337 U.S. 541 (1949), 442, Cohen v. Beneficial Industrial Loan Corp.

Docket Nº:No. 442
Citation:337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528
Party Name:Cohen v. Beneficial Industrial Loan Corp.
Case Date:June 20, 1949
Court:United States Supreme Court
 
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Page 541

337 U.S. 541 (1949)

69 S.Ct. 1221, 93 L.Ed. 1528

Cohen

v.

Beneficial Industrial Loan Corp.

No. 442

United States Supreme Court

June 20, 1949

Argued April 18, 1949

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Syllabus

1. Under 28 U.S.C. §1291, appeal may be taken from an order of a Federal District Court denying a corporation's motion that the plaintiff in a stockholder's derivative action be required, pursuant to a state statute, to give security for reasonable expenses of the defendants, in connection with the action. Pp. 545-547.

(a) The matters embraced in such an order are not of such an interlocutory nature as to affect, or to be affected by, a decision on the merits. P. 546.

(b) The order is appealable because it is a final disposition of a claimed right which is not an ingredient of the cause of action and does not require consideration with it. Pp. 546-547.

2. A state statute providing that, in any stockholder's derivative action pending at the time of its enactment or thereafter brought, in which the plaintiff's interest as a shareholder is less than 5% of the value of all outstanding shares and has a market value of less than 50,000, he may be required at any stage of the proceeding to give security for the reasonable expenses, including counsel fees, which the corporation may incur or for which it may become liable, does not violate the Federal Constitution. Pp. 547-555.

(a) The Federal Constitution does not oblige a state to place its litigating and adjudicating processes at the disposal of a plaintiff in a stockholder's derivative suit, at least without imposing standards of responsibility, liability and accountability which it considers will protect the interests he elects himself to represent. Pp. 547-551.

(b) The statute here involved does not violate the Contract Clause of the Constitution. P. 551.

(c) For a state to close its courts to this type of litigation if the condition of reasonable security is not met does not violate the Due Process Clause. Pp. 551-552.

Page 542

(d) The limitation of the requirement of the statute to stockholders whose interest is less than 5% and has a market value of less than $50,000 does not violate the Equal Protection Clause of the Constitution. Pp. 552-553.

(e) Assuming that the statute will not be construed as imposing liability for expenses incurred before its enactment, or perhaps before the granting of security in a particular case, the provision making it applicable to actions pending at the time of its enactment does not give it such a retroactive effect as to render it unconstitutional under the Due Process Clause. Pp. 553-554.

3. That a corporation which was the subject of a stockholder's derivative action in New Jersey was organized under the laws of Delaware does not make inapplicable a New Jersey statute providing that the plaintiff may be required to give security for reasonable expenses of the corporation. Pp. 554-555.

4. A federal court, having jurisdiction of a stockholder's derivative action only because of diversity of citizenship, must apply a statute of the forum State which makes the plaintiff, if unsuccessful, liable for reasonable expenses, including attorney's fees, of the defense and provides that the corporation may require the plaintiff to give security for their payment as a condition of prosecuting the action. Pp. 543-545, 555-557.

(a) A statute which so conditions the stockholder's action cannot be disregarded by the federal court as a mere procedural device. Pp. 555-556.

(b) A different result is not required by Rule 23 of the Federal Rules of Civil Procedure, since there is no conflict between that rule and the state statute. P. 556.

170 F.2d 44, affirmed.

A Federal District Court, having jurisdiction of a stockholder's derivative action solely because of diversity of citizenship, denied a motion to require the plaintiff to post security for reasonable expenses incurred by the defense, as required by a statute of the forum State. 7 F.R.D. 352. The Court of Appeals reversed. 170 F.2d 44. This Court granted certiorari. 336 U.S. 917. Affirmed, p. 556.

Page 543

JACKSON, J., lead opinion

MR. JUSTICE JACKSON delivered the opinion of the Court.

The ultimate question here is whether a federal court, having jurisdiction of a stockholder's derivative action only because the parties are of diverse citizenship, must apply a statute of the forum state which makes the plaintiff, if unsuccessful, liable for all expenses, including attorney's fees, of the defense and requires security for their payment as a condition of prosecuting the action.

Petitioners' decedent as plaintiff, brought in the United States District Court for New Jersey an action in the right of the Beneficial Industrial Loan Corporation, a Delaware corporation doing business in New Jersey. The defendants were the corporation and certain of its managers and directors. The complaint alleged generally that, since 1929, the individual defendants engaged in a continuing and successful conspiracy to enrich themselves at the expense of the corporation. Specific charges of mismanagement and fraud extended over a period of eighteen years, and the assets allegedly wasted or diverted thereby were said to exceed $100,000,000. The stockholder had demanded that the corporation institute proceedings for its recovery but, by their control of the corporation, the individual defendants prevented it from doing so. This stockholder, therefore, sought to assert

Page 544

the right of the corporation. One of 16,000 stockholders, he owned 100 of its more than two million shares, so that his holdings, together with 150 shares held by the intervenor, approximated 0.0125% of the outstanding stock, and had a market value that had never exceeded $9,000.

The action was brought in 1943, and various proceedings had been taken therein when, in 1945, New Jersey enacted the statute which is here involved.1 Its general effect is to make a plaintiff having so [69 S.Ct. 1225] small an interest liable for all expenses and attorney's fees of

Page 545

the defense if he fails to make good his complaint and to entitle the corporation to indemnity before the case can be prosecuted. These conditions are made applicable to pending actions. The corporate defendant therefore moved to require security, pointed to its by-laws by which it might be required to indemnify the individual defendants, and averred that a bond of $125,000 would be appropriate.

The District Court was of the opinion that the state enactment is not applicable to such an action when pending in a federal court, 7 F.R.D. 352. The Court of Appeals were of a contrary opinion, and reversed, 170 F.2d 44, and we granted certiorari. 336 U.S. 917.

APPEALABILITY

At the threshold, we are met with the question whether the District Court's order refusing to apply the statute was an appealable one. Title 28 U.S.C. § 1291, provides, as did its predecessors, for appeal only "from all final decisions of the district courts," except when direct appeal to this Court is provided. Section 1292 allows appeals also from certain interlocutory orders, decrees and judgments, not material to this case except as they indicate the purpose to allow appeals from orders other than final judgments when they have a final and irreparable effect on the rights of the parties. It is obvious that, if Congress had allowed appeals only from those final judgments which terminate an action, this order would not be appealable.

Page 546

The effect of the statute is to disallow appeal from any decision which is tentative, informal or incomplete. Appeal gives the upper court a power of review, not one of intervention. So long as the matter remains open, unfinished or inconclusive, there may be no intrusion by appeal. But the District Court's action upon this application was concluded and closed, and its decision final in that sense, before the appeal was taken.

Nor does the statute permit appeals, even from fully consummated decisions, where they are but steps towards final judgment in which they will merge. The purpose is to combine in one review all stages of the proceeding that effectively may be reviewed and corrected if and when final judgment results. But this order of the District Court did not make any step toward final disposition of the merits of the case, and will not be merged in final judgment. When that time comes, it will be too late effectively to review the present order, and the rights conferred by the statute, if it is applicable, will have been lost, probably irreparably. We conclude that the matters embraced in the decision appealed from are not of such an interlocutory nature as to affect, or to be affected by, decision of the merits of this case.

This decision appears to fall in that small class which finally determine claims of right separable from, and collateral to, [69 S.Ct. 1226] rights asserted in the action, too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated. The Court has long given this provision of the statute this practical, rather than a technical, construction. Bank of Columbia v. Sweeney, 1 Pet. 567, 569; United States v. River Rouge Improvement Co., 269 U.S. 411, 414; Cobbledick v. United States, 309 U.S. 323, 328.

We hold this order appealable because it is a final disposition of a claimed right which is not an ingredient

Page 547

of the cause of action and does not require consideration with it. But we do not mean that every order fixing security is subject to appeal. Here, it is the right to security that presents a...

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