Opinion
CIVIL ACTION NO. 01-2014 SECTION "K"(4)
September 6, 2001
MINUTE ENTRY
Plaintiff's original complaint sought relief on behalf of himself and Chasse Marine Transportation, Inc. Although not characterized as a stockholders derivative claim, plaintiff requested remedies for himself and on behalf of the corporation. Plaintiff relied on 28 U.S.C. § 1332 as his basis for jurisdiction and submitted that he was a citizen of Mississippi and all members of the corporation and its board were residents of Louisiana. Pending resolution of the matter, plaintiff sought a temporary restraining order to prevent the defendants from selling or offering for sale any assets or stock of the corporation. At the hearing on the Motion for a Temporary Restraining Order, the Court raised the issue of subject matter jurisdiction and directed parties to submit briefs within 10 days discussing (1) the nature of plaintiff's claims, (2) whether or not certain claims could only be asserted in a derivative suit and (3) the effect of the derivative nature of those certain claims upon this Court's diversity jurisdiction. After the hearing, plaintiff amended sections of the complaint that sought remedy on behalf of the corporation. Upon review of the facts and the law, this Court finds that it has subject matter jurisdiction.
Federal Rules of Procedure Rule 15(a) clearly provides plaintiff the right to amend the original petition before a responsive pleading is filed. However, if the district court lacks subject matter jurisdiction under plaintiff's original complaint, 28 U.S.C. § 1653 prohibits amendment to create such jurisdiction. In Newman-Green Inc. v. Alfonso-Larrain, 490 U.S. 826, 831 (1989) the United States Supreme Court noted that district courts can permit amendments to "remedy inadequate jurisdictional allegations, but not defective jurisdictional facts." It further explained this limit on the district courts' power to authorize amendments stating, "never having had the power to act in the matter, the court never had any authority to permit an amendment to the complaint." The Fifth Circuit has described the scope of § 1653 as limited to curing "technical defects." Boelens v. Redman Homes, Inc. 759 F.2d 504 (5th Cir. 1985).
In this case, plaintiff's original complaint sought relief that would benefit himself and the corporation. As such, his cause of action was in part a shareholder derivative action on behalf of the corporation. In any derivative action, the corporation is required to serve a "dual role" and is considered to be a plaintiff seeking recovery and a nominal defendant. Robinson v. Snell's Limb's and Braces, Inc., 538 So.2d 1045 (La App. 4th Cir. 1989). Because plaintiff's basis for jurisdiction was founded in § 1332, an alignment of the corporation as a plaintiff and defendant in this case would destroy the Court's subject matter jurisdiction.
Even though plaintiff did not align the corporation as plaintiff and defendant in the complaint, the Court has a duty to "look beyond the pleadings and arrange the parties according to their sides in the dispute." 13B Charles Alan Wright, Arthur R. Miller, and Edward H. Cooper Federal Practice and Procedure § 3607, at 430-31 (1984) citing City of Dawson v. Columbia Ave. Sav.0 Fund, Safe Deposit, Title Trust Co., 197 U.S. 178, 180 (1905). The general test used to determine proper alignment is the "ultimate interest test" which it is intended to ensure that there is an "actual and substantial controversy between citizens of different states, all of whom on one side of the controversy are citizens of different states from all parties on the other side." City of Indianapolis v. Chase Nat. Bank of City of New York, 314 U.S. 63 (1941). However, courts have recognized the anomalous effect that the "ultimate interest test" would have on shareholder derivative suits.
The typical derivative suit in federal court is such that "a shareholder citizen of one state sues one or more officers or the board of directions of a corporation, a citizen or citizens of another state for diversity purposes and names the corporation as a defendant since it has been deemed an indispensable party." 13B Charles Alan Wright, Arthur R. Miller, and Edward H. Cooper § 3607, at 441-42 (1984). Considering any recovery will inure to the benefit of the corporation, its "ultimate interest" is in harmony with the non-resident plaintiff. But, while the "ultimate interest of the corporation made defendant may be the same as that of the stockholder made plaintiff, the corporation may be under control antagonistic to him." Id. Because the individual defendants are usually citizens of the same state as the corporation, application of the "ultimate interest test" and alignment of the corporation on opposite sides of the dispute would destroy diversity in most cases. Therefore, shareholder derivative claims have received "special dispensation" from the "ultimate interest" alignment test. Koster v. American Lumbermens Mut. Cas. Co., 330 U.S. 518 (1947)
Instead, a federal court considering realignment in a shareholder derivative action based on diversity jurisdiction, is required to determine the "issue of antagonism" between the parties "on the face of the pleadings and by nature of the controversy and determine whether management is antagonistic to the stockholder." Smith v. Sperling, 354 U.S. 91 (1957). While antagonism surely exists when plaintiff alleges fraud or misdeeds on behalf of the directors, "wrongdoing is not the sole measure." Smith at 95. Rather, the Supreme Court has described "antagonism" as any situation where "management is aligned against the stockholder and defends a course of conduct which he attacks." Id. The Supreme Court has also noted in another decision that "the attitude of the directors need not be sinister. It may be sincere. Whenever the management refuses to take an action to undo a business transaction . . . antagonism is evident." Delaware Hudson Co. v. Albany S.R. Co., 213 U.S. 435 (1909). In Smith, the district court aligned the corporation as plaintiff and defendant (and destroyed diversity) because it found there was no antagonism when all decisions by the corporate board of directors were based on an "exercise of independent business judgment." Rejecting the lower court's analysis, the Supreme Court cautioned district courts not to delve into the merits of plaintiff's cause of action or claim of wrongdoing on behalf of individual defendants when determining the "jurisdictional issue." Rather, jurisdiction hinges solely on the presence of "antagonism" between the parties and can usually be determined from the "bill and answer." Smith at 96.
A review of the complaint and answer reveals acute antagonism between the plaintiff and defendant. Since the original complaint was in some aspects a derivative claim, the court aligns Chasse Corporation as a defendant. Thus, there is a sufficient basis for this Court to maintain jurisdiction over the matter.