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Beneficial Industrial Loan Corp. v. Smith

decided: September 22, 1948.

BENEFICIAL INDUSTRIAL LOAN CORPORATION (COHEN, AT AL., INTERVENERS)
v.
SMITH, JUDGE. COHEN (COHEN, INTERVENER) V. BENEFICIAL INDUSTRIAL LOAN CORPORATION ET AL.



Author: Biggs

Before BIGGS, Chief Judge, and O'CONNELL and KALODNER, Circuit Judges.

BIGGS, Chief Judge.

Hannah Cohen, Executrix of the Estate of Sol Cohen, deceased, is the plaintiff in a stockholders' derivative suit at our No. 9567 brought on August 9, 1943 on behalf of the corporate defendant, Beneficial Industrial Loan Corporation, a Delaware corporation, against the individual defendants, O. W. Casperson and the others named in the title of this appeal, officers and directors of the corporation. David Cohen intervened on the plaintiff's side. Jurisdiction is based on diversity of citizenship. The complaint is an exceedingly extensive one. In charges the individual defendants with corporate mismanagement and fraud. Article X of the By-Laws of the corporation provides that Beneficial will indemnify a director or officer of the corporation against any claim or demand to which he shall have become subject by reason of his having been an officer or director of the corporation, including reasonable expenses and counsel fees.*fn1

The plaintiff and intervener have never held more than 0.01 1/4% of Beneficial's stock. That corporation, pursuant to the provisions of R.S. 14:3-15, N.J.S.A. 14:3-15, an Act passed by the New Jersey Legislature which took effect on April 10, 1945, see N.J.R.S.Cum.Supp. 14:3-17, N.J.S.A. 14:3-17, moved the court below for an order requiring the plaintiff and intervener to give security in the amount of $125,000. The statutes are set out in the footnote.*fn2 The court below denied the motion on the ground that R.S. 14:3-15 is remedial in intent and in effect and that therefore the statute's provisions are not binding on a district court of the United States in a suit based on diversity as they would be if the Act gave a substantive right. See 7 F.R.D. 352. Beneficial has appealed. As an alternative, in the event the order is found not to be appealable at this stage of the proceeding, it has also petitioned this court at No. 9558 for a writ of certiorari or for a writ of mandamus, to the end that an order be entered by this court directing the court below to give effect to the New Jersey statute and require the plaintiff and the intervener to give security.

As to the Appealability of the Order Complained of.

Preliminarily, we must determine whether the order of the court below is appealable. Our appellate jurisdiction of course is purely statutory. United States v. Horns, 3 Cir., 147 F.2d 57. 28 U.S.C.A. § 1291, provides for the appeal of final decisions. But, as was pointed out by Judge Magruder in Rubert Hermanos, Inc. v. People of Puerto Rico, 1 Cir., 118 F.2d 752, 757: "A 'final decision' is not necessarily the ultimate judgment or decree completely closing up a proceeding. In the course of a proceeding there may be one or more final decisions on particular phases of the litigation, reserving other matters for future determination. See Knox National Farm Loan Ass'n v. Phillips, 300 U.S. 194, 197, 198, 57 S. Ct. 418, 81 L. Ed. 599, 108 A.L.R. 738; Trustees v. Greenough, 105 U.S. 527, 26 L. Ed. 1157; Gay v. Hudson River Electric Power Co., 2 Cir., 184 F. 689; Dant & Russell v. J. D. Halstead Lumber Co., 9 Cir., 103 F.2d 306. The words 'final decisions,' like the equivalent 'final judgments and decrees' in former acts regulating appellate jurisdiction, have not been understood in a strict and technical sense, but have been given a liberal and reasonable construction. Forgay v. Conrad, 6 How. 201, 203, 12 L. Ed. 404; City of Eau Claire v. Payson, 7 Cir., 107 F. 552, 557."

In Cobbledick v. United States, 309 U.S. 323, 328, 60 S. Ct. 540, 84 L. Ed. 783, the opinion by Mr. Justice Frankfurter contains an illuminating discussion of the subject of finality and refers to the "mischief" which may come to pass when an erroneous order, though made early in a proceeding but of final effect in determining a party's right, is considered not appealable. While the Cobbledick opinion deals with a criminal appeal the principal set out therein is equally applicable to civil causes. In United States v. River Rouge Imp. Co., 269 U.S. 411, 414, 46 S. Ct. 144, 145, 70 L. Ed. 339, it was said, "While the general rule requires that a judgment of a federal court shall be final and complete before it may be reviewed on a writ of error or appeal, it is well settled that an adjudication final in its nature as to a matter distinct from the general subject of the litigation and affecting only the parties to the particular controversy, may be reviewed without awaiting the determination of the general litigation." See also Janssen v. Belding-Corticelli, 3 Cir., 84 F.2d 577; Stokes v. Williams, 3 Cir., 226 F. 148, certiorari denied 241 U.S. 681, 36 S. Ct. 728, 60 L. Ed. 1234; Pennsylvania Co. for Insurances on Lives and Granting Annuities v. Philadelphia Co., 3 Cir., 266 F. 1. See also 10 Cyc.Fed. Procedure, 2nd Edition, 1943, p. 231.

The nature of the instant controversy and that of the main action in the case at bar leaves no doubt that Beneficial's application for security is collateral. The corporation seeks to enforce its own right under the statute against the plaintiff and intervener. Its interest in respect to security is adversary to that of the plaintiff and of the intervener. The individual defendants, real parties in interest in the main action, are not involved directly in the controversy as to the giving of security and cannot be affected legally by its determination. In at least two decisions the Supreme Court has come very close to the position asserted by Beneficial. In Trustees v. Greenough, 105 U.S. 527, 531, 26 L. Ed. 1157, the Court held that an order awarding expenses and counsel fees to the plaintiff in a representative bondholder's suit was appealable. In the more recent case of Sprague v. Ticonic Bank, 307 U.S. 161, 59 S. Ct. 777, 83 L. Ed. 1184, the Court took the position that an issue respecting the allowance of counsel fees and expenses was separate and distinct from the main litigation, outside the original decree of the trial court and the scope of the appellate mandates, and, treating an order denying counsel fees and expenses as appealable, passed upon the merit of the application.

We are not unmindful of the provisions of R.S. 14:3-15 which state that the corporation "at any stage of the proceeding" may make application for security but the court below deemed the statute inapplicable in the instant case at any time. It follows therefore that without the right to sustain an appeal Beneficial could never gain the security to which it is entitled if the statute is applicable for a writ of mandamus could issue from this court only in aid of its appellate jurisdiction. See 28 U.S.C.A. § 1651, and United States ex rel. Potts v. Rabb, 3 Cir., 147 F.2d 225, certiorari denied 324 U.S. 870, 65 S. Ct. 1013, 89 L. Ed. 1424. If the order of the court below is not appealable we would not have the right to issue the writ since insofar as the instant litigation is concerned this court would have no appellate jurisdiction to protect.

We hold the order to be appealable.

The Right Created by the New Jersey Statute and the Conflict of Laws.

Beneficial is a Delaware corporation. The law of Delaware is, of course, determinative of the liability of the officers and directors to the corporation and that of the corporation to its officers. Gallup v. Caldwell, 3 Cir., 120 F.2d 90. On March 31, 1941, Article X of the By-Laws was adopted by the vote of Beneficial's stockholders which, as we have stated, provides for the indemnification by the corporation of directors and officers against any claim or liability to which any of them might become subject by reason of his office. Indemnification is restricted, however, to claims or demands not arising because of the director's or officer's negligence or wilful misconduct.See note 1 supra. Article X finds sanction in Section 2(10) of the Delaware Corporation Law, 44 Delaware Laws, c. 125, Section 1, p. 442. The by-law was couched in the terms of the Delaware statute subsequently enacted.

The law of Delaware is important in the instant case only because it authorizes Beneficial to indemnify the defendants in the instant case if the plaintiff cannot maintain her cause of action. No substantial conflict-of-laws question appears under the circumstances for the obligation of indemnification created by Article X under the Delaware law would be enforceable against Beneficial in any State. The right of the officers and directors of Beneficial to indemnification under the by-law is analogous to a contract right. While a district court of the United States is compelled in diversity cases to follow the rule of law prevailing in the State in which the court sits, Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477, and Jackman v. Equitable Life Assurance Society, 3 Cir., 145 F.2d 945, we entertain no doubt that a State court of New Jersey would enforce freely and fully any liability arising under the contract. R.S. 14:3-15 simply provides a means whereby the corporation may recoup any losses which it may have sustained by reason of the indemnification of its directors of officers.

The Legislature of New Jersey in enacting the statute intended to prevent losses to both domestic and foreign corporations and to their stockholders by unjustified*fn3 litigation. We think that it is enough to state now that we can perceive no dichotomy between the laws of New Jersey and Delaware which would permit the plaintiff ...


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