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Price v. Gurney

Supreme Court of the United States
324 U.S. 100, 65 S. Ct. 513, 1945 U.S. LEXIS 2707 (1945)
ELI5:

Rule of Law:

The authority to file a voluntary corporate reorganization petition under Chapter X of the Bankruptcy Act rests with the corporation's board of directors as determined by state law, and stockholders cannot file such a petition on the corporation's behalf through a derivative action in bankruptcy court.


Facts:

  • Western Tool & Manufacturing Co., an Ohio corporation, defaulted on its bonds, leading to over 50% of its stock being placed in a voting trust controlled by the bondholders.
  • Members of the bondholders' committee also served as voting trustees, directors, and officers of the corporation, creating conflicting fiduciary duties.
  • The trustee for the bondholders initiated a foreclosure action in an Ohio state court, and a judgment of over $134,000 was entered against the company.
  • A stockholder, the respondent, alleged that the directors were mismanaging the company solely for the benefit of the bondholders and against the interests of the stockholders.
  • The respondent claimed the stockholders' equity would be lost in the foreclosure and that the voting trust was illegal and had expired.
  • After an unsuccessful attempt to have the corporation's management file for bankruptcy, the respondent filed a Chapter X reorganization petition in the company's name, asserting that the board was not legitimate.

Procedural Posture:

  • A trustee for bondholders filed a foreclosure petition against Western Tool & Manufacturing Co. in an Ohio state court.
  • The state court entered a judgment against the company and appointed a receiver.
  • A stockholder (respondent) filed a Chapter X reorganization petition in the name of the corporation in U.S. District Court.
  • The bondholders' committee and the corporation filed motions to dismiss the petition, arguing it was not authorized by the board of directors.
  • The District Court, a court of first instance, granted the motions and dismissed the petition.
  • The stockholder (appellant) appealed to the U.S. Circuit Court of Appeals.
  • The Circuit Court of Appeals (intermediate appellate court) reversed the District Court's dismissal.
  • The bondholders' committee and the corporation (petitioners) successfully petitioned the U.S. Supreme Court for a writ of certiorari.

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Issue:

Does a federal bankruptcy court have the authority to entertain a Chapter X reorganization petition filed by a stockholder on behalf of a corporation when the corporation's board of directors has not authorized the filing?


Opinions:

Majority - Mr. Justice Douglas

No. A bankruptcy court lacks the authority to entertain a reorganization petition filed by a stockholder on behalf of a corporation without authorization from the board of directors. The power to initiate a bankruptcy proceeding is a matter of corporate management, which, in the absence of a federal incorporation statute, is governed by state law. Chapter X of the Bankruptcy Act explicitly grants the right to file a petition to the corporation itself, creditors, or an indenture trustee, but not to stockholders. While stockholders have rights to participate after a petition is filed, they do not have the right to initiate the proceedings. The respondent's attempt to frame the filing as a derivative action is a misnomer; a derivative suit seeks to enforce a corporate cause of action against a third party for the corporation's benefit, which is distinct from initiating a bankruptcy proceeding. The bankruptcy court's jurisdiction does not extend to settling internal corporate disputes over who has the authority to act for the corporation prior to the proper filing of a petition. Any expansion of the bankruptcy court's jurisdiction to hear such intracorporate disputes is a matter for Congress, not the judiciary.



Analysis:

This decision reinforces the principle that federal bankruptcy courts are courts of limited statutory jurisdiction and must respect the separation between federal bankruptcy law and state corporate governance law. It clarifies that the initiation of bankruptcy is a management function, controlled by the board of directors under state law, not a shareholder right. The ruling prevents stockholders from using the bankruptcy process as a tool to circumvent state law and seize control from management in an internal power struggle. Consequently, stockholders with grievances against a board's refusal to file for bankruptcy must first seek remedies in state court, such as a derivative suit to compel board action or a suit to appoint a receiver, before the corporation can be brought into bankruptcy.

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