Smith v. Sperling - 354 U.S. 91 (1957)
U.S. Supreme Court
Smith v. Sperling, 354 U.S. 91 (1957)
Smith v. Sperling
Argued March 27-28, 1957
Decided June 10, 1957
354 U.S. 91
This is a stockholder's derivative suit brought in a Federal District Court in California on grounds of diversity of citizenship by a citizen of New York against two Delaware corporations and the directors of one of them, who are citizens of California. The complaint alleged fraudulent wastage of the assets of Warner Bros., the plaintiff's corporation, for the benefit of a son-in-law of one of its directors and the son-in-law's corporation. It alleged that a demand on the directors of Warner Bros. to institute the suit was not made because it would have been futile, since all or a majority of them had approved the contracts involved. The District Court found that (1) the contracts were made in good faith and without fraud, (2) the stockholders, officers or directors were not "antagonistic to the financial interests" of Warner Bros., (3) none of the directors "wrongfully participated" in the acts complained of, and (4) if a demand had been made on Warner Bros. to institute suit, the management would not have been disqualified "from faithfully doing their duty," but that "such a demand would have been futile." On these grounds, the District Court realigned Warner Bros. as a party plaintiff and dismissed the bill for want of diversity jurisdiction.
Held: it erred in doing so, and the judgment is reversed and the cause remanded. Pp. 354 U. S. 92-98.
(a) In considering the issue of federal diversity jurisdiction, the District Court should have considered only the face of the pleadings and the nature of the controversy, without attempting to adjudicate the merits of the charges of wrongdoing. Pp. 354 U. S. 94-98.
(b) Federal law governs the question of federal jurisdiction; but local law will govern the decision on the merits. Pp. 354 U. S. 95-96.
(c) There is "antagonism" between a corporation and its stockholder whenever the management is aligned against the stockholder and defends a course of action which the stockholder attacks, even though the management acts in good faith. Pp. 354 U. S. 95, 354 U. S. 96-98.
(d) Absent collusion, there is diversity jurisdiction when the real collision of issues is between citizens of different States. P. 354 U. S. 97.
(e) On the record in this case, it is evident that there is such a collision here. Pp. 354 U. S. 97-98.
(f) Diversity jurisdiction having once vested, it was not lost merely because the original plaintiff died while the suit was pending and the special administrator substituted for him was a citizen of California. P. 93, n 1.
(g) The bill meets the requirements of Rule 23(b) of the Rules of Civil Procedure that the stockholder show with particularity what efforts he made to get those who control the corporation to take action, "and the reasons for his failure to obtain such action or the reasons for not making such effort." P. 94, n 2.
237 F.2d 317 reversed and remanded.