441 U.S. 471 (1979), 77-1724, Burks v. Lasker

Docket NºNo. 77-1724
Citation441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404
Party NameBurks v. Lasker
Case DateMay 14, 1979
CourtUnited States Supreme Court

Page 471

441 U.S. 471 (1979)

99 S.Ct. 1831, 60 L.Ed.2d 404

Burks

v.

Lasker

No. 77-1724

United States Supreme Court

May 14, 1979

Argued January 17, 1979

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

Respondents, shareholders of an investment company registered under the Investment Company Act of 1940 (ICA), brought this derivative suit in Federal District Court against several of the company's directors and its registered investment adviser, alleging that the defendants had violated their duties under the ICA, the Investment Advisers Act of 1940 (IAA), and the common law in connection with a purchase by the company of the commercial paper of another company. The investment company's five directors who were neither affiliated with the investment adviser nor defendants in the action, acting as a quorum pursuant to the company's bylaws, concluded that continuation of the litigation was contrary to the best interests of the company, and its shareholders and moved the District Court to dismiss the action. Finding no evidence that the directors who voted to terminate the suit had acted other than independently and in good faith, the District Court entered summary judgment against respondents. The Court of Appeals reversed, holding that, because of the ICA, disinterested directors of an investment company have no power to foreclose the continuation of nonfrivolous litigation brought by shareholders against majority directors for breach of their fiduciary duties.

Held: In suits alleging violations of the ICA and IAA, federal courts should, as a matter of federal law, apply state law governing the authority of independent directors to discontinue derivative suits to the extent such law is consistent with the policies of the ICA and the IAA. Congress did not require that States, or federal courts, absolutely forbid director termination of all nonfrivolous actions. Pp. 475-486.

(a) Assuming, without deciding, that respondents have implied derivative causes of action under the federal Acts, state law cannot operate of its own force. Instead, [99 S.Ct. 1834]

the overriding federal law applicable here would, where the facts required, control the appropriateness of redress despite the provisions of state corporation law. . . .

J. I Case Co. v. Borak, 377 U.S. 426, 434 (emphasis added). Pp. 475-477.

(b) The fact that the scope of respondents' federal right is a federal question does not, however, make state law irrelevant. Since the ICA does not purport to be the source of authority for managerial power,

Page 472

but instead functions primarily to impose controls and restrictions on the internal management of investment companies, the ICA and the IAA do not require that federal law displace state laws governing the powers of directors unless the state laws permit action prohibited by the Acts, or unless "their application would be inconsistent with the federal policy underlying the cause of action. . . ." Johnson v. Railway Express Agency, 421 U.S. 454, 465. Pp. 477-480.

(c) Thus, the threshold inquiry in this case (not determined by either of the courts below) should have been to determine whether state law permitted the disinterested directors to terminate respondents' suit; if so, the next inquiry should have been whether such a state rule was consistent with the policy of the federal Acts. The Court of Appeals incorrectly implied that the only state law that would be consistent with the ICA would be one which absolutely prohibited the termination of nonfrivolous derivative suits. Although the Acts may justify some restaints upon the unfettered discretion of even disinterested mutual fund directors, they do not justify a flat rule that directors may never terminate nonfrivolous actions involving codirectors. The structure and purpose of the ICA indicate that Congress entrusted to the independent directors of investment companies, exercising the authority granted to them by state law, the primary responsibility for looking after the interests of the funds' shareholders. There may be situations in which the independent directors could reasonably believe that the best interests of the shareholders call for a decision not to sue -- as, for example, where the costs of litigation to the corporation outweigh any potential recovery. In such cases, it would be consistent with the Act to allow the independent directors to terminate a suit, even though not frivolous. Pp. 480-485.

567 F.2d 1208, reversed and remanded.

BRENNAN, J., delivered the opinion of the Court, in which BURGER, C.J., and WHITE, MARSHALL, BLACKMUN, and STEVENS, JJ., joined. BLACKMUN, J., filed a concurring opinion, post, p. 486. STEWART, J., filed an opinion concurring in the judgment, in which POWELL, J., joined, post, p. 487. REHNQUIST, J., took no part in the consideration or decision of the case.

Page 473

BRENNAN, J., lead opinion

MR. JUSTICE BRENNAN delivered the opinion of the Court.

The question presented in this case is whether the disinterested directors of an investment company may terminate a stockholders' derivative suit brought against other directors under the Investment Company and Investment Advisers Acts of 1940, 15 U.S.C. § 80a-1 et seq.; 15 U.S.C. § 80b-1 et seq. To decide that question, we must determine the appropriate roles of federal and state law in such a controversy.

Respondents, shareholders of Fundamental Investors, Inc., an investment company registered under the Investment Company Act, brought this derivative suit in February, 1973, in the District Court for the Southern District of New York. The action was brought against several members of the company's board of directors and its registered investment adviser, Anchor Corp. The complaint alleged that the defendants had violated their duties under the Investment Company Act (ICA),1 the Investment Advisers Act (IAA),2 and the common law in connection with the 1969 purchase by the corporation of $20 million in Penn Central Transportation Co. commercial

Page 474

paper.3 In response to the suit, Fundamental's board of directors determined that the five of its members who were neither affiliated with the investment adviser4 nor defendants in the action would decide what position the company should take in the case. On the basis of outside counsel's recommendation and their own investigation, the five, acting as a quorum pursuant to the company's bylaws, concluded that continuation of the litigation was contrary to the best interests of the company and its shareholders, and moved the District Court to dismiss the action.

The District Court held that, under the so-called "business judgment rule," a quorum of truly disinterested and independent directors has authority to terminate a derivative suit which they in good faith conclude is contrary to the company's

Page 475

best interests. 404 F.Supp. 1172 (1975). After permitting discovery on the question of the directors' independence, the District Court entered summary judgment against respondents, finding no evidence that the directors who voted to terminate the suit had acted other than independently and in good faith. 426 F.Supp. 844 (1977). The Court of Appeals for the Second Circuit reversed, 567 F.2d 1208, 1212 (1978), holding that, as a consequence of the ICA,

disinterested directors of an investment company do not have the power to foreclose the continuation of nonfrivolous litigation brought by shareholders against majority directors for breach of their fiduciary duties.

We granted certiorari, 439 U.S. 816 (1978). We reverse.

I

A fundamental issue in this case is which law -- state or federal -- governs the power of the corporation's disinterested directors to terminate this derivative suit. The first step in making that determination is to ascertain which law creates the cause of action alleged by the plaintiffs. Neither the ICA nor the IAA -- the plaintiff's two federal claims -- expressly creates a private cause of action for violation of the sections relevant here. However, on the basis of District and Circuit precedent, the courts below assumed that an implied private right of action existed under each Act. Brown v. Bullock, 194 F.Supp. 207, 222-228 (SDNY), aff'd, 294 F.2d 415 (CA2 1961) (en banc) (ICA); Abrahamson v. Fleschner, 568 F.2d 862 (CA2 1977) (IAA); Bolger v. Laventhol, Krekstein, Horwath & Horwath, 381 F.Supp. 260 (SDNY 1974) (IAA). The two courts also sanctioned the bringing of the suit in derivative form, apparently assuming that, as we held in J. I. Case Co. v. Borak, 377 U.S. 426, 432 (1964), [99 S.Ct. 1836] "[t]o hold that derivative actions are not within the sweep of the [right] would . . . be tantamount to a denial of private relief." As petitioners never disputed the existence of private, derivative causes of action under the Acts, and as in this Court all agree

Page 476

that the question has not been put in issue, Brief for Petitioners 28; Brief for Respondents 15, we shall assume without deciding that respondents have implied, derivative causes of action under the ICA and IAA.5

Since we proceed on the premise of the existence of a federal cause of action, it is clear that "our decision is not controlled by Erie R. Co. v. Tompkins, 304 U.S. 64," and state law does not operate of its own force. Sola Electric Co. v. Jefferson Co., 317 U.S. 173, 176 (1942). See Board of Comm'rs v. United States, 308 U.S. 343, 349-350 (1939); Deitrick v. Greaney, 309 U.S. 190, 200 (1940); C. Wright, Federal Courts 284 (3d ed.1976); Mishkin, The Variousness of "Federal Law": Competence and Discretion in the Choice of National and State Rules for Decision, 105 U.Pa.L.Rev. 797, 799-800 (1957); Hart, The Relations Between State and Federal Law, 54 Colum.L.Rev. 489, 529 (1954); 2 L. Loss, Securities Regulation 971 (2d ed.1961). Rather,

[w]hen a federal statute condemns an act as unlawful, the extent and nature of the...

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    ...of Texas. The latter two actions encompass, in addition to the claim that parallels that set forth in this suit, other claims. [5] 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979). [6] 15 U.S.C. s 80a-1 et seq. [7] 15 U.S.C. s 80b-1 et seq. [8] 441 U.S. at 480, 99 S.Ct. at 1838. See also ......
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    ...of action possessed by the nominal corporation against some members of the board of directors for alleged wrongdoing. See Burks v. Lasker, 441 U.S. 471, 480, 99 S.Ct. 1831, 1838, 60 L.Ed.2d 404 (1979); Lewis v. Anderson, 615 F.2d 778, 782-783 (9th Cir. 1979), cert. den., 449 U.S. 869, 101 S......
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  • 236 F.R.D. 561 (N.D.Ala. 2005), CV 03 HS 1439 M, Helms v. ConsumerInfo.com, Inc.
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    • 16 Marzo 2005
    ...not apply to Plaintiff's claims under the CROA, because it would totally undermine the statute and its purpose. See Burks v. Lasker, 441 U.S. 471, 479, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979). Because Plaintiff has not moved for class certification as to his state law unjust enrichment claim, ......
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