Court Opinion

ID: 9445917
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:41:04.369847+00
Date Added: 2024-06-11T17:30:27.061026
License: Public Domain

FINNEGAN, Circuit Judge
(concurring in the result).
Our court first encountered this case on appeal from two orders entered in the District Court dismissing the action. The unchanged complaint charged and averred, according to Mr. Justice Douglas, delivering the majority opinion of a divided court in Swanson v. Traer, 1957, 354 U.S. 114, 115, 77 S.Ct. 1116, 1117, 1 L.Ed.2d 1221 reviewing our first opinion reported as Swanson v. Traer, 7 Cir., 1956, 230 F.2d 228: “a conspiracy to defraud the Railway Co. The alleged fraud consisted of a series of sales of transit properties to the Railway Co., properties in which it is charged some of the directors were personally interested. The complaint averred a demand on the directors to bring suit, a refusal on their part, and the futility of making any demand on the stockholders.” Then follows, what I think is one of several significant aspects in the opinion of Mr. Justice Douglas: “The District Court dismissed the bill on the ground that no showing had been made that the refusal of the management to act to redress the alleged wrong was not a decision entrusted to the good-faith judgment of the directors. In other words, the District Court concluded that the controversy did not fall within the exceptional group of cases where the stockholder may dispute the management and take the reins of corporate litigation in his own hands. On appeal, the Court of Appeals did not reach that question.” When the Supreme Court majority rejected our court’s realignment of the parties the jurisdictional problem was hurdled leaving for our decision the question, among others, “whether this suit is of that exceptional character which stockholders may bring.” Obviously determining the state of Illinois law is a precursor to that question. Accordingly, we were directed to ascertain whether Illinois law follows “the classical description of those situations” delineated in Hawes v. City of Oakland, 1881, 104 U.S. 450, 460, 26 L.Ed. 827 “or adopts another and whether” Swanson v. Traer “falls within the one provided by local law.” Id., 230 F.2d at page 117. As I understand the controlling Supreme Court opinion there are now three questions before us; (1) does Illinois follow Hawes v. City of Oakland, 104 U.S. 450, 26 L.Ed. 827 or, (2) if not, what is the applicable Illinois law and (3) do the allegations in the complaint measure up to the relevant law established in answer to question (1) or (2)?
*861Because of the defects manifest from the face of the complaint, I would approve the district judge’s allowance of the several motions. It is difficult to discover any allegations through which plaintiffs assert the existence of an underlying cause of action on the behalf of Chicago, North Shore and Milwaukee Railway Company. Hawes v. City of Oakland, 104 U.S. 450, 460, 26 L.Ed. 827 explains the relevant doctrine “to be that to enable a stockholder in a corporation to sustain in a court of equity in his own name, a suit founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff, there must exist as the foundation of the suit some action or threatened action of the managing board of directors or trustees of the corporation which is beyond the authority conferred on them by their charter * * (then follows various alternatives).” Here there is a conspicuous absence of allegations showing why equity should annul the 1949 decision of the board of directors.
My brothers, relying on Goldberg v. Ball, 1940, 305 Ill.App. 273, 27 N.E.2d 575, have ascertained that the prevailing law in Illinois is an amalgam of United Copper Securities Co. v. Amalgamated Copper Co., 1917, 244 U.S. 261, 37 S.Ct. 509, 61 L.Ed. 1119, and Hawes v. City of Oakland, 104 U.S. 450, 26 L.Ed. 827. If that is the import of the Goldberg case, which incidentally is a decision at the intermediate appellate level in Illinois, I would assume we have further business with the case sent back to us. By its unequivocal statement “ * * * the corporation was properly made a defendant” the Supreme Court (345 U.S. 114, 116, 77 S.Ct. 1116, 1 L.Ed.2d 1221) established diversity jurisdiction leaving us to decide the correctness of the trial judge’s ruling on the motion to dismiss. See Smith v. Sperling, 1957, 354 U.S. 91, 96, 77 S.Ct. 1112, 1 L.Ed.2d 1205.
It is my view that unless the corporation itself has a cause of action the fact that stockholders have the requisite status under the Hawes case would be unavailing. In my judgment, a cause of action is not created, where none previously existed in the corporation, by considering stockholders’ standing to sue. I think it was correct to dismiss the case, below, in any event because there is grave doubt whether an underlying cause of action existed in the corporation in which these stockholders owned their shares.