Bank of City of New York, 314 U.S. 63, 69, 86 L. Ed. 47, 62 S. Ct. 15 (1941). Instead, the Court must "look beyond the pleadings, and arrange the parties according to their sides in the dispute. Litigation is the pursuit of practical ends, not a game of chess. Whether the necessary collision of interest exists is therefore not to be determined by mechanical rules. It must be ascertained from the principal purpose of the suit and the primary and controlling matter in dispute." Id. at 69-70 (internal quotations and citations omitted).
The "general rule" is that the corporation in a derivative suit should be aligned as a plaintiff because the action is brought for the benefit of the corporation and any judgment favorable to the plaintiff shareholder will inure to the benefit of the corporation. However, because federal courts require a "real collision" in interests, Smith v. Sperling, 354 U.S. 91, 97, 1 L. Ed. 2d 1205, 77 S. Ct. 1112 (1957), "the final alignment of the parties should reflect the actual antagonisms between the plaintiffs, the corporation, and the directors." Liddy v. Urbanek, 707 F.2d 1222, 1224 (11th Cir. 1983). Absent collusion, where management refuses to initiate a suit on behalf of the corporation, the requisite antagonism exists. Smith, 354 U.S. at 97; Rogers v. Valentine, 426 F.2d 1361, 1363 (2d Cir. 1970); ZB Holdings, Inc. v. White, 144 F.R.D. 42, 45 (S.D.N.Y. 1992) (J. Sand). Thus, as a practical matter, "where a plaintiff complies with the demand requirement found in Rule 23.1, the question of alignment should be resolved in favor of treating the corporation as a defendant." Wright and Miller, Federal Practice and Proc. § 1822, p. 21. Hence, it appears that absent special circumstances, Altesse should be treated as a defendant.
Plaintiffs argue that because Ono and Itoyama are coequal shareholders and directors, management cannot be viewed as sufficiently opposed to the action for purposes of finding that a "real collision" of interests exists. Indeed, there is support for that position. See Duffey v. Wheeler, 820 F.2d 1161, 1163 11th Cir. 1987 ("mere inaction, or inability to act on the part of the corporation, because of a deadlock between those who control the corporation has not been found to be the equivalent of active antagonism"); Liddy, 707 F.2d 1222 (where plaintiff alleged that he was the majority shareholder and court found that plaintiff was president and "at least" 50% shareholder, corporation was not found to be antagonistic to plaintiff and was realigned as a plaintiff); Cohen v. Huessinger, 1994 U.S. Dist. LEXIS 7119, no. 89-6941 (LEXIS 7119 (S.D.N.Y. May 24, 1994) (stating in dicta that where plaintiff does not allege that the defendant controlled the corporation, "management is deadlocked and one faction [i.e., one coequal shareholder] brings suit ... the corporation cannot be viewed as adverse to the plaintiff"); Gibson v. BoPar Dock Co. Corp., 780 F. Supp. 371, 375 (W.D. Va. 1991) ("because the corporation is unable to act on its own behalf and the shareholders are deadlocked, the corporation cannot be considered antagonistic to plaintiff for purposes of realignment of the parties"). However, the Court notes that determining the real interests of the parties is "a practical not a mechanical determination and is resolved by the pleadings and the nature of the dispute." Smith, 354 U.S. at 97 (emphasis added). It appears to the Court that plaintiffs argue for a hard and fast rule requiring corporations to be aligned as plaintiffs in all derivative actions brought by coequal shareholders against coequal shareholders. This rule fails to account for the nature of the dispute as required by Smith, supra. Moreover, in none of the cases cited above does the plaintiff allege, as here, that the coequal shareholder dominated the corporation through fraud and, in essence, extortionate behavior. As described in more detail above, pp. 2-4, the complaint alleges that once Altesse had been transformed into the marketing arm of Shinnihon USA, Itoyama's own corporation, and had thus become dependent upon Itoyama, Itoyama forced certain transactions through Altesse, such as the transfer of the apartment and relinquishment of the Fifth Avenue lease, which Ono was unable to stop because of her dependence on him. It seems clear that the complaint posits Itoyama as the dominant officer of Altesse and alleges that he gained control of the corporation through fraud and malfeasance. Cf. Liddy, 707 F.2d at 1224 (where the "complaint in a derivative action alleges that the ... dominant officials of the corporation are guilty of fraud or malfeasance, then antagonism is clearly evident and the corporation remains a defendant"). Accordingly, the Court finds that Altesse is antagonistic to Ono and will realign Altesse as a defendant. Therefore, diversity is destroyed and the complaint will be dismissed for lack of subject matter jurisdiction.
The Court notes that were it not for the lack of subject matter jurisdiction, this action would have been transferred to the United States District Court for the Southern District of New York. Although one defendant, Shinnihon USA, utilizes New Jersey as its principal place of business, it is clear from the complaint that New York was the site of the majority of the alleged acts from which the claims arose and was the home base of nearly all of the parties involved in this action. Both Ono and Altesse are from New York. During the relevant period, defendant Itoyama was a resident of New York and virtually all of his alleged acts occurred in New York. It appears that Ono and Itoyama will be the principal trial witnesses. Additionally, the properties whose value may be relevant to this dispute i.e., the $ 2.4 million apartment and Altesse's Fifth Avenue boutique lease, are located in New York City and witnesses with respect to those properties are likely to be located in New York City. The fact that the principal place of business of Shinnihon USA is in New Jersey appears to have no significance to this dispute.
In view of the Court's disposition of this matter, the remainder of the arguments raised by the defendants need not be addressed.
Date: April 27, 1995
John C. Lifland
United States District Court