(1938), the corporation on whose behalf the derivative suit was brought moved to be joined as co-plaintiff. The court held joinder was improper since by definition a derivative suit is based on the theory that the corporation is unwilling to sue and the corporation has indicated its willingness to sue by its motion. The clear implication of the decision is that if a corporation is to become a party-plaintiff in an existing suit brought on its behalf, the action can only be prosecuted as a direct action by the corporation and the stockholders can no longer be parties.
Lazar v. Merchants' National Properties, Inc., 22 A.D. 2d 253, 254 N.Y.S. 2d 712 (1964), held that a corporation on whose behalf a derivative action has been brought and which before suit had declined to sue may be substituted as plaintiff. In Lazar, there was no opposition by the original shareholder-plaintiffs to the corporation's motion to be substituted as plaintiff nor was there any evidence that the corporation would not prosecute the action in good faith.
These cases suggest that in order for a corporation or its representative to take over control of an action instituted on its behalf by its stockholders, there must be no hint of collusion between the corporation and the defendants to the suit or evidence that the corporation may not prosecute the action in good faith. The Trustees of the property of Transportation Co. were appointed by the Reorganization Court. They have the duty to protect the property and rights of Transportation Co. and are answerable to the Reorganization Court. None of the Trustees is, or has ever been, an officer or director of Transportation Co. or Holding Co. The Trustees' fiduciary responsibilities require that they marshal the assets and protect the interests of the corporation-debtor. All actions taken by the Trustees are subject to the review by and approval of the Reorganization Court. It would therefore appear that a clear case has been established for the absence of collusion and the presence of good faith on the part of the Trustees in seeking to assume control of the litigation of the claims belonging to Transportation Co. raised in the thirteen derivative suits in issue.
The only argument adduced by the plaintiffs which possibly relates to the issue of the Trustees' good faith in prosecuting the actions is the fact that the Trustees have petitioned the Reorganization Court to return to former and present executives of Holding Co. and/or Transportation Co. a portion of the money they contributed to a deferred pension fund. Plaintiffs assert that in their various complaints they cite the granting of excessive pension benefits as one of the violations of law committed by Holding Co. and various defendants and plaintiffs seek to enjoin the defendants from receiving any pensions. Therefore, plaintiffs conclude that the Trustees, by their petition concerning pension funds, have demonstrated that they do not adequately represent the interests of the Penn Central complex and should not be given exclusive control of these actions.
We do not believe that the plaintiffs have established that the Trustees would not vigorously and adequately prosecute the interests of Transportation Co. if given exclusive control of the claims on Transportation Co.'s behalf in the thirteen suits in question. The fact that the Trustees and plaintiffs do not have the same view as to what is in the corporation's best interest and do not seek the same relief for the corporation on every claim does not mean that the Trustees do not adequately represent the interests of Transportation Co. or do not satisfy the requirements of the cases concerning entry of a corporation into a derivative suit raising claims on its behalf.
The pension funds are funds held by Transportation Co. and not by Holding Co. They are therefore within the exclusive control of the Reorganization Court which is charged with the duty and responsibility of protecting the assets of the debtor. We must and do assume that Judge Fullam will approve only that which will be in the best interests of Transportation Co., and hence, indirectly in the best interest of Holding Co. We fail to perceive any possibility of injury to the plaintiffs arising from the Trustees' petition for the return of pension fund contributions.
In addition, the operative facts relevant to many of the claims of Holding Co., Transportation Co., and the direct actions of the stockholders are the same. Consolidated discovery and other pretrial procedures will permit the plaintiffs to maintain a watchful eye over the actions of the Trustees in the prosecution of the claims of Transportation Co. and to object to any possible failure of the Trustees to perform their duties in good faith.
Finally, this court should consider the fact that these actions are brought on behalf of a corporation in reorganization which is attempting to marshal and protect its property in order to meet its financial obligations. In the absence of any compelling reason why Transportation Co.'s interests in the pending derivative actions cannot be fully protected by the Trustees, it is imperative that this court attempt to reduce the attorney fees arising out of this litigation in order to increase the amount that can possibly be recovered for the corporation.
Having shown no compelling reason why the interests of Transportation Co. in the pending thirteen derivative suits cannot be adequately prosecuted directly by the Trustees of Transportation Co., the plaintiffs are hereby dismissed as parties to the thirteen suits insofar as claims on behalf of Transportation Co. are asserted therein. The Trustees of the property of Transportation Co., as parties-plaintiff in these actions with respect to Transportation Co.'s claims, have control of the prosecution of these claims subject to any subsequent orders of this court consolidating discovery proceedings and trial of these claims with discovery and/or trial of claims raised in M.D.L. Docket No. 56 on behalf of Holding Co. or other named or unnamed parties to the Penn Central securities litigation. We also grant the Trustees' request for leave to file a consolidated complaint embodying all claims asserted on behalf of Transportation Co. in the thirteen derivative suits in issue consistent with our decision in Section I defining Transportation Co.'s interests.
IV. HOLDING CO.'S MOTIONS TO BE REALIGNED AS PARTY-PLAINTIFF AND FOR EXCLUSIVE CONTROLS OF THE DERIVATIVE SUITS
The court has determined that the derivative suits brought by the shareholders of Holding Co. raise claims on behalf of Holding Co. for injuries which occurred after October 1, 1969. See Section I, B supra. Holding Co. has petitioned this court to be realigned as party-plaintiff in all cases on the M.D.L. Docket No. 56, in which causes of action on its behalf are asserted and the court will consider this motion insofar as it relates to those actions in which post-1969 claims on Holding Co.'s behalf are raised. Holding Co. is presently named as a defendant in the derivative suits.
The realignment of parties according to their interests is a significant issue in determining jurisdiction in diversity cases. 3A J. Moore, Federal Practice P19.03 (2d ed. 1970).
"* * * In a derivative action the corporation for whose benefit the action is brought is to be aligned as a plaintiff for the purpose of determining the existence of diversity, unless the corporation's management has evidenced an antagonism toward the plaintiff's action either by a refusal to bring the action in its own behalf or by a showing of circumstances indicating that the corporation is controlled by persons who for any reason do not favor plaintiff's suit and, therefore, do not or would not allow the corporation to sue." Tessari v. Herald, 207 F. Supp. 432, 435 (N.D. Ind. 1962). See also Smith v. Sperling, 354 U.S. 91, 77 S. Ct. 1112, 1 L. Ed. 2d 1205 (1957); Swanson v. Traer, 354 U.S. 114, 77 S. Ct. 1116, 1 L. Ed. 2d 1221 (1957); Koster v. Lumbermens Mutual Casualty Co., 330 U.S. 518, 67 S. Ct. 828, 91 L. Ed. 1067 (1947).
Because jurisdiction in the M.D.L. Docket No. 56 cases is founded on the federal securities laws and not on diversity, Holding Co.'s motion for realignment will have no effect on this court's jurisdiction. Nevertheless, we should still be concerned with the proper alignment of parties according to their interests when this issue is raised by the parties.
Holding Co. bases its argument for realignment on three points:
(1) No demand was made on the Board of Directors of Holding Co. to bring the actions which have been commenced in derivative form because the plaintiffs averred that such a demand would have been futile. However, after the bankruptcy of Transportation Co., an entirely new slate of directors took over control of Holding Co. The present directors had no connection with the company before January 1, 1971. Therefore, Holding Co. argues that a demand on the new Board to sue would not have been futile, and the new Board stands ready to prosecute the suits on the corporation's behalf.
(2) Holding Co.'s answers to the derivative suits' complaints directly contain cross-claims for damages and indemnification on Holding Co.'s behalf against each of the defendants.
(3) On June 18, 1971, Holding Co. instituted suit in this district (C.A. No. 71-1506) for causes of action which had previously only been asserted in derivative form against certain individuals and corporations, and therefore Holding Co. has demonstrated that it is ready, willing, and able to prosecute actions on its behalf.
The plaintiffs object to realignment on the grounds that (1) some of Holding Co.'s interests are opposed to those of the present plaintiffs and (2) the directors who caused the collapse of the Penn Central complex were in control of Holding Co. after the complaints in the present litigation were filed.
In order to establish that a corporation is antagonistic to the enforcement of the claims raised in the derivative suits, the shareholders must establish that the corporation is controlled by individuals whose interests are hostile to the action and who would therefore not prosecute the claims in good faith if the corporation was realigned as plaintiff. The hostile interest of the corporate management can be established by showing, for example, that management refuses to take action to undo a challenged transaction, that management's answers to the complaint do not deny the allegations of wrongdoing by directors and officers, or that the alleged wrongdoers against whom the derivative actions are brought still control the corporation. Smith v. Sperling, supra, 354 U.S. at 97, 77 S. Ct. 1112; Kennedy v. Blumeyer, 309 F. Supp. 939 (E.D. Mo. 1969).
Plaintiffs have failed to provide any evidence to support their claims that Holding Co. is antagonistic to the enforcement of the derivative claims. Rather the evidence supports Holding Co.'s motion since Holding Co. has demonstrated its willingness to prosecute claims on its behalf both in its answers to plaintiffs' complaints and in filing its own suit to recover for wrongdoing by former directors and officers. Although at the time of the filing of the plaintiffs' complaints Holding Co.'s management may have been antagonistic to the prosecution of the claims, the present directors have no ties with the old management and the actions of the directors to date indicate their desire and ability to prosecute Holding Co.'s claims in good faith.
We therefore grant Holding Co.'s motion to be realigned as a party-plaintiff in the cases on the M.D.L. Docket No. 56.
B. Exclusive Control
Holding Co. also seeks to be given exclusive control over the litigation of the claims raised on its behalf in the derivative suits. The basis of Holding Co.'s motion, like the petition of the Trustees for similar relief, is the fact that derivative suits assert claims on behalf of the corporation and if the corporation is willing to prosecute these claims itself, the actions need not continue in derivative form. Before permitting a corporation to assume exclusive control over claims for corporate injuries originally asserted in a derivative suit, the court must be satisfied that the corporation will prosecute the action in good faith. See Section III, supra.
Plaintiffs have failed to provide any evidence that Holding Co. would not prosecute the actions in good faith, and we therefore grant Holding Co.'s motion for exclusive control over the claims asserted on its behalf in M.D.L. Docket No. 56. We recognize that the plaintiffs have charged the former directors and officers of Holding Co. with violations of the federal securities law extending over a substantial period of time and including a large number of transactions and that plaintiffs are concerned with the ability of Holding Co. to fairly and adequately prosecute these claims. We understand that plaintiffs would want to be parties to the prosecution of these claims in order to insure the fullest possible recovery to the corporation. We feel that Holding Co. will adequately protect these interests; however, we note that the claims of Holding Co., Transportation Co. and the shareholders in their individual capacities include many of the same issues. Therefore, the consolidated discovery procedures and trial of these issues will permit the plaintiffs to maintain a watchful eye over Holding Co.'s prosecution of its claims and to call the court's attention to evidence of possible bad faith prosecution by Holding Co. Finally, we also grant Holding Co.'s request for leave to file a consolidated complaint embodying all claims asserted on behalf of Holding Co. in all the cases on M.D.L. Docket No. 56 consistent with our decision in Section I defining Holding Co.'s interests.