Swanson v. Traer

Background

A group of Nevada stockholders sued over alleged fraud in sales of transit properties to their company, the Chicago North Shore & Milwaukee Railway, an Illinois corporation. The complaint said some directors had personal interests in those sales, that the stockholders demanded the directors sue and were refused, and that asking other stockholders to act would be futile. The District Court dismissed the suit for failing to show the directors’ refusal was anything other than a business decision. The Court of Appeals then treated the corporation as a plaintiff, found no true hostility, and affirmed dismissal because diversity of citizenship no longer existed.

Reasoning

The Supreme Court examined whether the company should have been realigned as a plaintiff and whether the shareholders could bring the suit despite management’s opposition. The Court concluded the company’s management was plainly opposed to the litigation, so the corporation was properly treated as a defendant. The Court did not decide whether the shareholders can proceed on the company’s behalf; instead it sent the case back to the Court of Appeals to decide that question under state law. The opinion cites long-standing descriptions of when shareholders may sue for the corporation — for example, when managers act beyond their authority, engage in self-dealing that harms the company, or oppress other shareholders.

Real world impact

The ruling affects shareholders seeking to sue in federal courts based on diversity: courts should not automatically reclassify companies as plaintiffs when corporate management opposes the suit. The ultimate ability of the shareholders to continue depends on state law and so the case is not a final decision on the merits.

Dissents or concurrances

A separate opinion by Justice Frankfurter, joined by three other Justices, appears with differing views, reported separately but not summarized here.