Fielding v. Allen

• Citation: 181 F.2d 163
• Decision Date: 12 April 1950
• Docket Number: No. 172,Docket 21567.,172
• Parties: FIELDING et al. v. ALLEN et al.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

181 F.2d 163 (1950)

FIELDING et al. v. ALLEN et al.

No. 172, Docket 21567.

United States Court of Appeals Second Circuit.

Argued February 2, 1950.

Decided April 12, 1950.

Hays, Podell, Algase & Feuer, New York City, Mortimer Hays and Mortimer Feuer, New York City, of counsel, attorneys for appellants.

Whitman, Ransom, Coulson & Goetz, New York City, Richard Joyce Smith, Henry S. Reeder and Bernard L. Sanoff, New York City, of counsel, attorneys for Ogden Corporation, appellee.

Before L. HAND, Chief Judge, and SWAN and CHASE, Circuit Judges.

SWAN, Circuit Judge.

This action is a consolidation of two derivative stockholder's actions brought by Bennett I. Fielding and Frances Barretta, respectively, on behalf of themselves and all other stockholders of Ogden Corporation, against numerous defendants, including directors and officers of Ogden Corporation, to set aside a sale of corporate assets and to obtain an accounting from the defendants. The order of consolidation directed that the complaint in the Fielding action stand as the complaint in the consolidated cause. Hence our discussion need refer only to the Fielding complaint. After answering, Ogden Corporation moved for an order requiring the plaintiffs to furnish security pursuant to section 61-b of the New York General Corporation Law, McK.Consol.Laws, c. 23. From an order which granted this motion, stayed all proceedings until the security should be deposited, and provided for dismissal of the action if it were not deposited as directed, the plaintiffs and plaintiff-intervenors have appealed.

The complaint contains two counts, each purporting to set forth a separate cause of action on behalf of Ogden Corporation. The first count alleges that corporate assets were sold for a grossly inadequate price and charges the defendants with conspiracy, fraud, and breach of fiduciary duties by Ogden's directors. Federal jurisdiction is invoked on the ground of diversity of citizenship. The appellants concede, as they must under the authorities, that the security requirements of the New York statute¹ are applicable to this count.² Hence the questions presented by the appeal relate only to the second count, and are two: Whether the count alleges a cause of action founded upon a federal statute, and whether, if it does, the New York statute as to security applies.

Although the questions before us do not directly involve the first count of the complaint, a brief recital of the facts there alleged will aid discussion of the second count. Ogden Corporation is a holding company organized under the laws of Delaware and licensed to do business in the state of New York. It owned all the stock of a railroad company (Litchfield) and all the stock of a coal company (Mt. Olive). The stock of both companies, plus a large indebtedness owing by Mt. Olive to Ogden Corporation, were sold by the latter to Holtzmann who acted as an agent and dummy for Allen & Company, a partnership. Holtzmann paid only $1,758,883.33 for Ogden's interests in Litchfield and Mt. Olive although their real value was at least $7,625,000. The transaction was carried out pursuant to a conspiracy between the officers and directors of Ogden, Holtzmann and Allen & Company "wrongfully, fraudulently and unlawfully to divest Ogden of its assets and properties."³

The second count relates only to the sale of Litchfield stock. It repeats many of the allegations of the first count respecting breaches of fiduciary duties but it claims in addition that the sale of Litchfield violated section 5(4) of the Interstate Commerce Act, 49 U.S.C.A. § 5(4). This section makes it unlawful for any person to cause the control of two or more carriers to be united in a common interest without first securing the approval of the Interstate Commerce Commission, as required by § 5(2) (a) of the Act, 49 U.S.C.A. § 5(2) (a). The count alleges that Allen & Company when it acquired the Litchfield stock was in control of another railroad company and that the purpose of transferring the Litchfield stock to Holtzmann rather than directly to Allen & Company was to avoid having the Interstate Commerce Commission examine the transaction in terms of its fairness to Ogden's stockholders, as the Commission would otherwise have done; that the Commission's approval was solicited only for the "purely formal" transfer from Holtzmann to Allen & Company; that the hearing on this application was "perfunctory"; that the Commission's approval of the transaction was obtained by suppression of the fact that Holtzmann acted as Allen & Company's agent; and consequently acquisition of control of Litchfield by Allen & Company "was unlawful and void." The second count further alleged:

"37. This action arises under the laws of the United States, including Transportation Act of 1920 (41 Stat. 474), as amended by the Act of June 16, 1933 (48 Stat. 211) and the Act of September 18, 1940 (54 Stat. 905), U.S.C., Title 49, Sec. 1 et seq. 49 U.S.C.A. § 1 et seq. as hereinabove more fully appears, and jurisdiction of this Court depends thereon, as well as on diversity of citizenship."

The district judge was of opinion that the violation of the federal statute "is but an incident to the wrongful acts alleged to have been committed." He found that jurisdiction was predicated over both counts upon diverse citizenship exclusively. With this conclusion we are unable to agree. It not only makes the second count simply a repetition, with respect to Litchfield stock, of the first cause of action but it also disregards the allegations which plainly attempt to state a cause of action founded upon the Transportation Act.

It is well settled that "the party who brings a suit is master to decide what law he will rely upon."⁴ A complaint which sets forth a substantial claim under a federal statute presents a case within the jurisdiction of a federal court, even though it fails to state a cause of action good on the merits. Jurisdiction, as Justice Holmes pointed out in The Fair opinion, "is authority to decide the case either way."⁵ Nor need the federal statute upon which the claim is based expressly provide that the plaintiff shall have a remedy by way of suit. Bell v. Hood, supra. Hence we have only to determine whether the second count of the complaint asserts a right of Ogden Corporation based on a law of the United States. We think it does. It is true that jurisdiction is alleged to depend both upon the statute and upon diversity of citizenship. But the reference to diversity is a defect in pleading which may be regarded as surplusage. It should not defeat the obvious effort to state a cause of action based on the statute.

The count sets up the Transportation Act and alleges that its requirement of approval by the Interstate Commerce Commission was violated by transferring the Litchfield stock to Allen & Company through an intermediary. It asserts that the Commission's approval of the transfer from Holtzmann was obtained by the suppression of material facts and is void. Under the latter charge the claim may be considered as one to compel Ogden Corporation to apply to the Commission to reopen the hearing at which its approval was obtained. That is a claim under a federal statute whether or not Ogden Corporation has any standing to apply for such reopening. It is true that the count does not request a reopening, but probably such relief would be appropriate under the general prayer for "such other and further relief as may be just and proper in the premises," and, if not, the request could be reframed. Moreover, just as it stands, the count asks for a rescission of the sale and a reconveyance to Ogden Corporation of all the assets unlawfully transferred to the defendants. With respect to Litchfield stock that also is a claim under the statute. Nor is it a mere repetition of the first count, since if the Transportation Act was violated, as charged, it may be that Ogden Corporation can rescind the sale even though the consideration received for Litchfield stock was not so inadequate as to prove a breach of fiduciary duty by the directors in authorizing the sale. Viewed either way, the complaint raises a question which will be decided favorably or unfavorably to the plaintiffs depending on the construction given to the Transportation Act. That is the essence of a federal question from the jurisdictional standpoint.⁶ We do not, of course, express any opinion as to the merits of the claims asserted. We merely affirm their federal nature.

The appellee urges that the conclusion at which we have arrived is at variance with the result reached in Downing v. Howard, 3 Cir., 162 F.2d 654, certiorari denied 332 U.S. 818, 68 S.Ct. 155, 92 L.Ed. 395. That was a derivative suit in which federal jurisdiction was sought to be based on alleged violations of section 25 of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79y. It was held that section 25 gave the plaintiff no right of action, and the complaint was dismissed for lack of jurisdiction. The case has been criticized on the ground that it decided the jurisdictional question in terms of the merits.⁷ We are unable to follow it, in view of the Supreme Court's decision in Bell v. Hood, supra. That case and those on which it relies clearly separate the jurisdictional question from the merits of the cause.

Our decision in Meyer v. Kansas City Southern Ry. Co., 2 Cir., 84 F.2d 411, certiorari denied 299 U.S. 607, 57 S.Ct. 233, 81 L.Ed. 448, is not contrary to the conclusion above expressed. The federal claim there was based on the antitrust laws. But plaintiff, a stockholder suing on his corporation's behalf, disclaimed any purpose to recover under the antitrust laws as indeed he had to, in view of Fleitmann v. Welsbach Street Lighting Co., 240 U.S. 27, 36 S.Ct. 233, 60 L.Ed. 505. Accordingly, his claim presented a federal question only for the frivolous purpose of obtaining federal jurisdiction, which would otherwise have...