Lavin v. Lavin, 226

• Decision Date: 02 June 1950
• Docket Number: No. 226,Docket 21639.,226
• Citation: 182 F.2d 870
• Parties: LAVIN v. LAVIN et al.
• Court: U.S. Court of Appeals — Second Circuit

182 F.2d 870 (1950)

LAVIN v. LAVIN et al.

No. 226, Docket 21639.

United States Court of Appeals Second Circuit.

Argued May 4, 1950.

Decided June 2, 1950.

Kraushaar & Kraushaar, New York City, and Meyer Kraushaar, New York City, for appellant.

Leo E. Sherman, New York City, for appellees.

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

L. HAND, Chief Judge.

The plaintiff appeals from a judgment, dismissing his complaint because the district court lacked jurisdiction over the claim. The plaintiff is a shareholder of the defendant, Sanford Hotel Corporation, of which the individual defendants are directors and officers, and the action is based upon a claim that they have abused their fiduciary position in various transactions set out in seven counts, which it is not necessary to state in detail. The corporation was incorporated under the laws of New York, of which the plaintiff is a citizen; and the individual defendants are citizens of Connecticut, who have been served with process in the Southern District of New York. The court dismissed the complaint because the plaintiff and the defendant corporation were both citizens of New York, and the diversity of citizenship requisite to such cases did not exist.¹ The only question involved is whether the judge correctly interpreted § 1401 of the Judicial Code.²

We need not deal at length with the plaintiff's suggestion that it is only when the jurisdiction of the federal court will be sustained that in such actions the corporation may not be aligned as a plaintiff. True, so far as we have found that has been the case in all decisions of the Supreme Court, but it was not true in Groel v. United Electric Company, C.C., 132 F. 252, or in Kelly v. Mississippi River Coaling Company, C.C., 175 F. 482, which the Supreme Court cited with apparent approval in Hamer v. New York Railways, 244 U.S. 266, 274, 37 S.Ct. 511, 61 L.Ed. 1125. It may indeed be doubted whether as an original question the Supreme Court would not today align the corporation as a party plaintiff in all cases;³ nevertheless it has shown no disposition to change the rule in Doctor v. Harrington, 196 U.S. 579, 25 S.Ct. 355, 49 L.Ed. 606, but has recognized its continued authority.

We start with § 51⁴ of the Judicial Code as it stood after the amendment of 1936, 49 Stat. 1213, which added an exception on which the result here depends, and which was in these words: "suit by a stockholder on behalf of a corporation may be brought in any district in which suit against the defendant or defendants * * * other than said corporation, might have been brought by such corporation and process in such cases may be served upon such corporation in any district wherein such corporation resides or may be found." The question is whether this meant more than that, when there was proper diversity of citizenship under existing law, the shareholder might sue, not only in a district where he already might sue, but also in a district where the corporation could have sued the directors. Did it also mean that a shareholder should have access to a federal court, from which the existing law debarred him jurisdictionally, if the corporation would have had access to a federal court in an action against the directors, to which the shareholder was not a party? If the exception be construed as an added ground of jurisdiction, the law is that since 1936, not only may a shareholder sue, as he might before, the directors in the federal court when they and the corporation are citizens of one state or of different states, and he is a citizen of another; but that he may do so, when both he and the corporation are citizens of one state and the directors are citizens of another, or when the corporation is a citizen of one state and the shareholder and the directors are citizens of another, and the same, state. This would mean that, though the citizenship of the shareholder might be a source of "diversity jurisdiction," it could be disregarded, if it would defeat that jurisdiction. Federal jurisdiction would be absent only in cases in which the shareholder and the corporation and one of the directors were all citizens of the same state. It is of course impossible to say à priori that Congress could not have wished to extend this jurisdiction so far, and it is possible to read the words in that way. However, the jurisdiction has in recent years been subject to much attack, particularly as to that feature of it which treats a corporation as a "citizen" of the state of its incorporation; and it appears to us that we ought to approach the question at least without any bias favoring this interpretation.

Be that as it may, when we look at the course through Congress of the amendment, it becomes clear that no such jurisdictional expansion was contemplated. The act originated in the Senate in a bill⁵ introduced by Senator Tydings in the form which we quote in the margin,⁶ and which it will be observed was not confined to shareholders' actions. It changed the existing law that a "diversity action" must be brought in the district where all the plaintiffs, or all the defendants, reside, and allowed a plaintiff to select the residence of any one defendant, when there are several, and to serve the others where they reside or "may be found." This it coupled with a power in the court to transfer the action as the convenience of parties might demand. Senator Tydings upon the floor stated that the bill was designed for shareholders' actions when the corporation was beyond the reach of process in the district where the suit was brought; and, in spite of its generalized form, it is plain that no notion of any enlargement of jurisdiction was in anyone's mind. When the bill reached the House apparently the language was thought too broad, though the purpose was approved. At any rate the bill which the Judiciary Committee reported, and the House passed, was substantially the same as the amendment when enacted. This was accompanied by a report⁷ which stated that "as amended * * * this proposed legislation relates solely to venue in that class of stockholders' suits brought under the diversity of citizenship jurisdiction. * * * Its purpose is to plug a loophole * * * through which holding companies and parent corporations are enabled to strip a subsidiary. * * * Under the existing law with regard to venue, if a holding company and its subsidiary corporation are incorporated in different States, no Federal court...