Opinion ID: 1567838
Heading Depth: 1
Heading Rank: 5

Heading: As to Constitutionality Generally, and as to the So-Called Retroactive Application of the New Jersey Statute.

Text: It cannot be seriously contended that R.S. 14:3-15 would be unconstitutional as applied to any suit commenced after the date of its approval. The substantial question raised on this appeal on this aspect of the case is, we think, answered fully and clearly by the decision of Chief Judge Loughran in Lapchak v. Baker, 298 N.Y. 89, 80 N.E.2d 751, dealing with the constitutionality of Section 61-b of the General Corporation Law of New York. The contrary view is succinctly presented by Zlinkoff in his virile article entitled The American Investor and the Constitutionality of Section 61-b of the New York General Corporation Law. 54 Yale L.J. pp. 352-392. The learned writer, relying on the Due Process Clause, asserts Id., 80 N.E.2d at pages 374 et seq. that the operation of Section 61-b    will deprive a great majority of stockholders of the only available judicial remedy for the protection of their rights, by requiring security from them in an amount which they cannot produce. But R.S. 14:3-15 requires security for the reasonable expenses, including counsel fees, which may be incurred by the corporation and by other parties defendant. The statute also provides that the amount of the security required by the court may be increased or decreased from time to time as it may become inadequate or excessive. It is clear, we think, that the last two adjectives quoted must be read in connection with the adjective reasonable italicized above. In other words the test is the amount of the expenses reasonably to be anticipated rather than the extent or capacity of the plaintiff's pocketbook. But the amount of the security to be required by the trial court is not presently before us. No amount of security was set by the court below for the reason that it was of the opinion that the statute was inapplicable. Any question relating to the amount of the security is still in nubibus and we cannot pass upon it in the absence of an order based on appropriate findings by the court below. An analogy is presented by the extent of the review in the Lapchak case. See the last sentence of the seventh paragraph of the opinion of the Court of Appeals of New York. In conclusion upon this point we point out that it is not the duty of a court to pass upon the wisdom of a public policy effected by a legislature. Much of the plaintiff's and intervener's argument as well as that of the Zlinkoff article is addressed to the wisdom of statutes such as that sub judice. It is pointed out by the latter that Section 61-b does not meet the worst feature of the groundless strike suit in that the statute does not prohibit secret settlements. This is true also of R.S. 14:3-15. But the Legislatures of the States are in a very real sense laboratories for legislation and early experiments are rarely perfect. We may inquire as did the Supreme Court of the United States by Mr. Justice Roberts in Nebbia v. New York, 291 U.S. 502, 515, 54 S.Ct. 505, 507, 78 L.Ed. 940, 89 A.L.R. 1469, into the occasion for the legislation and its history. We did this under the previous heading of this opinion. But we think that it cannot be asserted fairly that the provisions of R.S. 14:3-15 do not represent a reasonable effort by New Jersey to eradicate an evil deemed by its Legislature to be widespread. We may not hold the statute unconstitutional on the showing made by the plaintiff and intervener. As to the so-called retroactive application of R.S. 14:3-15, 14:3-17 provides that the effective date of R.S. 14:3-15 should be immediately upon its approval, viz., on April 10, 1945, and [that R.S. 14:3-15] shall apply to all such actions, suits or proceedings now pending in which no final judgment has been entered, and to all future actions, suits or proceedings. The suit at bar was filed on August 9, 1943 and Beneficial's application for security under the Act was not filed until August 5, 1946. We agree with those portions of the opinion of the learned District Judge, 7 F.R.D. at pages 355-357, which hold that the right given by R.S. 14:3-15 is largely remedial, though, as we have stated, the right is actually a hybrid. The view that a statute of the character of R.S. 14:3-15 is somewhat remedial in nature was expressed by the Court of Appeals of New York by Chief Judge Lehman in Shielcrawt v. Moffett, supra, though that Court did not pass upon the question of whether Section 61-b of the General Corporation Law of New York applied retroactively would be constitutional. [16] The plaintiff and the intervener contend that the application of the New Jersey statute to the suit at bar would abridge the equity jurisdiction of the Court of Chancery in violation of Article VI, Section 1, of the New Jersey Constitution, N.J.S.A., citing Ex parte Hague, 104 N.J.Eq. 31, 144 A. 546, affirmed 104 N.J.Eq. 369, 145 A. 618, and other authorities including Eastwood Nealley-Corp. v. International Ass'n of Machinists Dist. No. 47, 124 N.J.Eq. 274, 1 A.2d 477. We cannot agree. The court below, quite properly, as we think, treated R.S. 14:3-15 as an extension in principle of the provisions of the New Jersey Chancery Act, in pertinent part embodied in R.S. 2:29-131, by which the Court of Chancery of New Jersey is empowered to award counsel fees and costs as between party and party. If we are correct in this conclusion it is clear that no provision of the Constitution of New Jersey will be violated by applying the provisions of the statute to the instant suit. The Courts of New Jersey, including the Court of Errors and Appeals, have held that statutes creating a right to counsel fees as part of the taxable costs may be applied to pending actions. See Igoe Bros. v. National Surety Co., 112 N.J.L. 243, 169 A. 841, 96 A.L.R. 1422; Robinson v. Jackson, Ct.Com.Pleas, 187 A. 918, 14 N.J.Misc. 866; and Murphy v. George Brown & Co., Sup., 91 N.J.L. 412, 103 A. 28. True, these decisions are based upon the proposition that such statutes are remedial only but nonetheless the decisions cited are clear rulings to the effect that no provision of the New Jersey Constitution is violated. Interpretations of the New Jersey Constitution by the courts of New Jersey are binding on us on this point of the instant case. By analogy, we are forced to the conclusion that the courts of New Jersey would also hold that the application of the statute sub judice, even to suits pending at the time of its approval, would violate no provision of the Constitution of New Jersey. In so stating we are aware that a right beyond that given by the pertinent section of the Chancery Act, R.S. 2:29-131, is awarded to corporations by R.S. 14:3-15. The pertinent provisions of the Chancery Act state that the Chancellor may make an allowance by way of counsel fee to the party obtaining the order or decree. Assuming that a decree in favor of the plaintiff against the individual defendants awarding a sum of money to Beneficial might be deemed to be a decree obtained by it, (and even to state such an assumption is in reality to refute it) Beneficial under R.S. 2:29-131 could obtain only its own counsel fees and expenses and could secure no indemnification whatsoever for sums expended by it to pay the counsel fees and expenses of the individual defendants. But the remedy or right conferred on corporations by R.S. 14:3-15 clearly proceeds along the same general lines of indemnification as those laid down by R.S. 2:29-131 of the Chancery Act. We are of the opinion that no clear-cut and effective distinction in principle between R.S. 14:3-15 and R.S. 2:29-131 is possible. [17] The plaintiff and intervener also contend that R.S. 14:3-15 violates the Contract Clause of the Federal Constitution, art. 1, § 10, cl. 1. But the right of a stockholder to prosecute a derivative action is not a contractual right. We know of no Delaware decision which suggests even remotely that a stockholder's derivative suit is based upon breach of contract. The right of a stockholder of a Delaware corporation to maintain a derivative suit on behalf of the corporation is based upon a breach of fiduciary duty by the directors or officers of the corporation. The officers and directors of a Delaware corporation are trustees for its stockholders under Delaware law. Lofland v. Cahall, 13 Del. Ch. 384, 118 A. 1; Bodell v. General Gas & Electric Corp., 15 Del.Ch. 119, 132 A. 442. Cf. Irving Trust Co. v. Deutsch, 2 Cir., 73 F.2d 121. The cases cited by the plaintiff and intervener as sustaining their position are inapposite. We conclude also that the application of R.S. 14:3-15 to the suit at bar will not fall within the prohibition of the Fourteenth Amendment of the Constitution of the United States. The remedy selected by the New Jersey Legislature was reasonable in view of the evil which the Legislature has sought to cure. The plaintiff is not deprived of her cause of action by the New Jersey statute and she may assert her remedy subject to a reasonable condition. The right to bring a stockholder's derivative suit is not a property right and as this court held in Overfield v. Pennroad Corporation, 3 Cir., 146 F.2d 889, 894, quoting 4 Pomeroy § 1095, the individual stockholder is permitted to sue simply in order to set in motion the judicial machinery of the court. As was said by the Supreme Court in Klein v. Board of Tax Supervisors, 282 U.S. 19, 24, 51 S.Ct. 15, 16, 75 L.Ed. 140, 73 A.L.R. 679,    it leads nowhere to call a corporation a fiction.    The corporation is a person and its ownership is a nonconductor that makes it impossible to attribute an interest in its property to its members. A stockholder's suit is a suit by the corporation conducted by the stockholder as its representative. Fletcher Cyclopedia Corporations (Perm.Ed.1943, Rev. Vol., § 5939). In Jones v. Union Guano Co., 264 U.S. 171, 181, 44 S.Ct. 280, 282, 68 L.Ed. 623, the Supreme Court said, The Fourteenth Amendment does not prevent a state from prescribing a reasonable and appropriate condition precedent to the bringing of a suit of a specified kind or class so long as the basis of distinction is real, and the condition imposed has reasonable relation to a legitimate object. While it is true that in the cited case the State statute, Section 7, c. 143, Laws of North Carolina of 1917, which prohibited a suit being brought for alleged defective fertilizer until after chemical analysis showing its ingredients had been made, was enacted prior to the time that the plaintiff commenced his suit, the principle stated is nonetheless applicable here. Although R. S. 14:3-15 and 14:3-17 did create a limitation on the right of the plaintiff to maintain the suit at bar it is a reasonable limitation when one considers the nature of the evil attempted to be cured. Moreover, the limitation imposed by the statutes does not run to the plaintiff's right to maintain her suit which remains legally unimpaired. On this aspect of the case as we have stated the New Jersey statutes are largely procedural and remedial, rather than substantive. Last, the mere fact that a statute is retroactive does not render it unconstitutional. Blount v. Windley, 95 U.S. 173, 180, 24 L.Ed. 424; Western Union Telegraph Co. v. Louisville & N. R. Co., 258 U.S. 13, 42 S.Ct. 258, 66 L.Ed. 437; cf. United States ex rel. Rodriguez v. Weekly Publications, Inc., 2 Cir., 144 F.2d 186. We conclude that the application of R.S. 14:3-15 to the instant suit is constitutional.