Cohen v. Beneficial Industrial Loan Corp.

Facts

The petitioners' decedent, a stockholder, sued in the United States District Court for New Jersey in the right of Beneficial Industrial Loan Corporation, a Delaware corporation doing business in New Jersey. This kind of suit is a derivative action: the stockholder asserts the corporation's own right. The defendants were the corporation and certain of its managers and directors. The complaint alleged a continuing conspiracy, beginning in 1929, to enrich the individual defendants at the corporation's expense. It charged mismanagement and fraud over eighteen years and said the assets wasted or diverted exceeded $100,000,000. The stockholder had demanded that the corporation sue, but the individual defendants controlled it and prevented that. He was one of 16,000 stockholders and owned 100 of more than two million shares. With 150 shares held by an intervenor, the holdings came to about 0.0125% of the stock, with a market value that never exceeded $9,000. The action began in 1943. In 1945 New Jersey enacted a statute that reached pending suits. It made a stockholder with so small an interest liable for the reasonable expenses and attorney's fees of the defense if he failed to make good his complaint. It also entitled the corporation to require security before the case went on. The corporation moved to require security and said a bond of $125,000 would be appropriate.

Issues

1. Was the District Court's order refusing to apply the state security statute an appealable final decision under section 1291, even though the main suit was still pending?
2. Does the New Jersey statute, which makes a small stockholder liable for the defense's reasonable expenses and entitles the corporation to security, violate the Federal Constitution?
3. In a diversity case, must a federal court apply the state security statute, or does its procedural character or Federal Rule 23 displace it?

Holding

The order refusing to apply the New Jersey security statute was appealable because it finally disposed of a claimed right that is not an ingredient of the cause of action. The statute is valid under the Federal Constitution and applies in the federal diversity suit, and Rule 23 does not displace it.