Meyer v. Fleming In re Chicago, R.I. & P. Ry. Co

• Decision Date: 04 February 1946
• Docket Number: No. 392,392
• Citation: 327 U.S. 161,90 L.Ed. 595,66 S.Ct. 382
• Parties: MEYER v. FLEMING et al. In re CHICAGO, R.I. & P. RY. CO
• Court: U.S. Supreme Court

327 U.S. 161

66 S.Ct. 382

90 L.Ed. 595

MEYER

v FLEMING et al. In re CHICAGO, R.I. & P. RY. CO.

No. 392.

Argued Jan. 4, 1946.

Decided Feb 4, 1946.

Mr. Walter E. Meyer, pro se.

Mr. William Stanley, of Washington, D.C., for respondents.

Mr. Justice DOUGLAS delivered the opinion of the Court.

Petitioner is the owner of a substantial number of shares of stock of the St. Louis Southwestern Railway Company. In April 1934 he filed a claim for the benefit of St. Louis Southwestern in the bankruptcy proceedings which previously had been instituted under § 77 of the Bankruptcy Act, 49 Stat. 911, 11 U.S.C. § 205, 11 U.S.C.A. § 205, for the reorganization of the Chicago, Rock Island & Pacific Railway Co. The claim filed was a claim for a cause of action which St. Louis Southwestern allegedly had against the Rock Island. It amounted to many millions of dollars and arose out of an alleged conspiracy between the Rock Island and others to control the St. Louis Southwestern to their own interest, in breach of their fiduciary relationship to St. Louis Southwestern, and in violation of the antitrust laws. It was stated in the claim that a demand on the board of directors of St. Louis Southwestern to file the claim was not made because it would be futile, the dominant stockholder and the directors of St. Louis Southwestern being parties to the conspiracy. In May 1935 the trustees of Rock Island objected to the claim by general denial. In December 1935—about a year and a half after the claim had been filed—St. Louis Southwestern filed a petition for reorganization under § 77 of the Bankruptcy Act. Shortly thereafter the petition was approved and a trustee was appointed. Thereupon the trustees of Rock Island further objected to the claim filed by petitioner on the ground that all causes of action belonging to St. Louis Southwestern had become vested in its bankruptcy trustee and could no longer be asserted in the Rock Island proceeding by petitioner. The claim was referred to a special master who, in February 1942, filed his report, concluding that petitioner should not be allowed to prosecute the claim. Two years later the District Court approved the special master's report and disallowed the claim. On appeal the Circuit Court of Appeals affirmed. 7 Cir., 149 F.2d 529. The case is here on a petition for a writ of certiorari which we granted because the problem presented is an important one in bankruptcy law.

The Circuit Court of Appeals held that a stockholders' derivative suit commenced before the corporation's petition under § 77 had been approved could not be continued thereafter without permission of the reorganization court. It relied on the provisions of § 77 which gave the reorganizing court exclusive jurisdiction of the debtor and its property¹ and which give a trustee appointed in those proceedings the title and powers of other bankruptcy trustees.² But the exclusive jurisdiction granted the reorganization court by § 77, sub. a, is that which bankruptcy courts have customarily possessed. ³ And the title and powers of the trustee are by § 77, sub. c(2), assimilated to those of trustees in ordinary bankruptcy proceedings. Certainly, so far as the enforcement of claims are concerned, there is no indication that Congress adopted a different ule in proceedings under § 77 than had long obtained in ordinary bankruptcy proceedings. Yet, if the view of the Circuit Court of Appeals were followed, any suit which had been brought by the corporation before its petition under § 77 had been approved would be defeated when that event happened. That is not the rule in ordi- nary bankruptcy proceedings. And it would be a radical change in the law to write that rule into § 77.

Litigation instituted by a creditor may not be defeated merely by reason of the fact that he has become a bankrupt. Thatcher v. Rockwell, 105 U.S. 467, 469, 470, 26 L.Ed. 949. Title to the claim vests, of course, in the bankruptcy trustee.⁴ He is in position to take control of the litigation. He may, as indicated in Johnson v. Collier, 222 U.S. 538, 540, 32 S.Ct. 104, 105, 56 L.Ed. 306, start a new suit⁵ and cause the old one to be abated, or intervene in the old one⁶ and obtain such benefits as it affords.⁷ The choice may indeed be a valuable one. Rights might be lost if the earlier suit were abated. And the speculative nature of the litigation or the expense involved might indicate to the trustee that it was more provident for him not to intervene in the existing suit, nor to institute a new one, but to let the one which had been started run its course.⁸ As stated in Johnson v. Collier, supra, 222 U.S. page 540, 32 S.Ct. page 105, 56 L.Ed. 306;

'If, because of the disproportionate expense, or uncertainty as to the result, the trustee neither sues nor intervenes, there is no reason why the bankrupt himself should not continue the litigation. He has an interest in making the dividend for creditors as large as possible, and in some states the more direct interest of creating a fund which may be set apart to him as an exemption. If the trustee will not sue and the bankrupt cannot sue, it might result in the bankrupt's debtor being discharged of an actual liability. The statute indicates no such purpose, and if money or property is finally recovered, it will be for the benefit of the estate. Nor is there any merit in the suggestion that this might involve a liability to pay both the bankrupt and the trustee. The defendant in any such suit can, by order of the bankrupt court, be amply protected against any danger of being made to pay twice.'⁹

The same rule obtains in equity receiverships.¹⁰

We see no reason why there should be a different rule in the case of stockholders' derivative suits. They are likewise suits to enforce a corporate claim. They are one of the remedies which equity designed for those situations where the management through fraud, neglect of duty or other cause declines to take the proper and necessary steps to assert the rights which the corporation has.¹¹ The stockholders are then allowed to take the initiative and institute the suit which the management should have started had it performed its duty. The corporation is a necessary party. City of Davenport v. Dows, 18 Wall. 626, 21 L.Ed. 938. Hence, it is joined as a defendant. But it is only nominally a defendant, since any judgment obtained against the real defendant runs in its favor. The reasons of policy for holding that ordinary suits to enforce a corporate claim are not abated when the corporation is adjudged a bankrupt or when a receiver is appointed are equally applicable here. The claim sought to be enforced in a derivative suit may be an important asset of the estate. It might be lost to the estate through the operation of statutes of limitations, if the trustee or receiver were required to start anew. As in case of ordinary suits to enforce corporate claims, he should be allowed a choice to let the suit continue under the stockholders' auspices;¹² to intervene in it;¹³ to start a new suit; or, in case he deems it more provi- dent from the point of view of the estate to make a settlement of the claim or to reserve it for the reorganized company, to cause it to be abated. ¹⁴ He might conclude that the more provident course was to let the suit continue without interference.¹⁵ That decision might be dictated by the speculative nature of the suit and the expense involved as Johnson v. Collier, supra, indicates. If the trustee will not sue and the stockholder cannot continue with the litigation, what might turn out to be a valuable claim might be lost to the estate not only through the operation of statutes of limitation, but in cases like the present through a discharge of the debtor.¹⁶ The point is that the trustee or receiver, being in a position to take control of the litigation by reason of the fact that the cause of action has become a part of the estate, should have the opportunity to make the choice which is most advantageous to the estate. Cf. Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 483, 60 S.Ct. 628, 630, 84 L.Ed. 876. The fact that the corporation is nominally a defendant should not lead to any different result.¹⁷ That gives the suit only a difference in form, not a difference in substance.

We have in the present case not a stockholders' derivative suit filed before the bankruptcy of his corporation, but a claim filed in the bankruptcy proceedings of the alleged debtor (Rock Island) by a stockholder on behalf of his corporation, St. Louis Southwestern. If the claim were to be filed after the petition for the reorganization of St. Louis Southwestern had been approv d, it could be done only with the consent of the bankruptcy court. For it has exclusive authority to determine how causes of action which have become a part of the bankruptcy estate shall be enforced. See Porter v. Sabin, 149 U.S. 473, 13 S.Ct. 1008, 37 L.Ed. 815; Klein v. Peter, 8 Cir., 284 F. 797. But since the claim was filed before the petition of St. Louis Southwestern under § 77 had been approved, no reason is apparent why that event should have a different effect on the claim than it would have had on a suit which had been previously instituted by or on behalf of the corporation. Indeed, the facts of this case emphasize the reason for giving the trustee an opportunity to choose what course to take. The claim was filed in April 1934, a year and a half prior to the time when the petition of St. Louis Southwestern under § 77 had been approved. We are told that the time for filing of claims against the Rock Island expired over eleven years ago. If the claim were now disallowed, the trustee of St. Louis Southwestern, if he desired to assert it, would be faced with the task of obtaining leave to file out of time.¹⁸ There is, therefore, the same reason for allowing the estate to obtain the benefits of the claim which has been filed, as there would be for allowing the trustee the opportunity to take...