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Schoen v. Mountain Producers Corp.

decided: November 9, 1948.

SCHOEN
v.
MOUNTAIN PRODUCERS CORPORATION ET AL.



Author: Maris

Before MARIS, McLAUGHLIN and O'CONNELL, Circuit Judges.

MARIS, Circuit Judge.

On May 26, 1947 the plaintiff, Edgar J. Schoen, who is a stockholder in Mountain Producers Corporation and a citizen of Illinois, brought this stockholder's derivative suit on behalf a Mountain Producers Corporation in the United States District Court for the District of Delaware. The suit was brought against Standard Oil Company (Indiana), and Indiana corporation, Stanolind Oil and Gas Company, a Delaware corporation, Saltmount Oil Company, a Delaware corporation, Argo Oil Corporation, a Delaware corporation, D. R. Murphy, a citizen of Colorado, Arthur E. Johnson, a citizen of Colorado, Harold D. Herndon, a citizen of Texas, G. E. Griffith, a citizen of Colorado, W. J. Geddes, a citizen of Colorado, T. A. Dines, a citizen of Colorado, and T. C. Tonkin, a citizen of Wyoming. The plaintiff also joined as a defendant Mountain Producers Corporation, which is a corporation of Delaware. All the defendants were served within the District of Delaware except Standard Oil Company (Indiana), Griffith, Geddes, Dines and Tonkin. These five defendants were not served and have not appeared in the action.

Defendants Johnson, Murphy and Herndon appeared and moved to dismiss the complaint as to them on the ground of improper venue and forum non conveniens. Defendants Stanolind, Argo, Mountain Producers, and Saltmount each appeared and filed motions to dismiss on the ground of forum non conveniens. With leave of the district court defendant Argo subsequently amended its motion to include improper venue as one of the grounds of dismissal. The district court entered a judgment dismissing the complaint as to all the defendants. Its action was based upon its conclusion that the venue was improperly laid and it did not pass upon the question of forum non conveniens. D.C., 76 F.Supp. 554. The present appeal by the plaintiff followed.

The case thus presents the question whether the District of Delaware was an appropriate district under the venue statute in which to bring this stockholder's derivative suit. The proper venue in such cases was determined, at the time the suit was brought,*fn1 by Section 51 of the Judicial Code of 1911,*fn2 which, as amended by the Act of April 16, 1936, 49 Stat. 1213, read as follows: "sec. 51. Civil Suits; Where to be Brought. - Except as provided in the five succeeding sections, no person shall be arrested in one district for trial in another, in any civil action before a district court; and, except as provided in the six succeeding sections, no civil suit shall be brought in any district court against any person by any original process or proceeding in any other district than that whereof he is an inhabitant; but where the jurisdiction is founded only on the fact that the action is between citizens of different States, suit shall be brought only in the district of the residence of either the plaintiff or the defendant; except that suit be a stockholder on behalf of a corporation may be brought in any district in which suit against the defendant or defendants in said stockholders' action, other than said corporation, might have been brought by such corporation and process in such cases may be served upon such corporation in any district wherein such corporation resides or may be found."

The jurisdiction of the district court in the present case is founded upon diversity of citizenship. Accordingly the general venue provisions of Section 51 relating to diversity cases are applicable. Those provisions are that a diversity suit may be brought either in the district where the plaintiff resides or in the district where the defendant resides. It has been held that when there is more than one defendant the latter means the district in which all the defendants reside.*fn3 In the present suit the plaintiff resides in Illinois and the defendants do not all reside in Delaware. Accordingly if the venue statute applicable to the ordinary diversity case is to be applied Delaware would not be a proper district in which to bring the present suit against all the defendants who have here been served.

The plaintiff, however, points to the last clause of Section 51, which is applicable only to stockholders' derivative suits, and he says that this clause authorized him to bring this suit in the District of Delaware, that being the district of residence of Mountain Producers, the injured corporation in whose behalf he brought the suit. The provision to which he refers is that "suit be a stockholder on behalf of a corporation may be brought in any district in which suit against the defendant or defendants in said stockholders' action, other than said corporation, might have been brought by such corporation." The crucial question in the case is as to the meaning of this language.

The district court took the view that this clause could be availed of by the plaintiff to provide an additional venue only if the injured corporation itself would have been empowered to bring a suit on the same cause of action in a federal court against the same group of defendants. The court thought, in other words, that in the hypothetical corporate suit to which the clause in question refers there would have to be diversity of citizenship between the hypothetical corporate plaintiff and the defendants before it could be said that such a suit could be brought at all, let alone in any particular district. In so holding it relied upon the decision of the District Court for the Western District of Pennsylvania in Sale v. Pittsburgh Steel Co., 1944, 57 F.Supp. 283. Since in the present case the injured defendant, Mountain Producers, and three of the other defendants, Stanolind, Saltmount and Argo, are residents of the same state, Delaware, the district court pointed out that there would not be diversity of citizenship in the hypothetical corporate suit to which the last clause of Section 51 refers and so concluded that this clause did not support the venue in the present suit. Since, as we have seen, the venue was not supported by the other provisions of Section 51 the court sustained the motions and dismissed the complaint.

The plaintiff strongly urges that in so doing the district court erred. He says, and he has as support the recent decision by the District Court for the Southern District of New York in Saltzman v. Birrell, 1948, 78 F.Supp. 778, that the clause under discussion relates only to venue, that it is wrong to import into it the jurisdictional concept of diversity of citizenship and that it was merely intended, assuming that there was jurisdiction in the hypothetical corporate suit, to designate the district in which the injured corporation resides and the district in which the other defendants all reside as appropriate venue for a stockholder's derivative suit.

The question is one of first impression in the courts of appeals. After mature deliberation we find ourselves in agreement with the construction which the district court in the present case placed upon the clause under discussion. In the first place the language of the statute itself is quite clear and unambiguous. It does not say, as would be appropriate if the plaintiff's contention were correct, that a stockholder's derivative suit may in every case be brought in the district in which the injured corporation resides or in the district in which the other defendants reside. What it does say is that the stockholder may bring his suit on behalf of the injured corporation in any district in which suit against the other defendants "might have been brought by such corporation". Whether a corporation may bring a suit in a given district certainly depends just as much upon whether the district court of that district would have jurisdiction of the subject matter as upon whether the district is one in which the venue statute authorizes suit to be brought. If no federal district court in any district would be empowered to entertain the suit it is idle to talk of a particular district in which the suit might be brought. Moreover under the statutory language we are compelled in any event to consider the question of jurisdiction before we can ascertain the proper venue. For the venue may be one thing if the case is founded on diversity of citizenship and quite another if it is based on some other ground of jurisdiction. It is true, of course, that this construction of the statute imports a jurisdictional element into a statute relating to venue but there is nothing to prevent Congress from drawing a venue statute in such terms and we think that in this instance it did so.

Moreover we find that this construction of the statutory language is supported by the legislative history of the Act of April 16, 1936, 49 Stat. 1213, which added to Section 51 the language here involved. That act originated as Senate Bill 2524 of the 74th Congress. The report of the House Committee on the Judiciary*fn4 as well as the statement of the sponsor of the bill in the Senate*fn5 show quite clearly that the bill was designed to correct a particular defect in the federal venue statute as applied to stockholders' derivative suits. The situation to which the bill was directed was that which appeared when the injured corporation and the wrongdoer were residents of different states. It had long been settled that the injured corporation was an indispensable party defendant in a stockholder's derivative suit.*fn6 It was, therefore, necessary for the plaintiff stockholder to join the injured corporation and the wrongdoer as defendants in the same suit. But if the stockholder sued in the district of the injured corporation's residence and the wrongdoer resided in a different state the venue was bad as to the latter and the suit could not be maintained against him over his objection even though the plaintiff may have succeeded in obtaining service upon him. Likewise if the plaintiff brought suit in the state of the wrongdoer's residence and the injured corporation resided elsewhere the venue was bad as to the injured corporation even though service had been obtained upon it. Moreover in such a case the plaintiff could not obtain relief in a state court since the process of a state could not run beyond its boundaries.

Injured stockholders were thus, as the House Committee Report and the debates point out,*fn7 frequently left without an available legal remedy and those in control of a corporation were consequently often in a position to strip it of assets with virtually complete immunity from suit. It will be seen that the basic fact, the existence of which resulted in the denial of a remedy in these cases, was the diversity of citizenship between the injured corporation and the wrongdoer.The cause of all the difficulty was the fact that these two indispensable parties to the prospective law suit were not residents of the same state. If the injured corporation and the wrongdoer resided in the same state the stockholder who wished to sue them had no difficulty. For if he did not reside in that state he could bring suit against them in a federal district court there, which under the general provisions of Section 51 for diversity cases was in that case a proper venue,*fn8 or if he resided in the same state as the defendants he could bring suit against them in the appropriate state court of that state. There was thus no likelihood of denial of a judicial remedy in this situation.

As Chief Justice Groner pointed out in King v. Wall & Beaver St. Corp., 1944, 79 U.S.App.D.C. 234, 145 F.2d 377, 380, "The entire legislative history of the statute (Section 51) demonstrates clearly that Congress has been intent upon limiting rather than expanding the venue of civil actions. The amendment of 1936 did extend the limits, but only to meet a specific and pressing need * * *." That need as we have seen was to provide a venue which would enable a stockholder to summon into one and the same court both the injured corporation and the alleged wrongdoer in cases where these two defendants resided in different states. The amendment made by the Act of 1936 met this need by authorizing the stockholder in such a situation to sue both defendants in either of the districts in which the injured corporation might have sued the wrongdoer, that is, in the district of the injured corporation's residence or in that of the wrongdoer's residence. And to make sure that the stockholder's suit would not be defeated by inability to serve both defendants in the same district the amendment further provided that the injured corporation might be served wherever it might be found.*fn9

We conclude that in the case of stockholders' derivative suits Section 51, as amended by the Act of 1936 and modified by Section 52, authorized suit to be brought (a) in the district in which the plaintiff stockholder resided, (b) in a district in the State, if any, in which all the defendants including the injured corporation resided, and also, if there was diversity of citizenship between the injured corporation and all the other defendants (c) in the district in which the injured corporation resided or (d) in a district in the State, if any, in which all the other defendants resided.*fn10 It follows that the district court was right in holding that since diversity of citizenship was lacking between Mountain Producers and all the other defendants the final clause of Section 51 did not authorize the plaintiff to bring this ...


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