Cohen v. Beneficial Industrial Loan Corp.

Mr. Justice Jackson delivered the opinion of the Court.

The ultimate question here is whether a federal court, having jurisdiction of a stockholder’s derivative action only because the parties are of diverse citizenship, must apply a statute of the forum state which makes the plaintiff, if unsuccessful,, liable for the reasonable expenses, including attorney’s fees, of the defense and entitles the corporation to require security for their payment.

Petitioners’ decedent, as plaintiff, brought in the United States District Court. for New Jersey an action 'in the right of the Beneficial Industrial Loan Corporation, a Delaware corporation doing business in New Jersey. The defendants were the corporation and certain of its managers and directors. The complaint alleged generally that since 1929 the individual defendants engaged in a continuing and. successful conspiracy to enrich themselves at the expense of the corporation. Specific charges of mismanagement and fraud extended over a period of eighteen years and the assets allegedly wasted or diverted thereby were said to exceed $100,000,000. The stockholder had demanded that the corporation institute proceedings for its recovery but, by their control of the corporation, the individual defendants prevented it from doing so. This stockholder, therefore, sought to assert [*544] the right of the corporation. One of 16,000 stockholders, he owned 100 of its more than two million shares, so that his holdings, together with 150 shares held by the intervenor, approximated 0.0125% of the outstanding stock and had a market value that had never exceeded $9,000.