Source: http://www.chanrobles.com/usa/us_supremecourt/327/161/case.php
Timestamp: 2019-05-27 11:01:05
Document Index: 395197414

Matched Legal Cases: ['§ 77', '§ 205', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 614', '§ 748']

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, 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 chanroblesvirtualawlibrary
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 property [Footnote 1] and which give a trustee appointed in those chanroblesvirtualawlibrary
proceedings the title and powers of other bankruptcy trustees. [Footnote 2] But the exclusive jurisdiction granted the reorganization court by § 77(a) is that which bankruptcy courts have customarily possessed. [Footnote 3] And the title and powers of the trustee are by § 77(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 rule 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 ordinary chanroblesvirtualawlibrary
Litigation instituted by a creditor may not be defeated merely by reason of the fact that he has become a bankrupt. Thatcher v. Rockwell, 105 U. S. 467, 105 U. S. 469-470. Title to the claim vests, of course, in the bankruptcy trustee. [Footnote 4] He is in position to take control of the litigation. He may, as indicated in Johnson v. Collier, 222 U. S. 538, 222 U. S. 540, start a new suit [Footnote 5] and cause the old one to be abated, or intervene in the old one [Footnote 6] and obtain such benefits as it affords. [Footnote 7] The choice may indeed be a valuable one. Rights might be lost if the earlier suit were abated. And the speculative nature of the litigation or the expense involved might indicate to the trustee that it was more provident for him not to intervene in the existing suit, nor to institute a new one, but to let the one which had been started chanroblesvirtualawlibrary
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. [Footnote 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. @ 85 U. S. 483. The fact that the corporation is nominally a defendant should not lead to any different result. [Footnote 17] That gives the suit only a difference in form, not a difference in substance. chanroblesvirtualawlibrary
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 approved, 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; Klein v. Peter, 284 F.7d 7. 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. [Footnote 18] There is therefore the same reason for allowing chanroblesvirtualawlibrary
It is said, however, that the claim was properly disallowed because the corporation on whose behalf the claim was filed was not before the court. As we have said, the corporation is a necessary party in a stockholders' derivative suit. Davenport v. Dows, supra. It can be joined as a party and brought in by summons in the usual way. But the filing of a claim in bankruptcy is not the institution of a plenary suit. It is a claim against assets in the hands of the bankruptcy court, not an action in personam. The absence of the corporation is a proper basis for an objection to the claim. But there is no way available to the stockholder to join it in the claim other than by moving the bankruptcy court to bring it in. The bankruptcy court has that power. [Footnote 19] The objections to the present claim, however, were not based on the absence before the court of St. Louis Southwestern or its trustee. [Footnote 20] But, whether such an objection was made or not, the proper and necessary procedure for the bankruptcy court is to summon in the corporation or its trustee so that all parties chanroblesvirtualawlibrary
It is said, however, that, by reason of events which have transpired since St. Louis Southwestern filed its petition for reorganization under § 77, the claim which Meyer filed in the Rock Island reorganization proceedings was properly disallowed. In the first place, it appears that a reorganization plan for the St. Louis Southwestern has been approved by the District Court. In re St. Louis Southwestern Ry. Co., 53 F.Supp. 914. The Interstate Commerce Commission, in preparing the plan, investigated Meyer's charges and concluded that they had no substantial support. St. Louis Southwestern Ry. Co. Reorganization, 249 I.C.C. 5, 46-149; 252 I.C.C. 325, 330-337. It refused to recommend that the cause of action be reserved in the plan of reorganization. 252 I.C.C. pp. 334, 335. The District Court concurred in that recommendation (53 F.Supp., p. 925), saying that the trustee had investigated the charges, found no basis for instituting legal proceedings on behalf of St. Louis Southwestern, and that there was no charge that the trustee had acted in bad faith or had shown a lack of diligence. 5 3 F.Supp. 926. Moreover, we were advised on oral argument, although the matter does not appear of record, that a motion of Meyer in the St. Louis Southwestern proceedings for an order directed to the trustee to show cause why Meyer should not be permitted to prosecute the claim filed by him in the Rock Island proceedings was denied in February, 1944. The grounds of this denial do not appear. We can infer, on the basis of the opinion of the District Court confirming the plan, that the motion was denied because the court was of the view that the claim had no substance. But a decision of the court not to direct or authorize its trustee to undertake the prosecution of a chanroblesvirtualawlibrary
And see Dauciger v. Smith, 276 U. S. 542; Bluegrass Canning Co. v. Steward, 175 F.5d 7, 543, 544; Paradise v. Vogtlandische Maschinen-Fabrik, 99 F.2d 53, 55; Bennett v. Associated Theaters, 247 Mich. 493, 496, 226 N.W. 239; Griffin v. Mutual Life Ins. Co., 119 Ga. 664, 46 S.E. 870.
See Missouri, K. & T. Trust Co. v. German Nat'l Bank, 77 F.1d 7, 122, 123; Boston Elevated Ry. Co. v. Paul Boynton Co., 211 F.8d 2, 822, 823; Hartford Accident & Indemnity Co. v. Federal Bond & Mortgage Co., 59 F.2d 950, 956. See 1 Clark on Receivers (2d ed., 1929) §§ 614, 615.
Cf. American Steel Foundries v. Chicago, R.I. & P. Ry. Co., 231 F.1d 03; Seagrist v. Reid, 171 App.Div. 755, 759, 157 N.Y.S. 979. And see 4 Cook on Corporations (8th ed.1923) § 748.
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, 266 F.8d 8, 835-837; Seaman v. McCulloch, 8 F.2d 820, 825, 826.
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., 136 F.1d 06, 1009, 1010; Pennsylvania Steel Co. v. New York City Ry. Co., 198 F.7d 1, 740-742), and provided further that the late filing does not unduly delay the proceedings. Guaranty Trust Co. v. Henwood, 86 F.2d 347, 353.