Document: 354 U.S. 91 77 S.Ct. 1112 1 L.Ed.2d 1205 Charles B. SMITH, as Special Administrator of the Estate Edward E. Birn, Deceased, Petitioner,v.Milton SPERLING, Harry M. Warner, Jack L. et al. No. 316. Argued March 27 and 28, 1957. Decided June 10, Mr. Herman H. Levy, Los Angeles, Cal., for petitioner. Messrs. Eugene D. Williams, Oliver Schwaf, Beverly Hills, respondents. Justice DOUGLAS delivered opinion Court. This suit was filed in Federal District Court California by reason diversity citizenship. It is a stockholder's derivative suit. The first cause action, only one involved here, based on alleged fraudulent wastage assets Warner Bros. Pictures, Inc. (which we will call Bros.) benefit Sperling, son-in-law director Bros., United States United), son-in-law's corporation. Extended allegations are made concerning various agreements between which, it charged, unfair to Demand directors institute this action not because, averred, such demand would be futile since, inter alia, all or majority board approved contracts. plaintiff citizen New York;1 defendant citizens California; Delaware corporations. 2 complaint joined defendant. urged before Court, claimed that since sought enforced belongs corporation 'antagonistic' stockholder within meaning term used Doctor v. Harrington, 196 579, 588, 25 355, 357, 49 L.Ed. 606, should realigned plaintiff. In event there no citizenship corporations both sides lawsuit. Strawbridge Curtiss, 3 Cranch 267, 435. held hearing issue—a lasted 15 days. found: 4 (1) contracts controversy were good faith without fraud; they considered best interests that, approving them, exercised their business judgment; 5 (2) under domination control Warners board; stockholders, officers, 'antagonistic financial interests' Bros.; 6 (3) neither nor any officers 'wrongfully participated' acts complained of; dominated controlled Sperling more them; 7 (4) if had been suit, management have disqualified 'from faithfully doing duty' but 'such futile.'2 8 For these reasons party dismissed bill. 117 F.Supp. 781. Appeals affirmed. 9 Cir., 237 F.2d 317. case here writ certiorari. 352 865, 98, 74. corporate brought stockholder. Whether proper assertion question here. Such problem Hawes City Oakland, 104 450, 26 827, upon which so much reliance placed supporting court below. Here assume may We concerned with federal jurisdiction. 10 gist findings fraud part making an exercise independent judgment, antagonistic That issue goes merits, There will, course, antagonism where dominant guilty misdeeds. But wrongdoing sense sole measure antagonism. whenever aligned against defends course conduct he attacks. charge normally cast terms fraud, breach trust, illegality. See supra; Venner Great Northern R. Co., 209 24, 28 328, 52 666; Koster (American) Lumbermens Mutual Casualty 330 518, 522, 523, 67 828, 830—831, 1067. answer, always denies wrongdoing. To stop try delve into merits. does seem us course. time-consuming, wasteful exertion energy preliminary case. instant illustration, has over eight years courts 11 Since our decision Erie Co. Tompkins, 304 64, 58 817, 82 1188, law governs merits actions local law. Cohen Beneficial Industrial Loan Corp., 337 541, 555—556, 69 1221, 1229 1230, 93 1528. result, then, approach followed below than trial matters going controversy. Obviously govern issues wrongdoing, matter Yet decide those favor stockholder, second require same tried out according set rules supplied 12 seems presented charges determine face pleadings nature bill answer whether Central Jersey Mills, 113 249, 456, 949, supra, indicate.3 refuse fail act number reasons. Fraud one; reluctance take close associate another; honest belief wisdom still on. As said & Hudson Albany S.R. 213 435, 451, 29 540, 545, 53 862, deemed 'The attitude need sinister. sincere.' Whenever refuses undo transaction whenever, case, solidly approves rescind futile, evident. sure, become through its managers hostile enforcement claim. 13 Collusion satisfy jurisdictional requirements Courts may, shown;4 defeat Absent collusion, jurisdiction when real collision issues, Indianapolis Chase National Bank, 314 63, 69, 62 15, 16, 86 47, stated Helm Zarecor, 222 32, 36, 32 11, 56 77, 'the actual controversy,' different States. practical mechanical determination resolved dispute. 14 plain who manage completely irrevocably opposed practice policy. A demonstrate wrong right. show dispute lies penumbra unaffected fraud. his evident judgment must therefore reversed remanded 16 Reversed. 17 dissenting opinion, see 91, 1119. 18 FRANKFURTER, whom BURTON, HARLAN, WHITTAKER join, dissenting. 19 holds collusion aside, bring behalf, purposes determining thus makes exception rule, confounding establishing substantive jurisdiction, overturns half-century's precedents scope significance undoing cannot appreciated brief review history adjudications—which present cases—and wholly stockholders' suits unquestionable constitutional sense. also necessary forth generous portions opinions prior cases do support Court's view being overturned it. 20 involve courts, alone. No aspect us. At outset, two guiding principles governing litigation kept clearly mind: These cases, involving 'judicial power' controversies 'between States.' suits; sues own right behalf 21 contrasting difference him it, crucial. former, claim own; merely personal regarding legal basis latter's third parties. Whatever money property recovered go corporation, fraction When entertained, effect allowed conscript complainant what asserts uncoerced discretion, unwilling initiate. situation from arises charged invasion Thus, instance, rearranges relationship classes security holders detriment class, disadvantaged class proceed protect interest. 22 basic often stated, obviously bear repeating: 23 'To sustain exist 'actual,' 'substantial,' Niles-Bement-Pond Iron Moulders Union, 254 81, 41 39, 41, 65 145, states, side states parties other side. Diversity conferred parties' plaintiffs defendants. duty, lower 'look beyond arrange dispute.' Dawson Columbia, etc., Trust 197 178, 180, 420, 421, 713.' 17, 47. 24 initial leading dealing alignment 606. stockholders individuals company third-party Realigning plaintiff, Circuit diversity, lack reversed. After stating Equity Rule 94 (now 23(b) Rules Civil Procedure, U.S.C.A.) contemplated 'brought founded rights properly asserted corporation,' went indicate aligning defendant: 'And decisions establish States, involves cognizable ultimate interest him, way detrimental rights. words, interests, subservient some illegal purpose. If hence arise, conditions exist, can litigated court.' at page 587, 357. then discuss 'conditions jurisdiction,' i.e., complainants' compliance procedural 94. refusing realign, did state mere refusal sue sufficient align referred 'interests, corporation' 'subservient purpose.' constitutes crux cases. 316, thorough stated: 'For 'in hands,' * 'hostile attitude,' permit presumptive surely requires argument suing desirability bringing Patently, 'controversy' required shown order preclude latter plaintiff-stockholder, occasion pages discussion control, every definition predicated assumption refused sue.' 781, 802. consistently taken Harrington. Three later, Harrington reaffirmed clear 666. Railroad President, James J. Hill, allegation 'railroad absolute control.' Id., 29, 328. Both defendants State. They removed claiming realigned, remand ground lacked thought, simpliciter sue, so. whole thought Moody's contrary. 30 'Let assumed disregard arrangement pleader, them really places alignment. (Citing re Removal Cases, 100 457, 593, cases.) rule applied leave pleader arranged them. doubtless railroad prevail. enough. unite, sufficiently appears petition proceedings, resisting plaintiff's illegality engaged conduct, injury accomplished joint action. both, rightfully necessarily defendants, can, purposes, regarded otherwise *.' 31, 329. 31 make explicit case's relation continued: precisely point branch conclusive. plaintiffs, circuit another 'who directed affairs dictated policy, selected directors.' fraudulently caused promissory note consideration, obtained note, sold, execution, less value, persons acting benefit. On citizenship, insisted because defendant, and, destroyed want decree, saying (the quotation Doctor, quoted 1120). bar confers jurisdiction.' 32—33, 330. 33 doctrine elaborated accepted ten ago summarized suits: 34 brings corporation's. 35 protection somewhat 'next friend' might individual, disabled protecting itself. If, however, treated actions, realign interests. typical many, put corporation) ousted. saved special dispensation hands. 606.' 522—523, 831. 36 Jackson's throws further light meant hands' characterizing interest,' 'disabled itself.' mean anything else except quoting disablement, viz., very stranglehold people therefore, meaning, reason. And obvious foregoing paragraph gives gave reinforced succeeding reference 'bringing faithless book.' 524, 832. 37 Smith Judge Mathes exhaustive survey relating test suits, affirmed 317, derived follows: 38 'If suffered actionable hands'—i.e. incapacitated keeping interests—then not, disability, plaintiff-stockholder exists.' 801. 39 Seventh took 149, Swanson Traer, 230 228, 237. 40 laid down half century—emerging standing itself—do represent capricious formalistic contrary, true appreciation faithful application well-settled jurisdiction: fact corporation's, appear among tool sought. circumstances compendious name controlling hiding behind purporting interpret half-century precedents, sweeps away. doing, greatly expands 'Antagonism' difficult standard meet unusual situation. Refusal provides automatic entry. Moreover, unless could shown. similar restriction possible non-diverseness generally too find non-diverse 42 professes apply precedents. absolutely 'nothing case.' found line deal solely requirements. nothing suits. 43 Prior Judiciary Act 1875, Stat. 470, limited Courts. Hart Wechsler, System, 727—730. established pleadings. 469, 593. desiring come vast enlargement virtue requisite procedure important Dodge Woolsey, noting suspected contrivance proved How. 331, 346, 401. 44 result described Miller 452, 827. 45 'Since Woolsey frequency most ordinary usual chancery remedies single possesses whose justify consideration grounds decided, just limitations principles. 46 'This grown until created laws large neighbors fellow-citizens adjudication, instead resorting State natural, lawful, appropriate forum. having controversy, foreseen end litigation, preferring whatever shall place court, antagonist sued recourse holder shares, called consultation, told enforce protect. He instantly demands duty regard, do, thereupon discovers causes entitling equitable relief chancery; namely, requested do; contests combines equity State, though court. prepared receives little attention, overburdened additional imposed simulated conventional arrangement, unauthorized facts sound 452—453. 47 Oakland allegedly imposition judiciary general run particularly, 48 Hawes, announced restrictions attempting 'a existing itself, itself plaintiff.' 460. Not ultra vires shareholder time (or acquired shares thereafter operation law), efforts induce desired necessary, collusive confer cognizance 461. codified Term 94, ix, now Procedure. Their purpose character define Court; proceeding consider after finding complied requisites equity. requirement rejected 33—34, 330: 'this overlooks rule. Neither deals prescribes manner exercised.' Compliance 862. certified questions maintenance failure allege during futility relied case—that 'attitude 545. Of quite correct. with, adverting to, alignment, talking about liminary Rules. (For respect directors, Ashwander T.V.A., 297 288, 318—323, 341—344, 466, 469—472, 480, 481, 80 688.)* 50 Further confusion introduced problems—jurisdictional 94—may careful separation issues; separate issues. concepts essential characterizes directors. thing hold sincere opposition futile. something purpose, itself' That, seen, factually false contrary 51 One final importance discussed applying adduced (354 96, 1115): '(T)he controversy.' determined ascertain courts. What while certain pleadings, limited. speaks determination,' hardly imagined. settled today 'It easy determination. I up considerations lead obligation, for, 316 costly error unconstitutional courts—for civil private controversy' exceeds sum value $3,000 arise 'under Constitution, treaties States,' exist. U.S.Const., Art. III; U.S.C. § 1332 808. proceedings each paths. presence indicated diversity. appeal, Ninth justification overturning conclusions extended analysis Appeals. affirm. plaintiffs' 'laid foundation suit.' affirmed, realignment dismissal 228. Examining position especially affidavit statement counsel concluded Busch corporation's counsel) filing stockholders. named disagreed. evidence Railway Company.' 54 'several members' conspiracy insufficient board. impressed lengthy, detailed counsel, retained transactions of, reviewed pursuant direction advised weight conclusion. allegations, imply hostility record, given opportunity substantiate initially came reason, hearing. While pending died administrator substituted. California. Had originally commenced decedent's representative, representative determinative Chappedelaine Dechenaux, 306, 629; Childress Emory, Wheat. 642, 669, 705; Mexican Eckman, 187 429, 434, 211, 213, 245; Mecom Fitzsimmons Drilling 284 183, 186, 84, 85, 76 233. once attached, impaired party's later change domicile. Mullen Torrance, 537, 154. Chief Marshall case: clear, depends things brought, vesting, ousted subsequent events.' 539. rationale, tested existed dies Dunn Clarke, 1834, Pet. 1, 845. meets U.S.C.A. particularity get 'and obtain effort.' 827; said, ofjurisdiction advantage minority denied stop, inquire colorable sustained judgment. reviewing earlier decisions, concluded, bill.' 358. cited out, looked contained 461—462. 1359, provides: 'A district party, assignment otherwise, improperly collusively invoke shown, example, neglect exists. Detroit Dean, 106 560, 300; Quincy Steel, 120 241, 520, 624. lines cases—the problems former concerned—is fully 792—809.

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