Black & White Taxicab probably more than anything led to a reexamination of the decision on the choice of law to be applied in diversity litigation.