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Smith v. Kansas City Title & Trust Co.

Supreme Court of the United States · 1921 · Civil Procedure

Civil ProcedureFederal question jurisdictionConstitutionality of federal legislationarising under jurisdictionfederal questionshareholder suitconstitutional challengenecessary and proper

Facts

A shareholder sought to prevent the Kansas City Title & Trust Company from investing corporate funds in farm loan bonds issued by Federal Land Banks and Joint Stock Land Banks under the Federal Farm Loan Act. He alleged that the directors intended to invest in those bonds because the Act declared them lawful investments and federal instrumentalities exempt from taxation, but that the Act was unconstitutional and the bonds therefore invalid. The bill described the organization of the banks, their issuance of bonds secured by farm mortgages, and the Treasury's role in subscribing capital stock, purchasing bonds, and the Act's authorization for the banks to serve as depositaries and financial agents of the United States. Diversity was lacking, so federal jurisdiction depended on whether the suit arose under the Constitution or laws of the United States.

Issue

Whether the federal courts had jurisdiction because the shareholder's suit arose under the Constitution or laws of the United States, and if so, whether Congress had constitutional power to create Federal Land Banks and Joint Stock Land Banks, authorize their bonds, and exempt those bonds from federal and state taxation.

Rule

Federal-question jurisdiction exists where the plaintiff's bill shows that the right to relief depends upon the construction or application of the Constitution or laws of the United States, and the federal claim is not merely colorable but has a reasonable foundation. Congress may create banking institutions as appropriate means to carry out national fiscal functions, including serving as depositaries of public money, financial agents, and purchasers of government bonds; when such institutions are constitutionally created, Congress may exempt their authorized securities from federal and state taxation.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nora Patel owns shares in Lakefront Fiduciary Holdings, a Wisconsin corporation based in Milwaukee. She sues in federal district court to stop the company from buying bonds issued by Prairie Infrastructure Banks under a recent federal statute, alleging only that the statute exceeds Congress's constitutional powers and that the bonds therefore are invalid investments under the company's governing obligations; no diversity exists.

Is federal-question jurisdiction proper?

Explanation. Federal-question jurisdiction exists when the bill shows that the plaintiff's right to relief depends upon the construction or application of the Constitution or laws of the United States and the federal claim is not merely colorable. Here, the only asserted ground for relief is that the federal statute authorizing the bonds is unconstitutional, so the controversy directly turns on federal law. That is enough under the majority's rule.