Source: https://caselaw.findlaw.com/us-supreme-court/327/161.html
Timestamp: 2019-04-21 19:10:18+00:00

Document:
[327 U.S. 161, 162] Mr. Walter E. Meyer, pro se.
Mr. William Stanley, of Washington, D.C., for respondents.
Petitioner is the owner of a substantial number of shares of stock of the St. Louis Southwestern Railway Company. In April 1934 he filed a claim for the benefit of St. Louis Southwestern in the bankruptcy proceedings which previously had been instituted under 77 of the Bankruptcy Act, 49 Stat. 911, 11 U.S.C. 205, 11 U.S.C.A. 205, for the reorganization of the Chicago, Rock Island & Pacific Railway Co. The claim filed was a claim for a cause of action which St. Louis Southwestern allegedly had against the Rock Island. It amounted to many millions of dollars and arose out of an alleged conspiracy between the Rock Island and others to control the St. Louis Southwestern to their own interest, in breach of their fiduciary relationship to St. Louis Southwestern, and in violation [327 U.S. 161, 163] of the antitrust laws. It was stated in the claim that a demand on the board of directors of St. Louis Southwestern to file the claim was not made because it would be futile, the dominant stockholder and the directors of St. Louis Southwestern being parties to the conspiracy. In May 1935 the trustees of Rock Island objected to the claim by general denial. In December 1935-about a year and a half after the claim had been filed-St. Louis Southwestern filed a petition for reorganization under 77 of the Bankruptcy Act. Shortly thereafter the petition was approved and a trustee was appointed. Thereupon the trustees of Rock Island further objected to the claim filed by petitioner on the ground that all causes of action belonging to St. Louis Southwestern had become vested in its bankruptcy trustee and could no longer be asserted in the Rock Island proceeding by petitioner. The claim was referred to a special master who, in February 1942, filed his report, concluding that petitioner should not be allowed to prosecute the claim. Two years later the District Court approved the special master's report and disallowed the claim. On appeal the Circuit Court of Appeals affirmed. 7 Cir., 149 F.2d 529. The case is here on a petition for a writ of certiorari which we granted because the problem presented is an important one in bankruptcy law.
The Circuit Court of Appeals held that a stockholders' derivative suit commenced before the corporation's petition under 77 had been approved could not be continued thereafter without permission of the reorganization court. It relied on the provisions of 77 which gave the reorganizing court exclusive jurisdiction of the debtor and its property1 and which give a trustee appointed in those [327 U.S. 161, 164] proceedings the title and powers of other bankruptcy trustees. 2 But the exclusive jurisdiction granted the reorganization court by 77, sub. a, is that which bankruptcy courts have customarily possessed. 3 And the title and powers of the trustee are by 77, sub. c(2), assimilated to those of trustees in ordinary bankruptcy proceedings. Certainly, so far as the enforcement of claims are concerned, there is no indication that Congress adopted a different ule in proceedings under 77 than had long obtained in ordinary bankruptcy proceedings. Yet, if the view of the Circuit Court of Appeals were followed, any suit which had been brought by the corporation before its petition under 77 had been approved would be defeated when that event happened. That is not the rule in ordi- [327 U.S. 161, 165] nary bankruptcy proceedings. And it would be a radical change in the law to write that rule into 77.
We see no reason why there should be a different rule in the case of stockholders' derivative suits. They are likewise suits to enforce a corporate claim. They are one of the remedies which equity designed for those situations where the management through fraud, neglect of duty or other cause declines to take the proper and necessary steps to assert the rights which the corporation has. 11 The stockholders are then allowed to take the initiative and institute the suit which the management should have started had it performed its duty. The corporation is a necessary party. City of Davenport v. Dows, 18 Wall. 626. Hence, it is joined as a defendant. But it is only nominally a defendant, since any judgment obtained against the real defendant runs in its favor. The reasons of policy for holding that ordinary suits to enforce a corporate claim are not abated when the corporation is adjudged a bankrupt or when a receiver is appointed are equally applicable here. The claim sought to be enforced in a derivative suit may be an important asset of the estate. It might be lost to the estate through the operation of statutes of limitations, if the trustee or receiver were required to start anew. As in case of ordinary suits to enforce corporate claims, he should be allowed a choice to let the suit continue under the stockholders' auspices;12 to intervene in it;13 to start a new suit; or, in case he deems it more provi- [327 U.S. 161, 168] dent from the point of view of the estate to make a settlement of the claim or to reserve it for the reorganized company, to cause it to be abated. 14 He might conclude that the more provident course was to let the suit continue without interference. 15 That decision might be dictated by the speculative nature of the suit and the expense involved as Johnson v. Collier, supra, indicates. If the trustee will not sue and the stockholder cannot continue with the litigation, what might turn out to be a valuable claim might be lost to the estate not only through the operation of statutes of limitation, but in cases like the present through a discharge of the debtor. 16 The point is that the trustee or receiver, being in a position to take control of the litigation by reason of the fact that the cause of action has become a part of the estate, should have the opportunity to make the choice which is most advantageous to the estate. Cf. Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 483 , 60 S.Ct. 628, 630. The fact that the corporation is nominally a defendant should not lead to any different result. 17 That gives the suit only a difference in form, not a difference in substance. [327 U.S. 161, 169] We have in the present case not a stockholders' derivative suit filed before the bankruptcy of his corporation, but a claim filed in the bankruptcy proceedings of the alleged debtor (Rock Island) by a stockholder on behalf of his corporation, St. Louis Southwestern. If the claim were to be filed after the petition for the reorganization of St. Louis Southwestern had been approv d, it could be done only with the consent of the bankruptcy court. For it has exclusive authority to determine how causes of action which have become a part of the bankruptcy estate shall be enforced. See Porter v. Sabin, 149 U.S. 473 , 13 S.Ct. 1008; Klein v. Peter, 8 Cir., 284 F. 797. But since the claim was filed before the petition of St. Louis Southwestern under 77 had been approved, no reason is apparent why that event should have a different effect on the claim than it would have had on a suit which had been previously instituted by or on behalf of the corporation. Indeed, the facts of this case emphasize the reason for giving the trustee an opportunity to choose what course to take. The claim was filed in April 1934, a year and a half prior to the time when the petition of St. Louis Southwestern under 77 had been approved. We are told that the time for filing of claims against the Rock Island expired over eleven years ago. If the claim were now disallowed, the trustee of St. Louis Southwestern, if he desired to assert it, would be faced with the task of obtaining leave to file out of time. 18 There is, therefore, the same reason for allowing [327 U.S. 161, 170] the estate to obtain the benefits of the claim which has been filed, as there would be for allowing the trustee the opportunity to take over a stockholders' derivative suit previously instituted.
The order disallowing the claim will be reversed. On remand of the cause the District Court will allow the claim to be amended by joining St. Louis Southwestern or its trustee. If it is established that the continued prosecution of the claim will be inconsistent with the plan of reorganization of St. Louis Southwestern or the administration of its affairs, the claim should be disallowed. If it is not so established, the claim should then be considered on its merits.
Mr. Justice FRANKFURTER and Mr. Justice JACKSON took no part in the consideration or decision of this case.
[ Footnote 3 ] Isaacs v. Hobbs Tie & T. Co., 282 U.S. 734, 737 , 738 S., 51 S.Ct. 270, 271, 272; Ex parte Baldwin, 291 U.S. 610, 615 , 54 S.Ct. 551, 553; Continental Illinois Nat'l Bank v. Chicago, R.I. & P. Ry. Co., 294 U.S. 648 , 682-684, 55 S.Ct. 595, 608, 609; Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 483 , 60 S.Ct. 628, 630. And see Thompson v. Terminal Shares, Inc., 8 Cir., 104 F.2d 1. Cf. In re Standard Gas & Electric Co., 3 Cir., 119 F.2d 658, 661, arising under 77B, 11 U.S.C.A. 207.
[ Footnote 4 ] Sec. 70 of the Bankruptcy Act, 52 Stat. 879, 11 U.S.C. 110, 11 U. S.C.A. 110. The same is true under 77 by reason of the provision in 77, sub. c(2), supra note 2.
[ Footnote 5 ] Sec. 11, sub. e of the Bankruptcy Act, 11 U.S.C. 29(e), 11 U.S.C. A. 29, sub. e, authorizes a receiver or trustee, within two years subsequent to the adjudication or within such further period of time as federal or state law permits, to institute proceedings in behalf of the estate upon any claim against which the statute of limitations had not expired at the time of the filing of the petition in bankruptcy.
This provision is applicable to proceedings under 77, sub. l by reason of 77, sub. l, set forth in supra note 1.
[ Footnote 6 ] Sec. 11, sub. c, of the Bankruptcy Act, 52 Stat. 849, 11 U.S.C. 29(c), 11 U.S.C.A. 29, sub. c, provides that 'A receiver or trustee may, with the approval of the court, be permitted to prosecute as receiver or trustee any suit commenced by the bankrupt prior to the adjudication, with like force and effect as though it had been commenced by him.' This provision is likewise applicable to proceedings under 77, sub. l, supra note 1.
[ Footnote 7 ] And see Dauciger v. Smith, 276 U.S. 542 , 48 S.Ct. 344; Bluegrass Canning Co. v. Steward, 6 Cir., 175 F. 537, 543, 544; Paradise v. Vogtlandische Maschinen-Fabrik, 3 Cir., 99 F.2d 53, 55; Bennett v. Associated Theatres, 247 Mich. 493, 496, 226 N.W. 239; Griffin v. Mutual Life Ins. Co., 119 Ga. 664, 46 S.E. 870.
[ Footnote 8 ] If the suit is continued by the bankrupt, the trustee is concluded by the judgment. Eyster v. Gaff, 91 U.S. 521, 524 , 525 S.; Paradise v. Vogtlandische Maschinen-Fabrik, supra note 7, 99 F.2d page 55.
[ Footnote 10 ] See Missouri, K. & T. Trust Co. v. German Nat'l Bank, 8 Cir., 77 F. 117, 122, 123; Boston Elevated Ry. Co. v. Paul Boynton Co., 1 Cir., 211 F. 812, 822, 823; Hartford Accident & Indemnity Co. v. Federal Bond & Mortgage Co., 8 Cir., 59 F.2d 950, 956. See 1 Clark on Receivers (2d ed., 1929) 614, 615.
[ Footnote 11 ] Glenn, The Stockholder's Suit, 33 Yale L.Journ. 580.
[ Footnote 12 ] Cf. American Steel Foundries v. Chicago, R.I. & P. Ry. Co., D.C., 231 F. 1003; Seagrist v. Reid, 171 App.Div. 755, 759, 157 N.Y.S. 979. And see 4 Cook on Corporations (8th ed. 1923) 748.
[ Footnote 13 ] Meyer v. Page, 112 App.Div. 625, 627, 98 N.Y.S. 739; Floyd v. Layton, 172 N.C. 64, 89 S.E. 998.
[ Footnote 14 ] Moreover, the stockholder's suit might so intimately affect the administration of the bankruptcy or receivership estate as to require that it be continued only under the auspices of the trustee or receiver. See Adler v. Seaman, 8 Cir., 266 F. 828, 835-837; Seaman v. McCulloch, 8 Cir., 8 F.2d 820, 825, 826.
[ Footnote 15 ] In re National Republic Co., 7 Cir., 109 F.2d 167, 171; McAnarney v. Lembeck, 97 N.J.Eq. 361, 127 A. 197.
[ Footnote 17 ] But see Coyle v. Skirvin, 10 Cir., 124 F.2d 934, 937, 938 ( receivership). The provision in 77, sub. j empowering the court to 'enjoin or stay the commencement or continuation of suits against the debtor until after final decree' obviously relates to suits where claims are asserted against the debtor, not where the debtor is made a nominal defendant for the purpose of obtaining a judgment in its favor.
[ Footnote 18 ] Sec. 77, sub. c(7) provides that the judge 'shall promptly determine and fix a reasonable time within which the claims of creditors may be filed or evidenced and after which no claim not so filed or evidenced may participate except on order for cause shown.' This is the equity rule (5 Collier on Bankruptcy (1944) p. 537) which permits the filing of claims out of time provided the claim is equitable, the claimant is not chargeable with laches, and the assets have not been distributed ( see Conklin v. United States Shipbuilding Co., C.C., 136 F. 1006, 1009, 1010; Pennsylvania Steel Co. v. New York City Ry. Co., 2 Cir., 198 F. 721, 740-742); and provided further that the late filing does not unduly delay the proceedings. Guaranty Trust Co. v. Henwood, 8 Cir., 86 F.2d 347, 353.
[ Footnote 19 ] Sec. 2, sub. a(6) of the Bankruptcy Act, 11 U.S.C. 11(a)(6), 11 U.S.C.A. 11, sub. a (6), grants the court power to 'Bring in and substitute additional persons or parties in proceedings under this Title when necessary for the complete determination of a matter in controversy.' See 1 Collier on Bankruptcy (14 ed. 1940), pp. 214-218.
[ Footnote 20 ] One of the grounds on which the Special Master based his recommendation for disallowance of the claim was that the claim was improperly filed in the first instance since the corporation was not made a party. But the District Court, like the Circuit Court of Appeals, proceeded on the ground that the claim could no longer be prosecuted after app oval of the petition for the reorganization of St. Louis Southwestern unless the bankruptcy court in that proceeding expressly authorized it.
[ Footnote 21 ] Cf. 14 Boston Univ.L.Rev. 802, 808.

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