Petition for Writ of Certiorari — Smith v. Sperling

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ete See Pe AUG 1 31956

sag rt one |

Supreme Guar wth the United

- Ocroser Tes, 1956.

"Gaiekes B. Sutra: as Sicciat Administrator of the

Estate of Edward S. Birn, Deceased, fa

Petitioner,

oat ee 7 |

| Minton Spertinc, Harry M. WARNER, Jack -L: War-

. NER, Unitep States Pictures, INc. and: aye

- Bros. PICTURES, Inc., } |

& Respondent, ,

| Petition for a “Writ of Certiorari to the United States %)

Pah ie Court of Appeals for the Ninth, Circuit.

| " ‘Herman-H. Levy,and 8

_ Morrts.J. Pottack, . Sa ae

ee ' ‘756 South Broadway, ~ Ne ater

age: 3S ee Los Angeles 14, California, =

; sone Moss, Lyon & Dunn,

: Cah At 210, West ‘Seventh Street, )

- ~ ". Los Angeles 14, California,

yee Attorneys. for Petitioner. —

SUBJ#CT INDEX

| PAGE

Citations to opinions below... isch hscsecinciesiieagti ee ee aes cme

icciisien oneness s caakiotaaieunens wish oe -@

Statute involved. a tanesenssncenssencenesseseneseevenesanscnsseeete- soe é ereseqeene 2 |

Questions “presented ene seein ; : aia | een oe | 2

Statement cudnt cancenlbioonenekiin TRYST ae oe

_ Reasons for granting the WN cs eal eek! wecshae i phe 7

COMCHSION —....----vvvesvoseerserene svoeevecneceecencseeeion seseesceecensnsssses 14

Judgment sien Se ee cee 15

Appendices : \

_ Appendix “A” Statutory provisions, Title 28, . Section, 1332

(a)(1), United States ‘Code................. italiana App. p.-1-

Appendix el Ges Opinion of the United States. Gourt of Ap

SII 5 iccaescdavtesapeslliansctianiaianinsiciniatannancsinniioe : 7: ae sada App. p. 1 -

Opinion of the United States Distfict ‘Court............. App. p. 11 ©

‘TABLE OF AUTHORITIES CITED

yet | 7 Pe CAsEs - . PAGE

Delaware & Hudson v.. Albany & Susquehanna; 213-U. S. 435...

tenis v. Harrington, 196 U. S. 579... eccscescecteeeeseens +, 7, & W

Hawes v. Oakland, 104 U. S. 450.0... pen bone ee 9, 10

Indianapolis v. Chase ’ Bank, eee. wee 6 oe

JRA Corporation v. wiiaue 30 Fed. Supp. 393, aff'd 109 F. -

SO re ae . 10

Koster v. Lumbermen’s Mutual, 330 U.S. S18. ensnntnnnnn 14

- Lavin v. Lavin, of Se

New Jersey v. Mills, 113 U. S. 249........ PO Oe eT Fa mts SEL 6

Railroad v. Grayson, rT a i 6

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LO ee et ene Se ETS Be ok teh a ee Oe. Bre ee, i hth aE a. SEE Tee Vhs aoe Oe

Schmidt v. Esquire, 210 F. a a ee ~

Venner v. Great Northern, 209 U. S. RRR eva Mens eth 6, 8

MISCELLANEOUS

Time, July 30, ci via sioboaie es svidadeilaseabclaasoinatonsnee

Federal Rules of Civil Procedure, Rule 23(b) 0.0. sia aisles 10

Equity Rules of the United States Supreme Court, Rule’94......7, 10 :

| ' STATUTES |

_ United States Code Annotated, Title 28, Sec. 1332(a) (1).......... 2

‘United States Code Annotated, Title 28, Sec. i, en FER 12

United States Code, Title 2B, Sec. 125461) ....-sesccov-n-- Tie aAee

| | TEXTBOOKS = | :

Berle and Means, The Modern Corporation and Private ‘Prop |

erty (1933), Pp. GS-G4.....-......racecmerserncerernecensersensneserseneenreneenesoneste 12

Berle and Means, The Modera Corporation and Private Prop- '

erty, PP. BI BZ..........--ce-ocven-cerasteorcreneseonssessecesensssorosensneceseeenpensesesses “13

48 Harvard d.aw ‘Review, ‘PP. 1, 8-9, Stone, The Public Influence

OF the Bav......ra--cecesssoressreecsnessessnseseneonvounentashentensvenesewereensvseennes 12

IN THE

_Sayen Cour of the ited States.

OcTOBER Téew, 1956.

NO Pivoeccensaie ;

CHartes B. ‘SMITH, as Special Administrator of the

Estate ot Edward Ss. Birn,_ Deceased, - ————

» Petitioner,

. US.

MILTON SPERLING, Harry M. Warner, JACK L. War- ©

‘NER, UNITED STATES PICTURES, Inc. and WARNER.

— Pictures, INc.,

_ Respondents.

Petition for'a Writ of Cestiorari to the United States

- Court of Appeals for the Ninth Circuit. -

a .

| { Pétitioner: prays that a writ of _certiorari- issue to

review the judgment of the United States Court of

Appeals for the Ninth Circuit,’ entered - in’ the above-

entitled case on May 21, 1956.

Citations to Opinions Below.

The opinion of the District Court, printed-in Appendix

ZB hereto, infra, page 11, is:reported in 117 Fed. Supp.

781. The opinion of the United States Court of. Appeals

printed in Appendix B shereto, _— page a, is still .

unreported.

2—

Tiie ulead ‘of the United States CR of ‘iced

was entered on May 21, 1956, page 15, infra. The- juris-

diction of this Court is a under 28 U. ‘'S.. 'C., Sec.

1254(1). ae |

Stature Involved.

The statutory provisions involved. are Title 28, Section |

1332(a)(1). United States’ Code Annotated. iat: are «5

printed in Appendix A, infra. ; &

Questions ‘Presented.

1. Where the directorate of a Delaware ‘corporation .

which is not dominated and controlled by its. ser ea |

or vice-president, is nevertheless admittedly. opposed to

a claim asserted by a New York stockholder in a deriva-

tive suit in a Federal Court viz.: his corporation is dealing

: unfairly with a corporation which is owned by the presi- ~

dent’s son- -in-law and. causing him to become > unjustly

enriched at the expense of the Stockholder’ $ corporation;

where these directors are avowedly hostile to the suit and

its objects ; where the stockholder’s corporation appears

in the action, unites with its president and vice-president :

in resisting the stockholder’ s claim of illegality, unites

with them in opposing his prayer that the Court terminate

‘the dealings ‘and cancel the contract between the two

companies and prays the complaint be dismissed ; where

counsel for the stockholder’s corporation admits in open

‘Court “no matter what demand the - plaintiff stockholder

had made on the directors, they would never have brought - |

this suit”; is not the stockholder’s corporation rightly |

| aligned as a defendant i in such a Suite

, ame a ~

2. May a Federal Court destroy diversity of citizen-

ship and‘conséquently its jurisdiction over this controversy

by realigning the stockholder’s corporation as a complain-.

ant and then disrniss the suit for failure of jurisdiction?

Statement.

Edwar, $ Birn, a New York citizen and stockholder

arher Brothers renee a: ‘Delaware corporation,

Named. as defendants in the haste cause were the corpo-

ration (Warner, for short), its President and Vice-

President, Harry Warner and Jack Warner, both citizens

' of California; the president’s son-in-law, Milton’ Sperling,

-.a California citizen, and, United States Pictures, Inc.

(United, for short), a Delaware corporation owned. by ©

_ Sperling and his two children—Harry Warner’ s grand-

children. [R. 3, 378- 380. ]

, Named as. defendants in ‘the second cause were the.

Warner corporation and Harry and Jack Warner. Sper-.

ling and United were not named in ths: second cause,

[R. 11.]

The gist of plaintiff: stockholder’ s ne A ae

United joint venture created and continued in a Series .~

[Exs. I, 3, 4, 7 and, 107, Schedule H] of Warner-United

contracts, entered into, successively, terms of which. were

negotiated and renegotiated by president Harry Warner

with his, son-in-law Sperling [R. 116, 129, 136],.

unlawful ahd unfair to Warner. It is causing Seeing

to become unjustly enriched at Warner’s expense. [R. °

8-10.] Complainant prayed -the Court halt the’ dealings

_ between the two companies, terminate their relationship,

cancel their contract [R. 15], and for. other. relief;

Warner appeared in the suit and combined with ethe

' co-defendants in resisting complainant’ s claim and prdyer:.

---In.a joint answer with the Brothers Harry and Jack

Warner, who were charged with a breach of trust ith

connection with Warner-United dealings, the Warner cor-

poration denied that complainant was a citizen“of New’ ©

York [R. 20]; denied the truth of his-claim [R. 20-24]; -

. pleaded the bar of the Statutes of Limitations of 3 States

[R. 24-25]. and prayed the complaint be dismissed.

[R. 26.] United and Sperling entered a similar plea.

[R. 16-20.] s

- The merits of the sinter: i.e., whether the Warner- |

United dealings are in fact seltetil ail should be termi-

‘nated and whether the Warner-United contracts should

be. ordered “cancelled, to the “extent: that they remain.

uneXecuted, were neither reacaee nor ° determined: The

Court ordered that two issues,

(1) Jurisdiction, and - -

(2) The-bar of the Statutes of Limitations,

be inquired into preliminarily and determined before con-

sidering the merits, and directed the parties: to appear

and present evidence “only as to those issues.” [Findings,

R. 72.] “Thereupon, evidence on behalf of plaintiff and

defendants ‘was. offered and received, the cause argued -

and submitted upon the two above stated issues only.”

[R. 72; emphasis added. ]

Plaintiff established diversity. ol citizenship between the

7. 4.

- parties: he proved he ‘was .a citizen of New York and

that the two corporations and the three individuals who ©

were aligned as defendants were citizens of states other

than New York. -[R. 73.

. —S—

In open Court, counsel ‘for Warner corporation ad-

mitted that plaintiff s tockholder and his corporation. were

at odds-and occupied opposing positions in the controversy.

over the legality of the Warner-United _relationship 1R..

588]; -admitted that the ‘Warner directors were hostile

and opposed to the objects ofthe suit: . . they would

have upheld [the Warner-United culeiaman at any ~

time against any attack .by any person, including any.

group of stockholders” and stipulated that it would have

been futile for the stockholders to demand of the. directors. -

that the corporation bring the @uit. [R. 588-589. ]

' The defendants also admitted that the brothers. Warner -

owned approximately 15% of Warner’ s stock arid that the

rest of the stock is distributed among approximately 30, 000

shareholders located in various parts of the world. {R..

ee ee | a ’

Evidence was also introduced by both parties < on the

limitations issue which issue was also not-reached, for

the judge concluded: | |

‘L. To change Warner’s position in the suit from de-

fendant to plaintiff, align it as such and thereupon dismiss

the First Cause of Action (iri which United is a defen-

dant) for, failure of jurisdiction. |

2. To dismiss the Second Cause of Action (in Witch

' United is not named ’a defendant) for the reason ‘that

the cause céuld not be determined without the presence

of United as a party" and consequeritly that cause was |

“without -_ 5 [R. 17- 79]

; No extended discussion is necessary to point out why a decree

by’ this Court. aso the second cause of .acfion wsthout the presence

_ of United before the Court would leave the controversy ‘in such a

condition. that its final determination may -be wholly inconsistent

with equity and good ‘conscience.’”’ (Opinionsof the District Court,

118 Fed. Supp. .at p. 6°, Appendix B, p. 63.) _

oe . . , : f | ‘ . "

The Court of Appeals “Affirmed as to the First Catise

_ of Action. Reversed and remanded as to the Second. wl

( Opinion, Appendix B, p: 10.) :

Reasons for Granting thé Writ.

1. oIn holding that, in a derivative suit, brought ina *:

federal Court a -stockholder’s corporation is Properly

"aligned as a defendant only if the stockholder’ succeed

’ jn establishing that the corporation is dominated and con-

_ trofled by the co-defendants who are accused of injuring it,

otherwise the corporation must be realigned as a plaintiff

and if such realignment destroys diversity ‘of citizenship,

the suit must be dismissed for failure-of jurisdiction; the fb q

_ Court below has decided an important question of law

' in a manner directly in conflict with the decisions of this. /

Court in: New Jersey v. Mills, 113 U: S. 249; Railroad

v. Grayson, 119.'U. S. 240; Doctor v. Harrington, 196

VU. Sy, 579; Venner v. Gt. Northern, 209 U. S. 24, 31, 32;

Dita & Hudson-¥-Albany & Su

“435, 451; Indianapolis v. Chase Bank, 3

With deference to the Court below, we

in none of the three cases cited in the opinion below (Ap-

pendix B, p. 6) namely, Doctor v. Harrington, Venner v..

Gt. Northern, and New Jersey< <u. Mills, supra, did ‘this

Court so hold. or suggest. To the contrary, in: New

Fersey v. Mills (1884)3" supra, this Court declared the

stockholdet’s corporation to be ‘ “rightly and necessarily” °

a defendant although there is not a word in the opinion

that either- holds, suggests or implies that the co-defen-

_dants im that case dominated and controlled the stack-

_ holder’s company. a |

And in the later case of. Railroad v. minted 1886), e

supra, cited in Indianapolis v. Chase Bank (1946),

' supra, this. Court pointed out that the stockholder: “does

"not represent. the conipany in its corporate capacity

and kas no authority to do so”; in bringing the suit,

the stockholder is suing: not for his corporation “but

for himself” albeit a decree in his ‘favor %s. advan-

. tageous to. the company; “as a stockholder he is. seeking

protection from the illegal acts of his own company” as

well as: the illegal conduct of, others and this Court again

declared that the corporation is “rightly and necessarily

-a defendant.” (119 U. S. at 244.) And not a word in _

its opinion in that case which suggests that the co-defen-

dant dominated or controlled the stockholder’ $. company.

“In Doctor v. Harrington’ (1905), Supra, this Court

* agdin declined to class the $tockholder’ s corporation other-

- wise than as a defendant. It reversed the District - Court

which had realigned the corporation as a plaintiff; thus

en diversity ‘of citizenship. The Court’s grounds for

| Teversing and restoring diversity, and consequently juris-

diction, were (1) that a stockholder who. sought protec-

ae placing New York citizens on both sides of the litigation:

a and thereby precluding: assumption of jurisdiction based

tion from claimed illegal acts of his corporation had <

right to sue his company and name {t a defendant, and:

(2). when such a Suit is between citizens Bh different .

‘States, it may be brought in a Federal Court.

_ The Court pointed out: that it had always parents

such a stockholder’s right to sue his company (196 U.

at 588) ; that it had set forth in its Equity Rules oats |

: Rute 94 what a stockholder’s bill in such a suit is required

tO exhibit. The Court went ‘on to hold that the stock-

~_holder’s. bill in’ the Harrington case satisfied the require-

tent of Rule 94, for the bill exhibited that the suit was

not collusive; that tomplainants were unable to obtain

par ag

sedress from the company or its stockholders because the

'. directory was “under the absolute control and domination

. of the defendant, John J. Harrington, and that said

Harrington, by reason of having possession of a majority :

of the capital stock of.said corporation’’ likewise con-

trolled “the action of ‘the stockholders” ;. that. Harrington .

had declined to redress the wrongs of which coniplaint

was made. (196 U. S. at 588.) .

In other words, these allegations of. “domination and

control” were ‘not a jurisdictional sina qua’ non; their |

function was (as the Court pointed out in Venner v. Gt.

N orthern, infra, and Delaware & H. v. Albany & Susque-

"hanna, infra) to exhibit to a Federal Court which had

"jurisdiction that the plaintiff-had either complied with

the requirements set forth inthe Equity Rule 94 or had

exhibited circumstances ‘which excused stich compliance. |

In Venner v. Gt. Northern (1907), 209 U. S. 24, this

Court again declined to regard the stockholder’s corpo-

ration otherwise than as a defendant. |

In that case it was argued (seemingly as it was in the

F Harrington case) that the Circuit Court “was without

_ jurisdiction and ‘should have remanded it to the State

Court for two reasons. First, because upon a proper

alignment of the parties there was-not.’a controversy

between citizens of; ‘different states. Second, because the

‘cause of action as disclosed by the. pleadings showed

that the Circuit Court had no jurisdiction over the sub-

ject matter” (209 U.S. at 31), i. e., because the plaintiff

had. failed to comply with Equity Rule 94 in that “Whether

"or not he was a stockholder at the time’ when the-alleged

wrongful acts were committed by the defendants does not ~

appear by any allegations in the complaint” (id. at 29).

| AD Dn Sa Watts

- a

, /

— ‘

“These reasons’ ’ said Mr: Justice Moody, ‘ ‘are entirely

independent of each other’ and require ‘separate consid-

eration. First was there a controversy between citizens

of different states?” (id. at 31). Justice Moody went on.

to point out that while the Court may realign parties and

place them “on the side. where their interests*in and atti- -

_tude to the’ controversy really places them and then may

determine the jurisdictional question in view of this align-

ment” (id. at 31 -32) the fact that “it would doubtless

be for the. financial interests of the defendant comes

that the plaintiff should prevail” . . . “is not enough’

to. warrant its being regarded other than as a deferidant: :

where. (as in the case at Bar) the corporation’ admittedly i.

“unites with the other defendants in resis‘ing the plain-

tiff’s claim. of illegality and fraud’; ‘where (as in the

case at Bar) ‘the defendants “are deta to have engaged

-in the same illegal conduct and the in’ fury is age to

, have been accomplished by their joint action.” Under

the circumstances, declared the Court “the. plaintiff’s con-

troversy is with both, and both are rightfully and ‘neces-

sarily made defendants’ and neither can, for jurisdictional

purposes, be regarded otherwise than as a defendant”

« (id. at'p, 32). ; aes

Coming to the second inquiry, namely, “DR the Cir-

cuit have jurisdiction of the subject matter of the litiga-

tion?”, Mr. Justice Moody rejected the appellant's argu-

ment Gd, at .33) “that a compliance with that rule

- [Rule 94] is -essentiak to the jurisdiction” and said (id.,

at 4) “Neither the rule nor the decision from which.

it is derived’ deals with the question of jurisdiction of the

it but only prescribes the manner in which jurisdic-

*Hawes v. Oakland, 104 U.S. 450.

a" Se

tion shall be exercised. ” The learned Justice went on. to

point out “The objection that plaintiff has failed to com-

_ply with Equity Rule 94 may be raised by’ demurrer, but™

the admitted power to decide this*question is also an ad-

mission that the Court ‘has jurisdiction of the. case.” .

(d.,at 35.) - 6 pte Se

In Delaware &@Hudson v. Albany & ores nee

(1908), 213 U. S. 435, this Court had occasion to refer

specifically to the: allegations.in the Harrington case with

respect to “domination and control” and said of these

allegations, that. their purpose and effeet was ‘

a case not of compliance with Rule 94, but circumstances °

which excused from such compliance.” (213 si S. at

449) 2 : ,

r Rule 94 is now eu in R. 93 (6), F. F. nm. © FB.

In its present form the rule is declaratory of this Court’s,

decisions in both Hawes v. Oakland,.104 U. S. 450, and

Delaware & ‘Hudson v. Albany & Susquehanna, supra, in

that a plaintiff is now required to, show either that he

tried to get his corporation to remedy the wrong com-

plained of or that such ‘effort would be vain and futile.

As pointed out in the Statement, ante, defendant’s‘coun-

sel in the case at bar stipulated that such efforts on the —

part of petitioner would liave been futile. [R. 587. }

2. The decision ‘of the Court below is directly in con-

flict with decisions* of the Second ‘Circuit Court of Ap=

peals on the same subject in JRA, Corp. v. Boylan, 30

Fed. Supp. 393- 394, affirmed. on opinion . below in 109

‘to\ show —

_ F. 2d 1018, aid in Lavin v. Lavin, 182:-F. 2d 870. This . §

conflict was conceded by the District Judge in his opinion, ©

117 Fed. Supp. 781, at pp. 805-806. Appendix, pp. 53-55. . °

The decision below is also’ directly in éonflict with the’

decision of the Seventh Circuit Court of Appeals in

Schmidt v. Beqhive (1954), 210 F. 2d 908, 912, in which

that, Court stated: “It does not seem that-a different’ rule

| of alignment: applies when, as in this case, there is no

indication that the refusal of the corporate. gnanagement

to sue results from fraudulent or.other i improper motives.”

, 3. The error of buch Courts below in realigning Warner

Corporation as a plaintiff thus destroying diversity be-

comes clear when this. Court’s language in Indianapolis

i Chase Nat'l Bank, 341 U. S. (1941) 63, is adapted

to the realities of the present case and it is seen that the.

question which “permeates | this litigation” (id., at 72)

is; should the Court terminate and cancel the Warner-

. United arrangement as unlawful and unfair to Warner

pew compel the co-defendants to account for Anjury they

- are alleged to have caused. oe ae

This is the “primary and. controlling matter in dispute”

. (id., at 72) with respect to which the plaintiff stockholder

is admittedly on one. side, and the Warner Corporation .

_ and the co-defendants are; by their own admission, in-

. dissolubly united-on the other side, “Plainly, therefore,”

‘(id., - 74) the Warner Corporation and the co-defend-

ants “are, colloquially speaking, partners in litigation.”

What the plaintiff: wants, the Warner Corporation and

_ the co-defendants do not want. Yet.-by the -decision of

‘the Court below the plaintiff and the Warner Corporation

were ranged alongside one another and “made to have a

~ common. interest” and objective when, in teality, they

"are opposed tq each other and are poles apart in what

they seek. “Therefore, if regard be had to -jurisdic-

tional integrity” the. Warner Corporation and the co-

‘ defendants “are on’ the same side of the controversy not

_only for their own purposes but“for purposes of div versity

jurisdiction.” (1d., at on

: : : —12—

4. Clearly the question is of importance since it affects

substantially the rights of some 8,000,000* citizens who

have invested in shares of publicly owned American com-

panies a substantial portion of their savings,’ to obtain

relief from scorporate practices ‘which are evil;® practi

which ‘result in unlawfully diluting and watering down |

the stockholder’ s rightful cepa of his company’s ss ia

and its” profits.* | |

We urge that it is.no answer to say to this citizenry

that the Courts of the States are there to protect them,

if for no other reason (and other reason there is) than

” the bald fact that State Courts are not always available,

and that Congress has recently recognized that fact’ when

it amended’: the venue statutes in order to make available a

- federal forum for the. stockholder who every so often faced

a situation: in which no State Court would hear him be-

‘cause he could not find within the territorial borders of

any -one. State and. therefore could not effect service of

process. on, his corporation—an indispensable party—and

the = and directors Whom he accused of ere it.

*“The U. S. now had '8,630,000 alittle in publicly held

companies, one-third more than’ four years ago. So New York

stock exchange President Keith Fuhston announced this week.—

Just over half (56.1%) of U. S. stockholders, are women.” —

- July 30, 1956.

“Within recent years approximatély half of all the savings of

the community have gone -into corporate securities—almost entirely

the securities of -Quasi-Public Corporations.” The Modern Corpo- |

ration and Private Property, Berle and Means (1933) pages 63-64.

* ‘Featherbedding occurs at top level management and extends

down to the rank of foremen,” said A. I. M. in a report to its

17,000 members. And one of the biggest causes of featherbedding is

nepotism. In more than half of the 23,000 U. S. companies A. I. M.

[American Inst. of Management] studied, an executive had put

his sons, cousins, brothers—even an assortment of relatives—on the

payroll. Time, May 14, 1956.:

®Stoné. The Public Influence of the Bar, 48 Harv. L. er. Pp. 1

‘at pp. 8-9.

"$1401, Title 28, U. .. C. A. See Lavin v. Lavin, 182 F. 2d 870.

Pe ee

. t

SIRT SBN 2 Pe LIME Sr ibis Fe

—

Unless the Court settles, this question, the doors of every

Federal Court in the. Ninth Circuit will be elosed to a

stockholder though he “succeed in extracting admissions

from members of .his corporation’s directory—like the »

plaintiff did in the case at bar—-: from one member, that

the directory is in effect a self-perpetuating body, 1. ¢., each

year it authorizes,the submission to the suiidadieds of

a list of candidates for election to. the board; appoints a

proxy committee and authorizes the solicitation. of -stock- —

holders’ proxies* [R. 261-264]; from others who are ern-

_ ployed by the company at substantial salaries or retainers,

admissions that’ their continued connection with the com-_

pany depends on their not becoming persona non grata

to the brothers Warner who between them have a “work-.

ing control” of the company,’ from{ others that their

presence on the board is' virtually at the brothers’ pleasure.

[R: 264, 285.]

Admissions like the foreeving will fall short of proof

“by a preponderance of the evidence” that the directory.

as “dominated and controlled” by, the alleged wrorig.

doers ‘because, as appellees successfully contended in the

Court below, men who poe personal strength and in-

Ty selecting the proxy committee the corporate management is

in a position to name the men who will be subservient to it ;—The

normal apathy of the small stockholder is such that he will either

fail to return his proxy, or will sign on, the dotted line returning

his proxy to the office of the corporation—the proxy votes are then -

used to rubber stamp the selections already made by those in con-

trol.” The Modern Corporation and Private Property, Berle and

Means, pages 81-82. .

“The proxy machinery has become one a the principal instru-

‘ments not by which a stockholder exercises power. over the manage-

ment of the enterprise but by which his power is separated

from him.” Jd. at 139.

_ *7d. at p. 80.

10Opinion of the’ District Court 117 Fed. Supp. at 788, Appendix .

B; p. 15.

—

—14—

’ tegrity cannot be controlled by such’ venal considerations. |

as substantial annual salaries or retainers from the corpo-

ration. + a . a5 et

In short, “the ecieion ae the Courts below, in es-

sence, require the stockholder to. demonstrate. to an

almost mathematical certainty that the ethical current in

each of hi® company’ s directors is not adequate to .over- |

come the promptings of self—a virtually impossible task;

a task which, with deference’ to the Cotirts below seems’

« decidedly. out of -harmony with. -_ Court’s recent ob-

servations: ~

“Tt has been the whole course of our law to break

down the barriers against. calling corporations to

account in all states where they may. do wrong in

- doing business.” | :

Mr. Justice Reed in Koster ?. Lumbermen's Mutual,

330 U. S. 518 at 538:

“The whole trend of recent Congressional legisla-

tion has been to protect corporate stock and security

holders. See, e. g., Securities Act, 1933. But this

_. legislation was not intended,as a complete substitute 4%

_ ° for the antidote provided by stdéckholders’ suits for,

' the dangers inherent in the modern’ development of

‘frequent conflicts of interest between corporate own-

ers and corporate managers.” = \

Mr. Justice Black in the same case at page 532

Conclission.

For the fotegoing reasons, this petition for. a Writ of

- Certiorari should be granted.- e |

"Respectfully submitted,

_ HERMAN H. Levy, and ~ a

Morris J. PoLiack, .

Moss, Lyon & Dunn, |

; - Counsel-for Petitioner.

, | Judgment.

____ United States Court of Appeals for the Ninth° Circuit.

Charles B. Smith, as Special Administrator of the Es-°

tate of Edward S. Birn, Deceased, Appellant, vs. Milton |

Sperling, Harry M. Warner, Jack L. Warner, United

States Pictures, Inc., and Warner Bros. Pictures, Inc.,

Appellees. No. 14334.

JUDGMENT.

Appeal tion the United States District Court for the | va

Southern District. of California, Central Division.

This cause came on to be heard on the transcript of

_ the record from the United States District Court for the ;

Southern District of California, Central Division, and was

duly submitted.

On constearasiee whereof, It is now ‘wa: ordered and.

adjudged by this Court, that the Judgment of the said

Distfict: Court inthis cause be>-and hereby is affirmed as .

to the first cause of action, and be, and hereby is revi 'rsed

as to the second cause of action, and that this cause te,

and hereby is remanded. to the said District Court, fo:

- further proceedings in accordance with the oplaion of

this court, without costs to any party.

(Enporsep) Judgment . . ;

Filed ‘and Entered: May 21, 1956 {

Pau P. O’Brien, Clerk. | |

-” APPENDIX “A.”

“§1332. Diversity of citizenship; amount in controversy

(a) The district courts shall have original jurisdiction

of all ws actions where the matter in controversy ex-

ceeds the sum or--value of $3,000 exclusive of interest

and costs, and is between: (1) Citizens of different

States: . > a

_ APPENDIX “B”.:

’ Siete of the United States Court of ‘aeaaite

In the District Court of Appeal of the State of Geali-

fornia, Southern District of California, Central Division.

Charles B. Smith, as Special Administrator of the

‘ Estate of Edward S. Birn, Deceased, Appellant, vs. Mil-

ton Sperling, Harry M. Warner, Jack L. Warner, United -

States Pictures, Inc., and Warner Bros. Pictures, Inc.,

‘ Appellees. Civil No. 14,334.

. Filed May 21,-1956.

BEFORE: STEPHENS, FEE and CHAMBERS, Circuit pee ‘

JAMES ALGER FEE, Circuit Judge: |

This is a stockholders” derivative suit, which was .

brought ostensibly for the benefit: of Warner Bros. Pic-

tures, -Inc., a Delaware corporation, by plaintiff Smith, as

Special Administrator of the Estate of Edward S. Birn,

- deceased, owner of 400. shares of stock therein. The cor-

poration was joined as a defegdant with two of its direc-

tors- and another Delaware corporation, United States

Pictures, Inc., along with one Sperling, a director of the

latter. The trial court directed that the questions relating

to jurisdiction and limitations should be determined before

trial on the merits.

Upon such a preliminary hearing, judgment of dismiisal

of the first cause of action was granted because, when the

court realigned Warner Bros., as plaintiff, diversity of

citizenship no.longer existed, since Delaware corporations

were, respectively, among the plaintiffs and among the

defendants.’ ) : ,

The second catise of action was dismissed for lack of

equity. This cause was asserted against defendants Harry

"Smith vs. Sperling, 117 F. Supp. 781.

on ;

i ey. |

M. Warner and Jack L. Warner alone, arid is. based ‘upon

alleged - violations of their duties in a fiduciary capacity

‘as directors of Warner Bros. A third cause of suit was

dismissed upon stipulati n by the parties.

~The facts which were found upon the preliminary hear-

ing were as follows:

“As to the’ First Cause of Action, the Court Finds:

“I, That this action was commenced by Edward |

'.§. Birn, a citizen of the State of New York, and.since

the commencement of such action, said Edward S.

Birn-has died and Charles B. Smith, as special admin- |

istrator of the estate of Edward S.\Birn, deceased,

has been: substituted in his placé as plaintiff. That said

Charles B. Smith is a citizen of the ¢ State of Cali-

fornia.

“II.- That defendants Harry M. Warner, Jack ae

- Warner and Milton Sperling, and each of them, are

citizens df the State of California, and that the ‘pike

-dants Warner Bros. Pictures, Inc. and United States _

Pictures, Inc., are, and. each of them is, a corporation

duly organized and existing under and by virtue of

the laws of the State of Delaware, and is a citizen

of the State of Delaware; and that as the parties are

aligned by the plaintiff, it appears that the plaintiff is —_

a citizen of the State of New York and that the defen- —

dants are citizens of the State of: California and

Delaware, as ‘hereinbefore stated.

“III. That this action was commenced’ by Edward

S. Birn as the owner, during the period of the trans-

actions challenged in the complaint, of four hundred

. shares of the capital.stock of the defendant Warner —

Bros. Pictures, Inc., and that he is suing derivatively

on behalf of and for the benefit of said defendant —

‘Warner Bros. Pictures, Inc., and the stockholders

thereof; that by the prayer of the complaint a trust is .

qanterec teases 8 a a

fe ph ane ae eae Oe — nemesis eee

‘sought to be impressed on the capital stocksand assets |

Bros. ‘Pictures, Inc., the’ agreement between : said.

of United States ta in favor of Warner. |

Warner Bros. Pictures, “Inc. and United States Pic-

’ tures, Inc. referred to in-the complaint is sought to

be cancelled and terminated and that the defendants -

Milton Sperling, Harry M. Warner, Jack L. Warner

and United States Pictures, Inc. be required to ac-

“count to Warner Bros. Pictures, Inc., for all losses

_and damages suffered by it and its subsidiaries and:

all profits and benefits received by said. defendants

and that said defendants make restitution accordingly. ;

That the claim set forth in the first cause of action of

the complaint, and relief sought, are for and on be-

‘half of the defendant Warner Bros. Pictures, Inc.,

and. that the said Warner Bros. Pictures, Inc. is the

‘real party in interest in said cause of action.

“IV. That the Board of Directors of: Warner Bros.

Pictures, Inc. is composed of eleven men of whom.

the defendants Harry’ M. Warner, Jack L. Warner

and their brother, Albert Warner, are but three;

that the contract in controversy was. made anid entered

into. in good faith and without fraud, and said con-

tract was intended by the directors to be of financiai

benefit to Warner Bros. Pictures, Inc. and ‘its stock-' |

holders, and said contract was considered by said

- eleven members of the Board of Directors of Warner

Bros: Pictures, Inc. to be a sound business arrange-

‘ment for the best present and. future interests of the

corporation ; that in approving and authorizing the.

‘contract, the officers and Board of Directors acted in

good faith and exercised their independent business

_ judgment. :That at the time of the execution. of the -

contract, Albert’ Warner, together with the defen-

dants Harry:M. Warner and Jack L. Warner, owned .

less than twenty percent of the outstanding shares of

- bid { .

stock.of Warner Bros: Pictures, Inc., and that neither

' the corporation nor the directors or officers were.

shown to be at that time or at any ‘time under the.

domination or control of the three brothers Warner

above named. That neither the stockholders, its offi-

cers or directors were at any time involved in this

action, antagonistic to the financial interests of the

corporation.

“VY, That it is not true either as alleged in the com-

plaint, or otherwise, that all or a majority or any of

the Board of Directors and officers of Warner Bros.

_ Pictures, Inc. wrongfully participated in the acts in.

the complaint complained of, nor was said Board of

Directors dominated or controlled by Harry M. War-

ner, Jack-L. Warner, Albert Warner, Milton Sper-

ling, or any.one or more of them. It is not true-that if

demand had been made. upon Warner Bros. Pictures,

Inc:, that_those to whom such application would be

_made to institutg such suit would have been disqualified

from faithfully doing their duty as directors and off-

cers of said corporation because of any matters or |

facts set forth in said complaint, or otherwise. That —

no demand was made.on the directors of said Warner

Bros. Pictures, Inc. to institute this action and such .

a demand would have been futile; nor was any de-

mand addressed to the stockholders of said corpor-.

ation. That the stockholders of said corporation were

not at the time of the execution of the contract com-

plained of or at any time or at all under the domina-

tion or control of the three brothers Warner; nor

was said corporation at any time herein reférred to in

hands or under control,antagonistic to the financial

interests of said ‘corporation and its stockholders.

_ “That because of the foregoing: findings of fact,

_ Warner Bros. Pictures, Inc. should be by the Court

realigned as a party plaintiff and that upon such re-

lies |

alignment it appears’ that a_ plaintiff, Warner’: Bros. :

.. Pictures, Inc., -is‘a citizen of the State of Delaware,

and -that the defendant, United States Pictures, . Inc.

is a citizen of the State of Delaware.

' “That the’ sole basis of the jurisdiction of this

Court is the claim set forth inthe complaint of di-

versity of citizenship and that in view of the realign-

ment of the parties in accordance with these findings,

~ such diversitys does wot. exist.”

The- record has been examined and giyes no occasion

for a reversal upon the facts found by the trial court. Only

two questions of law remain. The trial court did not at-

tempt to decide the cause on the merits, and this Court

makes no. such attempt esther.

The key questions are: - os

First: Where the complaint asserted that the two di- -

rectors Warner dominated and controlled the corporation

Warner Bros. and conspired to: misappropriate the assets

and business opportunities of the corporation and’ caused it

to enter an utterly improvident contract with United, was

the trial court empowered to go behind ‘the. allegations and,

on the facts found, realign Warner Bros. as a plaintiff?

‘Second.- Where United was a party served and appearing

ft the case and thus’ before the court, was it proper for

the court to dismiss the second cause of action because

United was not named in thé second cause of action as a

party against whom relief was sought therein? 7

The first question is answered by another. This question )

is whether Doctof v. Harrington, 196 U. S. 579, is indis- °

tinguishable from’ the case at bar. If. so, the trial court

must be reversed -as to the first cause of action. In that

case the complaint set up that Harrington and the individ-

ual defendant had the voting power of a majority of stock,

ere |

directed the management of the affairs of the corporation,

dictated its policy. and selected its directors. Without

holding a hearing to determine the truth of such allega- -

tions, the trial court dismissed the bill for lack of juris-

diction: The Supreme Court of the United States re-

versed on the ground that, accepting the allegations of

, the coriplaint, there was-no ground to realign the parties -

since the corporation had been used as.a tool without in-

- dependent ‘volition. _ To like effect:are Venner v. Great

' Northern Railway Company, 209 U. S. 24, and Central

Railroad Company of, New Jersey v. Mills, 113 U. S.

249. It is hardly conceivable that the court in the Harring- —

ton case enjoined the trial court, on remand after the re-_

versal .therein, to entertain. the action even though ‘it

- should be discovered 4s.a matter of fact that, contrary to

allegation, the corporation was not under disabling domin-

_ation.. Judicial power of the federal courts expires when

lack of jurisdiction is uncovered at any stage of the pro-

ceedings. In the case of Cutting v. Woodward, 9 Cir.,

255 Fed. 633, the court found after trial that a purported

sale of assets to: the president of the company had been

the merest sham and that virtual control of a majority of

the Board was exercised by the president. Actual fraud~

was thus’ established by the finding, Appellant cannot

complain of divergence of facts found by the trial court

here and a different court in a different suit. The courts

of the federal system are of special and limited jurisdic-

tion. The first inquiry in’ any of these tribunals. must be

directed to the end of discovering whether in fact the

judge has the power to entertain and decide the contro-

versy. In the inferior federal courts, this inquiry must:

be directed to the statutes by which Congress has author-

ized and empowered’ them to act, —

an.

The preliminary proceeding by the court was thus prop-

er. In any event, Rule 42 (b), Federal Rules of Civil Pro-

cedure, permits the trial court to isolate any issue and try

it first. No jury trial was involved, so that question does

not arise. In the event that a trial had been held and the

_ court had found that the corporation was not under domin-

ation, it would have been incumbent upon the ‘court to dis-

miss upon the grounds of lack. of jurisdiction. The

chances are that, if a trial had been held and the evidence

failed to show domination, the determination would have

been upon the merits. This circumstance probably ex-

plains’ the lack of precedents. It appears then that the

only point of appellant is that thé trial court passed upon

the question of its jurisdiction at the outset. Appellant

-would not have benefited -by delay.

It must be held ever firmly in the field of view.that the

question is one of jurisdiction ofthe District Court. It

has ‘consistently been held through the whole-history of

the federal judiciary that- jurisdiction depends upon the

_ facts. If it be assurned that the appropriate allegations |

or jurisdiction appear in the pleadings and the cause has

been fully tried and judgment entered, still if the facts in.

record do not show jurisdiction existed, the judgment must

be set aside and the cause-dismissed. If the case has been

affirmed and the lack of. such facts is found by the Su-

~ preme Court of the United States, the result must be the

same.

A great wien of hae cases have been decided upon the

allegations of the pleadings. If the appropriate allega-

tions are made ig the complaint to show the corporation ‘

‘under nore I the individual defendants and the cor-

poration depends upon the same grounds and with the

same lawyers as the individual defendants, it is apparent

that a prima facie case is ad. But, when the trial is

over, the court might well find that the corporation was. |

never dominated, but was at all times a free and uncontrol-

led agency. ‘When such facts are. established uncontro-

vertibly, jurisdiction is at an end and the parties must °

be realigned. f Sa

There seems to be no ground for saying, re no.

precedent appears. in the books for the trial of tHese de- °

cisive questions at the threshold, it cannot be done. Either

+ jurisdiction subsists or it does not.’-Theré is an- -absoltite

dichotomy. If any doubt existed, the Féderal Rules of

Civil Procedure now confirm the right of the courf to try

any issue separately and in advance of others.

It. would be burdensome to the court and litigants if

everyone were forced to accept allegations which all knew

were false as.a basis for jurisdiction and proceed to a long.

and expensive trial of the case, only to find by this arduous —

process that the allegations were untrue. Allegations are

extremely easy to write. The tendency to abuse of. stock-

holders derivative acfions is too well known to require

comment. Once the facts are found, as here, proper. re- =

alignment. must be made and jurisdiction does. not exist.

‘The’ dismissal of the second cause. of action gives us

pause. The ground of dismissal assigned by the trial

' court was “lack of equity.” . This ground was apparently

based upon the failure of plaintiff to join United Stafes

Pictures, Inc., as a defendant in the second « cause of action |

although it was a defendant. in the first cause of action and

its name appeared in the title. The second cause of action

was asserted against Harry M. Warner and Jack L. War-

ner, citizens of California, as directors and* officers. of

2117 F. Supp. 781, 811.

Warner Bros. Pictures, Inc., ‘a corporation of Delaware.

Since plaintiff was a resident and citizen of New York, re-|

alignment “of Warner Bros., as a plaintiff, would not have

destroyed jurisdiction. The lack of equity seems to have

. been based upon the feeling that the cause could not have

been completely: disposed of wRhout the presence of United -

States Pictures, Inc.® But.the provisions of Rule 19(b)

Federal Rules of. Civil Procedure, may haye been appli-

cable. There it is provided that the court in its discretion

‘may ‘proceed in the-action without joining persons “who

ought to be parties if complete relief is to be accorded be-

tween those already parties.” if “their joinder would de-

‘ prive the: court: of jurisdiction of the parties before it.”

Now, “indispensable parties” are excluded from the pro-

visions of this rule. The trial court did indicate that United

States Pictures, Inc., was -an “indispensable - party.””*

However, there is an apparent confusion i in this statement.

It may be that the trial court considered the question of

_whether a claim was stated in the so-called “second cause

’ of. action” -since a holding that United States Pictures,

Inc., is an indispensable party may involve a ruling that

this count does not state a “justiciable claim against Harry

- M. Warner and Jack L. Warner. .But the trial court

"seemed to feel there were jurisdictional implications.® No _

®United is referred to variously by the trial court as “not **

subject to ‘necessary joinder’ by the terms of Rule 19(a)”; as

“clearly a person who ‘ought to be’ a party within the meaning of

Rule 19(b)”; and as “one of the ‘parties so indispensable that a

court of equity will not proceed to final decision without them’.”

117 F. Supp. 781, 810.

4117 F. Supp. 781, 810. See Note 3 above.

“So in the case at bar, although diversity jurisdiction may exist

as to the second cause pf action, the question: still remains whether - .

the second cause of action is within. the’ equity jurisdiction of this

court.” 117 F. Supp. 781, 809-810. See State of Washington vs.

United States, 9 Gir.,: YF. 2d. 421, 427,

= ae

opportunity to amend was given, which normally | follows

a ruling on motion to: dismiss.

This Court does not rule upon the question of whether a_

claim could be stated against the directors for alleged

breach of trust to their 7: absent. United States

Pictures, Inc., if Warner Brds. were realigned.* It is -

doubtful whether the trial court ruled on. the point, and we’

do not reach it. ©, | |

We hold the wad court or have dicecnminea the

legal sufficiency of the ‘ ‘second cause of action” against

the Warners before proceeding to a determination of the

status of the parties and the necessity of joining United

States Pictures, Inc., and thus destroying jurisdiction.

Affirmed as to the first cause of action. Reversed and

remanded as to the second.

(Endorsed :) Opinion. F iled May 21, 1956.

Paul P. O’Brien, Clerk.

type

. ” 6Cf. Western States Life Insurance Co. vs. Lockwood, 166 Cali-

fornia 185,; Reid vs. Robinson, 64 California Appeals 46.

"Bourdieu vs. Pacific Oil Co., 299 U. S. 65. Cf. Caleote vs. Texas

Pacific Coal & Oil Company, 5 Cir., 157 F. 2d 216; United States

vs. McIntire, 9 Cir., 101 Y°. 24-650... :

ee Te

Opinion of the United States District Court.

‘In the District Court of Appeal of the State of Cali- 7

fornia,.Southern District of California, Central Division.

_ Charles B. Smith, as Special Administrator -of the

Estate of Edward S. Birn, Deceased, Appellant, vs.. Mil-

ton Sperling, Harry M. Warner, Jack L. Warner, United

States Pictures, Inc., and Warner Bros. Pictures, Inc.,

Appellees. Civil No. 9005 - ‘WM. :

Filed Dec. 16, 1953.

Memoeanbun - OF DECISION..

MaTHEs, District Judge.

Edward S. Birn, “owner of 400 shares of the capital

stock of defendant Warner ‘Bros. Pictures, Inc. .

since August 21st, 1944,” commenced this action in this

court on December 15, 1948, “suing derivatively on behalf

of and for the benefit of defendant Warner Bros. Pictures,

Inc., and the stockholders thereof.”’

The complaint contains three separate claims or causes ©

of.action. The third, alleging a violation of the Sherman

and Clayton Acts, 15 U.S. C. A. §§ 1, 15, was dismissed

‘without prejudice by order of court prior to trial. (Fed.

Rules Civ. Proc., Rules 23(a) (1)(c), 41(a)(2)(b),

- 28 U. S. C. A. 83, 379 (1950).) The second cause of ac-

tion is asserted against defendants Harry M. Warner and

Jack L. Warner alone and is grounded upon alleged vio-

lation of “their fiduciary duties as directors” of defendant

‘Warner Bros. Pictures, Inc.

The first cause of action is asserted against all named

defendants and the allegations material here are briefly:

- that defendant Milton Sperling is a son-in-law. of defen-

dant ‘Harry M. Warner: that the latter and his two

—-

7 ee cs

brothers, Albert Warner and jtonien — L. Warner,

“control and dominate Warner Brothers’’and ‘ ‘actually se-

lect,’ dominate and control the directors and officers of

- Warner Bros.”; that about the summer of 1945 the indi-

vidual defendants Milton Sperling and Harry M. and Jack

L. Warner conspired “to waste . . . and misappropri-

até the assets and business opportunities of ‘Warner Bros.

in favor of, and to further and enrich the private interests

ener Sperling ..-. .° at. the expense of Warner

Bros.” : that in furtherance of the objects of this conspir- ~

acy detoidacs United States Pictures, Inc. was organized

as a Delaware corporation and since » September, 1946

defendant Sperling has been‘ the sole stockholder; that.‘

or about September, 1945, the defendants caused Warner

Bros. and United to ‘enter into’ an agreement” for the

production of motion picturés by United at the studio of

Warner Bros.- upon terms improvident and unfair as to

Warner Bros. and unwarrantedly favorable to United;

that “demand upon the diregtors of Warner Bros. to insti-

tute this action would-be futile . . .”; and that plaintiff

“and stockholders similarly situated and Warner Bros.

will suffer irreparable damage unless the relief requested

herein be granted. :

The prayer is that “the defendants account to Warner

Bros. . . .’; that “a trust be. impressed upon the a

stock and assets of United in favor 6f Warner Bros.”

that “the agreement between Warner Bros. and United

be cancelled and terminated.”

‘Defendants Harry M. and Jack L. Warner and Warner.

Bros. ‘joined in an answer denying the substantive allega-

tions of the complaint and pleading affirmatively the bar

of California’s applicable statute of limitations. Defen-

dants Sperling and United filed an answer to: like effect.

— —l3—

? ‘ . ‘ . ne :

The original jurisdiction of this court is invoked upon

the claimed ground that “the matter in controversy ex-

ceeds the sum-or value of $3,000 exclusive of interest and

costs, and is between '. . .° Citizens of different States.

” (2 U.S. C; §1332.] -

It is true, as alleged, that plaintiff is a citizen of New

York, that defendants Warner Bros. and United are -

“corporations incorporated under the laws of

Delaware,” ard that defendants Milton Sperling and Harry

_M. and Jack L. Warner are citizens of California.

Since this court possesses only such jurisdiction as has

beén conferred by statute, [U. S. Const. Art. III; Lockerty,

_y. Phillips, 319 U. S. 182, 187 (1943) and “lack of

federal jurisdiction cannot be waived or overcome by an

agreement of the parties” [Mitchell v. Maurer, 293 U. S.

237, 244 (1934)], jurisdiction is the threshold issue in

every case brought here. [Rhode Island v. Massachusetts,

12 Pet. (37 U. S.) 657, 720 (1838); Brown v.. Keene,

8 Pet. (33 U. S.) 112 (1834); Capron v. Van Noorden,

2 Cranch (6 U. S.) 126 (1804).])

| “This question the court is bound to ask and answer

for. itself, even when not otherwise suggested. . . .”

[M. C. & L. M. Railway Co. v. Swan, 111 U. S. 379, 382

(1884); Clark v. Paul Gray, Inc., 306 U. S: 583, 588

(1939); St. Paul Mercury Ind. Co. v. Red Cab Co.,

— 303 U. S. 283, 287-290 (1938); McNutt v. Gen. Motors -

etc. Corp., 298 U. S. 178, 184-189 (1936); Robinson v.

Anderson, 121 U. S. 522 (1887); Williams v. Nottawa,

104 U. S. 209, 211 (1881); Minnis v. So. Pac. Co., 98

F. 2d 913, 915 (9th Cir. 1938), cert. denied, a U.S.

631 (1959). ]

While jurisdictional issues in, each case are properly

triable to the court [North Pac. S. S. Co. v. Soley, 257

U. S. 216, 221-223 (1921); Gilbert v. David, 235 U. S..

561, 566-568 (1915); Taylor v. Hubbell, 188 F. 2d 106,

109 (9th Cir. 1951), cert. denied, 342 U. S. 818 eit

there. is no St&tute~or rule of court prescribing “any

particular mode in which the question of . . . juris-

diction is to be:brought to the attention of the court, nor

how such question, when raised, shall be determined.”

_ [Wetmore v. Rymer, 169 U. S. 115, 120. (1898).]

Rule 12(h) directs “‘that whenever it appears by sug-

gesti of the parties or otherwise that the court lacks

jurisdiction of the subject | matter, the court shall dismiss

the action.” [Fed. Rules Civ. Proc., Rule. 12(h), 28

U. Se CA. ot See |

‘Rule 12(d) contemplates-a hearing and determination —

of jurisdictional issues in advance of the trial of other

issues: [Fed. Rules Civ. Proc., Rule 12(d), 28 U. S. C. A. °

at 335; Stauffer v. Exley, 184 F. 2d 962, 967 (9th Cir.

1950) ; 2 Moore’s Federal Practicé §12,16 (2d ed. 1948).].

And the Supreme Court has. declared .that: “Since

there is no statutory direction for procedure upon an issue

of jurisdiction, the mode of its determination is left to

the trial court.” [Gibbs v. Buck, 307 U. S. 66, 71-72

(1939); cf! Gulbenkian v. Gulbenkian, 33 F. Supp. 19

(S. D. N. ¥.. 1940).}

As a general rule therefore the trial court may, in ‘its

discretion, try all issues of fact as to jurisdiction by re- °

ceiving oral testimony and other evidence [Gilbert v.

David, supra, 235 U..S. at 566, 568], or by receiving and |

weighing affidavits [KVOS, Inc. v Ass. Press, 299 U. S. '

269, 277-278 (1936) ;-Mechanical Appliance Co. v. Castle-

—15— |

man, 215 U: S. 437, 440-441, 445-446 (1910); Wetmore

‘v. Rymer, supra, 169:U. S. at 119; Fed Rules Civ. Proc.,

“Rule 43(a)(e), 28 U.S.C. A. at 418.) 0 9

To borrow language from Land v. Dollar, 330 U. S. .

731 (1947), “when ‘a question of the District Court’s

: jurisdiction is raised, either by a party or by the court on

its own motion . . . Fed. Rules Civ. Proc., 12(b),

the court may inquire, by affidavits or othetwise, into the.

- facts as they exist.” [330 U. S. at 735, n. 4.].

Whether the question be raised. by the court ‘or by

motion or plea or answer of a party [see Steigleder v.

McQuesten, 198 U. S. 141 (1905) ; Coal Co, v, Blatchford, .

11 Wall. (78 U. S.) 172, 178 (1870); Smith v. Keér-

nochen, 7 How. (48 U. S.) 198 (1849)], the burden of -

proof always rests upon the party asserting existence of

jurisdiction. [KVOS. Inc. v. Ass. Press, supra, 299 U. S.

at 278; McNutt v. Gen: Motors etc. Corp., supra, 298

U.S. at 189-190; Seslar v. Union Local 901, 198 F, 2d

403, 407 (7th Cir. 1951), cert. denied, 341 U. S. 940°

(1951).; Barron & Holtzoff, 1 Federal Practice and Pro- _

cedure (Rules edition), §352: (1950 ed., 1952 _Supp.).]

That is. to say, it is incumbent upon any party who invokes

the jurisdiction of a federal court to. establish by a pre-

-ponderance of evidence all facts “upon which the court’s

jurisdiction depends.” [Fed. Rules oe Proc., 8(a), 28

‘U.S. C. A: at 252.]

In the case at bar oral motion was made, by the defen-

_dants at pretrial hearing to dismiss thé action for “lack of

jurisdiction over the. subject matter” [Fed. Rules Civ.

| Proce., Rule 12(b)(1}, (d), (h), 28 U. S.C. A. at 335-

336]; upon the ground that: requisite diversity of citizen-

ship was lacking at the commencement’ of the action, in

that Warner “Bros., a Delaware corporation, must Be

. aligned:as a. party plaintiff for diversity purposes, thus

leaving a New York citizen and a Delaware corporation as’

plaintiffs. and three California citizens and a Delaware cor-

poration. as defendants. [See: Miss. Pub. Corp. v. Mur-

- phree, 326 U. S. 438, 441, n: 2 (1946); St.Louis etc.

Ry. Co. v. James, 161 U. S. 545, 562-563 (1896) ; Doctor

v. Harrington, 196 U. $. 579, 586-587 (1905) ; Louisville

etc. R. Co. v. Letson, 2 How. (43 U. S.) 497, 554-558

(1844) ; Marshall v. B. & O. R. R. Co., 16 How. -*.

‘S. 314. 325-329 (1853).]

A trial of the jurisdictional and ‘the statute-of-limi-

tations issues, in advance of trial ot the other issues in the

case, was ordered.

As the parties were aligned by plaintiff, complete di-

versity of citizenship. appeared from the face of the com- -

plaint upon commencement of the action. [ Pacific R. Co.

v. Ketchum, 101 U. S. 289, 298 (1879)4 Prior to:trial _

the original plaintiff, New York ‘citizen Edward S. Birn,

died and the Probate Court of California appointed

Charles B. Smith as Special Administrator of the estate.

[Cal. Prob. Code §§460, 463.] Smith, a citizen of Cali- -

- fornia, was thereupon. substituted as party plaintiff. [Fed.

Rules Civ. Proc., Rule 25(a), 28 U. S.C. A. at 156.] ©

_. Where diversity jurisdiction exists at the commentement

of an action, a subsequent change of citizenship of one of

the parties does not oust it. [Wichita R. R. v. Pub. Util.

* Comm.,‘260 U. S. 48, 53654 (1922); Louisville etc. Ry.

Co. v. Louisville Trust Co., 174 U. S. 552, 566 (1899) ;

Clarke v. Mathewson, 12 Pet. (37 U. S.) 164, 171 —

(1838) ; Dunn v. Clarke, 8 Pet. (33 U.S.) 1, 2 (1834);

Mullen v. Torrance, 9 Wheat. (22 U. S.) 537, 538

(1824).] It. follows then that while the citizenship of the

administrator at bar would have been ” a factor if-he had |

” allt

originally brought the action, his citizenship as substituted

party plaintiff is held not to affect determination as to

diversity jurisdiction. [ See: Continental Ins: Co. v.

Rhoads, 119 U. S. 237 (1886); Blake v. McKim, 103

U. S. 336 (1880); Amory v. Amory, 95 U. S. 186

(1877); Rice v. Houston, Admr,, 13 Wall.. (80 U. S.)

66 (1871); cf. Jeffcott v. Donovan, 135 F. 2d 213 (9th

Cir.. 1943). ]

Subject to the exception that diversity jurisdiction can

be acquired by dropping parties not indispensable [Dol-

Jar S. S. Lines v. Merz, 68 F. 2d 594 (9th Cir. 1934);

Sechrist v. Palshook, 95 F. Supp. 746 (M.D. Pa. 1951);

_ Fed. Rules Civ. Proc., Rule 21; 28 U. S. C. A. at 71],

it is settled that as a general rule all other than mere

“nominal” or “formal” parties are to be considered in

determining whether there exists the diversity of citi-

zenship' required by. 28 U.S. C. §1332. [See: Hamer v.

N. Y. Rys. Co., 244 U. S. 266, 274 (1917); Waterman v.

_. The Canal-Louisiana etc. Bank Co:, 215 U. S. 33,47 .

(1909); Geer v.. Mathieson Alkali Works, 190 U. S.

428, 433 (1903); Bacon v. Rives," 106 U. S. 99,° 104

(1882); Barney v. Latham, 103 U. S. 205, 214 (1880):

Walden v. Skinner, 101 U. S. 577, 588-589 (1879)*

Horn v. Lockhart, 17 Wall. (84 U. S.) 570, 579 (1873):

Wood v. Davis, 18 How. (59 U. S.) 467, 469 (1855);

Wormley y. Wormley, 8 Wheat. (21 .U. S.) 421, 451

(1823); Schuckman v. Rubenstein, 164 F. 2d 952 (6th

Cir. 1947).] : | ;

In order to ascertain whether the Delaware corpora-

tion Warner Bros. is an indispensable party to appropri-

‘ate adjudication of the stockholder’s derivative suit at ‘bar, ©

we must look to the law of California [Erie k. Co. v. Tom-

_kins, 304 U. S. 64 (1938)], to “the entire body of sub-

staptive law governing an} identical action in the state

courts.” [Ruhlin v. N. Y. Life Ins. Co., 304 U.S. 202, .

209. (1938) ; and see Cohen v. Beneficial Loan Corp., 337...

U. S. 541, 555-557 (1949).]

_ Insofar as the first cause of action involves validity of

the 1945 agreement between Warner Bros. and United, ~

since that agreement was executed in New. York, any

' cause of action to cancel it presumably arose under New

York law. And where suit is brought on a foreign cause

of action in the courts of California, substantive- matters

are held governed by the law of the place where the cause

_ arose, while procedural matters are held governed by

California law. [Biewend v. Biewend, 17 Cal. 2d 108,

109 P. 2d 701 (1941); accord, Restatement, Conflict of |

Laws §584 (1934).] Moreover, whether a matter in such

a suit is substantive or procedural is a question of Cali-

fornia law. [Klaxon Co. v. Stentor Eléctric Mfg. Co., 313

U. S. 487 (1941) ; accord, Restatement, Conflict of Laws .

§ 584 (1934).]

The courts of California apply to the conduct of foreign.

corporations doing business within the-state, such as War-

ner Bros. here, the same standard as to domestic corpor-

ations. [See: Turner v. Markham, 155 Cal. 562, 102 Pac.

272 (1909); ‘Findley v. Garrett, 109 Cal. App. 2d 166,

240 P. 2d 421° (1952); Angelus Sec. Corp. v. Ball, 20 —

Cal. App. 2d 436, 67 P. 2d 158 (1937);:cf. Pratt v.

Odell, & Co., 49 Cal. App. 2d 550, 122 P. 2d 684 (1942);

Cal. Corp. Code § 6601; Ballantine & Sterling, Calif.

Corp.. Laws, §410, p. 515 (1949 ed.); see, also, Rogers v.

Guaranty Trust Co., 288 U. S. 123 (1933); Overfield v.

Pennroad Corp., 146 F. 2d 889, 894-896 (3d Cir. 1944); _

- ’ Bevdy v. H. M. Byllesby & Co., 27 Del. Ch. 33, 29 A. 2d

801 (1943); id. 27 Del. Ch. 381, 38 A. 2d 808 (1944).]

e ‘

. Speaking of a stockholder’s derivative suit, the Cali-

. fornia courts. have declared that: “A stockholder who

institutes it sues purely as .a trustee to redress corporate

injuries.” [Whitten v. Dabney, 171 Cal. (621, 629; 154

Pac..312, 315 (1915).]

Also that: “Asa general tule of law . . . where |

a stockholder of. a corporation seeks to maintain an action

for a wrong done to the corporation, such stockholder _

occupies.no better or different position with relation there-

to than would the corporation itself suing in its own be-

half.” [Reid v. Robinson, 64 Cal. App. 46, 55, 220 Pac.

676,. 680 (1923). i :

“The fact that a stockholder is the nominal. plaintiff

does not’ in any manner enlarge the rights and remedies _

of. the action. ” [Earl v. Lofquist, 135 Cal. App. 373,.

376,27 P. 2d 416, 418 (1938).]

And in cases where the corporation and its board of -

directors are “wholly under the domination of those who’

committed the original fraud, the corporation is deemeci

to be in the same position as an incompetent. ‘person or

a minor without legal. capacity . . . .” [Beai ve

Smith. 46 Cal. App. 271, 279, 189 Pac. 341, 345 (1920).

See, also: Sutter v. Gen. " P& Corp., 28 Cal. 2d 525, 530,

170’ P. 2d 898, 900° (1946) ; lopstock v. Superior Court,

17 Cal. 2d 13, 17, 108 P. 2d 908, (1941); Turner v

Markham, supra, 155 Cal. at 569, 70, 102 Pac. ‘at 275. .

The substantive law.of New York as to the ndture and

ownership of the cause of action involved i in a stockholder’s

derivative suit is in all material respects ‘the same as that

of California. . [See:.Clark v. Greenberg, 296 N. Y..146,

71 N. E. 2d 443 (1947) ; Isaac v. Marcus, 258 Nc “Y, 257,

179 N. E. 487 (1932) ; Flynn v. oon ma R. Co.,

—20~—

158 N. YY, 493, 53 N. E. 520 (1899) ; Alexander v.: Dono-

hoe, 143 N. Y. 203, 38 N. E. 263 (1894) ; Earl v. Brewer,

_ 248 App. Div. 314, 289 N. Y. S.. 150 (1936), aff'd 273

__N! Y. 669, 8 N. E, 2d 339 (1937).]

In the courts of’ California, then, and New York as

"well, the plaintiff-stockholder’ s corporation is the real °

party in interest and an indispensable party to appropriate

adjudication of the action. .

This view accords with that expressed in the decisions |

of the United States.Supreme Court. [See: Cohen v.

Beneficial Loan Corp:; supra, 337 U. S. at 548; Koster v.

Lumbermans Mutual Co., 330 U. S. 518, (1947 ); Meyer

v. Fleming, 327 U. S. 161 (1946) ; Davenport v. Dows,

. 18 Wall. (85 U. S.) 626 (1873); also: Lee v. Lehigh

Valley Coal Co., 267 U. S. 542 (1925); Hamée v. N. Y.

Rys. Co., supra, 244 U. S. at 274; Dickerman v. Northern

Trust Co., 176 U.S. 181, 188 (1900) ; Blacklock v. Sniall, ©

- 127 U. S. 96 (1888); Pacific R. R..v. Ketchum, supra, —

101 U. S. at 298-299 ; Memphis v. Dean, 8 Wall. (75

U. S.) 64, 73-74 (1868).]

As Mr. Justice Jaclison wrote oe v. Lumbermens _

“Mutual Co., supra: “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.” [330 U. S. at 522-523.]

- Moreover, as Mr. Justice Douglas said -in Meyer vy.

Fleming, supra: “The corporation is a necessary party.

' * * *. Hence, it is joined asa defendant. But it is

only inally a defendant, since any judgment obtained

. against the keal defendant runs ‘in its favor.* * * *

ee ee

| —

The fact that the ‘corporation is nominally a defendant

should not lead to any different result. ° That gives the

suit only a difference in form, not a difference in sub-

stance.” [327 U. S. at 167-168.]

_ In California; .as under our - -rules {Fed. Rules Civ.

-Proc., Rules 17, 19(a), 28 U. S. C. A. at 12, 36], every

action must normally be prosecuted i in the name of the real |

party in interest. [Cal. Code ‘Civ: Proc. §367], “but if the’,

consent of anyone who should have been ‘Joined as plain-

tiff cannot be obtained, he may be made a detendant

Po [Id. §382. ]

With respect to “an executor, administrator, guardian,.

trustee of an express _ trust”, Rule 17 states that each

“may sue.in his own name without joining with him the

party for whose benefit the action is ear ithe. ee

[Fed. Rules. Civ. Proc., Rule 17(a), 28 U. S.C. A. at .

12.) In such cases, since the person for oi thei the

action is prosecuted need not be joined, the citizership of

the representative who sues, and not that of the bencfi-

Ciary of the suit, is considered in determining whether

diversity jurisdiction exists. (See: Hamer-v. N.Y. Rys. _

Co.,.supra, 244 U. S. at 274: Héss v. Reynolds, 113 U. S.

73, 76 (1885); Knapp v. Railroad Co., 20 W all. (&7

U. S.)-117 (1873); Rice v. Houston, Admr., supra, 13

. Wall. at 67; Coal Co. v. Blatchford, supra, 11 Wall. (78 .

U.S.) at 175. Childress v. Emory, 8 Wheat. (21 U.S.)

42, 668-669 (1823); cf. In Re Moore, 209 UL. S.. 490

(1908); Mex. Cent. Ry. Co. v. Eckman, 187 U. S. 429.

— (1903) ;, Anglo-California Nat. Bank. v. Lazard, 106 F.

2d 693,.699-700 (9th Cir. 1939), cert. denied, 308 U. S.

— 624 (1940); Mayer v. Cohrs, 188 Fed, 443 cc £ D.

Wash. 1911).}

a. .

The stockholder’s derivative: suit is a historical excep-

tion to the rule that the action be prosecuted in the name

ofthe real party in interest. The’ exception permits the

stockholder to sue in his own name, but he is required to

join the: corporation as a party: ‘In Davenport v. Dows,

supra, 18 Wall. 626, the Court pointed out the reasons in

some ‘detail, saying : “It would be wrong, in case the

shareholder were tinsuccessful, to’ allow the. corporation

to renew the litigation iffanother suit, involving precisely,

the same subject matter. To. avoid such a result, a court

" of equity will not take cognizance of.a bill brought to: -

‘settle a. question in which-the corporation is the essen-

tial party: in interest, unless it is made a party to the liti- | -

gation.” [18 Wall. at 627; see also: Helm v. Zarecor, 222

UL S, 32, 36-38 (1911); Steele v. Culver, 211 U. S, 26,

29 (1908); Porter v. Sabi 149 U. S. 473, 478 (1893);

Dewing v. Perdicaries, 96 U. S: 193, 197-198 (1877) ; cf.

. Lee v. Lehigh Valley Coal Co., supra, 267 U.S. at 543;

Hamer v. N. Y. Rys. Co.; supra, 244 U. S. at 272-275;

American Bible Society v. Price, 110 U. S. 61 (1884).] -

Clearly then, the corporation for whose benefit a stock-

holder’s dérivative ° suit. -is brought is an indispensable

party to appropriate adjudication of the “matter in con-

troversy,” and as such is one of the parties whose citi-

- zenship is to be considered and counted ‘in determining

whether diversity’ jurisdiction exists [Dawson v: Columbia

Trust Co., 197 U. S. 178, 180-181 (1905); Shields v.

. Barrow, 17 How. (58 U. S.) 129; 139, 145. (1854) J—

in determining whether “the matter in controversy ——

_ ‘is between * * * citizéns‘oi different states” [28

U.S. C. §1332], “all of whom on one side of the contro-

| * versy are citizens of different states from all parties on.

the: other side.” [Indianapolis v.: Chase National Bank,

lie

314 Vv. S&S G&, 69 (1941); Strawbridge v. Curtiss, $

Cranch (7 U.S.) 267 (1806).]}

It is “the duty of the court in- determining whether

there was the requisite diversity of citizenship to. arrange

the parties with respect to the actual controversy, looking

beyond the formal arrangement made by the bill.” [Helm

v. Zarecor, supra, 222 U. S. at 36; and see; Lee v. Lehigh

Valley Coal Co., supra, 267 U. S. at 543; Hamer v. N. Y.

Rys. Co., supra, 244 U. S. at 274; Steele v. Culver, supra,

211 U. S, at- 29: Dawson v. Columbia ‘Trust Co., supra,

197 U. S. at 181; Blacklock v. Small; supra, 127 U. S. at

104; Harter v. Kernochan, 103 U. S. 562, 566 (1880).]

In the words oil Mr. Chief Justice Waite, a federal court

_ should, “for the purpose of jurisdiction * * * ascer-

tain the real rnatter in dispute, and arrange the parties on

_ one side or the other of that dispute” { Pacific a ae 2

Ketchum, supra; 101 U. S. at 298]; “and the pleadings _ .

‘may be.put aside, and the parties placed on different sides

: of the matter in dispute according to the facts.” [Re-

"moval Cases, 100 U.’S. 457, 469 (1879).]

As Mr. Justice Frankfurter observed in Indianapolis

v. Chase National Bank, supra: “These familiar doctrines’

governing the alignment of parties for purposes of deter-

mining diversity of titizenship- have consistently guided .

“the % *°* federal courts * * *” [314 U. S: at at

70"

One of the first tests to be applied in thecresntns

whether a defendant should be aligned with the plaintiff

is the prayer for relief. [Dawson v. Columbia Trust Co.,

supra, 197 U. S. at 180-181; Mahon v. Guaranty. Trust

- ete. Co., 239 Fed. 266, 269 (7th Cir. 1917):} In Steele v.

— Culver, supra, Mr: Justice Holmes declared for an. unani- .

eee

mous Court that: “The omission of any prayer for relief

against * * .* [a corporatedefendant } simply _—

that properly it is to be treated as a plaintiff i in this case.’

[211 U. S. at 29. Accord: Lee v. Lehigh Valley Coal Co.,

supra, 267 U.S. 542; Hamer v.-N.\ ¥. ‘Rys.. Co., supra,

244 U.S: at 272- 274.] As stated before, the complaint at

bar discloses not the slightest pretence - of asking relief

: against Warner Bros. as a party defendant.

But plaintiff conterits that ‘a stockholder’s, derivative

action stands as an éxception to all rules governing align-

ment of parties. First cited.in support of this contention

is Doctor v. Harrington, supra,, 196 U. S. 579, which,

says. plaintiff, holds that the stockholder’s corporation, by

refusing to sue and disputing or refuting the claim made e

on its behalf by,the suing stockholder, in legal effect aligns - |

_ itself on the defendants’ side of “the matter in contro- &

versy.” In other words, ‘plaintiff contends in effect that _ 4

, refusal of the corporation to’ join with the suing stock-

' holder operates as’ a‘matter of law,. under the rule of Doc- .

tor v. Harrington, to align the corporation with the de-.

fense for diversity jurisdiction purposes.

The inquiry is thus turned to consider whether the Court

has laid down a fixed rule to govern alignment in stock-

-holder’s derivative actions, or whether alignment in such

cases, as in other cases, turns upon the facts as disclosed |

by the pleadings: and, where available, the evidence. | -

_ In Doctor v. Harrington the trial court dismissed “on

the ground that it had no jurisdiction of the facts alleged,

and certified to the [Supreme] Court the question of juris-

diction.” [196 U. S. at 579.] It was alleged in the bill

of complaint that the complainant stockholders were citi-

zens of New Jersey; that the corporate defendant; on’

whose behalf they sued to set aside a judgment obtained

against it by defendants ‘Harrington, was a “New York

corporation and hence a citizen of New York as ‘were. de-

fendants Harrington. {Id. at 580.]

It was also alleged that “The board of directors .of said

corporation is under the absolute control and domination

of the defendant John Harrington * * * [who], by

‘reason of having possession of a majority of the capital

‘stock * * * likewise controls the action of the stock-

holders.” fId. at 582.) _

Reversing the. decree dismissing the bill for lack of

jurisdiction over the subject matter, the Court said: “The

ninety-fourth rule in equity. contemplates that there may

be, and provides for, a suit by a stockholder in a corpor-

ation founded on rights which ma¥ properly be asserted

by the corporation. And the decisions of this court es-

tablish 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. * * *

“In Detroit v. Dean, 106 U. S. 537 wet

‘court ordered the bill dismissed,. not because Dean and the

corporation had identical interests, but because the re-

fusal.of the directors of the corporation to sue was col- -

lusive * * * Hawes-v. Oakland, 104 U. S. 450, was

cited, where a like right was decided to exist. See also

Dodge v. Woolsey, 18 How. 331; Davenport v. Dows, 18

Wall. 626; Memphis v. Dean, 8 Wall. 64; Greenwood v._

U. S. 241. It-was said in Dodge v. Woolsey, that the re-

fusal of the directors to sue caused them and Woolsey, who |

~ _was.a stockholder in a’corporation of which they were di-

‘rectors, ‘to occupy antagonistic grounds in respect to the

controversy, which their refusal to sue forced him to take

in defense of his rights.’ Dodge v. Woolsey was modified ~

by Hawes v. Oakland, as to what circumstances would

justify ‘a suit by a stockholder if the directors refuse to

om * * *%

“The case at bar is ‘brought within. the doctrine of

those cases by the allegations of the bill.” Cas U. S. at

587-588.] -

Thus the Court, eintyiig “the ninety-fourth rile ‘in

equity” as a fededal rule of substantive law [see: Swift

v. Tyson, 16 Pet. (41 U.S.) 1 (1842); Venner v. Great.

Northern Ry, 209 U. S. 24, 33, 35 (1908)], held that

the facts alleged were sufficient. to invoke both the di- °

versity and the equity jurisdiction of the Federal -court.

[See: Mathews v. Rogers, 284 U. S. 521, 524 (1932);

Twist v. Prairie Oil Co., 274 U. S. 684, 689-692 (1927) ;

Venner._ v.’ Great Northern Ry., supra, 209 U. S. at 34

35.]: That is to say, the court took as true the facts

alleged in the bill of complaint, and in effect held that the

‘complaining stockholders not only met.the requirements

of Equity Rule 94, but further showed that the corporation

was “under a control_antagonistic” to its own financial

interests and should not, because of such incapacity, be

aligned with the plaintiffs in determining, Whether diver- °

sity jurisdiction existed.

Tn the. earlier case of Hawes v. Oakland, 104 U. oe

450 (1881),. the complaining stockholder of Contra Costa -

Water-Works Company, a California corporation, was ©

’

ION Cera Ee

$$ "STA. vy oe <.

Pr nat Ge

LOE LEI LT

teary ie

eae Bese

THE Be ces

fee! be ed oy a

One:

a citizen of New York. The named defendants, including ;

the city of Oakland, the Water-Works corporation and |

its directors, all were citizens of California.

The bill of complaint alleged that the corporation had —

refused to cease furnishing the city of Oakland a free

supply of water under disputed provisions of a contract

between the Water-Works Company and the. city. “To

this. bill the Water-Works Company and the directors

failed to make answer; and the city of Oakland filed a

- demurrer, which was sustained by the court and the bill

dismissed.” {Id. 104 U. S. at 451.]

« Upon sustaining the city’s demurrer and dismissing

the bill of complaint on the merits, Judge Sawyer of the |

Circuit [trial] Court did not refer to jurisdiction‘or align-

ment of parties. [See Hawes v. Contra Costa Water Co.,.

11 Fed. Cas. 862, No. 6,235 (C. C. S. D. Cal. 1878).]

The fact that the Removal Cases, supra, 100 U. S. 457,

were not decided until 1879, a year later, may account for

Judge Sawyer’s failure to realign the Water-Works Com-

_ pany with the complainant and dismiss the bill for lack of

. jurisdiction over the subject matter.

Some three years following his decision of the Hawes

case, in a stockholder’s derivative suit brought by Dan-

meyer, an alien, against Consolidated. Virginia Mining

Company, a California corporation, and California citi-

‘zens Coleman, Flood, Fair, Machay, et al., Judge Sawyer,

after citing the Removal Cases, wrote: “The complainant

Danmeyer’s interest .as a stockholder ‘is only secondary —

and derivative, and-merely incidental to that of the corpor-

ation. Transferring the corporation from the side of the

defendant to that of the complainant, who i is simply using

the. corporation and ‘litigating in his own name, and actual-

ly in behalf of the corporation’ and for its own benefit, as

—28—

is suggested in the Removal Cases, should be done for the |

purpose of determining the question of jurisdiction, and

we have an alien and a California corporation on one side,

and several California corporations and citizens on the

other. Does not this oust the, jurisdiction?” Danmeyer

v. Coleman, 11 Fed. 97, 103 (C. C. D. Cal. 1882).]

Whatever may have been the reasons for Judge Saw-

yer’s omission to dismiss the Hawes case for want of juris- .

diction, still, other reasons served .Mr. Justice Miller,.

speaking for the Court upon appeal from Judge Sawyer’s

decree dismissing the bill on the merits, to affirm the dis-

~ missal, not upon. the merits, but upon the ground that the

bill showed upon its face a want of equity.

' Four years previous to his opinion in’ Hawes v. Oakland,

Mr. Justice Miller, sitting as Circuit Justice in the Guest

Court of the District of Colorado, heard a motion. to re-

mand to the state court a stockholder’s derivative suit,

‘and upon denying the’ motion wrote: “The suit in. this

case is brought, as the parties concede, and as the petition

shows, by the commissioners of the county of Arapahoe, ’

who are citizens of the State of Colorado, against the

Denver Pacific Railway and Telegraph Company, which

_ is also a citizen-of Colorado, and against two gentlemen, .

Mr. Sayre and Mr. Moffat, who are citizens of Colorado,

and against seven or eight other persons, who are citizens’

of other states than Colorado. - The case has been removed.

to this court upon a petition setting forth substantially

these facts, and it is now asked to be remanded because

the requisite essentials, as prescribed by. the act of con-

gress conferring jurisdiction upon this court, are not found

~——

in this case. The objection is that the Denver Pacific Rail-

way and Telegraph Company, Sayre and Moffat, are

citizens of the same state with the complainants in this

—290—

action. * * * It is further alleged, in support of the

_ objection to the jurisdiction of. this court in this case, that

the Denver ‘Pacific Railway Company, and Sayre and

Moffat, each of them, are necessary adverse parties to

the complainants i in this suit. The objection, if well taken,

will require the suit to be remanded.

“The reply is. that the Denver Pacific Company, and

Sayre and Moffat,.are nominal parties, against whom no

\relief is sought, and against whom no decree cari be ren- |

. dered; that the bill is clear and specific on that point; con-

_ sequently the right which belongs to the other parties: to

remove the case is not and cannot be defeated by the join-—

der in the petition of other defendants, citizens of the

same state with the complainants, against whom-no relief

is prayed. As regards Sayre and Moffat, the case seems ©

very clear. A careful reading of the bill shows that no_

relief can be had against them. * * *”

Confronting the problem of alignment for jurisdictional

purposes, Mr. Justice Miller continued: “The case then

rests upon the question of whether the fact that the Den-

ver Pacific Railway Company is a party defendant, and

is a citizen of the same state of the party plaintiff, ousts

the jurisdiction of this court or defeats the right of re-

moval of the other parties who are citizens of other states.

That question does not rest upon the same principle as the

case of Messrs. Sayre and. Moffat. The Denver Pacific

Railway Company is a necessary party to this suit; it is: ;

one without which the suit cannot proceed. The main

object of this suit * * * is to obtain an accounting

* * * — The relief. *.* * asked is a decree in

favor of the’Denver Railway Company for the amount

found due upon that accounting. The Denver Pacifi¢ Rail-

way Company is a necessary party to that accounting.

‘ . ®

A party cannot be required to go to all the trouble of

accounting and having a decree, when that accounting and

decree will not be a valid defense against the principal

party having the right to call such party to account. * * *

This shows very.clearly that the Denver Pacific Railway

Company is not a mere nominal party, but is an indispen-. .

- sable party. But, as already stated, the main relief sought |

in this case will be; if the suit is successful, a decree in.

‘ “favor of the Denver Pacific Railway Company for the -

amount found due from the other defendants in this case.

That is an important and significant feature of ‘the trans-

action. * * * [I]t is very clear that the interest of the

- Denver Pacific Railway Company is the interest of the

plaintiffs; that their interest is identical—that the board of —

county commissionérs are using the. name of the Denver

Pacific Company to carry on this suit solely for the benefit

of that company. * * * The complainants recognize this

theinselves, for in their prayer for relief they say express-

ly what. they pray for is a decree in favor of the Denver

Pacific Railway Company against the Kansas Pacific

Railway Company and the other defendants. Now, the

controversy in this case is one in which the commissioners

of Arapahoe county and the Denver. Pacific Raliway Com-.

pany are on one side, citizens of the state of Colorado,

against all the other defendants. ee ‘

“The best judgment I am able to give is that this is a

. controversy between citizens of the state of Colorado on

‘ one side, and citizens of other states on the other side,

and is properly subject to removal.” [Arapahoe County v.

Kansas City Ry Co,, et al., 1 Fed. Cas. 1080, 1081-1083,

- No. 902 (G. C. D. Colo: 1877).]

It- is interesting that Mr. Justice Miller wrote this

opinion i in Arapahoe County two years before the Removal

eS ——— se eereeeorr,mh sememrmrreeerr

a ae

Cases were decided. Since both ee ey 1 Fed. one

1080, and the Removal Cases, 100 U. S. 457, were decided

under the Act of March 3, 1875: [18 Stat. 470], it seems

safe to conclude that the ‘former served as a forerunner

to the latter, in which the Court declared for the first time

that: “Under the new law the mere form of-the pleadings |

may be put aside, and the parties placed on different sides

of the: matter in dispute according to the’ facts.” [100

U. S. at 469.)

' Two years later, when Mr. Justice Miller came to write

the opinion in Hawes v. Oakland, he omitted to cite or

mention the realignment rule of either Arapahoe or the

Removal Cases and does not indeed appear-to have con-

sidered dismissal for lack of jurisdiction over the subject

matter rather than for want of equity, notwithstanding

reference in the opinion to the Act of March 3, 1875. [18

Stat. 470.] Rather, he referred, back to and distinguished “

Dodge.v. Woolsey, 18 How. (59 U. S.) 331 (1855), where

‘both diversity and equity jurisdiction were sustained in a

stockholder’s derivative suit brought by Woolsey, a Con-

necticut stockholder of an Ohio banking corporation,

against Dodge, an Ohio tax collector, ° “the directors of

the’ bank, and the bank itself, defendants.” [Id. at 336]

“To this bill the defendant, George C.. “Dodge, filed an

answer. The other defendants did not answer. He.admits

the material. allegations of the bill, except the allegation

that the tax law * * * is unconstitutional * * *.”—

[Id. at 339.] oy)

_ It is true, as- Mr. Justice McKenna pointed out in Doctor ©

v. Harrington, supra, 196 U. S. 579, that: “It was said

in Dodge v. Woolsey, that the refusal of the directors to

sue caused them and Woolsey, who was a stockholder i ina...

corporation of which they were directors, ‘to occupy an-

—32—

tagonistic grounds in respect to the controversy, which

their refusal to sue forced him to take in defense of his

| rights.’ : [196 U. S. at 588.) |

The quoted statement from Dodge v. Wony was s made. me

by Mr. Justice Wayne in disppsing of an “imputation of

contrivance” between Woolsey and the directors of the

- bank to give the federal court jurisdiction “on account

of their residence and citizenship “being in different

states.” [18 How. at 345- -346.]

In comparing Hawes v. Oakland and Dodge Vv. Woolsey, :

it is of assistance to keep in mind that the latter was de-

cided “under the old law,’’ and that, as stated in the Re-

moval ‘Cases: “Under. the old law the pleadings only were

looked at, and the rights of the parties in. respect to a_ |

removal were determined solely according to the asa

they occupied as’ plaintiffs or defendants _ in the suit.”

~ [100 U. S. at 469.]

As authority for the statement last above quoted, the -

Court in the Removal-Cases cites Coal Company v. Blatch- .

ford, supra, where Mr.. Justice Field observed that “In

Osborn v. The Bank of the United States, [9 Wheat. (22

. U.S.) 738, 857 (1824)], the Chief Justice laid it down

as a universal rule that, in controversies between citizens

of different States, the jurisdiction of the Federal courts

depended not upon the relative situation of the parties

concerned in interest, but upon the relative situation of

the parties named in the record.” fll Wall. at 175.] ¢

Thus at the time of Dodge v. Woolsey the court had

no power to consider realignment of the parties—“the

pleadings only were looked at.” [Removal Cases, supra,

100 U. S. at 469.] But such power did exist at the time

Hawes v. Oakland was decided, and it is clear ftom Arap-

AGAR CHR EGAN RAE YO MEE SALI ES aS SEEK Ka EME BAAS ASS ANG A 8 at CIB EI AN Aaa CSTE BRN ESE BELGE PRO LRA NG BIER OS

—33—

hoe and the Removal Cases that the Co urt was then mind-

> ful of realignment. *

The tenor of the opinion: in Hawes v. Oakland indi-

cates that the Court deliberately chose that case as the.

springboard for‘a new rule of substantive law [Swift v.

Tyson, supra, 16 Pet. 1] to curb the then prevalent evils

. of collusive maintenance of derivative suits - by stock-

holders in federal courts. [104 U:S. at 459-462; see 18

Stat. 470, 472 (1875); cf. 28 U. S.C. §1359.]

So instead of realigning the parties and Sceiiaiie for

lack. of jurisdiction over the subject matter, the Court

affirmed dismissal of the bill, not on the merits, but for

want of equity, “because the appellant shows no standing

in a ‘court of equity—no right in himself to prosecute the

suit.” [104 U.S. at 462; see Venner v. Great Northern

‘Ry. Co., supra, 209 U.S. at 34; cf. Bourdieu v. Pacific Oil -

Co., 299'U.S. 65, 70-71 (1936); Anti-Fascist Comm. v. -

McGrath, 341 U.S. 123, 150-157 (concurring —".

~. 1951).]

At the ‘same October Term, 1881 Mr. Justice Miller.

in an opinion, Huntirigton v. Palmer, 104 U.S.. 482

(1881), affirming a decree dismissing-for want of equity.

.a stockholder’s derivative suit similar to Dodge v. Wool- _

. Sey, supra 18 How. 331, said: “There is here no formal.

‘written appeal to the board * -*° * and there is noth-

ing to repel the reasonable presumption that parties were

improperly and collusively made in order to .invoke the

‘jurisdiction of the Federal \cqurt.” [104 U.S. at 484, ]

Later in the same term, Mr. Justice Miller wrote the

opinion in Greenwood v. Freight Co., 105 U.S. 13 (1881),

in which the Court, without discussing possible realign-

ment of the parties or any jurisdictional issue, held that

: =

the stockholder’s bill of complaint met the substantive —

requirements .specified in Hawes v. Oakland, supra 104.

U.S. at 460-461, but affirmed the trial court’s decree sus-

taining a demurrer and dismissing the bill for want of

equity. [105 U.S. at -16, 24. See, seriatim: Detroit. v.

Jersey v. Mills, 113 U.S. 249 (1885); Mills v. Central: —

R. Co. of New Jersey, 20° Fed. 449, 451 (C.C.D.N,J.:

1884) ;. East Tenn. etc. Railroad y. Grayson, 119 U.S. 240, .

243 (1886); cf. Smith v. McKay, 161 U.S. 355, 357

(1896); In Re Lehigh Min. & Mfg. Co., 156 U.S. 322,

- Dean, 106 U.S. 537 (1882) ; Central we of .New

"327 (1895).]

Of next importance to the problem at bar is ae

y. Steel, 120 U.S. 241 (1887), which was a stack-

holder’s derivative suit brought in the Southern District. .

of Illinois by a.citizen of Alabama against the city of

Quincy. and the Quincy Gas Light and Coke Co., an —

Illinois corporation. A demurrer interposed by the city

of Quincy was overruled, “the city refused to plead —

further, and decree was thereupon rendered against it.”

[120 U.S. at 243.] Upon appeal by the city the decree

was reversed and the case remanded with instructions

to sustain the demurrer and dismiss the bill on the merits. .

Speaking again for the Court, Mr. Justice Miller said:

“Prior to 1875 cases had come into the courts of the

United: States, especially into the Circuit Courts, where

citizenship had been simulated,’ and parties improperly

_.made or joined either as plaintiffs or defendants, for the’

purpose of creating a case cognizable in the Circuit ,

Courts originally, or removable thereto from the state

courts; and as it very frequently occurred that both plain-

tiffs and defendants were willing to seek. that court in.

preference to the state courts, it had been found very ~

difficult to prevent these improper cases from being tried

in those.courts. In the act of March 3, 1875 [18 Stat.

470, 472], an attempt was made to correct this. evil, and

by the fifth section of that act it was declared ‘that if,

in any suit * * * it shall appear to the satisfaction

of said Circuit Court, ‘at any time after such ‘suit has

been brought or removed ‘thereto, that such suit does not

really. and substantially involve a dispute or controversy

, properly within the jurisdiction of said Circuit Court, or

that the parties to said suit have been improperly or

collusively made or joined, either as plaintiffs or defend-.. °

ants, for the purpose of creating ‘a case cognizable or. .

removable under .this act, the said: Circuit Court shall

proceed ho further therein, but shall dismiss the suit or

_temand it to-the court from whence it was removed, as.

justice . may require.’ ,

“In the cases of ‘Hawes v. Oakland, 104 U.S . 450, -and

Huntington v. Palmer, 104 U.S. 482,” Mr. Justice Miller

continued, “the ‘question. of the growth of the form of

‘invoking Federal jurisdiction, where it does not otherwise

exist, by the attempt of a corporation which cannot sue

in the Federal court to bring its grievance into that court

by a suit in the name of one of its stockholders who has,

the requisite citizenship, was very much considered. ° In

--. order to. give effegt.to the principles there laid down this

court at that term adopted Rule 94 of the Rules of Prac-

- tice for Courts of Equity, of the United States, which is

as follows:

- “Every: bill brought by one or morg stockholdérs in =

a corporation, against the corporation and other ‘parties,

' founded on rights which may properly be asserted by the |

corporation, must be verified by oath, and must. contain

an oe that: the plaintiff \ was a shareholder at the |

. —i6—

time of the transaction of which he complains, or that his

share had devolved on him since, by operation oflaw;

and that the suit is not a collusive one to \confer on a

court of the United States jurisdiction of a clee of which

it would: not otherwise have cognizance. It\ must ‘also ;

set forth with particularity the efforts of the plaintiff to £

‘secure such action as he desires on the part ‘of the man-

aging directors or trustees, arid, if ‘necessary, of the

‘shareholders, and the causes of his failure to obtain such =

action.’ 104 U. Ss. “Ax-x,

“The bill in the: present case, although verified by oath,

is. far from complying with the letter or the spirit of

this rule.” [120 U.S. at 244-246.]

- The 94th Equity Rule, so conceived; was later em-

bodied in Equity Rule 27 and is now intorporated.” in

~ Rule 23(b) of the Federal Rules of “Civil Procedure.

[See Notes of Advisory Committee foll. Rule 23, 28.

. U.S. C. A. at 83, 85-87.] Since it was not until 1938

that Erie R. R. Co..v. Tompkins, supra, 304 U.S. 64,

overruled Swift v. Tyson, supra, 16 Pet. 1, Equity Rule

.94 and successor Equity Rule 27 are to be considered as

embodying both substantive and adjective law. [See:

Hawes v. Oaklarid, ‘supra, 104 U‘S. at 459-461: Quincy

v. Steel, supra, 120 U.S. (at at 244-248; Notes of Advisory ©

Committee foll. Rule 23,)28 U. S. C. A. at 85-86.] a

Thus the Act of March 3, 1875 [Stat. 470, 472] in

effect foreclosed the equity jurisdiction of the Federal

: courts to. every stockholder’s derivative syit in which the

‘complaining stockholder failed to. establish lack of collu-

sion. Consequently, whenever the allegations of the

stockholder’s bill of complaint were found insufficient to

‘negative collusion under Equity Rule 94, or successor

Rule 27—insufficient to show ‘ ‘standing in a court of |

—_

—

Equity * * * right in hisnself to prosecute the suit”

[Hawes v. Oakland, supra’ 104 U.S. at 462,]—the suit

was dismissed for want of: equity; arid it was neyer con-

sidered necessary to raise the question of proper alignment

- of parties, since the allegations of the bill were always

taken as true upon .the demurrer for want of equity.

[See, e.g.: Chicago v. Mills, 204 U.S. 321 (1907); IN.

. Central R. Co. v.. Adams, 180 U.S. 28, 38 (1901): Le-

high Mining & Mfg. Co. v. Kelly, 160 U.S. 327 (1895) ; |

cf. Niles-Bement-Pond Co. v. Iron Moulders: Union, 254

U.S. 27, 81-82 (1920) ; _ v. Zarecor, supra, 222 US.

at 35.)

Venner v. Great Wirehuie Ry., supra, 209 US. 24,

explains this practice. - - Theré, i in the language of Mr.

Justice ‘Moody: ‘The plaintiff. * © © , a Citizen of

New York, brought * * * suit in equity in the Su-

- preme Court of New York against the defendant rail- —

road, a citizen of Minnesota, and the othér defendant, its

president, also a citizen of Mionesote. The complaint set

forth in substance * * *The plaintiff was a stgck-—

holder in the defendant rallvosd at the time of the be-

ginning of the suit in 1906. * * * The defendant

James J. Hill was a director and the president of the |

other defendant, the Great Northern Railway Company, |

and that railroad and its board’ of directors were under

his absolute control. While holding these offices and ex-

ercising this control, in reg and 1901,. Hill purchased,

or caused to be purchased - * * stock of the Chi-

cago, Burlington and “one Railroad Company of, the

par value of $25,000,000. * * * with the design of

selling the stock at a higher price to the company of which

he was * * * president. Subsequently, in 1901,

while still holding his offices in the Great Northern Rail-

fe O

ii.

way and exercising the same control over that corpora-

tion, he sold to it a large amount of the stock *® * *.

and made an unlawiul profit of $10,000,000 on the tran-

- saction. *.* * The prayer was that Hill should ac-

count for his profit and pay it to the Great Northern

" Railway Company with interest, and for general relief.

On the. defendants” ‘petition the case was removed to the

United States Circuit Court for the Southern District

of New York; on the ground of diversity of citizenship.

* * * The complaint. did -not conform to the require-

ments of Equity Rule 94, relating to suits of-this nature.

eee hide ‘defendants then demurred separately to .

. the bill. - * Thereafter the plaintiff moved to re-

‘mand the cause to the’ state court. * * * This mo-

tion was denied. . The demurrer was sustained ‘and the

bill dismissed [for want of eauity].. * -* * The éase

comes here’-on direct appeal rom the Circuit Court on

the question of jurisdiction alone, certified. * * *” ©

‘The opinion by Mr. Justice Moody proceeds: “First,

was there a controversy between citizens of different

Statés? * * * Let it be assumed: for the purposes

of this decision’ that the.court may disregard the arrange-

"ment of parties made by the pleader, and align them upon

the side where their interest in and attitude’ to the con-

_ troversy really places them, and then may determine the |

- jurisdictional question in view of this alignment. Re- ©

_ moval Cases, 100 U.S. 457..* * * If this rule should

be applied it would leave me 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 .

arid other proceedings, jg resisting the plaintiff’s claim of —

oie

‘illegality and fraud. They are alleged to have engaged

. in the same illegal and fraudulent conduct, and the in-

jury‘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 other-

wise than as a defendant. * * % The case of Doctor

v. .larrington is precisely in point on his branch of the °

case, and is conclusive. =e *

Turning to Equity Rule 94 and the cases which gave

; rise to it, the opinion continues: “Second. Did-the Cir-

cuit Court have jurisdiction of the subject matter: of the

litigation? It has already been shown that the plaintiff

in his petition did not bring this case within the terms

of Equity Rule 94. * * * “It may be noted that the °

plaintiff in Doctor v. Harrington, supra, complied with

the requirements of ‘the rule. It is argued that .a com-

_pliance with that rule is essential to the jurisdiction, and

that a controversy of-the general nature contempiated by

the rule is beyond the jurisdiction of the Circuit Court,

_ unless the plaintiff shows the existence of all the facts

_which the rule makes indispensable to his success in the

suit. But this argument. overlooks the purpose and nature

of the rule. The rule simply expresses the principles

which this court, after a review of.the authorities, had

‘declared in Hawes v. Oafland, 104 U.S. 450, to be ap-

plicable in the decision. of .a stockhelder’s suit of the kind

now under consideration. Neithér the rule nor the deci-

sion 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. If

a. controversy of this general.nature is’ brought in the

Circuit Court and the, necessary. diversity Of citizenship ,

. . —40—

exists, but upon the pleadings or the proof it appears that

' the plaintiff has not shown: a case within the decision in

Hawes v. Oakland, or: the rule of court declaratory of

that decision, the: bill should be dismissed for. want of

equity. and not for want of jurisdiction. *° * * So it

was that in. Hawes vy. Oakland the demurrer was sus-

tained-and the bill dismissed, not for want of jurisdiction,

but, in the words of the court (p. 462), ‘becatise the

appellant shows no standing in a court of equity—no

right in himself to prosecute this suit.’ The same order

- was made. in Huntington v. Palmer, 104 U.S. 482, and

Quincy v. Steel, 120 U.S. 241. This very question was

considered by the court in Illinois Central Railroad

a 3 v. Adams, 180 U.S. 28, where it said, p. 34:

il ta *-At common law neither an infant, an insane

‘ person, married woman, alien enemy, nor person having

no interest in the cause of action, cam maintain a suit in|

his or her own name; but it never would be contendéd

that the court would not have jurisdiction to inquire.

whether such disability in fact existed, nor that’ the case

- would be dismissed: on motion for want of jurisdiction.

* * * The objection that plaintiff has failed to com-

ply with Equity Rule 94 may be raised by demurrer, but |

the admitted power to decide this question is also an

admission that the court has jurisdiction of the case.’ ”

[209 U:S. at 28-35. See: Simpson, Fifty. Years of

American Equity, 50 Harv. “lL. Rev. 171, 190, n. 121

(1936).]

Next cited. by plaintiff at bar’is Cutting v. Woodward, .

255 Fed. 633 (9th Cir. 1918). There Illinois stock-.

‘holders sued a California corporation and ‘a California —

citizen, the appellant. The Court of Appeals said: “The -

court below found that during all this period the appellant

| al |

had virtual control of the majority of the board of direc- |

_. tors, and that they were ever ready to do his: bidding.

These transactions constitute actual and not constructive

fraud.

“The.trust company raises the question of jurisdiction,

asserting that the company is not an adversary party to

the plaintiffs in the suit, but is the real party in interest

as plaintiff, and that consequently there is no ‘diversity of

citizeyship. But this is not a case ‘in which the trust —

company, although made @ defendant, should be realigned

as a plaintiff, as in Hamer y. New York Railways, 244 .

U.S. 266, 274. * ™ ™* Here the attitude u- the trust

company is hostile to the plaintiffs. It appeared in a joint

answer with the appellant, and by the same counsel, and

it denied the allegations of the bill and prayed for the

‘ dismissal thereof.. The cause is therefore one in which

plaintiffs, citizens of Illinois, bring suit against. defend-

ants who are citizens of California. Doctor v. Harring-

tori, 196 U.S. 579° * * * ; Venner v. Great Northern

_ Railway, 209 U.S. 24. * * *” [255, Fed. at 635.

See: Cutting v. Bryan, 30 F.2d 754, 758 (9th Cir..

1929); cf. Minnis v. Southern Pac. Co., supra, 98 F.2d

at 915.] |

What then is to govern alignment of parties-in a stock-

holder’s derivative suit where, as is the usual case, federal

a jurisdiction is invoked upon the ground of claimed diver-

sity of citizenship?

Recalling’ that in Doctor v. Harrington, supra, where

‘the stockholders’ bill of complaint alleged that the “board

of directors * * °* is under the absolute control and

domination ‘of * * *® John J. Harrington * * *

[who] by reason of having possession: of a majority of

a on

the capital stock * * .* likewise controls the action

_ of the stockholders” [196 U.S. at 582], the Court, faced

with answering the certified question’ of jurisdiction, as

to “Whether * * * the-complainants’ bill * * *

showed * *, *. diversity of citizenship * * *”

lid. at 579], observed: “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 |

thade subservient to some illegal purpose.” [Id. at. 587.]

Recalling that in Venner v. Great Northern Ry., supra,

. where the. stockholders’ bill of complaint dineed that

“defendant James, J. Hill was _*. * * the president of

the other defendant, the Great Northern Railway * * *

and that railroad and its board of directors were under

his absolite control” [209 U:S. at 29], the Court, like-

‘wise in response to the certified “question of jurisdiction”

[id. at 30], found the jurisdictional facts by taking as

true the ‘allegations of the bill and the defendants’ peti-

tion for removal, and declared: “Both defendants unite,

as. sufficiently appears by the petition and other proceed-

ings, 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 jur-°

isdictional purposes, be regarded otherwise than as a de- :

fendant. . . . The case of Doctor v. Harrington is

precisely in point on this branch of -the case, and is con-

clusive.”” [209 U.S. at a :

Recalling that in Cutting v. Woodward, supra, the de-

fendant-president. of the corporation was found -to have

“yirtual control of the majority of the board of directors,

. . [who] were ever ready to do his bidding,” and the

Court of Appeals for this -Circuit said: e . . this is

not a case in which the . ...° Company . . . should

_ be realigned as a plaintiff. . . . -Here the attitude of

the .- . . Company is hostile to the plaintiffs.” [255

* Fed. at 635. Cf. Gage v. Riverside Trust Co.s 156 Fed.

1002, 1007 (C. C. S. D. Cal. 1906) ; Opici v. Cucamonga

_ Winery, 73 F. Suipp. 603 (S..D. Cal. 1942).]

Recalling also that in Koster v. Lumbermens Mutual

Co., supra,“the Court commented that “jurisdiction is

saved in this class of cases by a special dispensation be-

cause the corporation is in antagonistic hands. . Doctor v..

Harrington, 196 U. S. 579.” [330 U. S. at 523.]

It would seem ad extremum that there can be no fi :ed

tule for alignment of the parties in ‘every case; that at

most the binding precedents establish a test by which the 7

court may properly determine when not to align as a party’

plaintiff in a stockholder’s derivative suit the corporation

for whose benefit ‘the action- is by definition commenced

and maintains.

If the corporation has suffered actionable wrong and is |

“in antagonistic hands’—4. e. so dominated that it is

incapacitated to act in keeping with its own financial in-

terests—then a federal ‘court. should tot, because of -such

_ disability, align the corporation with the plaintiff-stock-.

“holder in determining whether diversity jurisdiction exists.

[Cf. Indianapolis v. Chase National Bank, supra, 314 .

U. S. 69-71, 74; Lee v. Lehigh Valley Coal Co., supra,

267.U. S. 542; Hamer v. New York Rys. Co., supra, 244

U. S. at 274; Helm v. Zarecor, supra, 222 U. S. 32; Ven-

ner y. Great Northern Ry., supra, 20 U. S.°32, 35; Chi-

cago v. Mills, supra, 204 U. S. at 326; Dawson v.. Colum-

bia Trust Co., supra, 197 U.. S. at: 180-181; Doctor v.

Harrington, supra, 196 U. S. at 587; Lehigh-Min. &

Mfg. Co, v. Kelly, supra, 160 U. S. 327; Groel v. United

- Electric Co., 132 Fed. 252, 261, 265 (C..C. D. N. J.

1904) ; Laughner v. Schell, 260 Fed. 396, .398 (3d Cir.

1919); Richardson -v. Blue Grass Min. Co., 29 F. Supp.

658, 663 (E. D. Ky. 1939); aff’d on opinion below, iw.

F. 2d 291 (6th Cir. 1942), cert. den. 317 U: S. 639

(1942):], | eae

The quotation in Venner y. Great Northern Ry., supra,

209 U. S. at 35, from Illinois. Central Railroad Co. v.

“Adams, supra, 180 U. S. at 34, suggests an analogy to the.

disability of an infant or the lack of capacity of an-in-

sane. person. -In Koster: v. ‘Lumbermens Mutual Co.,

supra, 330 U. S. 518, the Court explained that the plaintiff-

stockholder: sues in protection of the corporation’s interest

“somewhat as a ‘next friend’ might do for an‘individual”

because the corporation’is “disabled from protecting it-

‘self.’ [330 U. S. at 522-523.] State courts draw upon

like analogies. -[See: Reid v. Robinson, supra, 64. Cal.

' App. 55, 220 Pac. at 680; Clarke v. Greenberg, ‘supra,

- 296 N, Y: 146, 71 N. E. 2d 443.] .

_ Quaere whether, followed to loyrical conclusion, the dis-

‘ability concept does not require that the corporatjon always

be considered either as a real-party-in-interest plaintiff or. as

if “disabled from protecting itself,” a nominal defendant

for res judicata purposes [see Davenport v. Dows, supra,

78 Wall: 626],-not to be aligned on either side in deter-

mining jurisdiction. [See: In re Moore, supra, 209 U.S.

490; Mex. Cent. Ry. Co. v.. Eckman, supwa, 187°U. S.

429; Anglo-California Nat. Bank v. Lazard, supra, 106

-F, 2d 698; Stout v. Rizney, 107 Fed. 545, 551-552 (8th

Cir. 1901); Merritt v. Greenberg, 4 F. Supp. 655 (E. D.

N. Y. 1933). Compare: Lavin v. Lavin, 182 F. 2d 870

_ (2d Cir. 1950) - Groel v. United Electric Co.,-supra, 132

- Fed. 252; Tucker v. National: Linen Service Corp., 92 -

F. Supp. 502, 505 (N. D. Ga. 1950), aff’d, 188 F. 2d

265 (Sth Cir. 1951), cert. denied, 342 U. S. 828 (1951);

Tucker v. New Orleans Laundries, 90 F. Supp. 290,

' 292-296 (E. D. La. 1949), aff’d on opinion below, 188

F.2d 263 (Sth Cir. 1951), cert. denied, 342 U. S: 828

~ . (1951); Cohen v. Industrial Finance Corp., 44 F. Supp.

489, 490 (S. D. N. Y. 1941); J. R. A. Corp. v. Boylan, .

30 F. Supp. 393, 394, 38 Mich. L. Rev. 724 (1940), aff’d

on opinion below, 109.-F. 2d 1018 (2d Cir. 1940); see

Venner v. Great Northern Ry., supra, 209 U. S. at 32.]

In all events, whether the corporation. is under disabi ity

and so unable to act otherwise than by domination: Of

- alleged wrongdoers is a question of fact in each case.

And: whenever diversity of citizenship is decided upon

the complaint alone, or upon the complaint and petition

for removal, the facts alleged in the pleadings as to “abso-

lute control” must: of course be taken as true, as was

done in Doctor v. Harrington, supra, 196 U. S. at 582, |

587-588, and Verner v. Great Northern Ry., supra, 209 -

-U. S. at 29, 32. [See: Barry v. Edmunds, 116 U. S.

~ 550; 559 (1886) ; Hartog v. Memory,.116.U. S. 588, 591

(1886).} | | {St

For a corporation to, be “in antagonistic hands” [Koster

v. Lumbermens’ Mutual Co., supra, 330 U. S. at 523],

or to have a “hostile attitude” [Cutting v. Woodward, |

supra, 255 Fed. at 635] 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 stock-

holder 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 aligriment of the latter with the plain-

tiff-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.

By §2.of Article IIT, the Connietion extends the

federal judicial power-“‘to controversies . . . between .

citizens of different States.” This -provision of the Con-

_ stitution “simply gives to the ... . courts the capacity .

to take jurisdiction . . + it requires an act of Con-

260 U. S. 226, 234 (1922); The Mayor vy. Cooper, 6 |

Wall. (73 U, S.)..247, 252 (1867).] _And by act of:

Congress jurisdiction | has been conferred upon federal

district courts “where the’ matter in controversy exceeds

the sum or value of $3,000 exclusive of interest and costs,

~ and is between . . . Citizens of different states. ae

| [28 U.S. C. §1332.]

The pleading requirements of old Equity Rule 94 F104

- U.S. ix-x (1882); Ill. Cent. R. Co. v. Adams, supra,

180 U. S. at 34-35], and later Equity Rule.27 [226 U. S.

629, 656 (1913); Ashwander v. T. V. A., supra, 297:

U. S. at 318], and present Rule 23(b) ‘[Fed. Rules Civ.’

Prog., Rule 23(b), 28 U.S. C. A. at 83, 84-87]. have

| not extended or- otherwise altered jurisdiction.

As the Court explained in Venner v. Great Northern

Ry., supra: “The jurisdiction ... . is prescribed by _

laws enacted. by Congress in pursuance of the Constitue

tion and this court by its rules has no power to increase

or diminish the jurisdiction thus created, though it may

regulate its exercise in any. manner not inconsistent with

. the laws of the United States.” [209 U. S. at 35.]

Moreover Rule 82 of the Federal Rules of Civil Proce-

dure expressly provides that: “These rules shall not be

construed to extend or limit the jurisdiction of the United

States district courts. . . .” [Fed. Rules Civ. Proc.,

Rule 82, 28 U. S. C. A. at 499; see: Cohen v. Beneficial

Ind. Loan Corp., supra, 337 U. S..at 556; Miss. Pub.:

Corp. v. Murphree, supra, 326 U. S. at 444-446.) = -°

State-law concepts as to the nature of derivative ‘suits

cannot affect federal jurisdiction. [Cf. Ballantine, Cor-

' porations §§ 145-150 (Rev. Ed: 1946); Klopstock v. Su-

perior Court, supra, 17 Cal. 2d 13, 108 P. 2d 906; Cantor

y. Sachs, 18 Del. Ch. 359, 162 Atl. 73 (1932); see also -

Otis & Co. v. Pennsylvania R. Co., 57 F. Supp: 680, 683

(E. D. Penn. 1944), aff'd on opinion below, 155 ‘Fed.

"522 (3d Cir. 1946).] .

Nor can federal jurisdiction be enlarged upon the thecry

that a stockholder’s derivative suit is “ancillary” in charac-

ter. [See e. g.: Mitchell v. Maurer, supra, 293 WV. S.

237;. Fulton Nat. Bank v. Hozier, 267 U. S. 276, 280 .

(1925) ;, Hamer v. N. Y. Rys, Co., supra, 244 U. S. at |

275; Phelps.v. Oaks, 117 U.-S. 236, 241 (1886) ; Stewart |

v. Dunham, 115. U.S. 61, 64 (1885); Feidler v. Bartle-

son, 161 Fed. 30, 35. (9th Cir. 1908) ; Oils, Inc. v. Blank-

enship; 145 F. 2d 354 (10th Cir. 1944), cert. denied, 323

U. S. 803 (1945); Johnson v. Sheppard Co.,2 F.R. D. -

164 (D. Mass. 1941); 1 Barron Hoitzoff, supra, §23; ity

Note, 64 Harv. L. waa 968-976 or | |

It. has been settled from the beginning that diversity of

citizenship exists only when all parties on one side. of the ._

controversy “are citizens of different states from all

. parties on the other side.” [Indianapolis v. Chase Na- —

tional Bank, supra, 314 U. S. at 69; Hooe v. Jamieson,

166 U. S. 395 (1897); Coal Co. v. Blatchford, supra, 11

Wall. at 174-175; bantu a v. Curtiss, supra, 3 Cranch

267. } :

And it is equally well settled that the Geceaee

relied upon to invoke diversity” jurisdiction must be

“actual” [Helm v. Zarecor, supra; 222 U. S. at 36] and

“substantial” {Niles-Benient-Pond Co. v. Iron Moulders.

ticiable “controversy” within the meaning of §2 of Article

III of the Constitution. [See: Aetna Life Ins. Co. v.

Haworth, 300 U. S. 227, 240-241: (1937); Ashwander v.

T. V. A., supra, 297, U. S. at 318, 324-325; South Spring.

etc. Gold Min. Gp. v. Amador etc: Gold Min. Co., 145

‘Uz S. 300 (1892).] :

_ A mere argument then, or even a heated prey between

a-shareholder.and his corporation over the advisability of

bringing suit is not a “controversy” as that term is em- _

ployed in §2.of Article III.of the Constitution. But even

if it were, it is not “the matter in controversy” with re-

spect to which the court is; duty- -bound to align the parties

-to the action for the purpose of ascertaining whether

requisi.e diversity of citizenship exists.’ [28 v —_—s”

§1332:]) ee. | ve

The “matter in controversy” referred to in 28 U. S. é

- §1332 must be ascertained from the “principal purpose

of the suit.” . [East Tenn. etc. Railroad v. Grayson, supra.

119 U. S. at 244.]. Hence it is the duty of the-court, in.

testing the claim of diversity jurisdiction, to arrange the

ice

parties on opppsite sides of “the primary and controlling _

matter in dispute.” [Merchants’ Cotton Press etc. Co.

v. N. A. Ins. Co., 151 U.S. 368, 385 (1894); see Indian-

apolis v. ‘Chase Nat. Bank, supra, ‘314 U.S. at 69-70.]

The ‘ ‘primary ‘and controlling matter. in dispute” in -

the case at bar is the contract between Warner Bros. and’

.. United. ‘That contract is “the matter in controversy.”

Only i in cases where it: —— that the plaintiff-stock-

holder’s corporation was “in antagonistic hands” [Koster

vy. Lumbermens Mutual Co., supra, 330 U. S. at 523], has -

the Court found that “difference ar collision of interest”

between apckholder and corporation as to “the matter in —

'. controvergy” [Dawson v. Columbia Trust Co., supra, 197

U. S. at 181] which precludes alignment of the corpara--

tion with the stockholder ’ ‘in. _determthing sdiversity juris- .

diction: '

And only in cases where it appeared that. the plaintiff.

' ., Stockholder’s corporation yas “dominated and controlled”

_ by the alleged wrongdoers [Koster v. Lumbermens Mutual |

Co., supra, 64 F. Supp: 595, 396 (E. D. N. Y. 1945)],.

and so “made to act .°. .- subservient to some ‘illegal

“purpose” [Doctor v. Harrington, supra, 196 U. S. at 587]

or to engage in. “the same illegal and fraudulent conduct” —

[Venner v. Great Northern-Ry., supra, 209 U. S. at 32],.

has the Court found the corporation to be * ‘in antagonistic

hands. . = eo Boake

Thus in each case the determinative fact i is not whether

the directors controlling the corporation are antagonistic

to the suing stockholder, but whether those in control

are shown to be antagonistic ‘to the financial! interests of

the corporation.

—50—

“In each. case, moreover, the Court has considered the-

_ problem of whether or-not the corporation was in “an-

tagonistic hands” to be a question of fact, just ‘as the

" requisite jurisdictional amount arid the citizenship of the

parties are questions of fact. [See: KVOS, Inc.’ v.. As- --

sociated Press, supra, 299 U. S. 269; Gilbert -v. David,

supra, 235 U.‘S. 561; Pioneer Southwestern Stages v.

Wicker,-50 F. 2d 581 (9th: Cir. 1931); cf. Woodworkers

Tool Works v. Byrne, 202 F. 2d 530° (9th. Cir. -1953).]

And in each case the record was such ag to require the _ -

Court, in determining the proper alignment of the parties -

for jurisdictional pui poses, to accept as ‘true the ‘ ‘antagon-

istic hands’’ allegations of plaintiff” s complaint. -

' In the.case at bar, both the pleadings, and the evidence |

are before the court to aid determination as to whether

the case. presents “a controversy wholly between citizens

of different states, within the jurisdiction of the District

7 Court.” [Niles-Bement-Pond Co. v. Iron’ Moulders Union,

' supra, 254 U. S. at 82.] For here a trial was ordered as

_to the. jurisdictional and the, statuté-of-limitations issues.

[See: Gibbs v. Buck; supra, 307 U. S.'at 71-72; Gulben-

kian v. Gulbenkian, supra, 33 F. Supp. 19.] |

Trial.of these issues required more than fifteen days,

a large volume of docurgentary evidence was received and

‘the reporter’ s transcript. runs some 2000 pages. As the

size of this record indicates, the evidence adduced upon the

trial of the jurisdictional issues was voluminous and com-

plex, because those -issues proved to bé in. many respects

coextensive with’ issues”as to the merits. [Cf. Land’ v.

Dollar, supra, 330 U. S. at 7 735, 739; Calcote v. Texas

Pac. Coal & Oil Co., 157 F. 2d 216, 218.(5th Cir. 1946),

‘cept. denied, 329 U. S. 782 (1946); Williams v. Minn.

Min. & Mfg. Co., 14 F.-R. D. 1 (S. D. Cal.1952).]

| —51— |

‘No useful purpose. would be served by y Aelating the-evi-

dence in detail. « It is sufficient here to say that the proofs.

adduced ‘upon the trial compel the following findings of

fact: (1). That the céntract in controversy. with United

was and is considered by the eleven-man Board of Direc-

tors.of Warner Bros. to be 4 sound ‘business arrangement

for the best present and future financial interests af the

corporation; (2) that in approving and authorizing the

contract, the members of the Board of Directors acted in

good faith and exercised their independent business judg-

‘ment; and (3) that at the time of the execution of the

contract Albert .Warner together with defendants Harry

M. and Jack L. Warner owned less than 20% of the out-

standing shares of the corporation; and neither the cor-

poration nof.the directors or officers were shown to be at

any time under the domination or control of the three

brothers Warner: : | . a | ;

Accordingly, since no “collision of interest” sade

between plaintiff and defendant Warner Bros:. the cor-

’. poration will be aligned as a party plaintiff, and as such an

alignrient shows that the requisite diversity of citizenship .

does not exist [28 U. S. C: §1332], it follows as a matter.

_ of law that this court is without jurisdiction over the ‘sub-

ject matter of the first | cause of action “asserted in the

complaint. | |

This conclusion necessarily: ‘rests upon my ‘understanding |

-of the law: that whenever federal jurisdiction is invoked

upon claimed diversity of citizenship in a stockholder’s

derivative suit, the court is free to inquire into the juris-

dictional facts as in other cases and- _— the parties on

_ either side of the “matter in controversy,” and in so doing -

to determine as a fact whether or not the plaintiff stock-

_ holder’s - corporation is “in n antagonistic hands”. or so

7 ; — \

é @ —52 ae | \"

—-

_ dominated as to be inane to act in its. own financial

> interests. |

“It is rec nized: of course-that my atin of ;

: ithe: law i is ae degrees at odds with the opinions . of |

others. For example,. sée the fbllowing authorities not

heretofore cited: Hutchinsorf Box & Paper Co. v. Van

Horn, 299. Fed. 424, 428-429 (8th Cir. 1924) ; Hayms v.°

Calumet,& Hecla-Mining Co., 221 Fed, 529, 538° (6th Cir.

1935); Montro Corp, v. Prindle, 105 F. Supp. 460 (S. D.

~N. ¥.1952); Levitan ‘v. Stout, 97 F. Supp. 105, ag

(W.D. Ky. 1951); Smallen v. Louisville Fire & In3:

80 F. Supp. 279 (W.'D. Ky. 1948); Cohen v. Tdi

~~ trial Finance Corp, 44 F. Supp... 489, 490 (S. D. N. >

1941); Nagle v. Wyoga Gas & Oil Corp., 10 F.. Supp.

905, 906 (M. D. Penn. #935) ; ‘Hodgman v. Atlantic Re--

fining Co,, 274 Fed. 104, 105 (D. Del. 1921); Whitaker:

'.y. Whitaker Iron .Co:, 238 .Fed. 980, 990-991 (D. C.

_ N.D. W. V. 1916), aff'd, 249 Fed. 531 (4th Cir. 1918),

cert. denied, oo U, S. 564 (1918) ; Crawford v. Seattle,

R. & S. Ry. Co , 198 Fed. 920 (D. €. W. D...Wash. -

- 1912); east ' v. National ‘he sume Co., 182 Fed 215,

- 220 (C.:C..N..D. W. V. 1910). °

ae arriving at thé conclusions here reached; ‘thése opiri-

- ions and others previously cited have prompted great pause,

not only becausé of the respect I hold for such differing

; > views as to proper | interpretation. of precedent, but. also

ae because of reverence fot stare decisis, the doctrine of

judicial precedent, as. the distinctively characteristic insti

- tution [Pound, The Spirit-of the Common. Law, 64-65, .

182-183 (1921) ], yin gives necessary historic continuity _

to our common-law systetn of justice. [Holmes,-Collected | -

-Legal Papers, 139 (1920) ; cf. Marshall v. B. & @. R. R.

Co., 16, How. G7 U. S.) 314, 343 (1853).

. Study has brought the conviction that’ the views here °

expressed are not at variance with the authority ‘of any

' precedent binding this -court. Along the pathway to

. decision doubts have natyrally arisen*from the cases cited,

and from the fact, that such ‘scholarly judges as Chief -

Judge Learned Hang with his colleagues Judges Chase

. and Clark of the Secolll Circuit, and Judge Wyzanski of

the. District: of. Massachusetts, appear to have regarded.

Doctor v. Harrington as fixing a rule—rather than stating.

a test—for alignment of the stockholder’ : corporation in .

derivative suits.

. In Lavin v.. Lavin, supra, 182 F. 2d 870, the oe

‘eit: “It may indeed be foubted whether as an original

_ question the Suprenie Court would not today align the cor- -

- poration as a party plaintiff in all cases; nevertheless it .

- \has, shown no ‘disposition to change the rule in Doctor

v. Harrington, 196 U. S..579 ... but has recognized

- its continued authority.” (182. F, 2d at 87 s;

: In Ashley v. Keith Oil Corp. 73 ¥. Supp. 37 (D. Mass.

1947), Judge Wyzanski wrote: “If the question of federal

| jurisdiction were an open_.one, I should rule that there had

“ not been compliance: with the essentials set forth i in United

States Constitution, Article III, Section 2 and 36 Stat.

1091, 28 U.S. Ci A. §41(1). Disregarding the form of .

the pleadings in this case, I should conclude ‘that the

. parties should be realigned according to their real iriterest.

- That is, I should treat this as‘a suit by a Massachusetts

corporation against ‘a, Massachusetts officer. 2 Moore’s

Federal, Practice, 2272,.2275. Resort to such ‘realign-

ment is admitt ly necessar¥ and proper. to determine

whether in the case. at bar there is involved the $3,000

which is a prerequisite to the exercise of diversity juris-

diction. .° .: ...° Resort to such realignment seems ‘the

only, logically Consistent course to determine whether in)

the case at bar there is_involved the necessary diversity

of citizenship. In addition. to such logical considerations,

I should have thought weight ought ‘to be given to°the

fact that ‘the dominant note in the successive enactments

of. Congress’ relating to-diversity jurisdiction is one of

jealous, restriction, of avoiding offense to state sensitive-

ness. . . .’ City of. Indianapolis v. Chase National

Bank, 314 U. S. 63, 76...” . .”

“But”, Judge Wryzatsle continues,, “T am not a: free

agent. In 1905 the Supreme Court in’ Doctor v. Harring-

ton, 196 U. S. 579... “held. that the realignment.

which I would have thought proper is inapplicable where -

_ the corporation is in antagonistic hands. , And only a few —

‘months ago, the: Supreme Court: . . repeated the .

same doctrine to sustain federal juirtediction in Koster v@

c | oe Lumbermens Mutual Casualty Co., 330 U. S.. :

518... . . That was a derivative suit. . . . [and]

Me justices of the Supreme Court in their wails

and mixerity opinions seem to have concluded that diver-

sity of Spain existed. And, bowing to their judgment,

I. concludé | that diversity of citizenship. exists in the case

at bar.” [73 F. Supp. at 52-53.]

The yery considerations of réason and policy which

Judge Wyzanski mentions “have prompted a search behind

- the equivocal language. of Doctor v. Harrington to find

there a flexible test for alignment of the plaintiff-stock-:

holder’s ‘corporation, rather’ than a rigid rule of doubt-

ful cohistitutionality. The same considerations have also

‘prompted a :look behind the language of Koster v, Lum- —

bermens Mutual Cas. Co., supra, 330 U. S. at 523, to,

find a basis on’ which ‘to conclude that it was never neces-

sary there td reach the question of proper. alignment of

- S—

the corporation for the purpose of ascertaining whether

| requisite diversity of citizenship existed.

For in Koster the ‘doctrine of: forum. non conveniens —

was invoked and the first inquiry was “where trial will.

‘best serve the ‘convenience of the parties and’ the ends

: of justice.”’ [330 U.. S. -at. 527.]- Trial denotes a hear-

ing and adjudication of issues of law as well: as fact.

It is axiomatic that a federal court always has.‘ Gurisdic- .

* tion to determine ‘its own jurisdiction” [United States’ v.

- United Mine Workers, 330 U. S. 258, "292-293, nm. 57

: (1947) ; Steele v. Culver, supra, 211 U. S. at 30]—the —

power to determine in every case whether the’ prerequi- _

sites to jurisdiction in fact exist. [See: Land v. Dollar,

supra, 33Q U. S. at 739;.Texas & Pac. Ry. v. Gulf etc.

Ry., 270_U. S. 266, 274 (1926).] y ae neo

' By the. same token where, as in Koster, the doctrine

of forum non conveniens is invoked, the court in which:

the action pends has. the power to determine, and no doubt

should first determine, the forum conventens in which |

-the issues of law. ‘and fact, including issues of law and

fact as to federal jurisdiction, ought to be tried.

In Koster, the District Court applied the doctrine of |

Sua non conveniens and’ dismissed the action. [Id. 64

p. 595.] The Court of Appeals affirmed. [Id.

hy . 2d 888. ] The Supreme Court granted certiorari

[id. 329 U. S: 700], and:at the outset Mr. Justice Jack-

son explained. “This case: involves the Special problems

of forum non conveniens which inhere in derivative ac--. |

tions, and-which have been fittle considered by this Court.”

« [330 U. S..at 521.)

The Court then. proceeded to alin the holding below:

. “that the case “should not ‘be: tried in New York as there

y, ae

was ample remedy available in the state and federal courts

of Illinois” [iden], thus leaving open for-trial in the fed- os

eral courts of. Illinois, if suit were later filed there, all

issues of fact and law as to federal jurisdiction presented

by Koster’s case. | ;

' Both logic and cd judicial . administration combined -

. to dictate that the " proceedings in Koster take such a

course. The case at bar is an apt example of the possible

breadth of issues of fact and law necessary ‘to be tried in

. determining whether ‘diversity | jurisdiction exists. [Cf. |

Hammerstein v. Superior Court, 341 U. S. 491. (1951);

Layne etc. Co. v-. Western Well Works, 261 U. S. 387,.

~ 392-393 (1923).] ,

A ‘review of the cases in their historical. settings [see

Quincy v. Steel, supra, 120 U. S. at 244-246] gives the.

- of diversity jurisdiction in Doctor v. Harrington, supra, -

196. U.S. at 587, resulted from the Court’s preoccupa-

tion with the problem of collusive suits; that the obvious -

collusion in Hawes v.’ Oakland, -supra, 104 U. S. at 461,

anid the apparent lack of collusion in-Greenwood v. Freight

Co., supra, 105 U. S. at 16, prompted Mr. Justice Miller to-

write opinions which in effect ~ rejected diversity juris- -

‘diction in Hawes and sustained it in Greenwood, with-

out mentioning his well reasoned opinion as Gircuit Jus-

- tice in Arapahoe County v. Kansas Pac. Ry. Co., supra,

- 1 Fed. Cas. 1080. [But cf. Bourdieu. v. Pacific Oil ase

supra, 299 U. S. at 70-71.] : |

It is hardly necessary to. add that the decision in the |

“case at bar could correctly have consisted of a reference

to what Mr. Justice,-Miller so well said in Araphoe, for

this case is in fat on: all nea Ww ith Arapafioe insofar as”

determination of alignment of parties for purposes of

diversity jurisdiction is concerned. :

In my opinion the Constitution and every relevant con-

sideration of reason and policy join forces to argue that

differences of . fact alone—and rot of law—explain how

it was possible for diversity jurisdiction to be sustained in

both Arapahoe and Doctor v. Harrington.

* This conclusion is reinforced by what was so clearly

expounded in Kline v. Burke Construction Co., supra:

“The right of a litigant to maintain ‘an action in a fed- .

eral court on the ground that there is a controversy be-

tween citizens of different States is not one derived from

the Constitution of the United Stafes, unless in a very

indirect sense. Certainly it is not a right granted by the

sary. to be quoted here, are contained in Article III. Sec-

, tion. 1 of thai Article provides, “The judicial power of the

United States shall be vested in one Supreme Court, and

in-such inferior courts as the Congress from time to time -

ordain and establish.’ By §2 of the same Article it 1s

previded that the judicial power shal\ extend to certain

“t

designated ¢ases and controversies and, among them, ‘to

“controversies . . . between citizens of different States.

” The effect of these provisions is not to vest. jur-

isdiction in the inferigr courts over the designated : cases

and controversies but to delimit those in respect. gf which

Congress may confer jurisdiction upon such courts as

it creates. Only the jurisdiction of the Supreme Court

is derived directly from the Constitution. Every other

" court created by the general government derives its. juris-

_ diction wholly from the authority of Congress. That body

may give, withhold or restrict such jurisdiction at its

discretion, provided it be not extended beyond. the boun-

| pa fixed by the Constitution.” . [260 U.S. at 233-234.

- See: Hart, The Power of Congress ‘to Limit the Juris-

diction of the Federal Courts, 66: — L. Rev. 1362 —

>. (HS3).}

— Ta this should be added the policy —_ by Mr. justice

Stone in Healy v. Ratta, 292 U:.S. 263 (1934): “The

power reserved to the states, under the Constitution, to

provide for the determination of controversies in their

courts may be restricted only by the action of Congress

in conformity to the judiciary sections of the Constitu- -

tion. . . . Due regard for.the rightful independence

_ of state governments, which should actuate federal courts,

Fae that they scrupulously confine their own juris-

- diction to the precise limits whi¢h the statute has defined.”

[292 U. S. at 270. Compare: 28 U. S. C. §1441(c) ; |

Lewin, The Federal Court’s Hospitable Back Door, Oo .:

Harv. L. Rev. at 423 (1953).]

Thus all seeming technicalities surrounding hbeel jur-

. isdiction based upon claimed ‘diversity of citizenship are

actually safeguards dgainst unintended violation of the

jurisdiction constitutionally reserved to the states. As the.

Court expressed it in Indianapolis v. Chase. National Bank,

supra: “These requirements, however technical seeming,

must be viewed in thé perspective of the constitutional

limitations upon the judicial power of the federal courts, .

and of the Judiciary Acts in defining the authority of the -

federal courts when they sit, in effect, as state courts.”

(314 U. S. at 76.) |

It is more than costly error therefore—it is. an uncon

stitutional 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

—S9— Bae

controversy” exceeds the sum or value of $3,000, exclu-

sive of interest and costs, but does not arise “under the

Constitution, laws—or-treaties_of the-United-Spates” [28

U. S. C. §1331], and diversity of citizenship as to “the

matter in controversy” does not-exist. [U.S. Const. Art.

TT; 28 U. S. C $1332. See: :| American Fire &.Cas. Co.

v. Finn, 341 U. S. 6, 17-18 (1951); Skelly Oil. Co. v.

Phillips .Co., 339 U. S. 667, 671-674 (1950) ;° Shamrock

Oil Co. v. Sheets, 313 U. S. 106, 108-109 (1941) ; Shields

_v. Barrow, supra, 17 How. at 145.]

So whenever the party invoking federal jurisdiction can- :

| _ not sustain his burden of proof to show existence of “the

grounds upon which the court’s jurisdiction depends” [Fed. .

Rules Civ. Proc., Rule 8(a), (b), 28 U. S.C. ‘A. at 252-

253; KVOS,. Inc. v. Ass. Press, supra, 299 U. S. at 278;

-_McNutt.v. Gen. Motors etc. Corp., supra, 298 U. a

187-190; Seslar v. Union Local 901,: supra, 186 F. 2d at -

407;.1 Barron & Holtzoff, supra, §352 (1952 Supp.) ],

the proper order always is to dismiss the action. for ‘lack

of jurisdiction, regardless of whether the factual issues

involved in this determination be simple or ‘complex, since‘

- when “beyond the Constitution . . . every act must be

a violation of duty, an. usurpation.” “[Marshall v. B. & O.

R. R. Co., supra, 16 How. at 343.] |

- Dismissal in the federal courts for lack of jurisdiction

can in no way, prejudice the bringing of the-action in a_

- court>of competent jurisdiction, because a judgment. of

dismissal for want of jurisdiction is not res judicata as

a final decision .upon the merits and consequently doés -

not bar a subsequent action. [Southern Pacific Co. v.-

Bogart, 250 U. S. 483, 490 (1919); Smith v. McNeal,

109 U. S. 426, 429,430 (1883) ; Hughes v. United States,

4 Wall. (71 U. S.) 232, 237 (1866) ; Walden v. Bodley,

—0—

14 Pet. (39 U.: S) 156 (1840); Sida Hill & Sullivan

Min. & C. Co. v. Shoeshine Min. Co., 109 Fed. 504, 507

~~” (9th Cir. 901).]

So also the findings of this court which: servé as mre

cate for the conclusion that the plaintiff-stockholder’s cor-

poration is not in “antagonistic hands” cannot operate to |

bar contrary findings by a court having plenary jurisdic-

tion of the case, since the collateral estoppel doctrine is not —

: applicable to such ‘interlocutory or “incident ” determina-

_ tions of fact [Restatement, Judgments §71 (1942); Scott,

Collateral Estoppel By Judgment, 56 Harv. L. Rev. 1, 18-

ne 22 (1942); cf. United States v. International Bidg. Co.,-

z ‘

345 U. S. 502, 504-505 (1953); Zank v. Laridon, 205°F.

24-615 (9th Cir. 1953) ; Sachs v. Ohio Nat. Life Ins. Co.,

148 F. 2d 128 (7th Cir. 1945), cert. denied, 326 U. 5.

753 (1945); Musher. Foundation v. Alba Trading Co.,

427 F. 2d 9,11 (2d Cir. 1942), cert. denied, 317 U. S.

641 (1942); contra: Simmons y. Superior Court, 96 Cal.

- App. 2d 119, 125, 214 P. 2d 844, 849 (1950) ], made in

the exercise of the power to determine jurisdiction. { Land

v. Dollar, supra, 330 U. S. at 735.]. |

What has been said relates to the first. cause of action.

It remains to consider whether this court has jurisdiction, .

over the second cause of action ‘which the plaintiff-stock-

‘holder asserts against defendants Harry. M. and Jack Lb.

Warner only, omitting defendants United and Sperling.

“There exists diversity of citizenship as to the second

cause’ of . action unless United is an indispensable or

necessary party to it, for without United the “matter in

> controversy” would be between the New York plaintiff- .

‘stockholder and his Delaware corporation, Warner Bros.,

both: aligned on ‘one side, with the two “brothers Warner,

citizens of California, aligned om the other.

wail onn

“In essence, thjs second count or den i is that by causing ;

United: States Pictures, Inc., a Delaware corporation, to.

be formed, and by causing defendant Warner’ Bros. to

enter into the challenged contract with United, the two —

defendant-directors allowed the assets of Warner Bros.

to be dissipated for the benefit of United and Sperling;

. and that this failure of the individual defendants to live up __

_to their fiduciary duties as. directors -of “Warner “Bros.

~ ¢aused large pecuniary loss to the corporation.

: Thus plaintiff asks this court, in the exercise of its equity

jurisdiction, to render-a money judgment for damages

in favor of defendant Warner Bros. based upon the

allegedly improvident and fraudulent contract with United, -

while leaving the contract in force to govern future rela- -

"tionships. between United and Warner Bros., merely ‘be--

cause plaintiff has chosen for reasons of his own to name

United as a party defendant tg the first cause of action

but not to the second. [Cf. Twist v. Prairie Oil Co., 274

U. S. 684, 689-692. (1927).]

It is true of course that whenever diversity jurisdiction |

exists, plaintiff’s “motive in preferring-a Federal tribunal

a immaterial. ” [Chicago v. Mills, supra, 204 U. S. at

330; Blair v. Chicago, 201 U. S. 400, 448-449 (1906). |

But even when diversity jurisdiction exists, the case may

_. not be such as to warrant: exercise of the equity jurisdic-

tion of the court. [See: Matthews v. Rogers, 284. ¥v. 5.

521, 524 (1932); Twist v. Prairie Oil Co., supra, 274

U. S. at 690;.Venner v. Great Northern Ry., supra, 2@9.

U..S. at.34; Reynes v. ‘Dumont, 130 U. S. 354, 395

(1889).]

_As the Court observed’ in Twist v. Prairie Oil Co.,

supra, “the objection that the case is not within the equity

“

eee a a ;

; jurisdiction denne dots ‘not go to the power ogi

Court as a. federal Court. ” [274 U. S. at 691.]

So in the case.at bar, although. diversity jurisdiction

"may exist as to the second cause of action, the question :

still remains whether the second cause of action is ‘within

the equity jurisdiction. of this court; and the answer to

‘that ‘question turns upon whether or not United is an

indispensable party to proper adjudication of the second

cause of action. an, .

Rule 19( a) of the Hawi Rules of Civil Procedure °

_ does not attempt affirmatively to define who are indis- —

‘pensable parties, : but does restate existing law. [Fed.

. Rules Civ. Proc., Rule 19, 28 U. S. C. A: at 36; Wesson.

--y, Crain, 165 F. 2d 6, 8-9 (8th Cir. 1948); Chidester v,

: City of Newark, 162 F. 2d 598, 600 (3d.Cir: 1947);

Young v. Garrett, 149 F. 2d 223, 228 (8th Cir. 1945);

- Cather v, Ocean Acc. sete. Co., 94 F. Supp..511, eile

(D. Neb. 1950).]. : :

Rule. 19(b) provides that: “When persons sto . who

- ought to be parties if complete rélief is to be accorded be- |

: tween those already parties, have not been made parties

and’ are subject to the jurisdiction of the court as to both

_ service of process and venue. . . .. The court in its”

discretion may: proceed in the action without making such .

persons parties, if . . . their joinder would deprive

the court of jurisdiction of the parties before it; but the .

judgment rendered therein does not affect the rights or

liabilities of absent persons.” [Fed. Rules Civ. Proc.,

Rule 19(b), & U. S.C. A. at- 36; cf. Louisville ete. R..

, Coe ®. Letson, supra, at 555-556. ] |

Hence Rule 19(B) permits the court, in the exercise

of discretion, either to proceed or not proceed to judg-

_— ee

a joint 4interes

ment without absent parties “who ought to be parties if

somes relief is to be accorded between those already

parties.” [See: Bourdieu v. Pac. Oil Co.,, supra, 399 -

UL S-at 70-71; California v. Southern Pac. Cos 157 U.S.

229, 255 (1895).]

While not an indi pensable party. in the suniin-ot oo

: fd for that reason subject to “necessary

joinder” by thdterms of Rule 19(4), United is clearly a

person who “oughta be” a party within ‘the meaning of

Rule 19(b). . In the anguage of Niles-Bement-Pond Co.

-y. Iron Moulders Union, supra : “There is no prescribed |

formula for. determining in every case whether a person.

or corporation is an indispensable party or not, but a rule -

early announced and often ‘applied by this court-is sharply.

applicable to.the case at bar. -In Shields v. Barrow,’ 17°

How. 130, 139, this language . . . was, used to de-

-" scribe parties so’ ‘indispensable that a court of equity wilk-

not proceed to final decision without them, viz:

“ ‘Persons who not only have an interest in. the con- "|

troversy, but: an interest of such a nature that a final —

_ decree cannot be madé without -either affecting that in-

terest, or leaving the controversy in such a condition that

its-final termination may. be wholly inconsistent with equity

and good* conscience.’ ” (254 U. S: at 80. See: State

of Washington v. United States, 87 F. 2d 421, 427-428 |

(9th Cir. 1936); I. C.-C. v. Blue Diamond etc. Co., 192 :

F. 2d 43, 47 (8th Cir. 1951).]

No extended discussion 1s necessary to point out why |

a decree by this court as to the second cause of action

without the presence of United before the court would

_ leave the controversy “in such a: «condition that its. final

termination may be. wholly’ incorisistent wee equity and

good eomecierice.” -~ v. — or, 7 —_

at 139.].- |

it 1s" therefore nry , opitiion iat, as to the second cause

of action, United i is one of the “parties so indispensabte

that a court of equity will not proceed to final decision

without them” [Niles-Bement-Pond Co. v. fron. Mortiders

Union, supra, 254 U. S. at 80; cf. Lee v. Lehigh Valley :

Coal Co., supra, 267 U.S. at 543; Walden v. Skinner,

supra, 101 U. S. at 589; Wormley v: Wormley, supra, 8

supra, 1 Fed. Cas. at 1082-1083], “since a fimal ‘decree

could not be arade without meee leaving the coatro-

a condition wholly inconsistent with that equity

Ww geks to put an end to litigation by doing complete

and final ret ” [Niles-Bement-Pond Co. v. iron’ Mould:

ers Union, supra, 254 U. S. at 81] i.

' The doctrine of pendent jurisdiction, even if applicable

here, could not operate to alter the conclusion just stated. -

{See, seriatim: Osborn v. Bank of the, United States,

_ . Supra, 9 Wheat. at 822-82 ; Siler v. ‘Louisville & NLR. R

Co., 213 U. S. 175 (1909); Hur v. Oursler, 289 U. S.

238, 245-246 (1933) ; Montana-Dakota Ca. v. Pub: Serv.

Co, 341 U. S. 246 (1951).]

' Accordingly the second cause of action will be dicminnel é

‘ for want of equity [Mallow v.’ Hinde, | ‘12 Wheat. MS

'U. S.) 193, 199 (1827)], and the judgment of dismissal )

shall expressly declare that. it does not “operate as an

adjudication upon the merits” and is without prejudice

or res judicata effect. [See Fed. Rules Civ. Proc., Rule

41(b), 28 U. S. C.°A. at 379-380; Barney v. Baltimore,

supra, 6 Wall. at 284-285, 287, 289.] as

Discretion to dismiss is exercised. in the face of high

| peers that plaintif will confront a plea of the bar

/ of a three-year statute of limitations im the event this

suit should aow be filed in a California court of competent -

" Ajurisdiction. [Sep: Cal. Gode Civ Proc. §§335, 338(4),

359, 361; Bovay v. H. M: Byllesby & Co., ‘supra, ‘27 Del |

Ch. 381,.38 A. 24 808.] as 3

if the action were not. already barred wii commenced

here, the courts of California might hold that the appli-

cable statute of limitations was tolled during the pendency

in this court, since it is the policy of the ‘California law.

as expressed in §396 of the Code of Civil Procedure, that: .

. {f an action or proceeding ts commenced in a court which

- dacks jurisdiction of the subject matter thereof, as deter- .

. .mined by fhe complaint or petition, if there fs a court of |

this State which las such jurisdiction, the, action or pro-

ceeding shall . . . be. transferred ed a court having ,

jurisdiction of the subject matter. . . .” {[See: Morgan

v. Somervell, 40°Cal. App. 2d 398, 104 P. 2d 866 (1940). 1.

The literal terms of this statute prechide its application _

. to an action brought in a federal court, as there is no

machinery for transfer such as the statute requires. Cal.

Code Civ. Proc. §396.] Resort may be had, ‘however; to

reasoning by amalogy from’ the statute. This common-. .

Jaw technique involves the age-old principle of the “equity

of the statute,” requirmg that a legislative enactment be

‘treated as a declaration be policy which serves as precedent

in analopeys situations not’ expressly covered by the statute. -

' The equity-of-the-statute principle presupposes that the

legislature-made precedent is entitled to recognition. com-

parable to that accorded judge-made precedent, and appli-.

_ cation of the principle necegsarily invokes: the cohcept

: ae | sti

i. petent jurisdiction to redress plaintiff’s grievances,

. f ( 3 : ~ .

Gibintin of Légielative policy. [See: United. States -v.

Freeman, 3 How. (44 U: S.) 556, 565 (1845) ; Stone, :

‘The Common Law ‘in ‘the United States, 50 Harv. L. ;

Rev. 4, 12 (1936) ; Landis, Statutes and the Sourtes of

Law, Harvard Legal Essays, 213, 214-218 (1934) ; Pound, ras

~. Common ‘Law and Legislation, 21 Harv. L. Rev. 386

(1908).7° “As. Mr. ’ Justice’. Frankfurter observed upon

- ULS. 379 ( 1953): “Statutes . . . are not to be deemed

oe ,Self-ericlosed. instances ; they are to be regarded as starting

. points of reasoning, as means for securing coherence and.

_ for effectuating purpose,” [345 U. S. at 390. Cf. United

States v. Atlantic Mutual Ins. Co., 343 U. S. ‘236, 245-249

| (dissenting opinion, 1952); Panama R. R. Co..-v. Rock,

266 U. S. 209, 215-216. (dissenting opinion, 1924) ;\John-

son v: United States, 163 Fed. 30, 32 asi Circuit

Justice, 1st Cir. 1908] .

In. corisidéring the availability. ofa State court

com- ;

are asserted in the second cause . of action, it should 1

; remarked ‘that . there are ‘now’ pending in the Supreme 4 z

Court of New York County, New York, nine derivative

suits by stockholders of Warner Bros. similar to that at _

bar, none of which are on calendar and rhost of. which*:

have long been stayed because of failure of compliance |

with the New York oourt’s order for security for costs.

[See:‘N. Y. Gen. Corp, Law, §61; Shielcrawt v. ‘Moffett,

204 N. Y. 180, 61 N. E. 2d 435 (19%8); Noel Associates,’

: dissenting® in Pope v: Atlantic Coast Line R. Co.,..345_

Inc.-v. Merrell, 184 Misc. 646, 63 N.Y. S. 2d 143 (1944);

_ Fed. Rules Civ. Proc., Rule 23, Notes of niece de Com- .

mittee, 28 U. S. C. A. at 83- 87. | yn

And it should be noted also that any stockholder’ s de-

rivatve suit filed in the California courts must confront

_ the possibility that security for costs may»now be required

in such cases. [See: Cal, Corp: Code §834, Stats. 1949,

‘p. 857; Hogan v. Ingold, 38 Cal. 2d. 802, 243 P. 2d 1.

(1952) ; Cohen v. Beneficial Ind. Loan Corp., supra, 337

VS 541.) ©

The conclusions ‘reached as to the jurisdictional issues.

‘make it unnecessary to express any opinion on the issues

raised by defendant’ s plea of the bar of applicable statutes °

of limitations.

Defendants will lodge with the’ ik Simone findings ;

> of fact, conclusions of law and judgmient of dismissal ‘pur-

‘Suant to local rule:7 within ten days. :

. December 16, 1953. | at

“ Wo. ot MATHES )

ae States District Judge

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