255 U.S. 180 (1921)
A bill was filed in the United States District Court for the Western Division of the Western District of Missouri by a shareholder in the Kansas City Title & Trust Company to enjoin the Company, its officers, agents and employees from investing the funds of the Company in farm loan bonds issued by Federal Land Banks or Joint Stock Land Banks under authority of the Federal Farm Loan Act of July 17, 1916, c. 245, 39 Stat. 360, as amended January 18, 1918, c. 9, 40 Stat. 431.1
The bill avers that the Board of Directors of the Company are about to invest its funds in the bonds to the amount of $10,000 in each of the classes described, and will do so unless enjoined by the court in this action. The bill avers the formation of twelve Federal Land Banks, and twenty-one Joint Stock Land Banks under the provisions of the act.2
As to the Federal Land Banks, it is averred that each of them has loaned upon farm lands large amounts secured by mortgage, and, after depositing the same with the Farm Loan Registrar, has executed and issued collateral trust obligations called Farm Loan Bonds, secured by the depositing of an equivalent amount of farm mortgages and notes; and that each of said Federal Land Banks has sold, and is continuing to offer for sale, large amounts of said Farm Loan Bonds. The bill also avers that private persons in different parts of the United States have organized twenty-one Joint Stock Land Banks, the capital stock of which is subscribed for and owned by private persons. The Joint Stock Land Banks have deposited notes and mortgages with the Farm Loan Registrar and issued an equivalent amount of collateral trust obligations called Farm Loan Bonds. These bonds have been sold and will be continued to be offered for sale to investors in large amounts in the markets of the country.3
The bill provides specific amounts including that up to September 30, 1919, bonds have been issued under the act by the Federal Land Banks to the amount of $285,600,000, of which about $135,000,000 are held in the Treasury of the United States, and that bonds have been issued by Joint Stock Land Banks to the amount of $41,000,000, which are now in the hands of the public.4 The First Joint Stock Land Bank of Chicago and the Federal Land Bank of Wichita, Kansas, were allowed to intervene and became parties defendant to the suit. The Kansas City Title & Trust Company filed a motion to dismiss in the nature of a general demurrer, and upon hearing the District Court entered a decree dismissing the bill. From this decree appeal was taken to this court.5
Whether the District Court had jurisdiction over the shareholder's bill because the cause of action arises under the Constitution or laws of the United States?6
A suit arises under the Constitution or laws of the United States when the plaintiff's right to relief depends upon the construction or application of the Constitution or federal law. The federal claim must not be merely colorable but must rest upon a reasonable foundation. The controversy must directly draw the constitutional validity of an act of Congress into question.7
Yes. The bill filed by the shareholder in the Kansas City Title & Trust Company directly challenges the proposed investment of corporate funds in Farm Loan Bonds. The challenge rests on the explicit ground that the Federal Farm Loan Act exceeds congressional power.8 The established facts show that the bill avers the Board of Directors is about to invest ten thousand dollars in each class of bonds unless enjoined. Twelve Federal Land Banks and twenty-one Joint Stock Land Banks have been formed and have issued hundreds of millions in bonds.
The shareholder seeks relief solely because those bonds rest on an allegedly unconstitutional statute. These averments make the constitutional validity of the federal act the central and dispositive issue. The right to an injunction stands or falls on the resolution of that federal question.9
The District Court possessed jurisdiction and the direct appeal to this Court on constitutional grounds is authorized.10
Related opinions on this issue
Joined by Justice Mcreynolds
Justice Holmes dissented on the ground that the cause of action arises wholly under Missouri law.11 The shareholder's right to restrain the directors rests on the corporation's charter and Missouri statutes governing fiduciary duties.12 Federal law enters the case only because Missouri law chooses to treat compliance with the Federal Farm Loan Act as a criterion for permissible investments.13
Because the suit is created by state law, it does not arise under federal law even though a federal question is embedded as a test.14
Whether the Federal Farm Loan Act of July 17, 1916, as amended, is within the constitutional power of Congress to the extent it authorizes creation of Federal Land Banks and Joint Stock Land Banks and issuance of Farm Loan Bonds?15
Congress possesses authority under the Necessary and Proper Clause to create fiscal agencies and depositaries of public money.16 These agencies serve national governmental purposes. This holds even when the greater part of their capital is privately subscribed.17 Their operations may include private banking functions.18 The institutions must be designated to act as financial agents or purchasers of government obligations.19
Yes. The established facts demonstrate that the Federal Farm Loan Act organizes twelve Federal Land Banks and twenty-one Joint Stock Land Banks.20 The Act empowers the Secretary of the Treasury to designate them as depositaries of public money and financial agents.
The Act authorizes the Secretary to invest public funds in their capital stock.21 These features place the banks squarely within the class of institutions sustained in McCulloch v. Maryland and subsequent national-bank cases.22 Congress has conferred upon them the governmental functions of receiving public deposits and marketing federal obligations.23 The fact that the banks also make farm-mortgage loans does not invalidate the legislation, any more than the private banking powers of national banks invalidated their creation.24
The Federal Farm Loan Act is a valid exercise of congressional power insofar as it creates the described banks and authorizes issuance of Farm Loan Bonds.25
Whether the provisions of the Federal Farm Loan Act exempting Farm Loan Bonds from federal, state, municipal, and local taxation are valid?26
Yes. Because the established facts establish that the banks have been organized as constitutional fiscal agencies and depositaries, the statutory exemption of their bonds from federal, state, municipal, and local taxation necessarily follows.29 The exemption prevents the states from imposing a tax that could destroy or hamper the federal instrumentalities Congress has created to facilitate agricultural credit and to serve as government depositaries.30 The principle that the power to tax involves the power to destroy, recognized since McCulloch v. Maryland, directly supports the validity of the exemption provisions.31
The tax-exemption provisions of the Federal Farm Loan Act are valid.32