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Swanson v. Traer

November 29, 1957


Author: Schnackenberg



The United States Supreme Court reviewed our decision in this case, Swanson v. Traer, 7 Cir., 230 F.2d 228, and held that jurisdiction, based upon diversity of citizenship, is present. Swanson v. Traer, 354 U.S. 114, 77 S. Ct. 1116, 1 L. Ed. 2d 1221. That court therefore reversed our judgment and remanded the case with instructions that we consider whether, under Illinois law, this suit is of that special character which stockholders may bring, which question we did not reach in our prior opinion.

It will be noted that the Supreme Court referred to Hawes v. City of Oakland, 104 U.S. 450, 560, 26 L. Ed. 827, as containing the classical description of those situations in which a stockholder may sue on behalf of his corporation. The court said, 354 U.S. at page 117, 77 S. Ct. at page 1118:

"Whether local law follows that definition or adopts another and whether this case falls within the one provided by local law is a question on which the Court of Appeals has not ruled. We therefore remand the case to it for consideration of the question."

The facts which are relevant at this time are among those set forth in our prior opinion, supra.

Aided by reargument we now explore the law of Illinois applicable to those facts.

To ascertain the law of Illinois, plaintiffs rely, inter alia, on Goldberg v. Ball, 305 Ill.App. 273, 27 N.E.2d 575. In that case, leave to appeal was denied by the Illinois Supreme Court. 306 Ill.App. xxiii. Defendants do not dispute that the Goldberg case declares the Illinois law; in fact, the most exhaustive brief for any of the defendants, that filed for Bernard J. Fallon, repeatedly cites that case.

Because the court, in determining the Illinois law in a stockholders' derivative action, in the Goldberg case, 305 Ill.App. at 283, 27 N.E.2d at page 580, cited with approval and quoted from United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, 37 S. Ct. 509, 61 L. Ed. 1119, we are justified in considering the latter case for our present purpose. In the Amalgamated Copper case, plaintiffs were the holders of a small part of the outstanding stock of United Copper Company. On its behalf, they brought an action for damages charging that defendants violated the Sherman Act and thereby injured United Copper Company. Their complaint alleged that, before commencing the action, they demanded that United Copper Company institute such action and that its board of directors refused so to do.

The court said, 244 U.S. at page 263, 37 S. Ct. at page 510, that the question presented was:

"Whether a stockholder in a corporation which is alleged to have a cause of action in damages against others for conduct in violation of the Sherman Act may sue at law to recover such damages in the right of the corporation, if, after request, it refuses to institute the suit itself?"

For the court, Justice Brandeis answered the question, -

"Whether or not a corporation shall seek to enforce in the courts a cause of action for damages is, like other business questions, ordinarily a matter of internal management, and is left to the discretion of the directors, in the absence of instruction by vote of the stockholders.Courts interfere seldom to control such discretion intra vires the corporation, except where the directors are guilty of misconduct equivalent to a breach of trust, or where they stand in a dual relation which prevents an unprejudiced exercise of judgment; * * *."

Inasmuch as there is no showing in the case at bar that the 1949 board of directors, upon which plaintiffs made a demand, was controlled by the alleged wrongdoers or that a majority of the directors on the 1949 board stood in any relation to the alleged wrongdoers, or that they had been guilty of any misconduct whatsoever,*fn1 the following statement from Justice Brandeis' opinion, 244 U.S. at page 264, 37 S. Ct. at page 510, becomes pertinent:

"* * * In the instant case there is no allegation that the United Copper Company is in the control of the alleged wrongdoers, or that its directors stand in any relations to them, or that they have been guilty of any misconduct whatsoever. * * * The fact that the cause of action is based on the Sherman Law does not limit the discretion of the directors or the power of the body of stockholders; nor does it give to individual shareholders the right to interfere with the internal management of the corporation."

In deciding whether this suit is of that exceptional character which stockholders may bring (354 U.S. 114, 116, 77 S. Ct. 1116, 1 L. Ed. 2d 1221), we refer to Hawes v. City of ...

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