Eisenberg v. Flying Tiger Line, Inc.
451 F.2d 267 (1971)
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Rule of Law:
A shareholder's lawsuit is a direct, representative action, not a derivative action, if the primary alleged injury is to the shareholder's individual rights, such as voting rights, rather than to the corporation itself. Consequently, such an action is not subject to state statutes requiring plaintiffs in derivative suits to post security for the corporation's costs.
Facts:
- Max Eisenberg was a stockholder in The Flying Tiger Line, Inc. (Flying Tiger), an operating airline company.
- In 1969, Flying Tiger executed a corporate reorganization by first creating a wholly-owned subsidiary, the Flying Tiger Corporation (FTC), which in turn created its own subsidiary, FTL Air Freight Corporation (FTL).
- Flying Tiger then merged into FTL, with FTL surviving as the new operating company and subsequently changing its name back to "The Flying Tiger Line, Inc."
- As a result of the merger, the original shares of Flying Tiger were converted into shares of the holding company, FTC.
- This restructuring meant that the original shareholders now owned stock in a holding company (FTC) rather than the operating company (the new Flying Tiger Line, Inc.).
- Eisenberg alleged that the purpose and effect of this reorganization was to dilute his voting rights and deprive him and other minority stockholders of any direct influence over the affairs of the operating company.
Procedural Posture:
- Max Eisenberg filed a class action lawsuit against The Flying Tiger Line, Inc. in the Supreme Court of the State of New York.
- Flying Tiger removed the action to the U.S. District Court for the Eastern District of New York based on diversity of citizenship.
- In the district court, Flying Tiger moved for an order requiring Eisenberg to post security for costs pursuant to New York Business Corporation Law § 627.
- The District Court granted Flying Tiger's motion and ordered Eisenberg to post a security of $35,000.
- After Eisenberg failed to post the security, the District Court dismissed his action.
- Eisenberg, as appellant, appealed the dismissal to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Is a shareholder's class action lawsuit seeking to enjoin a corporate merger that allegedly deprives shareholders of their voting rights in the operating company a direct, representative action rather than a derivative action, thereby exempting the shareholder from the security-for-costs requirement under New York Business Corporation Law § 627?
Opinions:
Majority - Kaufman, Circuit Judge
Yes, a shareholder's lawsuit challenging a merger that deprives them of voting rights is a direct, representative action. The core of the complaint determines the nature of the suit; if the alleged injury is to the stockholder individually, rather than to the corporation, the suit is direct and not subject to the security-for-costs requirement applicable to derivative actions. The court reasoned that the gravamen of Eisenberg's complaint was the deprivation of his personal right to vote on the affairs of the operating company—a right that belongs to the stockholder, not the corporation. The court distinguished and limited the precedent of Gordon v. Elliman, noting that the New York legislature amended its corporate law to specify that derivative actions are those brought to procure a judgment "in its [the corporation's] favor." Since Eisenberg's action does not seek a judgment for the benefit of the corporation but rather seeks to protect his own rights as a stockholder, it is a representative action. Therefore, the requirement to post security under New York Business Corporation Law § 627 does not apply.
Analysis:
This decision clarifies the critical distinction between direct and derivative shareholder lawsuits under New York law, particularly in the context of corporate reorganizations. By limiting the expansive reach of the older Gordon v. Elliman precedent, the court makes it less burdensome for minority shareholders to challenge corporate actions that directly infringe upon their fundamental rights, like voting power. This ruling protects shareholders from the procedural hurdle of posting security for costs in such cases, thereby facilitating challenges against management actions that consolidate control at the expense of shareholder influence. The case establishes that the focus of the inquiry is on the nature of the harm—whether it is an injury to the corporation's assets or a direct impairment of a shareholder's personal rights.
