Case Name: SMITH, SPECIAL ADMINISTRATOR, v. SPERLING et al.
Court: Supreme Court of the United States
Jurisdiction: United States
Decision Date: 1957-06-10
Citations: 354 U.S. 91
Docket Number: No. 316
Parties: SMITH, SPECIAL ADMINISTRATOR, v. SPERLING et al.
Judges: whom Mr. Justice Burton, Mr. Justice Harlan, and Mr. Justice Whittaker join,
Reporter: United States Reports
Volume: 354
Pages: 91–113

Head Matter:
SMITH, SPECIAL ADMINISTRATOR, v. SPERLING et al.
No. 316.
Argued March 27-28, 1957.
Decided June 10, 1957.
Herman H. Levy argued the cause for petitioner. With him on the brief was Morris J. Pollack.
Eugene D. Williams and Oliver B. Schwab argued the cause for respondents. On the briefs were Mr. Williams and Ralph E. Lewis for Warner Bros. Pictures, Inc., et al., and Mr. Schwab, Marvin Sears and Norman Altman for United States Pictures, Inc., et al., respondents.

Opinion:
Mr. Justice Douglas
delivered the opinion of the Court.
This suit was filed in a Federal District Court in California by reason of diversity of citizenship. It is a stockholder's derivative suit. The first cause of action, the only one involved here, is based on alleged fraudulent wastage of assets of Warner Bros. Pictures, Inc. (which we will call Warner Bros.) for the benefit of one Sperling, a son-in-law of a director of Warner Bros., and United States Pictures, Inc. (which we will call United), the son-in-law's corporation. Extended allegations are made concerning various agreements between Warner Bros, and United which, it is charged, are unfair to Warner Bros. Demand on the directors of Warner Bros, to institute this action was not made because, it is averred, such a demand would be futile since, inter alia, all or a majority of the board of directors approved the contracts. The plaintiff is a citizen of New York; the defendant directors are citizens of California; and Warner Bros, and United are Delaware corporations.
The complaint joined Warner Bros, as a defendant. It was urged before the District Court, and it is claimed here, that since the cause of action sought to be enforced is one that belongs to the corporation and since the corporation is not "antagonistic" to the stockholder within the meaning of that term as used in Doctor v. Harrington, 196 U. S. 579, 588, Warner Bros, should be realigned as plaintiff. In that event there would be no diversity of citizenship since Delaware corporations would be on both sides of the lawsuit. Strawbridge v. Curtiss, 3 Cranch 267.
The District Court held a hearing on the issue — a hearing that lasted 15 days. It found:
(1) that the contracts in controversy were made in good faith and without fraud; that they were considered by the directors to be in the best interests of Warner Bros, and that, in approving them, they exercised their best business judgment;
(2) that Warner Bros, was not under the domination or control of the Warners on the board; and that the stockholders, officers, or directors were not "antagonistic to the financial interests" of Warner Bros.;
(3) that neither all nor a majority nor any of the directors and officers of Warner Bros, "wrongfully participated" in the acts complained of; that the board was not dominated or controlled by the Warners and Sperling or by any one or more of them;
(4) that if demand had been made on Warner Bros, to institute suit, the management would not have been disqualified "from faithfully doing their duty" as officers and directors but that "such a demand would have been futile."
For these reasons the District Court realigned Warner Bros, as a party plaintiff and dismissed the bill. 117 F. Supp. 781. The Court of Appeals affirmed. 237 F. 2d 317. The case is here on a writ of certiorari. 352 U. S. 865.
This is a corporate cause of action brought by a stockholder. Whether it is a proper case for assertion by a stockholder of that cause of action is not the question here. Such was the problem involved in Hawes v. Oakland, 104 U. S. 450, upon which so much reliance is placed in supporting the court below. Here we assume that this corporate cause of action may be enforced by the stock holder. We are concerned only with a question of federal diversity jurisdiction.
The gist of the findings of the District Court is that since there was no fraud on the part of the directors in making the contracts but only an exercise of independent business judgment, the management was not antagonistic to the financial interests of the corporation. That is an issue that goes to the merits, not to the question of jurisdiction. There will, of course, be antagonism between the stockholder and the management where the dominant officers and directors are guilty of fraud or misdeeds. But wrongdoing in that sense is not the sole measure of antagonism. There is antagonism whenever the management is aligned against the stockholder and defends a course of conduct which he attacks. The charge normally is cast in terms of fraud, breach of trust, or illegality. See Doctor v. Harrington, supra; Venner v. Great Northern R. Co., 209 U. S. 24; Koster v. (American) Lumbermens Mutual Casualty Co., 330 U. S. 518, 522, 523. The answer, of course, always denies the charge of wrongdoing. To stop and try the charge of wrongdoing is to delve into the merits. That does not seem to us to be the proper course. It is a time-consuming, wasteful exertion of energy on a preliminary issue in the case. The instant case is a good illustration, for it has been over eight years in the courts on this question of jurisdiction.
Since our decision in Erie R. Co. v. Tompkins, 304 U. S. 64, the law which governs the merits in these derivative actions is local law. Cohen v. Beneficial Loan Corp., 337 U. S. 541, 555-556. The result, then, of the approach followed by the court below is to have more than a preliminary trial on matters going to the merits of the controversy. Obviously federal law would govern the preliminary trial on the issues of wrongdoing, for that matter goes to the question of federal jurisdiction. Yet should the District Court decide those issues in favor of the stockholder, a second trial on the merits will require that the same issues be tried out according to the set of rules supplied by local law.
It seems to us that the proper course is not to try out the issues presented by the charges of wrongdoing but to determine the issue of antagonism on the face of the pleadings and by the nature of the controversy. The bill and answer normally determine whether the management is antagonistic to the stockholder, as Central R. Co. v. Mills, 113 U. S. 249, and Doctor v. Harrington, supra, indicate. The management may refuse or fail to act for any number of reasons. Fraud may be one; the reluctance to take action against a close business associate may be another; honest belief in the wisdom of the course of action which the management has approved may be still another; and so on. As the Court said in Delaware & Hudson Co. v. Albany & S. R. Co., 213 U. S. 435, 451, where the management was deemed to be antagonistic to the stockholder, "The attitude of the directors need not be sinister. It may be sincere." Whenever the management refuses to take action to undo a business transaction or whenever, as in this case, it so solidly approves it that any demand to rescind would be futile, antagonism is evident. The cause of action, to be sure, is that of the corporation. But the corporation has become through its managers hostile and antagonistic to the enforcement of the claim.
Collusion to satisfy the jurisdictional requirements of the District Courts may, of course, always be shown; and it will always defeat jurisdiction. Absent collusion, there is diversity jurisdiction when the real collision of issues, Indianapolis v. Chase National Bank, 314 U. S. 63, 69, or as stated in Helm v. Zarecor, 222 U. S. 32, 36, "the actual controversy," is between citizens of different States. This is a practical not a mechanical determination and is resolved by the pleadings and the nature of the dispute.
Here it is plain that the stockholder and those who manage the corporation are completely and irrevocably opposed on a matter of corporate practice and policy. A trial may demonstrate that the stockholder is wrong and the management right. It may show a dispute that lies in the penumbra of business judgment, unaffected by fraud. But that issue goes to the merits, not to jurisdiction. There is jurisdiction if there is real collision be tween the stockholder and his corporation. That there is such a collision is evident here.
The judgment must therefore be reversed and the case remanded to the District Court. Reversed
While the action was pending plaintiff died and for him a special administrator has been substituted. The latter is a citizen of California.
Had the suit been originally commenced by the decedent's representative, it would have been the citizenship of the representative which would have been determinative of jurisdiction in this diversity case. See Chappedelaine v. Dechenaux, 4 Cranch 306; Childress v. Emory, 8 Wheat. 642, 669; Mexican Central R. Co. v. Eckman, 187 U. S. 429, 434; Mecom v. Fitzsimmons Drilling Co., 284 U. S. 183, 186. But jurisdiction, once attached, is not impaired by a party's later change of domicile. Mollan v. Torrance, 9 Wheat. 537. As Chief Justice Marshall said in that case: "It is quite clear, that the jurisdiction of the Court depends upon the state of things at the time of the action brought, and that after vesting, it cannot be ousted by subsequent events." Id., p. 539. The rationale, that jurisdiction is tested by the facts as they existed when the action is brought, is applied to a situation where a party dies and a non-diverse representative is substituted. Dunn v. Clarke, 8 Pet. 1 (1834).
The bill therefore meets the requirements of Rule 23 (b) of the Rules of Civil Procedure that the stockholder show with particularity what efforts he made to get those who control the corporation to take action, "and the reasons for his failure to obtain such action or the reasons for not making such effort." And see Hawes v. Oakland, 104 U. S. 450; Delaware & Hudson Co. v. Albany & S. R. Co., 213 U. S. 435.
The Court in Doctor v. Harrington, supra, at p. 587, said, "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. In other words, his interests, and the interests of the corporation, may be made subservient to some illegal purpose. If a controversy hence arise, and the other conditions of jurisdiction exist, it can be litigated in a Federal court."
The complaint in that case charged fraud by a dominant director and stockholder to his advantage and to the detriment of the minority stockholders. The answer denied the fraud. The Court did not stop, as the District Court did in the instant case, to inquire if transactions complained of were colorable or were sustained by sound business judgment. After reviewing the earlier decisions, the Court concluded, "The case at bar is brought within the doctrine of those cases by the allegations of the bill." Id., p. 588. The leading case cited by the Court was Hawes v. Oakland, 104 U. S. 450, where in determining whether a proper case for a derivative action had been made out, the Court looked only to the nature of the charges contained in the biU. Id., pp. 461-462.
28 U. S. C. § 1359 provides:
"A district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court."
Collusion is shown, for example, where the neglect or refusal of the directors to take the desired action on the part of the corporation is simulated so that it may be made to appear that the diversity of citizenship necessary for federal jurisdiction exists. Detroit v. Dean, 106 U. S. 537; Quincy v. Steel, 120 U. S. 241.