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National Yeast Corp. v. City of Crystal Lake.

November 8, 1948


Author: Briggle

Before SPARKS, Chief Judge, MAJOR, Circuit Judge, and BRIGGLE, District Judge.

BRIGGLE, District Judge.

Plaintiff-appellee is engaged in the manufacture of baker's yeast in the City of Crystal Lake, Illinois. By virtue of a contract entered into on November 10, 1939, between the Yeast Company and the City, expiring five years from the date thereof, plaintiff discharged its waste into the storm sewers of the city and continues to do so regardless of the expiration date of the contract. The District Court has awarded the plaintiff an injunction restraining the defendant from closing the shut-off value in the plaintiff's effluent line between its plant and the storm sewer of the city, and from interfering in any manner with the discharge of the plaintiff's waste into such storm sewer prior to November 10, 1949, except under the special circumstances provided for in the contract.This on the theory that the City acted arbitrarily and unreasonably in its refusal to give effect to a proviso of the contract making it subject to renewal for a further term of five years "providing conditions are satisfactory to both parties." The lower court held that plaintiff's delay in the treatment of its effluent so as to eliminate offensive odors, as provided in the contract, was to be excused on account of the war and the non-cooperative conduct of defendant.

This case was before us in March, 1945 (Reported in 7 Cir., 147 F.2d 711) on an appeal from a refusal of the District Court to grant plaintiff a temporary injunction. For a further statement of the facts reference is made thereto.The decision of the District Court had at that time been made upon the pleadings and an affidavit submitted by defendant, and after a consideration of the facts as disclosed by the pleadings and the affidavit we reversed the decision of the District Court and remanded the cause for a full hearing upon the evidence.

Upon remandment an amended complaint was filed bringing the allegations of fact to date, and the defendant then challenged, for the first time, the jurisdiction of the Court. This challenge was based upon the assertion by the defendant that the Crystal Lake Building Corporation, an Illinois corporation, was a necessary and indispensible party to the proceeding, that its interests were antagonistic to that of the defendant city and if made a party to the proceeding and properly aligned with plaintiff it would have the effect of defeating jurisdiction because there would then be no diversity.

To show the applicability of this contention it is necessary to refer briefly to the contract between the plaintiff and defendant of November 10, 1939. At that time, the Yeast Company being hardpressed for a method of suitable disposition of its effluent, entered into a contract with the city whereby the city agreed to allow the Yeast Company to connect its disposal line to the storm sewer of the city.It was agreed that the plaintiff would treat all waste emptied into such storm sewer so as to eliminate offensive odors and in a manner to meet the approval of the Sanitary Water Board of the State of Illinois; that a shut-off valve would be installed to which the City would have free access for the purpose of shutting off such waste matter in the event of noncompliance and for other emergency reasons, such as a heavy rain storm or an overcharging of the capacity of the sewage system. All paragraphs and provisions of this contract relate to the covenants of the Yeast Company and the City of Crystal Lake with the single exception of paragraph 7. By paragraph 7, the Crystal Lake Building Corporation, at that time the holder of the legal title to the real estate upon which the Yeast Company's plant was situated, together with the Yeast Company, agreed to indemnify the City of Crystal Lake against any damages it might sustain by reason of any claims filed against the City growing out of the discharge of such effluent into the storm sewer of the City, and the Yeast Company and Building Company agreed not to further encumber their plant.

Paragraph 11 of the agreement provided that the agreement would expire in five years but was subject to renewal "providing conditions are satisfactory to both parties hereto at the expiration of this agreement."

The Crystal Lake Building Corporation is something of a figurehead in the entire transaction, being a wholly-owned subsidiary of the Yeast Company, organized for the single purpose of receiving title to the real estate upon which the Yeast Company contemplated the equipment of a plant for the operation of its business. Before the controversy arose between the Yeast Company and the City, and long prior to the institution of the proceedings herein, the Building Corporation had divested itself of such real estate by conveyance to the Yeast Company, and the Yeast Company had subsequently discharged all liens against the property. There of course remained as a barrier to the dissolution of the corporation, the Building Company's contingent liability under paragraph 7 of this contract concerning any possible claims that might be filed against the City for causes of action arising prior to November 10, 1944. It is not contended that any such claims have ever been filed Under these facts, the District Court declined to make the Building Corporation a party to the proceeding, and this question of jurisdiction is now before us for review for the first time.

The City contends that the Building Corporation was an indispensible party for the reason that its obligations under the contract were such that a final decree could not be made without affecting its interests, and that its interests being antagonistic to the City it would if brought in defeat jurisdiction, and cites Shields v. Barrow, 17 How. 130, 58 U.S. 130, 15 L. Ed. 158; City of Indianapolis v. Chase Nat. Bank, 314 U.S. 63, 62 S. Ct. 15, 16, 86 L. Ed. 47, and numerous other decisions of lower courts.

The Chase Nat. Bank case is a most interesting 5-4 decision in which jurisdiction was denied following a contrary holding by this Court. The facts are so different from our own case that its value here is doubtful except for the fundamental principles declared in the majority opinion. The Court there said:

"As is true of many problems in the law, the answer is to be found not in legal learning but in the realities of the record. Though variously expressed in the decisions, the governing principles are clear. To sustain diversity jurisdiction there must exist an 'actual' * * * 'substantial', * * * controversy between citizens of different states, all of whom on one side of the controversy are citizens of different states from all parties on the other side. * * * Diversity jurisdiction cannot be conferred upon the federal courts by the parties' own determination of who are plaintiffs and who defendants. It is our duty, as it is that of the lower federal courts, to 'look beyond the pleadings, and arrange the parties according to their sides in the dispute.' * * * Litigation is the pursuit of practical ends, not a game of chess. Whether the necessary 'collision of interests' * * * exists, is therefore not to be determined by mechanical rules. It must be ascertained from the 'principal purpose of the suit', * * * and the 'primary and controlling matter in dispute' * * *."

So here the question of whether the Building Corporation was a necessary party must be determined from "the realities of the record."

There can be no question but that the decree of the Court herein is ineffective to place any additional burden upon the Building Corporation. Its obligation under paragraph 7 of the agreement expired on November 10, 1944, and as asserted by the City it could successfully defend against any claim arising subsequent to that date. Its present contingent liability to respond in damages by reason of suits against the City for acts arising between November 10, 1939 and November 10, 1944 remains unaffected except by any appropriate statute of limitations. Its position seems to have been that of a guarantor or an indemnitor and thus was made a party to the agreement because at that time it held title to the Yeast Company property. This property has since been conveyed to the Yeast Company and the potency of the Building Company as an indemnitor has ceased to exist, but its contingent liability has not and cannot in the least be affected by the decree herein.

If it is conceded that the effect of the Court's decision herein is to award the plaintiff a renewal of such contract from November 10, 1944 to November 10, 1949 it can, of course, be effective only as between the Yeast Company and the City, but this would in no sense affect the interest of the Building Company. The question of whether the Yeast Company should have upon the entry of the decree herein furnished the City with further sureties for the faithful performance of its contract to indemnify the City for the period from November 10, 1944 to November 10, 1949, was a proper subject for consideration of the Court at the time of the decree herein if it had been presented. If the City in this renewal of its obligation to receive the effluent from the Yeast Company had believed that it was entitled to be further indemnified other than by the obligation of the Yeast Company, we presume it could have so indicated to the trial court and the trial court would undoubtedly have had authority under its equity jurisdiction to have made the injunction order contingent upon the Yeast Company furnishing further security. The surety could have been any person or corporation qualified to act. The fact that the Building Company had for the preceding five years been the indemnitor can make no difference in this respect. A "collision of interests" between the City and the Building Corporation can only arise if and when the ...

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