Legal Definitions - assignee clause

The assignee clause was a historical legal provision designed to prevent parties from improperly creating federal courtjurisdiction. Specifically, it stopped a litigant who lacked "diversity of citizenship" – meaning they and the opposing party were from the same state – from transferring their legal claim to someone else who did reside in a different state, solely to gain access to a federal court.

The underlying principle was to ensure that federal courts only heard cases genuinely falling under their jurisdiction, rather than those manipulated to bypass state courts. While the original clause from the Judiciary Act of 1789 has been replaced, its core intent lives on in current federal law (28 U.S.C. § 1359), which prohibits federal jurisdiction when a party is improperly or collusively added to a lawsuit, through assignment or other means, simply to invoke federal jurisdiction.

Here are some examples illustrating the concept:

• Debt Collection Scenario: Imagine a small business in Florida is owed money by a customer also residing in Florida. Both parties are Florida residents, meaning any lawsuit between them would typically belong in a Florida state court. However, the business owner prefers federal court, perhaps believing it offers a quicker resolution. To achieve this, the business "assigns" the right to collect the debt to a separate entity it owns, which is incorporated in Delaware and has its principal place of business there.

  Explanation: The assignee clause (or its modern equivalent) would prevent this maneuver. Since the original dispute was between two Florida entities, there is no genuine diversity of citizenship. The assignment to the Delaware corporation would be considered "collusive" or "improper" because its sole purpose is to create the appearance of diversity and invoke federal jurisdiction, rather than serving a legitimate business function related to the debt collection itself. A federal court would likely dismiss the case for lack of jurisdiction.

• Contract Dispute Between Companies: Consider two manufacturing companies, both headquartered in Texas, that have a significant dispute over a supply contract. Normally, this case would be heard in a Texas state court. However, one of the companies believes it would receive a more favorable outcome in federal court. To try and achieve this, it assigns its contractual rights and the right to sue for breach of contract to a newly formed subsidiary company, which it deliberately incorporates and establishes its primary operations in Oklahoma.

  Explanation: This situation directly illustrates the purpose of the assignee clause. The original parties to the contract and the dispute are both Texas entities. The creation of an Oklahoma subsidiary and the assignment of the claim to it, if done primarily to manufacture diversity of citizenship, would be deemed an improper attempt to invoke federal jurisdiction. The federal court would look past the assignment to the true parties in interest and decline jurisdiction.

• Personal Injury Claim: Suppose a driver from Arizona is involved in an accident with another driver, also from Arizona. The injured Arizona driver wants to sue the at-fault driver for damages. Typically, this personal injury claim would be filed in an Arizona state court. However, the injured driver's lawyer suggests assigning a small percentage of the potential recovery from the lawsuit to a relative who lives in Nevada, hoping this will create the necessary diversity of citizenship to bring the case in federal court.

  Explanation: Here, the assignee clause (or its modern form) would apply because the original parties to the dispute are both from Arizona. The assignment of a partial interest to a Nevada resident, if motivated primarily by the desire to create diversity and access federal court rather than a genuine transfer of ownership or interest for other reasons, would be considered collusive. The federal court would likely refuse to hear the case, recognizing the assignment as an attempt to improperly establish jurisdiction.