Before MAJOR and MINTON, Circuit Judges, and LINDLEY, District Judge.
This action was instituted by the plaintiff, a Delaware corporation, as a stockholder's suit to assert the rights by derivative action of Pioneer Publishing Company, an Illinois corporation, in and to certain monies alleged to have been embezzled by Telfer MacArthur, a defendant and the president of defendant corporation, and certain shares of stock alleged to have been illegally issued to said Telfer MacArthur. Jurisdiction was predicated upon diversity of citizenship with the requisite allegation as to the amount in controversy.
The appeal comes from the order of the District Court dismissing the complaint as insufficient to meet the requirements of Rule 23(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c. The rule, so far as here material, provides:
"In an action brought to enforce a secondary right on the part of one or more shareholders * * * the complaint shall * * * aver (1) that the plaintiff was a shareholder at the time of the transaction of which he complains * * *."
The lower court in a memorandum opinion held that the plaintiff was not a "shareholder" as contemplated by this rule. The complaint alleged that plaintiff "is now and has been at all times hereinafter complained of the owner of 6538 shares of the common stock of Pioneer Publishing Company, an Illinois corporation, defendant herein." The motion to dismiss attacks this allegation as insufficient and asserts that the plaintiff "is not and never has been during the transactions complained of herein a shareholder of Pioneer Publishing Company under the laws of Illinois, the State of incorporation of the latter corporation." Plaintiff submitted an affidavit by one of its officials concerning the ownership of its shares in the defendant corporation. An affidavit was also submitted by the defendant MacArthur, showing that no stock of the defendant corporation had been issued to the plaintiff and that it had never been a shareholder of record. We think it unnecessary to relate the details of these affidavits. For the purpose of the question before us, it is conceded that the plaintiff was the sole equitable and beneficial owner of the shares described in its complaint and that it had owned such shares since long prior to the time of the grievances complained of. It is also conceded that plaintiff was not a shareholder of record of the defendant corporation and that the certificate evidencing its shares was issued to its nominee who endorsed and delivered the same to the plaintiff.
The single contested issue, therefore, is whether the equitable and beneficial owner of non-recorded shares of stock in a corporation is a "shareholder" so as to be entitled to maintain a shareholder's suit on behalf of such corporation under Rule 23(b). It is the contention of the defendant, sustained by the lower court, that the question as to who is a "shareholder" is one of substantive law to be determined by the rule of Illinois. On the other hand, it is the contention of the plaintiff that the rule is strictly procedural and that the question must be determined irrespective of local law.
That the effect to be given this rule has engendered a vast amount of contrariety of opinion is evidenced by the decisions. In Hurt v. Cotton States Fertilizer Co., et al., 5 Cir., 145 F.2d 293, 295 (certiorari denied 324 U.S. 844, 65 S. Ct. 679, 89 L. Ed. 1406), the court held that it was not necessary that the plaintiff hold the legal title to the stock but that it was sufficient if it was the owner of an equitable interest. The court stated (page 295):
"In equity, therefore, the owner of the equitable title to shares of stock is a stockholder in a fuller sense than is the owner of the naked legal title. Assuredly it is not the purpose of either the statute or the rule to afford the holder of the naked legal title to shares of stock a right of action and to deny the holder of a higher right, the equitable title, such a privilege. The protection of the law would hardly be denied to the owner of the substance, meanwhile being accorded to the holder of the shadow. We do not believe that it was the purpose of either the rule or statute to deny the process of the Court to the owner of an equitable right, title, or interest in stock, regardless of whether that right be vested or contingent."
It appears that the court considered the applicable State law and found nothing either in the rule or in the State statute which prevented an equitable owner from maintaining such a suit.
In Richardson, et al. v. Blue Grass Mining Co. et al., D.C., 6 Cir., 29 F.Supp. 658, 665, affirmed on th lower court's opinion, 127 F.2d 291, certiorari denied 317 U.S. 639, 63 S. Ct. 30, 87 L. Ed. 515, the court without reference to local law stated:
"Some authorities hold that only a stockholder of record is qualified to maintain such a derivative suit, but the weight of authority seems to be that the owner of an equitable interest in corporate stock is likewise entitled to maintain the action."
In Perrott v. United States Banking Corp., et al., D.C. 53 F.Supp. 953, upon a motion to dismiss the complaint for failure to allege that the plaintiff was a shareholder, the court ignored the State rule. It stated (page 956):
"Simply because a particular plaintiff cannot qualify as a proper party to maintain such an action does not destroy or even whittle at the cause of action. * * * The criticism that federal courts will not be dispensing the same justice that could be obtained in a state court in stockholders' derivative actions if Rule 23(b) is applied when in conflict with the state rule, ...