Liddy v. Urbanek, 82-5141

• Decision Date: 20 June 1983
• Docket Number: No. 82-5141,82-5141
• Citation: 707 F.2d 1222
• Parties: George B. LIDDY, Plaintiff-Appellee, v. Lawrence W. URBANEK, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1222

707 F.2d 1222

George B. LIDDY, Plaintiff-Appellee, v. Lawrence W. URBANEK, Defendant-Appellant.

No. 82-5141.

United States Court of Appeals Eleventh Circuit.

June 20, 1983.

Patrice A. Talisman, Daniels & Hicks, Sam Daniels, Miami, Fla., for defendant-appellant.

Joel D. Kenwood, Boca Raton, Fla., Larry Klein, West Palm Beach, Fla., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before RONEY and HILL, Circuit Judges, and MORGAN, Senior Circuit Judge.

LEWIS R. MORGAN, Senior Circuit Judge:

George Liddy, plaintiff-appellee, and Lawrence Urbanek, defendant-appellant, formed Boca Raton Land Development Incorporated (BRLD), under the laws of Florida in 1973. The articles of incorporation listed Liddy as president and Urbanek as secretary-treasurer. The two men served as the only directors and each owned fifty percent of the outstanding stock upon formation of the company. In 1979, Liddy filed this action in the District Court for the Southern District of Florida claiming in five separate counts that Urbanek had wasted and converted the assets of their corporation. The complaint recited that the suit was a stockholder's derivative action brought under Rule 23.1 of the Federal Rules of Civil Procedure and that jurisdiction was based on the diversity of citizenship of the parties. Liddy is a citizen of New Jersey and Urbanek is a citizen of Florida. The corporation was not named as a party to the suit. After extensive discovery, Liddy moved for summary judgment on the issue of liability in four of the five counts. Urbanek did not oppose the motion, and the district court granted it. Liddy then abandoned the claim in the fifth count of his complaint, and the case proceeded to trial on the issue of damages. The jury returned an award in favor of Liddy for over $480,000 compensatory and over $700,000 punitive damages.

In this appeal, Urbanek argues that the case must be dismissed for lack of jurisdiction. ¹ He claims that BRLD, a Florida corporation, was an absent indispensable party which should have been named as a plaintiff, and thus diversity jurisdiction does not exist. ² We agree with this argument and remand the case with instructions to dismiss.

There is no question that a corporation is an indispensable party in a derivative action brought by one of its shareholders. City of Davenport v. Dows, 18 Wall. 626, 21 L.Ed. 938 (1874); Meyers v. Fleming, 327 U.S. 161, 66 S.Ct. 382, 90 L.Ed. 595 (1946); Ross v. Bernhard, 396 U.S. 531, 90 S.Ct. 733, 24 L.Ed.2d 727 (1970). Thus, BRLD was an indispensable party to this suit, and the trial below erroneously proceeded without its presence. ³ Recognition of this error does not end our inquiry, however, since a subsidiary but dispositive issue remains. Urbanek contends that BRLD should have been named as a plaintiff to this action, thereby destroying diversity jurisdiction. In response, Liddy argues that the corporation should have been named as a defendant, and accordingly diversity jurisdiction would continue to exist. ⁴ After a careful review of these arguments, we find that the relevant cases and principles of law fully support Urbanek's position.

The plaintiff stockholder in a stockholder's derivative suit is "at best the nominal plaintiff." Ross v. Bernhard, 396 U.S. at 538, 90 S.Ct. at 738. The corporation is the real party in interest even though the corporate management has failed to pursue the action. Koster v. Lumbermens Mutual Casualty Company, 330 U.S. 518, 67 S.Ct. 828, 91 L.Ed. 1067 (1947). But as a practical matter, the corporation is initially named as a defendant. In this way the stockholder insures the presence of the corporation as an indispensable party. Once joined and present before the court, the corporation is then realigned, if necessary, according to its real interests. Smith v. Sperling, 354 U.S. 91, 77 S.Ct. 1112, 1 L.Ed.2d 1205 (1957); Lewis v. Odell, 503 F.2d 445 (2nd Cir.1974). Thus, in theory the corporation should be realigned as a plaintiff in a stockholder's derivative action since as the real party in interest it stands to benefit from a successful suit. See Schmidt v. Esquire, Inc., 210 F.2d 908 (7th Cir.), cert. denied 348 U.S. 819, 75 S.Ct. 31, 99 L.Ed. 646 (1954). This principle is modified, however, by the necessity of producing an actual controversy or real collision of interests between the parties. Smith v. Sperling, 354 U.S. at 97, 77 S.Ct. at 1115. For this reason, the corporation properly remains a defendant in a stockholder's derivative action whenever the corporate management is "antagonistic" to the plaintiff shareholder. Doctor v. Harrington, 196 U.S. 579, 25 S.Ct. 355, 49 L.Ed. 606 (1905). In other words, if the management of the corporation is actively aligned against the plaintiff shareholder and his lawsuit, then the shareholder and the corporation are actually on opposing sides of the controversy, and the corporation is properly named as a defendant. Smith v. Sperling, 354 U.S. at 95, 77 S.Ct. at 1114.

The question of whether to realign the corporation as a plaintiff or allow it to remain as a defendant is "a practical not a mechanical determination and is resolved by the pleadings and the nature of the dispute." Smith v. Sperling, 354 U.S. at 97, 77 S.Ct. at 1115. Thus, if the complaint in a derivative action alleges that the controlling shareholders or dominant officials of the corporation are guilty of fraud or malfeasance, then antagonism is clearly evident and the corporation remains a defendant. See, e.g., Swanson v. Traer, 354 U.S. 114, 77 S.Ct. 1116, 1 L.Ed.2d 1221 (1957). On the other hand, if the individual plaintiff is the majority stockholder or a controlling officer, then the corporation cannot be deemed antagonistic to the suit and it should be realigned as a plaintiff. ...