Brief Fact Summary. Plaintiff brought a stockholder’s derivative action in federal court. Defendant, Beneficial Industrial Loan Corporation, argued that a New Jersey state law requiring parties to secure a bond for payment of the opposing party’s legal fees should be followed.
Synopsis of Rule of Law. A shareholder’s derivative suit will follow state non-procedural laws regarding the derivative suits when possible.
Issue. The issue is whether New Jersey’s statute requiring the payment of legal fees in the event of an unsuccessful derivative suit should be followed by the federal courts.
Held. The New Jersey statute should be followed because the statute is not a procedural matter than would preempt federal rules. The statute is constitutional, and can be used on ongoing litigation, as long as the attorney’s fees covered are solely the fees accrued post-enactment of the statute. Further, the statute does not violate the Contract clause of the United States Constitution because the requirement to pay opposing legal fees is a justifiable necessity to prevent frivolous lawsuits.
Dissent. The dissent argued that the statute was aimed at procedural matters, and as such should be preempted by Federal Rules of Procedure.
Discussion. Shareholder derivative suits will still have to follow applicable state laws. States are within their rights to determine how they want to resolve competing interests, and plaintiffs are not going to be able to avoid the state statutes by claiming diversity and using the federal courts.