Krangel v. Crown, Civ. No. 91-0210-R(P).

Decision Date04 May 1992
Docket NumberCiv. No. 91-0210-R(P).
Citation791 F. Supp. 1436
CourtU.S. District Court — Southern District of California
PartiesHerman and Lillian KRANGEL, et al., Plaintiffs, v. Lester CROWN, et al., Defendants, and General Dynamics Corporation, a Delaware corporation, Nominal Defendant.

William S. Lerach, Milberg, Weiss, Bershad, Specthrie & Lerach, Edward M. Gergosian, Barrack, Rodos & Bacine, San Diego, Cal., for plaintiffs.

Nicholas D. Chabraja, Jenner & Block, Chicago, Ill., Michael Tracy, Gray, Cary Ames & Frye, San Diego, Cal., for defendants.


RHOADES, District Judge.

I. Background

General Dynamics, a private corporation, has been named as a nominal defendant in a shareholder derivative action against its management. Plaintiffs allege, among other things, fraud by the management of General Dynamics in its weapons contract dealings with the United States government. The suit was initially filed in San Diego Superior Court. Defendants removed to federal court on February 15, 1991 under the federal question and federal officer removal provisions. Plaintiffs then moved to remand the case to state court.

In its Order of December 9, 1991, this court rejected defendants' federal question claim. I did not, however, make a final ruling on whether federal officer removal is proper. Finding that General Dynamics did "act under" a federal officer in this case, the court asked the parties to submit additional briefs on two issues: (1) whether the shareholder derivative action is "against" General Dynamics for the purpose of federal officer removal; and (2) whether General Dynamics should be considered a "person" for the purpose of federal officer removal.

II. Legal Standard

On a motion to remand, the court must determine whether the case was properly removed to the federal court. See Emrich v. Touche Ross & Co., 846 F.2d 1190, 1194-95 (9th Cir.1988). Because a court's decision to remand may not be appealed, "courts should be cautious about remand." Roche v. American Red Cross, 680 F.Supp. 449, 451 (D.Mass.1988). However, removal statutes are strictly construed against removal, and the burden of establishing federal jurisdiction is on the party seeking removal. Emrich, 846 F.2d at 1195. In its Order of December 9, 1991, this court discussed an exception to this strict construction against removal. Order at 19. Case law has established that removal is to be broadly construed when determining whether a federal officer is acting "under color of office" within the meaning of § 1442(a)(1). See Willingham v. Morgan, 395 U.S. 402, 406-07, 89 S.Ct. 1813, 1816, 23 L.Ed.2d 396 (1969). We deal here, however, with two different and unrelated issues regarding § 1442(a)(1), and thus this exception clearly does not apply. See Gensplit Finance Corporation v. Foreign Credit Insurance Association, 616 F.Supp. 1504, 1508 (E.D.Wis.1985) ("the issue in Willingham ... was not whether the parties seeking removal were `persons'"); see also, Areskog v. United States, 396 F.Supp. 834, 838 (D.Conn.1975). This court will thus construe the federal officer removal statute narrowly.

The opportunity for removal is further narrowed by the rule that a case "should be remanded if there is doubt as to the right of removal in the first instance." Jones v. General Tire & Rubber Co., 541 F.2d 660, 664 (7th Cir.1976). There are sound reasons for this rule. "First, a plaintiff's choice of forum should not be denied lightly. Second, major inefficiencies result where a district court's decision that removal was proper is ultimately overturned on appeal after a full trial on the merits." Roche, 680 F.Supp. at 451.

III. Discussion

28 U.S.C. § 1442(a)(1) provides that civil or criminal actions instituted in state court against "any officer of the United States or any agency thereof, or person acting under him" may be removed by the officer or person acting under him to the district court of the United States. Two issues are before this court: first, whether this shareholder derivative action is "against" General Dynamics for purposes of removal under the statute; and second, whether General Dynamics is a "person" within the meaning of the statute.

A. The Shareholders Derivative Suit is "Against" General Dynamics Because there is Antagonism Between the Shareholders and the Management.

Plaintiffs argue that General Dynamics cannot remove under the federal officer provision because this shareholder derivative action is brought on behalf of, rather than "against," the corporation.

It is not questioned that in a shareholder derivative action the real party in interest is the corporation, and the plaintiff-stockholder is "at best the nominal plaintiff." Ross v. Bernhard, 396 U.S. 531, 538, 90 S.Ct. 733, 738, 24 L.Ed.2d 729 (1970); see also, Smith v. Sperling, 354 U.S. 91, 97, 77 S.Ct. 1112, 1115, 1 L.Ed.2d 1205 (1957) (derivative suit cause of action is the corporation's); Koster v. Lumbermens Mut. Casualty Co., 330 U.S. 518, 523, 67 S.Ct. 828, 831, 91 L.Ed. 1067 (1947) (shareholder brings derivative suit "somewhat as a `next friend' might do for an individual"). The corporation is named as a defendant, however, to assure its inclusion as an indispensable party to the action. Liddy v. Urbanek, 707 F.2d 1222, 1224 (11th Cir.1983). Courts have the power to realign the parties according to their true interest once they are present before the court. Smith, 354 U.S. at 93, 77 S.Ct. at 1113; Liddy, 707 F.2d at 1224. In light of this precedent, plaintiffs argue that this court should realign nominal defendant General Dynamics as a plaintiff. They point out that no claims are asserted against General Dynamics, and thus the true interest of the corporation lies with the prosecution of the claims against the management.

Plaintiffs make a sound presentation of the legal fiction of corporate defendants in shareholder derivative suits. But they fail to take the essential next step in determining whether this court can realign General Dynamics as a plaintiff. As defendants correctly emphasize, it is well established that whenever there is "antagonism" between the shareholders and the management in a derivative suit, the corporation properly remains a defendant. See Smith, 354 U.S. at 97-98, 77 S.Ct. at 1116 (Court reversed district court's dismissal of suit for want of diversity because corporate management was antagonistic to shareholders and thus realignment destroying diversity was improper); Liddy, 707 F.2d at 1224 (corporation should have been permanently realigned as a plaintiff where no real antagonism existed); Van Gelder v. Taylor, 621 F.Supp. 613 (N.D.Ill.1985) (corporation properly named a defendant because of antagonism between the shareholder and management). As the Court stated in Doctor v. Harrington, 196 U.S. 579, 587, 25 S.Ct. 355, 357, 49 L.Ed. 606 (1905), overruled by Smith v. Sperling, 354 U.S. 91, 77 S.Ct. 1112, 1 L.Ed.2d 1205 (1957), "the ultimate interest of the corporation made defendant may be the same as that of the stockholder made plaintiff, but the corporation may be under a control antagonistic to him, and made to act in a way detrimental to his rights." Furthermore, even the case that the plaintiffs rely on in their argument, Koster v. Lumbermens Mutual Casualty Co., 330 U.S. at 523, 67 S.Ct. at 831, states that diversity "jurisdiction is saved in shareholder derivative suits by a special dispensation when the corporation is in antagonistic hands." Although we do not deal with diversity jurisdiction here, the rule is well settled and applicable to the case at hand.

To determine whether there is antagonism between shareholder plaintiffs and corporate management, courts look to the pleadings and the nature of the dispute. Smith, 354 U.S. at 97, 77 S.Ct. at 1115. "The bill and answer normally determine whether the management is antagonistic to the stockholder." Id. at 96, 77 S.Ct. at 1115. The Supreme Court has repeatedly found antagonism when the shareholder suit charges corporate management with fraud. See id. at 95, 77 S.Ct. at 1114 ("There will, of course, be antagonism between the stockholder and the management where the dominant officers and directors are guilty of fraud and misdeeds."); Swanson v. Traer, 354 U.S. 114, 116, 77 S.Ct. 1116, 1117, 1 L.Ed.2d 1221 (1957). See also Van Gelder, 621 F.Supp. at 620-21.

Clearly there is antagonism between the plaintiff shareholders and General Dynamics' management here. Plaintiffs make specific allegations of fraud by the management in their complaint. Complaint of January 17, 1991, ¶¶ 102-104. No further inquiry need be made into the question of fraud for this court to determine that antagonism exists. Whether defendant management actually committed fraud in its dealings with the government "is an issue that goes to the merits, not to the question of jurisdiction." Smith, 354 U.S. at 95, 77 S.Ct. at 1114.

Moreover, the Supreme Court has stated that "there is antagonism whenever the management is aligned against the stockholder and defends a course of conduct which he attacks." Id. There is no room to dispute that General Dynamics' management has defended the conduct alleged to constitute fraud. Indeed, plaintiff's complaint states that the "board of directors ... has refused to pursue legal action against those persons responsible for the fraud, and has instead caused the Company to issue public statements denying any wrongdoing or violation of law with the allegations contained in this Complaint in other contexts...." Complaint of January 17, 1991, ¶ 34(e). This is thus clearly "an instance where the management — for good reasons or for bad — is definitely and distinctly opposed to the institution of this litigation." Swanson v. Traer, 354 U.S. at 116, 77 S.Ct. at 1118 (corporate management refused to bring suit for conspiracy to defraud corporation where management would be implicated as...

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