UNITED STATES SUPREME COURT
Nos. 149 and 316.
Ralph D. SWANSON, Marie A. Swanson, and Janet C. Sheaff, Petitioners,
Glenn W. TRAER et al.
Charles B. SMITH, as Special Administrator of the Estate of Edward E.
Birn, Deceased, Petitioner,
Milton SPERLING, Harry M. Warner, Jack L. Warner, et al.
Decided June 10, 1957.
(354 U.S. 91)
Mr. Justice FRANKFURTER, whom Mr. Justice BURTON, Mr. Justice HARLAN,
and Mr. Justice WHITTAKER join, dissenting.
The Court holds that, collusion aside, whenever a corporation refuses to
bring a suit and a derivative suit is brought by a stockholder on its
behalf, the corporation is always to be aligned as a defendant for
purposes of determining diversity jurisdiction. The Court thus makes
the exception the rule, and by confounding the requirements for
establishing a substantive cause of action with the requirements of
diversity jurisdiction, it overturns a half-century's precedents in this
Court. The scope and significance of this undoing cannot be appreciated
without a brief review of the history of the jurisdictional
adjudications--which control the present cases--and of the wholly
different precedents establishing the substantive rules that govern
stockholders' suits when there is unquestionable jurisdiction in the
constitutional sense. It will also be necessary to set forth generous
portions of the opinions of the Court in prior cases to demonstrate that
not only do they not support the Court's view but that they are being
overturned by it.
The present cases involve the jurisdiction of the federal courts, and
that question alone. No aspect of the substantive cause of action is
before us. At the outset, two guiding principles governing this
litigation must be kept clearly in mind: (1) These are constitutional
cases, involving the 'judicial power' of the United States over *99
controversies 'between citizens of different States.' (2) These are
stockholders' suits; the stockholder sues not in his own right but in
the right and on behalf of the corporation.
The contrasting difference between a stockholder's suit for his
corporation and a suit by him against it, is crucial. In the former, he
has no claim of his own; he merely has a personal controversy with his
corporation regarding the business wisdom or legal basis for the
latter's assertion of a claim against third parties. Whatever money or
property is to be recovered would go to the corporation, not a fraction
of it to the stockholder. When such a suit is entertained, the
stockholder is in effect allowed to conscript the corporation as a
complainant on a claim that the corporation, in the exercise of what it
asserts to be its uncoerced discretion, is unwilling to initiate.
This is a wholly different situation from that which arises when the
corporation is charged with invasion of the stockholder's independent
Thus, for instance, if a corporation rearranges the relationship of
different classes of security holders to the detriment of one class, a
stockholder in the disadvantaged class may proceed against the
corporation as a defendant to protect his own legal interest.
The basic principles of diversity jurisdiction, often stated, obviously
'To sustain diversity jurisdiction there must exist an 'actual,' Helm v.
Zarecor, 222 U.S. 32, 'substantial,' Niles-Bement-Pond Co. v. Iron
Moulders Union, 254 U.S. 77, 81, controversy between citizens of
different states, all of whom on one side of the controversy are
citizens of different states from all parties on the other side.
Strawbridge v. Curtiss, 3 Cranch 267. Diversity jurisdiction cannot be
conferred upon the federal courts by the parties' own determination of
who are plaintiffs and who defendants. It is our duty, as it is that of
the lower federal courts, to 'look beyond the pleadings and arrange the
parties according to their sides in the dispute.' City of Dawson v.
Columbia, etc., Trust Co., 197 U.S. 178, 180.' City of Indianapolis v.
Chase National Bank, 314 U.S. 63, 69.
The initial and leading case dealing with the alignment of parties for
jurisdictional purposes in a stockholder's suit is Doctor v. Harrington,
196 U.S. 579. That was a suit by stockholders against two individuals
alleged to control the company in question and a third- party
corporation. Realigning the corporation as a plaintiff, the Circuit
Court held that there was no diversity, and it dismissed the bill for
lack of jurisdiction. This Court reversed. After stating that Equity
Rule 94 (now Rule 23(b) of the Federal Rules of Civil Procedure, 28
U.S.C.A.) contemplated suits 'brought by a stockholder in a corporation
founded on rights which may properly be asserted by the corporation,'
the Court went on to indicate what must have been the basis for aligning
the corporation in that case as a defendant:
'And the decisions of this court establish that such a suit, when
between citizens of different States, involves a controversy cognizable
in a Circuit Court of the United States. 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.' 196 U.S. at 587.
The Court then went on to discuss these other 'conditions of
jurisdiction,' i.e., the complainants' compliance with the substantive
and procedural requirements of Equity Rule 94. In refusing to realign,
the Court did not state that mere refusal to sue on the part of the
corporation was a sufficient reason to align the corporation as a
defendant. The Court referred to 'antagonistic' control and the
stockholder's 'interests, and the interests of the corporation' being
made 'subservient to some illegal purpose.'
This question of what constitutes 'antagonistic' control is the crux of
the present cases. The District Court in No. 316, in the course of its
thorough opinion, stated:
'For a corporation to be 'in antagonistic hands,' * * * or to have a
'hostile attitude,' * * * such as would permit alignment on the side
against its presumptive financial interests, surely requires more than a
mere argument or difference of opinion between the corporation and the
suing stockholder as to the desirability of bringing the suit.
Patently, if difference of opinion were all the 'controversy' required
to be shown between the stockholder and his corporation in order to
preclude alignment of the latter with the plaintiff- stockholder, then
there can be no occasion for all the pages of discussion of corporate
domination or control, since every stockholder's derivative suit is by
definition predicated upon the assumption that the corporation has
refused to sue.' 117 F.Supp. 781, 802.
This has been the view that this Court has consistently taken since
Doctor v. Harrington. Three years later, Doctor v. Harrington was
reaffirmed and its basis made clear in Venner v. Great Northern R. Co.,
209 U.S. 24. That was a stockholder's suit brought in a state court
against the Great Northern Railroad and its President, James J. Hill,
with an allegation that the 'railroad and its board of directors were
under his absolute control.' Id., 209 U.S. at 29. Both defendants were
citizens of the same State. They removed the case into the federal
court and the plaintiff, claiming that the corporation should be
realigned, sought remand to the state court on the ground that the
federal court lacked jurisdiction. The Court, if such was its thought,
obviously would have said simpliciter that since the corporation refused
to sue, the corporation must be aligned as a defendant. It did not do
so. The whole thought of Mr. Justice Moody's opinion is completely
'Let it be assumed for the purposes of this decision that the court may
disregard the arrangement of parties made by the pleader, and align them
upon the side where their interest in and attitude to the controversy
really places them, and then may determine the jurisdictional question
in view of this alignment. (Citing the In re Removal Cases, 100 U.S.
457, 25 L.Ed. 593, and other cases.) If this rule should be applied it
would leave the parties here where the pleader has arranged them. It
would doubtless be for the financial interests of the defendant railroad
that the plaintiff should prevail. But that is not enough. Both
defendants unite, as sufficiently appears by the petition and other
proceedings, in resisting the plaintiff's claim of illegality and fraud.
They are alleged to have engaged in the same illegal and fraudulent
conduct, and the injury is alleged to have been accomplished by their
joint action. The plaintiff's controversy is with both, and both are
rightfully and necessarily made defendants, and neither can, for
jurisdictional purposes, be regarded otherwise than as a defendant * *
*.' Id., 209 U.S. at 31, 32.
To make explicit the case's relation to the prior case of Doctor v.
Harrington, the Court continued:
'The case of Doctor v. Harrington is precisely in point on this branch
of the case, and is conclusive. In that case the plaintiffs,
stockholders in a corporation, brought an action in the circuit court
against the corporation and Harrington, another stockholder, 'who
directed the management of the affairs of the corporation, dictated its
policy, and selected its directors.' It was alleged that Harrington
fraudulently caused the corporation to make its promissory note without
consideration, obtained a judgment on the note, and sold, on execution,
for much less than their real value, the assets of the corporation to
persons acting for his benefit. On the face of the pleadings there was
the necessary diversity of citizenship, but it was insisted that the
corporation, because its interest was the same as that of the plaintiff,
should be regarded as a plaintiff. The court below so aligned the
corporation defendant, and, as that destroyed the diversity of
citizenship, dismissed the suit for want of jurisdiction. This court
reversed the decree, saying (the quotation is of the part of the Court's
opinion in Doctor, quoted supra, 77 S.Ct. 1120). There was therefore in
the case at bar the diversity of citizenship which confers
jurisdiction.' Id., 209 U.S. at 32-3.
The jurisdictional doctrine of Doctor v. Harrington, as reaffirmed and
elaborated in Venner v. Great Northern R. Co., was accepted without
question only ten years ago in Koster v. (American) Lumbermens Mutual
Casualty Co., 330 U.S. 518. The Court in that case summarized the
jurisdictional doctrine of alignment of parties in stockholders' suits:
'The cause of action which such a plaintiff brings before the court is
not his own but the corporation's. It is the real party in interest and
he is allowed to act in protection of its interest somewhat as a 'next
friend' might do for an individual, because it is disabled from
protecting itself. If, however, such a case as this were treated as
other actions, the federal court would realign the parties for
jurisdictional purposes according to their real interests. In this
case, which is typical of many, this would put (the corporation) on the
plaintiff's side * * * and jurisdiction would be ousted. City of
Indianapolis v. Chase National Bank, 314 U.S. 63. But jurisdiction is
saved in this class of cases by a special dispensation because the
corporation is in antagonistic hands. Doctor v. Harrington, 196 U.S.
579.' Id., 330 U.S. at 522-23.
Mr. Justice Jackson's opinion for the Court throws further light on what
is meant by 'antagonistic hands' by characterizing 'the real party in
interest,' the corporation, as 'disabled from protecting itself.' That
cannot mean anything else except what the Venner case, quoting from
Doctor v. Harrington, set forth as the reason for disablement, viz.,
that the very individuals who have a stranglehold over the corporation
are the people against whom suit is sought to be brought and, therefore,
in any sense that has any meaning, they are the defendants for that
reason. And it is not merely that the obvious sense of the foregoing
paragraph quoted from Koster gives the significance to Doctor v.
Harrington that Venner gave it. That meaning is reinforced by the
Court's succeeding reference to a stockholder's interest in 'bringing
faithless managers to book.' Id., 330 U.S. at 524.
In the District Court in No. 316, Smith v. Sperling, Judge Mathes made
an exhaustive survey of all the precedents relating to the
jurisdictional test to be applied in stockholders' suits, 117 F.Supp.
781, affirmed 9 Cir., 237 F.2d 317, and stated the jurisdictional test
to be derived from the cases as follows:
'If the corporation has suffered actionable wrong and is 'in
antagonistic hands'--i.e. so dominated that it is incapacitated to act
in keeping with its own financial interests--then a federal court should
not, because of such disability, align the corporation with the
plaintiff-stockholder in determining whether diversity jurisdiction
exists.' 117 F.Supp. at 801.
The Court of Appeals for the Seventh Circuit took the same view in
Swanson v. Traer, 230 F.2d 228, 237.
The jurisdictional rules that the Court has laid down for over half a
century--emerging from all the cases and not merely from Doctor v.
Harrington standing by itself--do not represent a capricious or
formalistic determination as to when there is or is not diversity
jurisdiction. On the contrary, they represent a true appreciation of
the nature of the stockholder's suit and a faithful application of well-
settled principles of diversity jurisdiction: when a suit is brought
that is in fact and in law the corporation's, the corporation from the
nature of the cause of action is a plaintiff and must appear among the
plaintiffs, except when the corporation is in fact the tool of the very
people against whom a judgment is sought. In the latter circumstances
the corporation is merely a compendious name for the controlling
defendants who are hiding behind it.
The Court, purporting to interpret this half-century of precedents,
sweeps them away. In so doing, it greatly expands the diversity
jurisdiction. 'Antagonism' is a difficult standard to meet and is a more
Refusal to sue provides automatic entry. Moreover, whenever the
corporation and the real defendants are of the same citizenship, there
would be no diversity jurisdiction unless antagonism could be shown. No
similar restriction on jurisdiction is made because of possible non-
diverseness of the stockholder and the corporation defendant because it
is generally not too difficult to find a non-diverse stockholder to
The Court professes to do no more than to apply well-settled precedents.
But the well-settled precedents that are applied have absolutely
'nothing to do with the case.' The Court has found support in the line
of cases that deal solely with substantive requirements or with the
procedural rules for establishing compliance with those requirements.
These have nothing to do with the constitutional jurisdiction of the
federal courts in diversity suits.
Prior to the Judiciary Act of 1875, 18 Stat. 470, there was only very
limited federal question jurisdiction in the District Courts. See Hart
and Wechsler, The Federal Courts and the Federal System, 727--730.
Moreover, diversity jurisdiction was established on the basis of the
alignment set forth in the pleadings. In re Removal Cases, 100 U.S.
457, 469. If a corporation desiring to bring suit could not come within
the requirements of diversity jurisdiction, the only way its suit could
be tried in the federal courts, prior to the vast enlargement of their
jurisdiction by the Act of 1875, was by virtue of a suit brought on its
behalf by a stockholder of the requisite citizenship. This was the
procedure followed in the important case of Dodge v. Woolsey, the Court
noting that any suspected issue of contrivance should have been alleged
and proved by the defendant. 18 How. 331, 346.
The result of this practice was described by Mr. Justice Miller for the
Court in the leading case of Hawes v. City of Oakland, 104 U.S. 450.
'Since the decision of this court in Dodge v. Woolsey * * * the
frequency with which the most ordinary and usual chancery remedies are
sought in the Federal courts by a single stockholder of a corporation
who possesses the requisite citizenship, in cases where the corporation
whose rights are to be enforced cannot sue in those courts, seems to
justify a consideration of the grounds on which that case was decided,
and of the just limitations of the exercise of those principles.
'This practice has grown until the corporations created by the laws of
the States bring a large part of their controversies with their
neighbors and fellow-citizens into the courts of the United States for
adjudication, instead of resorting to the State courts, which are their
natural, their lawful, and their appropriate forum. * * * A corporation
having such a controversy, which it is foreseen must end in litigation,
and preferring for any reason whatever that this litigation shall take
place in a Federal court, in which it can neither sue its real
antagonist nor be sued by it, has recourse to a holder of one of its
shares, who is a citizen of another State. This stockholder is called
into consultation, and is told that his corporation has rights which the
directors refuse to enforce or to protect. He instantly demands of them
to do their duty in this regard, which of course they fail or refuse to
do, and thereupon he discovers that he has two causes of action
entitling him to equitable relief in a court of chancery; namely, one
against his own company * * * for refusing to do what he has requested
them to do; and the other against the party which contests the matter in
controversy with that corporation. These two causes of action he
combines in an equity suit in the Circuit Court of the United States,
because he is a citizen of a different State, though the real parties to
the controversy could have no standing in that court. * * * the whole
case is prepared for hearing on the merits, the right of the stockholder
to a standing in equity receives but little attention, and the
overburdened courts of the United States have this additional important
litigation imposed upon them by a simulated and conventional
arrangement, unauthorized by the facts of the case or by the sound
principles of equity jurisdiction.' Id., 104 U.S. at 452-53.
The Court in Hawes v. City of Oakland was not concerned at all with
control of the corporation by allegedly wrongdoing directors for
purposes of aligning the parties. The Court was concerned with
imposition on the jurisdiction of the federal judiciary in the general
run of stockholders' actions, and more particularly, in the usual
situation where the defendants would not be directors at all but third
parties having nothing to do with the management of the corporation.
The Court in Hawes, therefore, announced restrictions upon a stockholder
attempting to bring 'a suit founded on a right of action existing in the
corporation itself, and in which the corporation itself is the
appropriate plaintiff.' Id., 104 U.S. at 460. Not only must a
complainant show some ultra vires or fraudulent action by the directors
but he must also demonstrate that he was a shareholder at the time of
the transaction complained of (or acquired shares thereafter by
operation of law), that he has made efforts to induce the desired action
by the directors and, if necessary, by the stockholders, and that 'the
suit is not a collusive one to confer on a court of the United States
jurisdiction in a case of which it could otherwise have no cognizance *
* *.' Id., 104 U.S. at 461. These rules were codified that Term in
Equity Rule 94, see 104 U.S. ix, now Rule 23(b) of the Federal Rules of
Civil Procedure. Their history and purpose indicate the character of
the requirements laid down by the Court. They do not define the
constitutional jurisdiction of the Court; they are the allegations in
any event requisite to the Court's proceeding to consider the case. In
Hawes itself, the Court, after finding that the stockholder had not
complied with the requisites for suit, dismissed the action, not for
want of jurisdiction, but for want of equity. The argument that
compliance with the rule was a jurisdictional requirement was made and
rejected in Venner v. Great Northern R. Co., 209 U.S. at 33--34: 'this
argument overlooks the purpose and nature of the rule. * * * Neither the
rule nor the decision from which it was derived deals with the question
of the jurisdiction of the courts, but only prescribes the manner in
which the jurisdiction shall be exercised.'
Compliance with Rule 94 was the issue in Delaware & Hudson Co. v. Albany
& S.R. Co., 213 U.S. 435. In that case, the lower court certified to
this Court questions concerning maintenance of a stockholders' suit in
the face of failure to allege demand for relief upon the directors and
stockholders of the corporation. The Court held that such a demand
would have been futile in view of the control of the defendant
corporation by the other corporate defendant. It was during the course
of its discussion of the futility of making a demand in such a situation
that the Court stated what is relied upon by the Court in the present
case--that the 'attitude of the directors need not be sinister. It may
be sincere.' Id., 213 U.S. at 451. Of course, the Court in that case
was quite correct. But it was not concerned with, or adverting to,
jurisdictional alignment, any more than it was talking about
jurisdictional alignment in Hawes, also now relied upon by the Court.
Both cases involved by the liminary requirements for stating a cause of
action under the Rules. (For a similar discussion of what stockholders
must allege with respect to the attitude of directors, but in a case
where there was clearly federal question jurisdiction, see Ashwander v.
T.V.A., 297 U.S. 288, 318-23, and 341-44.) [FN*]
Further confusion is introduced by the fact that both problems--
jurisdictional alignment and compliance with Rule 94--may be present in
the same case. This was true in Doctor v. Harrington, where the Court
was not very careful in making explicit separation of the two issues; it
was also true of Venner v. Great Northern R. Co., supra, where the Court
was very careful to separate the two issues. Such separation of very
different concepts is of course essential when one characterizes the
attitude of the directors. It is one thing when suit is against a third
party to hold that a demand on the directors need not be made if such
demand would for any reason be futile, and that sincere opposition by
directors would make such a demand futile. It is quite something else
to state that, since sincere opposition is sufficient for that purpose,
it is also sufficient to demonstrate that the corporation is 'disabled
from protecting itself' and should therefore be aligned as a defendant.
That, as we have seen, is factually false and is contrary to what this
Court for 52 years has laid down as the controlling rules governing
One final matter of general importance should be discussed before
applying the general principles adduced to the facts of the present
cases. The Court states (354 U.S. 96): '(T)he 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.'
Of course the charges of wrongdoing need not be determined to ascertain
the jurisdiction of the federal courts. What must be determined when
directors or other persons alleged to control the corporation are joined
as defendants is the relation of these people to the corporation. And
while in certain cases the issues may be determined from the face of the
pleadings, the courts are not so limited. The Court speaks of making 'a
practical not a mechanical determination,' but a more mechanical
determination could hardly be imagined. If anything had been regarded
as settled until today about federal jurisdiction, it was that 'It is
our duty, as it is that of the lower federal courts, to 'look beyond the
pleadings and arrange the parties according to their sides in the
dispute.' City of Dawson v. Columbia, etc., Trust Co., 197 U.S. 178,
180.' City of Indianapolis v. Chase National Bank, 314 U.S. 63, 69. Of
course, this may take time and may not always be easy of determination.
I had not thought up to now that such considerations should lead us to
disregard our constitutional obligation, for, as the District Court
stated, 'It is more than costly error therefore--it is an
unconstitutional invasion of the jurisdiction of the state courts--for a
federal court to sustain federal jurisdiction of a civil action between
private persons where 'the matter in controversy' exceeds the sum or
value of $3,000 * * * but does not arise 'under the Constitution, laws
or treaties of the United States,' * * * and diversity of citizenship as
to 'the matter in controversy' does not exist. U.S.Const., Art. III; 28
U.S.C. s 1332 * * *.' 117 F.Supp. at 808.
The proceedings in each of the present cases have followed different
In No. 316, Smith v. Sperling, the District Court held a hearing to
determine the presence of the special circumstances that this Court's
decisions indicated would require alignment of the corporation as a
defendant. It did not find such circumstances and, aligning the
corporation as a plaintiff, it dismissed the cause of action for lack of
the requisite diversity. 117 F.Supp. 781. On appeal, the Court of
Appeals for the Ninth Circuit affirmed this aspect of the case. 237 F.2d
317. I find no justification for overturning the findings and
conclusions of the District Court made after extended hearing and
analysis and affirmed by the Court of Appeals. I would therefore
In No. 149, Swanson v. Traer, the District Court dismissed plaintiffs'
complaint on the merits because it did not appear that they had 'laid a
foundation sufficient to support a derivative stockholders' suit.' On
appeal, the Court of Appeals for the Seventh Circuit affirmed, but on
the ground that necessary realignment of the corporation as a plaintiff
destroyed diversity and required dismissal of the suit for lack of
jurisdiction. 230 F.2d 228.
Examining the pleadings, the position taken by the corporation in the
litigation, especially the affidavit and statement by counsel for the
corporation, the Court of Appeals concluded that 'in their business
judgment, both the directors and Mr. Busch (the corporation's counsel)
were of the sincere opinion that the filing of such a suit would not be
for the best interests of the corporation and its stockholders. The
named plaintiffs disagreed. This difference of opinion is not of itself
evidence of antagonism on the part of the Railway Company.' Id., at 237.
The court stated that the allegation of the complaint that 'several
members' of the corporation's board of directors at the time suit was
filed had been a part of the alleged conspiracy was insufficient to
allege antagonism by a majority of the board. The court was also
impressed by a lengthy, detailed affidavit filed by the corporation's
counsel, retained after the transactions complained of, who stated that
he had reviewed the transaction pursuant to the direction of the board
of directors and had advised against suit. The facts relied on by the
Court of Appeals are not without weight in support of its conclusion.
The plaintiffs' general allegations, however, imply hostility on the
part of the whole board of directors, and, in this state of the record,
plaintiffs should have been given an opportunity to substantiate their
allegations at a hearing before the District Court, as was the indicated
course of proceeding when the matter initially came before the District
For this reason, I would remand the case for such a hearing.
FN* The confusion between these two lines of cases--the jurisdictional
alignment cases and the cases dealing with the problems with which
former Equity Rule 94 was concerned--is fully treated in the opinion of
District Judge Mathes in No. 316. See 117 F.Supp. 781, 792--809.
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