Gully v. First National Bank
(1936)
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Rule of Law:
For a case to 'arise under' the Constitution or laws of the United States for purposes of federal question jurisdiction, a right or immunity created by federal law must be an essential element of the plaintiff's cause of action, and this federal question must be disclosed on the face of the well-pleaded complaint.
Facts:
- The First National Bank of Meridian, a national banking association, became insolvent.
- In June 1931, the insolvent bank conveyed its assets to a new entity, the First National Bank in Meridian.
- Under the contract, the new bank covenanted to assume and pay the debts and liabilities of the insolvent bank.
- Among the assumed liabilities were state, county, city, and school district taxes owed by the old bank, which Gully, the state Collector of Taxes, sought to collect.
- These taxes were assessed on the shares of the old bank's capital stock, and Mississippi law required the bank to pay these taxes as an agent for its shareholders.
- The new bank failed to pay the assumed taxes as required by its contract.
Procedural Posture:
- Gully, the state Collector of Taxes, filed suit against the First National Bank in Meridian in a Mississippi state court.
- The bank (respondent) filed a petition to remove the cause to the federal District Court on the grounds of federal question jurisdiction.
- The state court granted the removal order.
- In the federal District Court, Gully's (petitioner's) motion to remand the case back to state court was denied.
- After a trial, the federal District Court dismissed Gully's complaint.
- Gully appealed to the U.S. Circuit Court of Appeals for the Fifth Circuit, which affirmed the district court's dismissal.
- The U.S. Supreme Court granted certiorari, limited to the question of the District Court's jurisdiction.
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Issue:
Does a state law claim for breach of contract, where the underlying debt assumed by the contract is a state tax on a national bank authorized by federal statute, 'arise under' the Constitution or laws of the United States, thereby creating federal court jurisdiction?
Opinions:
Majority - Mr. Justice Cardozo
No. A suit does not arise under federal law simply because a federal law permitted the state action that created the right being enforced; the right itself must be created by federal law. The plaintiff's cause of action is for a breach of contract, a right created entirely by Mississippi state law. The federal statute that permits states to tax national bank shares (R.S. § 5219) is not an element of the plaintiff's claim. It may be part of a potential defense or provide historical context, but it is not the basis of the suit. The court reiterated the 'well-pleaded complaint' rule: the federal question must appear on the face of the complaint itself and cannot be based on an anticipated defense. The Court reasoned that the 'federal nature of the right to be established is decisive—not the source of the authority to establish it.' Because the right here is a state-law contract right, there is no federal jurisdiction.
Analysis:
This case is a foundational decision for understanding the 'well-pleaded complaint' rule and the limits of federal question jurisdiction. It establishes that a federal issue merely 'lurking in the background' is insufficient to confer jurisdiction. The decision reinforces the principle that the plaintiff is the 'master of the complaint,' able to avoid federal court by pleading exclusively state-law claims. By distinguishing between a right created by federal law and a right merely permitted by federal law, the Court narrowed the scope of 'arising under' jurisdiction, ensuring that state courts would handle disputes grounded in state law, thereby preserving the balance of federalism.
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