Swanson v. Traer

PETITIONER:Swanson
RESPONDENT:Traer
LOCATION:Kingsley Books, Inc.

DOCKET NO.: 149
DECIDED BY: Warren Court (1957-1958)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 354 US 114 (1957)
ARGUED: Mar 27, 1957
DECIDED: Jun 10, 1957

Facts of the case

Question

  • Oral Argument – March 27, 1957 (Part 1)
  • Audio Transcription for Oral Argument – March 27, 1957 (Part 1) in Swanson v. Traer

    Audio Transcription for Oral Argument – March 27, 1957 (Part 2) in Swanson v. Traer

    Earl Warren:

    Mr. Baker you may proceed.

    James E. S. Baker:

    Thank you, sir.

    I think that it might be a good point of departure for this after recess just to briefly state what the Court of Appeals said if the rule was that they were applying.

    And they said that the test is whether there’s a collision between the personal interest of those in control of the corporation and the interest of the corporation itself in the subject matter in the suit.

    Such antagonism may appear from the relationship of those in control of the corporation to the defendants or by the words or acts of those in control, which as a matter of fact, proven attitude antagonistic to the suit.

    That’s on the last page practically of the record.

    That’s the test the Court of Appeals said they were applying.

    Now, this — this corporation doesn’t fall within either of those circumstances, controlled by the real defendants is not alleged and sometimes referred to in a case as domination or in antagonistic hands.

    And it is in a case where the corporation has taken sides with the real defendant, become partners in litigation with the real defendants, actively participating in the defense in such manner that the Court can conclude that the corporation is in antagonistic hands with respect to the basic controversy.

    Now, in the Court of Appeals, in its opinion and I believe our brief also amply demonstrate that no hostility or antagonism was alleged or shown.

    The complaint doesn’t allege facts which charge that the people were in control.

    Now, referring to the complaint here, he referred — Mr. Doyle did on his argument to the fact that there was a statement about hostile hands.

    I’d like to read just a very short excerpt from the complaint.

    It’s from paragraph 4 (a).

    It starts at the bottom of page 6 of the record, the last sentence, “A stockholder’s resolution directing the bringing of suit would be futile, since the control of such action would be in hostile hands for the reason that the officers and directors and counsel for the Railway Company have indicated as plaintiffs are informed and believed that they do not believe this suit should be brought and they would refuse to bring it.”

    In other words, the complaint says that the action be in hostile hands because the directors have indicated they’d refused to bring a suit.

    All that —

    Earl Warren:

    Well, what is wrong with that, if you please?

    James E. S. Baker:

    Well, the Court of Appeals treated this as a — a mere conclusory allegation —

    Earl Warren:

    All right.

    James E. S. Baker:

    — and it said that the plaintiffs must state facts in their complaint, which lend credence to the statement that the action would be in hostile hands.

    Hugo L. Black:

    Suppose there had been affidavit attached, three affidavits attached about people who said they knew it.

    They talked to them and they had said they would not file a suit that should not be filed, would that be enough?

    James E. S. Baker:

    Well we didn’t — we had precisely that, sir.

    We had an affidavit of Mr. Busch that — the general counsel of the corporation.

    He made a statement in the District Court and he filed an affidavit.

    He — and he made a statement in the Court of Appeals, which were cited at great length, the reasons why the corporation had refused to commence the suit.

    Those are the reasons that the plaintiff should have put in its complaint but didn’t and Mr. Busch supplied those by affidavit.

    Now —

    Hugo L. Black:

    You would — you would say that that affidavit wouldn’t be sufficient then because it failed to show sufficient facts to indicate that the directors were not exercising an honest judgment?

    James E. S. Baker:

    That’s correct.

    Hugo L. Black:

    Is there any difference?

    James E. S. Baker:

    As a matter of fact, it showed just the opposite.

    It showed that the directors were exercising an honest judgment based on legal advice and investigation of the action.

    Earl Warren:

    And did they — did he say that he believed that the suit was ill-founded?

    James E. S. Baker:

    I think he said that.

    Yes, sir.

    The affidavit is in the record, I think that’s a fair summary of what he said.

    Earl Warren:

    Does that make him neutral?

    James E. S. Baker:

    Yes sir, I think so.

    He expressed his legal opinion to the board of directors to the effect that the fact —

    Earl Warren:

    Well, insofar as the suit is concerned, that —

    James E. S. Baker:

    Well, yes.

    Earl Warren:

    — in the alignment of parties, the question is whether they’re — whether the corporation is friendly or — or unfriendly or as you say neutral to the — to the litigation.

    But if he says, “We have — we have judged it and — and we find that there is no merit to it, we believe that” —

    James E. S. Baker:

    Well, he didn’t say to the Court upon —

    Earl Warren:

    — the suit should — well, I know but I’m —

    James E. S. Baker:

    Yes, sir.

    Earl Warren:

    — putting a little gloss —

    James E. S. Baker:

    All right.

    Earl Warren:

    — and he says, “We don’t think that the lawsuit should be maintained.”

    How is that consistent with your theory that because the corporation is neutral that it should be in lined as a plaintiff rather than as a defendant —

    James E. S. Baker:

    Well, I suggest —

    Earl Warren:

    — because as I understand, you concede that if — if it was antagonistic —

    James E. S. Baker:

    Yes, sir.

    Earl Warren:

    — to the litigation and it should be a defendant.

    James E. S. Baker:

    And your — your question is, if he said that he thought that — the corporation thought that the suit was ill-founded, would that —

    Earl Warren:

    Yes.

    James E. S. Baker:

    Well, as I said before, he didn’t quite say that but I think that the neutral corporation — the corporation, it’s not throwing stumbling blocks in the way.

    In whose refusal to bring the suit is not based upon a control by the real defendants or by an attitude toward the basic controversy that is opposed to that of the plaintiffs that that corporation should be aligned where its real interest lies.

    James E. S. Baker:

    It’s not disabled from protecting itself.

    Earl Warren:

    Well, how would you know whether — what influence there was behind it unless you tried the case out from the merits and found out what they — what the interest and what the motives were of the corporation in not acting?

    James E. S. Baker:

    Well, it’s up to — that may be true, sir.

    But in order to try, in order to have something to try, there must be allegations of fact in the complaint.

    There must be an issue of fact raised to be tried.

    And that’s what the Court of Appeals did, it did two things.

    Earl Warren:

    But as the issue, is it — do they have to prove wrong doing on the part of the corporation or do they have to prove merely wrong doing on the part of the individuals who have — who are indebted to the corporation and then show that the corporation just didn’t act.

    James E. S. Baker:

    No, sir.

    They have to prove that the refusal of the corporation to act, to bring the litigation was wrongful.

    Earl Warren:

    Now, wrongful in what sense?

    James E. S. Baker:

    Wrongful to the plaintiff.

    Earl Warren:

    But they didn’t bring it — but they didn’t bring it in the facts, justified it or because they had improper motives in not doing it.

    James E. S. Baker:

    Improper motives, yes sir.

    Earl Warren:

    In other words, it’s your position that if — if the — these other people had actually committed the wrongful acts, that were complained of in the complaint, and that was an established fact.

    And the board of directors, just without any particular malicious reasoning, just didn’t want to bring the action.

    Would you say that that — that would defeat the action?

    James E. S. Baker:

    Yes, sir.

    The — in other words, whether a corporation is — this is really getting over to the point that was decided in the Distinct Court but I’d be glad to answer your question.

    It — a corporation doesn’t have to bring every lawsuit that it — it can — has or can have.

    There’s a discretion vested in the board of directors as to initiating litigation as well as to doing any other corporate act.

    And if you’re going to permit a stockholder, however misguided to bring litigation on behalf of the corporation just because the corporation refuses to do it without that refusal being wrongful.

    Earl Warren:

    No.

    Well, I’m not —

    James E. S. Baker:

    Yes, sir.

    Earl Warren:

    You — you give us a converse of what I’m asking, not a misguided stockholder.

    James E. S. Baker:

    Well, all right.

    Earl Warren:

    But a — but a stockholder who — who shows, who establishes that certain people did a wrong to the corporation that resulted in — in a severe loss to the corporation.

    James E. S. Baker:

    Yes, sir.

    Earl Warren:

    We — we accept that as — as a proven fact.

    But the board of director says, “Well, true, amounted to a million dollars maybe but we don’t choose to do anything about it.”

    Earl Warren:

    Do you — and you don’t have — you’re not in the position to prove that it was an immoral act if they did or unconscionable act because of personal interest.

    Do you still think that that’s within the discretion of the — of the board of directors and that they should in that posture be a party plaintiff instead of a party defendant.

    James E. S. Baker:

    Yes, sir, if there’s a — this is — disinterested majority of the board that makes that decision.

    Yes, sir.

    If that — if that decision is based without control, now of the corporation or the board by the real defendants, if that based on what is for the best interest of the corporation, that decision of the board of directors should control the binding.

    But I take it, that’s not exactly the question we have here that —

    Earl Warren:

    Well, let me — let me ask just one other question.

    It might not be determinative but I’m interested in it anyway.

    You said that there must be control, take your nine men board of directors that you spoke of a little while ago.

    Suppose they could establish that nine or that four out of the nine had improper influence —

    James E. S. Baker:

    Yes, sir.

    Earl Warren:

    — brought to bear in this matter and this results obtained, will their action fail because they haven’t proved the fifth member —

    James E. S. Baker:

    Yes sir.

    Earl Warren:

    — that was controlled?

    James E. S. Baker:

    Sir, there’s a disinterested majority there.

    Actually —

    Earl Warren:

    Yes?

    James E. S. Baker:

    — in this case and it’s apparent in the various minutes insofar that we have, there were two interlocking directors so to speak.

    That is two directors of the corporation from which these properties were purchased were also directors of North Shore.

    At the time the decision was made not to sue those two directors upon advice of the corporate counsel, refrained from voting and the vote was unanimous, seven to nothing.

    And those facts were brought out in the pre-trial controversy.

    William J. Brennan, Jr.:

    Well, Mr. Baker —

    James E. S. Baker:

    Yes, sir.

    William J. Brennan, Jr.:

    — you tell me.

    Assuming hostility means as you suggest improper motives, is there no sustenance for the charge of hostility in the remaining allegation to the complaint?

    James E. S. Baker:

    Yes, sir, I’d be glad to take them up one by one if you like, sir.

    William J. Brennan, Jr.:

    Well, what I’m getting to laying aside for the moment while I gather as your position with a decent as to the majority, however, it may be the corrupt — now on the large, the corrupt minority.

    A decent that a majority does sufficiently say that the action may not be maintained, laying that aside for a moment.

    James E. S. Baker:

    Yes, sir.

    William J. Brennan, Jr.:

    Isn’t there enough in the allegations beginning at paragraph 8 for those several pages to add more than it was to the charge of hostility?

    James E. S. Baker:

    Those allegations can simply prove the relationships among the defendants.

    That’s one of the points they make is that they charge that — that all of the defendants are related to the three dominant defendant.

    They don’t charge that the dominant defendant directors are related to the three dominant if I may say.

    William J. Brennan, Jr.:

    Are none of these allegations concerned with the either directors of other in control of the management of the railroad?

    James E. S. Baker:

    There are — there’s three directors that are involved here, Runkel, Bogan and Burleigh.

    Those are the —

    William J. Brennan, Jr.:

    Does all of them —

    James E. S. Baker:

    And Runkel was not a director when the decision that a sue was made.

    So there’s only two of the people that are referred to there that were directors at the time the decision not to sue was made.

    Then you have Fallon and Clinch.

    William J. Brennan, Jr.:

    Yes, but these two — to those two, who are they?

    James E. S. Baker:

    Bogan and Burleigh.

    William J. Brennan, Jr.:

    Well, now, isn’t that enough from the allegation that concerns their activities in connection with the alleged conspiracy to support a finding at least just to them of hostility?

    James E. S. Baker:

    That might be.

    But you have to have — you have to show as I get the law, you have to show that there’s either control of the corporation by the real defendants or domination by the litigants and that’s not alleged nor shown.

    Now —

    William J. Brennan, Jr.:

    Now, as the rotten apple theory doesn’t apply in case to this —

    James E. S. Baker:

    No sir, not when the rottenness of the apple was made apparent and other directors know about it.

    William J. Brennan, Jr.:

    Well, I’m looking only at the allegations.

    James E. S. Baker:

    Suppose a disclosure.

    William J. Brennan, Jr.:

    And that’s suggesting to —

    Felix Frankfurter:

    Mr. Baker, aren’t you — aren’t you blending two things that are very different?

    You talk at large as to what does or doesn’t constitute a meritorious suit by minority stockholders or by stockholders against the corporation.

    And so, we pass on this thing at large on the merit that the state law is questioning —

    James E. S. Baker:

    I think it was getting —

    Felix Frankfurter:

    — the rest of the cases.

    So, how can we talk at large whether it is or it isn’t —

    James E. S. Baker:

    I think we’re getting far —

    Felix Frankfurter:

    — without going to the Illinois law?

    James E. S. Baker:

    Yes, sir.

    Felix Frankfurter:

    But before we get to that, you have to satisfy the requirements of this kind of a suit under federal law.

    James E. S. Baker:

    That’s right.

    Felix Frankfurter:

    It was laid down by the series of the cases long before 23 (b) was in existence at which 23 (b) reflects.

    James E. S. Baker:

    That’s right.

    Now, if you’d like me to I’ll — I’ll run through this allegation.

    We’ve done it in the brief, the allegations of the complaint that they —

    Charles E. Whittaker:

    Mr. Baker, —

    James E. S. Baker:

    — point — point — yes, sir?

    Charles E. Whittaker:

    I — I hesitate, you had so many interruptions — but i have a question or two.

    I wonder if I might have a privilage of asking you.

    James E. S. Baker:

    Yes sir.

    Charles E. Whittaker:

    I think it may land to something to clarity here.

    In the first instance, there must be allegations tending to show that the corporation’s right of exercise of free will have been destroyed, is that approved?

    James E. S. Baker:

    That’s right.

    Charles E. Whittaker:

    Now, the question of whether or not the allegations are adequate is one of law, isn’t it?

    James E. S. Baker:

    That’s right.

    Charles E. Whittaker:

    All right.

    Now, the allegations being present and if challenged become an issue of fact, am I right?

    James E. S. Baker:

    Yes, sir.

    Charles E. Whittaker:

    Now then, the third question is, you say that simply because a mere majority of the directors are acting in good faith, domination cannot be solved.

    Do you really mean that?

    Wouldn’t it be a question of fact as to whether even a strong minority might dominate?

    James E. S. Baker:

    Yes, sir, but that isn’t charged in the complaint.

    Charles E. Whittaker:

    All right then, then that’s the view the judge not took.

    And he, treating the matter, the Herman says, “Inadequate is a matter of law dismissed.”

    James E. S. Baker:

    That’s right.

    Charles E. Whittaker:

    Isn’t that it?

    Now, if he was right about that that ends this case, doesn’t it?

    James E. S. Baker:

    Well, yes sir, and we — we support at that very vigorously in the Court of Appeals.

    We also argued that the — that the corporation because it —

    Felix Frankfurter:

    Before you go on what you argued —

    James E. S. Baker:

    Yes.

    Felix Frankfurter:

    — what did the Court of Appeals do with that ruling of Judge Knoch?

    James E. S. Baker:

    It never reached it —

    Felix Frankfurter:

    All right.

    James E. S. Baker:

    — because that it said, we have at the outset a question of jurisdiction raised by the Traer defendants.

    Felix Frankfurter:

    But his treatment actually — the Court of Appeals’ treatment was factually similar to Judge Knoch that he applied it to a different theory.

    James E. S. Baker:

    Well, I think that’s correct, yes sir, and many of the same allegations bear on these two questions.

    One is the bill state an equitable cause of — for relief.

    And two that it’s state one of jurisdiction, diversity jurisdiction.

    Many of the allegations are similar but they are not the same and I — we cover that in our — in our brief.

    Now, —

    Felix Frankfurter:

    Well, before you sit down, will you deal however briefly with Mr. Doyle’s suggestion that in as much as the Court of Appeals did not explicitly deal with the — Judge Knoch point, that Knoch’s ground to dismiss it, namely, assuming there were diversity which one on that ground must be true.

    There wasn’t a proper case of equity that therefore, since the Court of Appeals didn’t reach that question even assuming won’t agree with Judge Knoch or would agree, this isn’t the place to determine that, but that can be sent back to the Court of Appeals.

    James E. S. Baker:

    That’s as I understand the effect of the Court’s rule, yes sir.

    It’s not a question —

    Felix Frankfurter:

    But we sometimes don’t want to think all it did —

    James E. S. Baker:

    Yes sir.

    Felix Frankfurter:

    — because of your question of law —

    James E. S. Baker:

    I tried to be —

    Felix Frankfurter:

    — in which we need no local law.

    That’s a different story.

    What is your position now that in this case?

    James E. S. Baker:

    Well, yes —

    Felix Frankfurter:

    (Voice Overlap) —

    James E. S. Baker:

    – as I take a possession in my brief that that question is not before this Court, as I understand the rule, Rule 40.

    And I cite the specific paragraph of it.

    I tried to find cases where — from which I could —

    Felix Frankfurter:

    Why did you argue —

    James E. S. Baker:

    — that the Court should consider it.

    Felix Frankfurter:

    Why not before it?

    James E. S. Baker:

    It isn’t before it.

    Felix Frankfurter:

    I say why isn’t it?

    James E. S. Baker:

    Because it wasn’t one of the questions raised in the petition.

    Felix Frankfurter:

    All right.

    James E. S. Baker:

    Yes, sir, that’s right.

    Earl Warren:

    Mr. Baker, I’m going to take one more interruption and this one might not be unwelcome.

    We’ve — we’ve all taken a lot of your time as we did of Mr. Doyle’s.

    I will — I’m going give you 10 minutes more to cite if you — in order that you might be able to complete your argument.

    James E. S. Baker:

    All right, thank you sir.

    Well, I’m going to skip around a little bit so I’ll be sure not to overlook this.

    They have argued that Mr. Doyle has argued that the Court of Appeals made findings of fact.

    That’s his second question that he raises.

    Now, I think all you need to do to weigh that clause is to read exactly what the Court of Appeals says it’s doing.

    It said that accepting the petitioner’s contention that the — only the allegations of the complaint are to be considered, then it examined the — several allegations of the complaint.

    And it said that that complaint failed to charge that the corporation or those in control of it were hostile to the prosecution of this suit.

    Then, it said, “Secondly, the named plaintiffs say that if matters beyond the complaint are to be looked to, the decisive fact is that the answer filed by the Railway Company controverts the complaint and important particulars referring specifically to paragraph 16 of the answer.”

    Then, the Court examined that paragraph of the answer and held that that didn’t — that that answer did not show antagonism to the suit.

    Then they examined some other conduct, the conduct that Mr. Busch, the counsel for the corporation in — which is recited at great length.

    Here, is his statements to the Court and they found that each of those statements showed that there was no antagonism towards this suit.

    They didn’t make any findings of fact there.

    Then they — they make — they make the final statement in the opinion that’s on the very last page of the opinion.

    It says, “Situations readily suggest themselves in which plaintiffs might be impeded in preparing in prosecuting a case such as a refusal of the corporation’s permit to access to its files and records, or the corporation is giving aid to the defendants in opposing the suit.”

    It says, “No such relationship, words, or acts are charged by the plaintiffs in this case.”

    Well, that’s my full point on that finding of fact.

    The Court of Appeals made no findings of fact.

    It said we — if we accept the plaintiff’s contention that this is to be determined on the complaint alone, the complaint is inadequate.

    The plaintiffs in their reply brief that pointed the certain facts which they say are decisive that antagonism exists with — the Court of Appeals examined each one of those alleged facts.

    Really, they were the answer in the conduct of counsel, that’s all.

    They weren’t all this matter in the depositions of any and said, “We don’t find that in any of those.”

    James E. S. Baker:

    There is evidence of antagonism toward this suit.

    Then they went on they said, “We — we can conceive of situations for there might be antagonism shown by corporate conduct.

    No such conduct is charged.”

    Now, that’s prior from the finding of fact.

    And clearly of a failure to charge essential facts is to be differentiated from a making a findings of fact.

    Now, we contended in the Court of Appeals that in — Mr. Doyle talked about this summary judgment.

    One of the things we contended in the Court of Appeals was on the state of the record.

    Summary judgment was justified.

    We’ve submitted affidavits and we’ve submitted depositions and these people had had a year or two years to submit countervailing material and they didn’t do it.

    Now, if they thought there was anything in the facts that would show that there was antagonism, it was up to them either to amend their complaint as Mr. justice Black suggested to charge such conduct or at least to show by an affidavit or deposition or some other way to point out a fact which showed that there was antagonism.

    And the — the facts that they pointed out to the Court of Appeals, the Court of Appeals held it didn’t show any such conduct.

    It didn’t charged it and the burden is on them to charge it.

    Earl Warren:

    What about the statement of Mr. Doyle, to the effect that the Court of Appeals used the great many of these things that were not legitimately a part of the record?

    I — I so understood him to — to say that.

    What about the use of those —

    James E. S. Baker:

    Well I — I thought — I mean I was attempting to answer that, sir.

    That’s not so.

    I mean, they — the only things that — that the Court of Appeals referred to in its opinion that were matters beyond the complaint, were the answer of the Railway Company.

    In other words, what is the attitude that this corporation has expressed in its answer?

    Has it joined with the real defendants?

    Is it neutral?

    Has it joined with the plaintiff?

    And they said that — that nothing in the answer in certain specific allegations were referred to shows that there’s antagonism towards the suit.

    Then, Mr. Busch made an argument in the District Court at the time Mr. Marshall proposed that his — in the pre-trial conference, proposed to file a motion to dismiss.

    Mr. Busch said in effect, “On the corporation, this litigation is going to cost us a lot of money.

    Here’s a — here is a motion that if it is right — and I don’t say it’s right or wrong.

    But if it’s right, it will determine this litigation.

    I urge the Court to listen to it.”

    That’s about what he said.

    Now, the Court of Appeals examined that statement and quoted from it at length and said that —

    Earl Warren:

    Well, is that appropriate on hearing on the demurrer?

    James E. S. Baker:

    Well, yes sir, I think it would be.

    But this — you have to realize the context in which the Court did then.

    The Court of Appeals said, “We accept their contention that — that only the complaint is to be looked to know.

    We can’t find anything in the complaint to charge the antagonism.”

    But the plaintiff say, “Even if you’re going to look beyond the complaint, here are some decisive facts that appear in the record and it looked at those facts and said, “We don’t think they show any evidence of antagonism.”

    You’ve got to realize — I should perhaps say it that way but I mean — I call to the Court’s attention that when this matter was decided by Judge Knoch, it was an extensive pre-trial conference.

    There had been complaints, motions, answers.

    There had been three requests for admissions of fact and answers thereto.

    There’d been half a dozen or a dozen depositions and there were a couple of affidavits.

    Felix Frankfurter:

    Let me ask you a question —

    James E. S. Baker:

    Yes, sir.

    Felix Frankfurter:

    — that I’d like to — the same one I addressed to Mr. Doyle when he comes to reply.

    The record we have here was — was a record to be the physical questions that are susceptible of physical answers.

    Is the record we have here, the record that was before the Court of Appeals?

    James E. S. Baker:

    Yes sir, as the terra cotta —

    Felix Frankfurter:

    All right.

    James E. S. Baker:

    — torn off and Brown never put on —

    Felix Frankfurter:

    All right.

    You did say you do.

    James E. S. Baker:

    Yes, sir.

    Felix Frankfurter:

    All right, number 2, if ever is — did the Court of Appeals rely on anything that I can’t find in print in this record?

    James E. S. Baker:

    No, sir, with the possible exception of the brief that was filed in the Court of Appeals by the Railway Company which is substantially identical with the brief that is filed in this Court.

    Felix Frankfurter:

    (Inaudible)

    James E. S. Baker:

    That’s right.

    So, the answer is yes.

    Felix Frankfurter:

    Where — what are the inference of this brief of the opinion of the Court of Appeals?

    What views did it make of it?

    For the record, Mr. Baker, I mean this — I don’t ask you what if.

    I don’t ask you to state it but I just ask you to give me — point out where the — in the opinion of the Court.

    James E. S. Baker:

    I don’t think they do refer to that brief in the opinion of the — of the — they do —

    Hugo L. Black:

    Page 318 of the record?

    James E. S. Baker:

    Oh yes.

    That’s page 318 of the record, it says in the Railway brief in this Court and the —

    Felix Frankfurter:

    That’s a quotation.

    James E. S. Baker:

    A quotation from —

    Felix Frankfurter:

    Quotation from the case.

    James E. S. Baker:

    Yes sir.

    Felix Frankfurter:

    Do you hold the record?

    James E. S. Baker:

    I Am.

    Well, I have from — Mr. Gale and I have arranged to divide this time and I practically — I’ve come to the end of my time.

    I just want to mention a couple of other things that Mr. Doyle hasn’t referred to the case of Chicago versus Mill upon which he based his principal argument in the brief as I understand it.

    We rely on Doctor versus Harrington and Koster versus Lumbermens and I think we adequately covered in the brief the case of Chicago versus Mill.

    Now, on this distinction between Rule 23 (b) and this rule of jurisdiction alignment that’s here before the Court, that also has been covered in the brief and in the case of Venner against Great Northern which referred to many times there, that distinction has made abundantly clear that 23 (b) is a rule of equity and the decision is to whether complaint comprise with that as an exercise of jurisdiction, whereas this jurisdiction of alignment rule is not.

    It’s a —

    William J. Brennan, Jr.:

    Mr. Baker may I ask?

    Do you conceive it necessary in this kind of suit to proceed — to plead the sensual allegations anymore precisely than the sensual allegations that are required to be pleaded under the federal rules in any form of action, maintainable under those rules?

    James E. S. Baker:

    Well, yes sir, insofar as Rule 2 — certainly insofar as Rule 23 (b) required.

    William J. Brennan, Jr.:

    I’m speaking of the elements now, the way in which the necessary elements are pleaded.

    Is there any special formula that has to be applied in the pleading here than from —

    James E. S. Baker:

    Yes, sir, I think the answer to that is that the — is it Indianapolis versus Chase?

    I think that’s a case.

    The — in any event, the Court said that the jurisdiction of facts must be pleaded so that the first —

    William J. Brennan, Jr.:

    That’s right.

    They must be pleaded.

    James E. S. Baker:

    That’s right

    William J. Brennan, Jr.:

    But is there any special way they have to be pleaded?

    In other words, generally, I think, pleading is under the federal rules as long as the substance of the necessary elements may reasonably be found in the words used in the pleading that satisfies the requirements.

    James E. S. Baker:

    Well, substantiality there at all —

    William J. Brennan, Jr.:

    The old test mentality is —

    James E. S. Baker:

    Substance has to be there.

    William J. Brennan, Jr.:

    All right.

    The substance has to be there but that’s all.

    James E. S. Baker:

    I’m on Rule 23 (b) that goes into some specificity as to the exact allegation that have to be made.

    William J. Brennan, Jr.:

    Do you mean you have to use the precise language of 23 (b) or as favorable to the pleading?

    James E. S. Baker:

    No, but you have to state — that you —

    William J. Brennan, Jr.:

    You have to state the substance of it.

    James E. S. Baker:

    That’s right.

    Yes sir.

    Charles E. Whittaker:

    The language is you state with particularity of the efforts of the plaintiff to secure from managing directors or trustees and if necessary from the shareholders such action as he desires.

    James E. S. Baker:

    And the reasons for failures —

    Charles E. Whittaker:

    And the reasons for his failure to obtain such action or the reason for making such effort.

    James E. S. Baker:

    For not making such effort.

    Charles E. Whittaker:

    They’re not making such effort.

    James E. S. Baker:

    Yes, sir.

    Charles E. Whittaker:

    Yes.

    James E. S. Baker:

    That’s precisely correct and that is what the Court of Appeals held.

    It was not done here and — and —

    William J. Brennan, Jr.:

    Well now, what I’m getting at is that we can find it within the four corners of this complaint.

    The fact that the exact language of that rule or any other is not employed in the pleading.

    It’s not material, is it?

    James E. S. Baker:

    Mr. Gale says he will undertake to answer that question.

    I have agreed to give him the balance of the arguments and I thank you, sir.

    Marland Gale:

    If it please the Court.

    I think in essence, a derivative stockholder bringing an action must allege in the words of Mr. Justice Whittaker that the defendant corporation is captive in the hands of the Miller factors and I think that is not alleged in substance here.

    There was a confusion between — in the language between the allegations among defendants who are not directors.

    My client never was a director, never had any interest, neither had a one who represent him on the board.

    He knew no part about what happened at the board meeting when this action was declined by the board.

    I’d like to make one comment to — in reply to a question of Mr. Justice Frankfurter.

    When Judge Knoch heard these motions, he also renewed and heard the motions on realignment.

    Marland Gale:

    So that was before the Court —

    Felix Frankfurter:

    Did he pass on it, Mr. Gale?

    Marland Gale:

    He heard them.

    He reheard them at the same time and he had before him all the material.

    And then, in response to Mr. Justice Black’s question of why didn’t they amend?

    They didn’t amend because they couldn’t.

    At the hearing before Judge Knoch, we challenged them to amend and to make good allegations and they couldn’t do it because by that time as they knew and we had established from their own admissions over the course of depositions and a year and a half of pretrial.

    Now, these may be non-satisfactory records here, but it’s a record in which their great deal of work and effort has been done and a great many hearings have been held before the pretrial court.

    And the kind of facts which I — I am now going to address myself with the power of the Court to listen or look at the facts in the record.

    Where do they come from?

    Not from my client’s statements, not from these gentlemen’s client’s statements.

    They come from the plaintiff, unless that the word extraordinary case on the facts, on admissions.

    Now, I submit that if a man admits himself out of Court, you don’t have to have a trial after that to see whether what the facts argue, no.

    It’s just as if he had put it in the pleading.

    Now, the defect of his pleading which is unamendable was shown by the concessions of the plaintiff and his own personal counsel that was on the board, and the executive vice president of the company, and the man who dominated the board was the plaintiff’s man.

    The plaintiff himself plainly came into the case —

    Felix Frankfurter:

    What — what’s the —

    Marland Gale:

    I beg your pardon.

    Felix Frankfurter:

    What is the basis for that last statement of yours, namely, the dominant hand on the board of the plaintiff?

    Marland Gale:

    The basis of that is set forth in our brief on pages 10 to 11 that — the 13 of each — each facts stated there comes out of the mouth of Mr. Crummer, the plaintiff or his personal counsel Mr. Whitehair.

    Felix Frankfurter:

    Is that printed in this record?

    Marland Gale:

    No, in our brief and the brief of —

    Felix Frankfurter:

    No, but —

    Marland Gale:

    It’s all in the record, yes sir.

    Felix Frankfurter:

    Yes, all right.

    Marland Gale:

    Oh, yes.

    Felix Frankfurter:

    All right.

    Marland Gale:

    It was in the record before the District Court.

    Over those long pretrial hearings, he was made clearly familiar with these facts.

    And there was never any —

    Felix Frankfurter:

    Who was the pretrial —

    Marland Gale:

    I beg your pardon?

    Felix Frankfurter:

    Who was the pretrial —

    Marland Gale:

    Judge Knoch.

    Felix Frankfurter:

    Pardon me, Judge Knoch.

    Marland Gale:

    Judge Knoch, yes.

    We did a lot of sifting down.

    Now, I submit that if that kind of a long procedure is disregarded as you’re just rendering nugatory, all the discovery and pretrial proceedings or one who would be doing that which have been so carefully developed to help simplify issues and reduce a trial.

    I don’t think that pretrial procedures necessarily must follow — must result on a trial.

    Every single fact on — from pages 10 to 15 of the brief of National City Lines is documented in this record and it comes from Mr. Crummer.

    Mr. Crummer claimed before the directors in as far as stockholders’ meeting, two months before the first demand was claimed, he claimed and I quote from page 176 that he had around 100,000 shares he could deliver of this company that had 500 hundred shares.

    “Here is a derivative stockholder’s suit by the biggest stockholder.”

    And before that, he wanted to have representation on the board.

    He went to Mr. Francis B. Whitehair who for the 20 years as they both testified and sworn that there’s notice read about this with Mr. Crummer’s personal attorney.

    Mr. Whitehair made arrangements to go around.

    He got on the board with another man.

    He’s elected.

    In the short time, he became an Executive Committee.

    Within about a year, he was the Executive Vice President and every single motion that was made to decline to bring suit was made by Mr. Crummer’s personal attorney.

    That’s why that the plaintiff was never amended.

    He made the motion.

    Someone else seconded it.

    Another big thing that Mr. Crummer did right away was to reorganize the legal department.

    Earl Warren:

    Well, Mr. Gale, is this — is this all proper on the demurrer?

    Marland Gale:

    I — I submit — I submit it’s not a demurrer.

    Earl Warren:

    It would seem to me that if it — if it was on a summary judgment, it would be one thing.

    You could use on this pretrial material but on — on a demurrer, should we take all of those things into consideration?

    Marland Gale:

    I submit it’s not a demurrer, Your Honor.

    It’s a speaking demurrer or a summary judgment and we’re entitled — we were entitled to put that in before the District Court and we did.

    Earl Warren:

    Well, what is — what are we arguing now, on a demurrer or on a summary judgment?

    Marland Gale:

    I’m arguing what the — whether on the hard realities of this record, if you’re going to cite a case in accordance with the undisputed facts or whether you’re going to decide that honest obstructions of jurisdiction and so on.

    I don’t think we have to worry about the — the inadequacies of the — of the complaint when we know, but what if the plaintiff has told us.

    If he had signed the supplementary complaint admitting certain things, he’d be out of the Court.

    I think he —

    Earl Warren:

    Well, I know but — but we’re at least entitled to know what we’re arguing about, whether we’re arguing a demurrer here or whether we are arguing a — arguing on a summary judgment.

    Now, I understood Mr. Doyle was saying that it was conceded by — by counsel that this was in the nature of a demurrer.

    Marland Gale:

    I — I never concede that, sir.

    Earl Warren:

    Well I — I may have misunderstood now.

    I may have misunderstood Mr. Doyle but that’s — that’s what I’m — understood him to say.

    Marland Gale:

    Right.

    Hugo L. Black:

    May I express upon the difficulty of these things?

    Marland Gale:

    Yes sir.

    Hugo L. Black:

    I’ve just read Judge Knoch’s motion.

    Marland Gale:

    Yes, sir.

    Hugo L. Black:

    I’ve read his opinion.

    He purports and not to be ruling on what you say.

    He makes no finding of fact.

    He says you had an answer and withdrew it and that it’s submitted to him on complaint to the motion to dismiss and the briefs.

    I do not understand how we can go beyond that in connection with this order.

    There were findings of fact.

    What you’re asking us to do it seems to me and maybe properly is that we look at all these affidavits and so forth that were put in here, even though the only rule on the motion to dismiss and on the ground that he stated that taking up the allegations of complaint one by one is — wasn’t enough.

    Marland Gale:

    All I can say to that is that he was fully informed and he said he was fully informed in the matter.

    Now —

    Hugo L. Black:

    If he said he is fully informed from the — from the question he pleads, he said you withdrew that you didn’t care to have it.

    You didn’t accept on the motion

    (Voice Overlap) —

    Marland Gale:

    I’m sorry, sir.

    I didn’t — let me — let me find that again.

    Tom C. Clark:

    They, whose against on it, but —

    Marland Gale:

    But the fact is that —

    Tom C. Clark:

    — you might see how we could do this unless you withdrawn the issue in someway in support of the summary judgment or we had some kind of findings of fact.

    It seems to me like we’re thrown back on the sufficiency of the complaint.

    I want to hear what he said.

    Marland Gale:

    I — I don’t find where he said we withdrew anything.

    Hugo L. Black:

    To this cause having come on order further in pretrial conference and so forth.

    All the defendants who were served from an ally, each of them having moved even though answers had previously been file that the complaint be dismissed for failure to state a claim upon which relief can be granted.

    Marland Gale:

    What page is that, sir?

    Hugo L. Black:

    The Court after we — page 285.

    Earl Warren:

    285.

    Marland Gale:

    Oh.

    Hugo L. Black:

    And the Court has again argued with the counsel having permitted to have motion as we presented.

    The Court has a very extensive oral argument, thereupon presented for both in having read written briefs by — or said defendants counsel haven’t fully considered the same and hasn’t studied them thoroughly, fully advised of the merit, having filed a memorandum opinion, he dismissed it

    Marland Gale:

    But the memorandum opinions —

    Hugo L. Black:

    Now, in his memorandum opinion, he does not rest on the evidence as I read it.

    Marland Gale:

    Well, the memorandum —

    Hugo L. Black:

    He rests on a holding if the complaint doesn’t state a cause of action, maybe it does.

    Marland Gale:

    Yes.

    His memorandum opinion goes farther, but I submit that at the case of this point when the defendants or the plaintiffs have admitted themselves out of the Court as I say they have, this Court need not fail to take those facts into consideration.

    Hugo L. Black:

    If Judge Knoch had ruled on that, that will be one thing.

    But did he rule on it?

    Marland Gale:

    Well, considering —

    Hugo L. Black:

    Did he say that?

    Marland Gale:

    — he had it before him and he came up result in our favor.

    Now, I don’t know what his mental process is where he say it.

    Felix Frankfurter:

    Mr. Gale, I don’t see why you — why you argue this point.

    If it appears in our record, although nobody had taken notice of it, neither judge nor counsel but if it appears of the record that there is no diversity, then this Court must take notice of it sua sponte of its own motion because there is no jurisdiction and jurisdiction warranting we can’t act on.

    Marland Gale:

    That’s exactly my —

    Felix Frankfurter:

    I don’t call you could go on with denial.

    Marland Gale:

    — contention, sir.

    Hugo L. Black:

    Now, may I say to you that I don’t have to give an argument with my brother on advance.

    Hugo L. Black:

    I’m fully familiar with that rule.

    I’ve heard that before.

    What you have here is a diversity if the complaint alleges to that to show there is hostility between them and, or if it would have shown the same thing or that it is whatever it takes, or it — it would be the same thing if they’d gone through what Judge Barnes said in heard evidence and had a fact of finding of such things.

    Now, where do you have here anything that compels us to say to what Judge Knoch said or anybody else said that a judge could not rule on anything except that the complaint wasn’t enough.

    Now, if it be true that there’s enough in their complaint to show the kind of — of fighting between the — the plaintiffs and the directors to make them have adverse interest and of course there’s no diversity applied, there is no difference to the party.

    You don’t have a diversity necessary, but do you not have to go back and look to see about the complaint.

    Marland Gale:

    May I suggest that if we’re sent back for retrial, we’ll do exactly the same thing before Judge Knoch who introduced the same deposition for the last readmissions and then the — he will be compelled —

    William J. Brennan, Jr.:

    Well, may I make the comment Mr. Baker strikes me with to be here seven years after the filing of the complaint on the procedural point, all of which might well have been avoided had Judge Barnes’ original notion been followed through, he is extremely unfortunate.

    We talk about delay in litigation.

    But here, we’re arguing here today for a couple of hours on the procedural point after two years or seven years, rather.

    Marland Gale:

    You address that question —

    Felix Frankfurter:

    And before you sit down Mr. — Mr. Gale —

    Earl Warren:

    Now, just one at a time.

    Felix Frankfurter:

    I want to state it clearly that I do not think Judge Knoch ruled on the question of diversity jurisdiction.

    I do not read his opinion so.

    I read the opposite.

    What I’d say is, what my view is that we are not restricted in a record before us to what the complain says or what Judge Knoch said or what anybody else says if the record discloses to us on our search of the record that there is not the necessary jurisdiction of diversity.

    Marland Gale:

    Thank you.

    Earl Warren:

    Mr. Doyle.

    James E. Doyle:

    Your Honor, I do understand that the Court contended that each side should have a little —

    Earl Warren:

    Yes, sir.

    Yes sir, you have 20 minutes.

    James E. Doyle:

    And Your Honor, I would like to devote just a few moments in this portion of my argument to the matters, which the Court had just been — about which the Court has just been questioning counsel about what happened procedurally in this case.

    And then, if I may, I’d like to move on to state our position about what the rule of alignment should be in — that governs in this diversity cases but still speaking now about the procedural history of the case.

    I wish first to call the Court’s attention to the record, page 261.

    261 of the record is the motion by Bernard J. Fallon by his attorneys and that’s the motion on which Judge Knoch ruled.

    No other motion, not motions that were made and overruled by Judge Barnes two and a half or almost two and half years earlier, but this motion —

    Felix Frankfurter:

    Is it your view, Mr. Doyle that we are restricted on this review in the ascertainment of whether or not they were proper aligned — proper, — there was diversity jurisdiction.

    Is it your view that we are restricted here to review in what Judge Knoch did?

    James E. Doyle:

    No, sir.

    Felix Frankfurter:

    All right.

    James E. Doyle:

    No, sir.

    The point I just made was in response to what I believe was in the accurate statement made to the Court by counsel that there was something more before Judge Knoch than a motion to dismiss which the moving party conceded was a demurrer.

    That’s what he considered he was doing, was demurring and that’s what Judge Knoch passed on.

    Now, Your Honor, if I may respond next to the suggestion which — with which I agree that at any time at any Court, District Court, Court of Appeals or Supreme Court of the United States discovers on the phase of the record that there is a jurisdiction —

    Hugo L. Black:

    All of it.

    James E. Doyle:

    All of the record, that there is a jurisdictional —

    Hugo L. Black:

    Have you heard any disagreement on that?

    James E. Doyle:

    Sir?

    Hugo L. Black:

    Have you have heard any disagreement between people about that?

    I thought the disagreement here was the argument or you claimed that it’s enough to show from this record that there is an adverse interest between these parties and they claim there’s not.

    That’s basic isn’t it to determining whether there’s diversity of jurisdiction.

    Of course, you look at the whole records.

    Felix Frankfurter:

    But you’re not restricted to the complaint that we heard a minute ago, and you’re not restricted to what Judge Knoch found.

    You work — you worked — the whole record is open and if that record discloses, I want a diversity in this Court without jurisdiction because the law called it without jurisdiction.

    James E. Doyle:

    Well, I would concede that that’s the fact that any Court, or this Court, the Court of Appeals or the District Court might look at the complaint alone and decide that the allegations of the complaint are insufficient for jurisdictional purposes, that either they are insufficient or they’re not sufficient.

    Hugo L. Black:

    They might look at all the evidence of both sides that had an ample opportunity to try that out.

    James E. Doyle:

    Exactly.

    Hugo L. Black:

    And you tried it out on that issue.

    James E. Doyle:

    Exactly.

    Hugo L. Black:

    Because if they were not, they were adverse interest.

    James E. Doyle:

    Exactly and — and no Court, no —

    Felix Frankfurter:

    Whether you tried it out unnoticed, the defendant makes concessions no matter in what circumstance, is that enough?

    James E. Doyle:

    Your Honor, the deposition —

    Felix Frankfurter:

    I’m not —

    James E. Doyle:

    The deposition that —

    Felix Frankfurter:

    Mr. Doyle, I’m not suggesting such as the fact I do not know.

    James E. Doyle:

    I beg your pardon.

    Felix Frankfurter:

    I’m trying to get a rule of law.

    I do not know.

    Felix Frankfurter:

    I’m at the slightest notion because I’m going through this record.

    I’m concerned of the criteria by which I must judge the record.

    And I gather you agree that I can go through the whole record and find whether or not there is that diversity by people on both sides on the facts in this record which I may take account of, you disagree with that?

    James E. Doyle:

    I believe that this Court or any court may examine any proper record and find out whether there is some jurisdictional defect.

    And I — and now, I want to say though Mr. Justice Frankfurter and Mr. Justice Black and the whole Court that what has happened here is, and this is the literal truth about this record, a brief, — let’s go back to 1951.

    This is the motion to dismiss before Judge Barnes which Judge Barnes overruled way back there.

    A brief was filed by the defendants who Mr. Baker’s firm represents.

    Attached to that brief was an affidavit by counsel, Mr. Baker, to the affect that he had examined the depositions taken up to that point and he selected and I’m not suggesting anything improper about this.

    And for the purpose, he selected from those depositions certain portion of the deposition.

    That’s what’s in this printed record in this Court and nothing else, nothing else.

    No — no — they’re not all a deposition.

    And — and Your Honor, it isn’t as if what suggested here jurisdictionally is that suddenly here in the Supreme Court, the Court itself notices that — that one of these plaintiffs is not a citizen of Nevada but it’s actually a citizen of Illinois or some gross jurisdiction defect of that kind.

    What’s suggested here is that on the rules of alignment, whether or not there is this sufficient antagonism as between the plaintiffs and those in control of the corporation, that — that’s the jurisdictional defect that’s suggested.

    And it’s — with respect to that question, that counsel here now seeks just to page through excerpts of depositions, which they themselves pick and find things which they suggest our admissions with respect to whether or not this hostility occur.

    Felix Frankfurter:

    May I ask you this?

    I’ve gathered from what you’ve just said that they did not go up to the Court of Appeals the whole record below, is that correct?

    James E. Doyle:

    That’s correct, definitely.

    Yes sir.

    Felix Frankfurter:

    They must have gone up as one of the questions to be considered by the Court of Appeals whether there was or wasn’t diversity jurisdiction.

    Was that not an issue in going up to the Court of Appeals?

    James E. Doyle:

    It wasn’t the holding in the District Court nor was —

    Felix Frankfurter:

    I’m asking.

    I don’t know.

    I’m —

    James E. Doyle:

    Oh no, no sir, that the —

    Felix Frankfurter:

    Do you mean that when you went up —

    James E. Doyle:

    Only in the sense that jurisdiction is always open in the —

    Felix Frankfurter:

    No, no, no, but I mean that was not one of the —

    James E. Doyle:

    No, no definitely not.

    Felix Frankfurter:

    So, you went up — the briefs — I think there’s some — it’s not wholly good, but the assignment of error were abolished that when you went up on appeal to the Court of Appeals, he went out by agreement or by formulation, merely on — on the corrections of Judge Knoch’s ruling.

    James E. Doyle:

    We went up on that — on that ground and that’s what we — when we said Judge Knoch was wrong in saying that that there’s this rule of equity.

    Felix Frankfurter:

    (Voice Overlap) but was — was the questions of diversity not raised before the Court of Appeals?

    James E. Doyle:

    Oh, no, no —

    Felix Frankfurter:

    Did they — the Court of Appeals pulled this off the sky?

    James E. Doyle:

    No, no I beg your pardon.

    Now, that — that’s what Judge Knoch held.

    We objected to Judge Knoch’s holding and appealed from his ruling.

    We designated portions of the record of — with our view that this was a demurrer.

    Counsel designated additional portions and then in the Court of Appeals, they raised that — in the Court of Appeals, they took the position that in order to dismiss the complaint can be sustained on any one of a number of — of questions, and one that Judge Knoch or the jurisdictional question or will attack on a processes of the bankruptcy court which is another thing in the background here.

    Felix Frankfurter:

    What you — what you’ve said that is disturbing to me, if the record bears it out.

    Namely, that the record was prepared with reference to Judge Knoch’s ruling as to the question of equity, not diversity.

    James E. Doyle:

    It was by the appellants, by us.

    Yes, sir.

    Felix Frankfurter:

    That it went up to the Court of Appeals on that issue that the diversity problem wasn’t properly before the Court of Appeals.

    But nevertheless, on a mutilated portion of the pretrial evidence, they did rule on that.

    James E. Doyle:

    That is the point, and Your Honor —

    Felix Frankfurter:

    That — that is — if that is so, nothing could be more disturbing to me.

    James E. Doyle:

    Well, the Court understands the disturbance of counsel for the petitioner as about what happened here and — and Your Honor, I — let me just add this about that.

    I believe that the respondents were entirely free in the Court of Appeals to contend as they did, that any one of a number of grounds would sustain the order of dismissal below.

    I believe that’s good law including this fact that there was improper alignment.

    That was a proper thing for them to raise there.

    But if that was what disturbed the Court of Appeals, then the Court of Appeals should have said, “There are factual questions underlying this alignment thing.

    We’ll send it back for the District Court and let the District Court — let everybody square off here on the factual questions that — that underline the alignment problem and let the District Court have a hearing and let people produce what they will on that point and let the District Court make its findings.”

    Felix Frankfurter:

    But we have the briefs before the Court of Appeals, are they available?

    James E. Doyle:

    Yes, sir.

    William J. Brennan, Jr.:

    Well, may I ask —

    Felix Frankfurter:

    If it’s all right, I hope we can get them.

    William J. Brennan, Jr.:

    Mr. Doyle, looking at your record in the Court of Appeals as you said your notice of appeals in Judge Knoch’s order and your statement of points at 294 apparently go only to whether the complaint did or did not state a cause of action.

    And then, your designation of the record at 296 seems to include only those things appropriate to that issue.

    James E. Doyle:

    Not 296, Your Honor, our designation is back at 292.

    William J. Brennan, Jr.:

    That’s right, 292.

    But then, I noticed that your adversaries getting at 296 designated all the material we’ve been discussing.

    James E. Doyle:

    Yes sir.

    William J. Brennan, Jr.:

    But then, there’s a stipulation at 302 which currently you signed, which in addition makes part of the record, the depositions of Mr. Traer and Clinch.

    Now, in what — what bearing did those depositions have on the only issue apparently argued in ways by your statement of points?

    James E. Doyle:

    Your Honor, we took the position — may I be excused for just a moment to —

    Earl Warren:

    Yes.

    James E. Doyle:

    If — if Your Honor, we believe we did take the consistent position that the record in the Court of Appeals should be a demurrer record.

    The appellees did include other items.

    I understand now from our counsel of record, Mr. Scolnik, that the stimulation to which you refer is a stipulation to the effect that the originals of certain deposition may be used very well in copies and that’s all, and we didn’t intend to concede anything about the propriety of having those —

    William J. Brennan, Jr.:

    Well, now, did you brief the diversity point at the Court of Appeals?

    James E. Doyle:

    Yes sir.

    William J. Brennan, Jr.:

    In your main brief or in your reply brief?

    James E. Doyle:

    In our replied brief.

    We — we briefed —

    William J. Brennan, Jr.:

    Without supplementing the record — with all of the material.

    James E. Doyle:

    That’s true.

    That’s correct, but we — we did not consider that that was the appropriate place to argue the facts about the jurisdictional question.

    Your Honor, I believe it is uncommon on the petitioners to express their views of the law involved in this — the rule of law involved here about the alignment and the diversity jurisdiction, and I’d like if I may to proceed to that.

    Earl Warren:

    If you please.

    James E. Doyle:

    Everything that has been said in connection with this argument about what happened procedurally in the case, in everything that we have said here as to whether the complaint is sufficient.

    In all of that, we have proceeded on the — we have accepted for that purpose the assumption that there is a requirement for alignment purposes that there must be some wrongful — something wrongful about the refusal to sue that as counsel here conceded that there — that there must — that the plaintiffs must show some improper motives on the part of those who refused the suit, and we‘ve conceded that.

    I say we assumed that for purposes of this discussion up to here and we have contended that our complaint needs that requirement if there is such a requirement, that the — that is that there was a sufficient hostility and that there is domination and so on and we refer to things in the complaint which we think carried that out.

    We do in our brief contend and I want to state the contention here that it is not the law as decided by this Court in its decisions or by this Court through the rule making power or in any other way.

    It is not the law that the plaintiffs for purposes of jurisdiction, for purposes of alignment, proper alignment of the corporation must either allege or prove improper motives on the part of the directors in their refusal to sue.

    We do — now, I want to say at this point that we do not concede that that’s the law, and we believe that the law is — and the only requirement for purposes of alignment and jurisdictional diversity purposes, the only requirement is that the refusal on the part of the directors to sue must be real, not feign.

    Real, not feign and we quote that language several times in our briefs.

    It comes from Doctor and Harrington quoting it I believe from Dodge and Woolsey which is the — the beginning leading case reading in point of time in this whole series of cases.

    Harold Burton:

    And that satisfies the test of hostility to make it real and not feign?

    James E. Doyle:

    Yes, sir, but the word “hostility” or “antagonism”, we — we would suggest there’s a better word that there is in truth a conflict, not a — not a collusive one.

    James E. Doyle:

    They’re not a collusive situation but that there is in truth a conflict between these plaintiff’s stockholders and the management of the corporation as to whether or not this suit should be brought.

    Now, I don’t suggest, Your Honor, it is the moment I don’t suggest that I’m talking now about the equitable basis for a stockholder suit once you’re in Court.

    That’s a separate question on which we would like some time to be heard in this case, but — but I’m saying that for purposes of alignment and for the application of the rule of the Indianapolis case or for any of the cases that I’ve held that there must be a genuine difference that separates this plaintiff’s stockholders from the corporation.

    For those purposes, I say that the question must be whether the refusal was real and not feign, Your Honor.

    Now, we cite as one authority for that proposition a case decided by this Court, Chicago against Mills in 204 U.S.two years after Doctor and Harrington which we believe is a wholly, and which we believe it was necessary to a holding in a case and it was a jurisdictional case that this proposition be recognized.

    In other words, in Chicago against Mills, the directors had refused — the directors of a utility company in Chicago had refused to bring a suit to enjoin the enforcement of a certain rate regulation of the City of Chicago and it was admitted.

    I shouldn’t say admitted.

    It was in the pleadings that the reason they refused to bring the suit was they thought that if they brought such a suit, they’d get in trouble with the city council of Chicago and that the Mayor would get after him and that they’d have a of political trouble in Chicago.

    So, they decided for what the Court called prudential reasons, not to — not to bring the action.

    The plaintiff’s stockholder from another state then brought the action.

    There was a long and it involves procedural history of that case too.

    Ultimately, it came to this Court on the question of jurisdiction and you’ll understand there’s no suggestion of hostility on the part of the directors who refused the suit toward the plaintiff who brought it, but only a genuine disagreement, and — and it was also suggested of course by the defense that this was collusive.

    The collusion question was — was explored below and also explored in the Supreme Court, and they held there was no collusion, and then the Court held that there was federal jurisdiction.

    William O. Douglas:

    Another way stating that then Mr. Doyle in your position is that if there’s a bona fide, honest refusal on the part of the corporation to bring the action, no matter what the motivation may be, that’s suffices doing that to establish diversity.

    James E. Doyle:

    Or the purpose of where the corporation should be aligned and then you apply the diversity rule and you either admit it or you don’t.

    Felix Frankfurter:

    But in the Koster case, Mr. Doyle as you well know this Court speaking from Justice Jackson that this is a proceeding for public and corporate interest against faithless for these frames against faithfulness in the record.

    James E. Doyle:

    That’s what we have in this case allegedly.

    Felix Frankfurter:

    Well the, I thought I’ve already said I don’t — for all I know, you got it overwhelmingly.

    All I’m saying is one searches for test when he is — and its faithlessness and it’s not error of judgment.

    James E. Doyle:

    Oh, but Your Honor, you’re talking about the faithless directors who committed the fraud, not the —

    Felix Frankfurter:

    I’m — I’m talking about the faithlessness of those who reach — I’m talking about the faithlessness of those who control the policy of the corporation.

    James E. Doyle:

    Your Honor, the problem in this case arises from the fact that the composition of the board of directors changed somewhat between the time that the wrongs were complained of and the time when the demand was made.

    Felix Frankfurter:

    Well, that — that still — that still gives — still gives corporate discretion to those who are in charge of the corporation to determine in good faith the opposite of faithlessness to determine in good faith in the first place whether there is a reasonable cause of action.

    In the second place, whether as a matter of policy, lots of people have causes of action which is a matter of policy.

    They do not pursue without being faithless.

    James E. Doyle:

    Yes, sir.

    Justice Jackson surely meant in the context of that opinion that the stockholder suit is a device to redress wrongs by faithless directors who commit frauds against the corporation, and that’s what this lawsuit is all about if we ever get to it.

    Felix Frankfurter:

    But maybe —

    James E. Doyle:

    But — but on your point, Your Honor —

    Felix Frankfurter:

    I meant merely — merely because the board of directors, either they committed the act to the — to the — a sale or the board of directors in charge of the corporation after the directors have committed them are gone.

    Felix Frankfurter:

    They exercised a discretion that may be foolish, that may be unwise but that isn’t enough to make them — to make the corporation that acts on such advice or — or both of a party hostile to the plaintiff, does it?

    James E. Doyle:

    That’s — that’s not what the Court decided in Chicago against Mills two years after Doctor and Harrington, Your Honor.

    Felix Frankfurter:

    Well, then I misunderstand the cases.

    James E. Doyle:

    And may I say one word —

    William J. Brennan, Jr.:

    Well, Mr. Doyle, do you mean this for example?

    Suppose in all good faith, the board of directors says it’s useless to bring this lawsuit because if we get a judgment, we can’t recover it.

    Why waste the money of the corporation prosecuting the suit in the time of its officers and directors, which will be taken up from the prosecution, and that’s the reason.

    Now, it’s an entirely bona fide honest refusal on that ground.

    Are you suggesting to us that that’s enough to establish the right of a plaintiff to have a corporate align — the corporation aligned as a defendant?

    James E. Doyle:

    Yes sir, if the disagreement between the — a plaintiff stockholder and the director is genuine.

    Then for the alignment purposes —

    William J. Brennan, Jr.:

    Well, Mr. I’ve given you the hypothesis.

    James E. Doyle:

    Yes, sir.

    William J. Brennan, Jr.:

    I’ve given you the hypothesis.

    That’s a pure business judgment on the part of the board of directors, very honest one that there’s no use in wasting time prosecuting a lawsuit merely for the fun of prosecuting a lawsuit.

    James E. Doyle:

    That’s our position, Your Honor, but if I may just add one word and I’ll stop here.

    The — we have — scrupulously, I believe it’s true, a discussion of facts which we do not think are appropriate to the consideration of this case in this Court.

    What I cannot in the face of what’s been said particularly by Mr. Gale stopped my argument without just making this statement which I’ll term a sort of an offer of proof.

    If we ever have the opportunity to try the jurisdictional facts that underline the alignment question, we believe that we can show that a majority of the directors as of 1949 when the refusal to sue occurred.

    On the basis of the complaint, we can link that up and show that five of nine were involved in the conspiracy alleged.

    Do you want these briefs Your Honor?

    Earl Warren:

    Yes, you might give them to the Court, if you please.

    James E. Doyle:

    All right, sir.