Cohen v. Beneficial Industrial Loan Corp.
337 U.S. 541 (1949)


Facts: Cohen (P) was required under state statute to post security bond for expenses in a shareholder derivative action suit. The district court denied D's motion for the bond. P's initial complaint alleged that since 1929, the individual defendants engaged in a continuing and successful conspiracy to enrich themselves at the expense of the corporation. The assets that were alleged to be wasted or diverted were in excess of $100,000,000. A demand was made to the corporation but it was prevented from addressing the issue as Ds controlled the company board. P sued in 1943 and in 1945 New Jersey enacted the statute that required the posting of a security bond for expenses in a shareholder derivative action suit. The court of appeals reversed and the Supreme Court granted certiorari.

Issue:Must a federal court hearing a stockholder's derivative action based only on diversity jurisdiction apply the law of the forum state and require a plaintiff to provide security for the payment of costs if he or she is ultimately unsuccessful?

Rule:A statute requiring that a bond be posted before a shareholder brings a derivative suit is both constitutionally permissible and sufficiently substantive to be applied by a federal court sitting in diversity.

Holding & Analysis Plaintiff filed a shareholder derivative complaint that alleged defendants engaged in a continuing and successful conspiracy to enrich themselves at the expense of the corporation. Plaintiff alleged mismanagement, fraud, and that corporate assets were wasted or diverted. The issue presented was whether a federal court was required to apply which rendered plaintiff liable for the reasonable expenses and attorney's fees of the defense if plaintiff was unsuccessful in her shareholder suit. Also entitled the corporation to require security for the payment of the defense expenses. The court held that the New Jersey statute applied in federal courts, and the district court erred in declining to fix the amount of indemnity reasonably to be exacted as a condition of further prosecution of the suit. The court affirmed the judgment of the appellate court and noted the deterring effect of the statute to shareholder suits. The court held that it was within the power of the state to require security for the payment of defense expenses in the event plaintiff was unsuccessful in her shareholder suit.