CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.
Stone, Black, Reed, Frankfurter, Douglas, Murphy, Rutledge, Burton; Jackson took no part in the consideration or decision of this case.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
Petitioners, residents of the City of New York, are holders of Class B debentures issued by respondent railroad company, a Wisconsin corporation. They brought this suit in the New York courts to recover amounts alleged to be due and payable under the debentures out of earnings in lieu of interest. On petition of respondent the
action was removed to the federal District Court for the Southern District of New York on the grounds of diversity. Respondent thereupon moved (1) to set aside the service because respondent was not doing business in New York and (2) to dismiss because the subject matter was concerned with the internal affairs of a foreign corporation. The District Court denied the first motion, but granted the second. 59 F.Supp. 98. On appeal the Circuit Court of Appeals affirmed by a divided vote, holding that the District Court did not abuse its discretion in basing its dismissal on forum non conveniens. 147 F.2d 777. We granted certiorari because of the importance of the question presented.
The Class B debentures, issued in 1896, have no maturity date. Their principal is payable "only in the event of a sale or reorganization" of the company and "then only out of any net proceeds" remaining after specified payments to the Class A debentures and to the stock. The covenant in the Class B debentures out of which this litigation arises is set forth below.*fn1 The Circuit Court of
Appeals was divided as to its meaning. The majority concluded that even though there were net earnings after the payments to the Class A debentures and to the stock, the directors had discretion to determine whether or not that sum should be paid to the Class B debentures. The court thereupon held, in reliance on Rogers v. Guaranty Trust Co., 288 U.S. 123; Cohn v. Mishkoff Costello Co., 256 N. Y. 102, 175 N. E. 529; Cohen v. American Window Glass Co., 126 F.2d 111, that the suit concerned the internal affairs of respondent and could better be tried in Wisconsin, the State of its incorporation. The minority thought that the amount of net earnings remaining after deducting the payments made to the Class A debentures and to the stock was to be paid to the Class B debentures, that the directors had no discretion to withhold such amounts, and that their payment involved nothing more than a ministerial act.*fn2 In that view the suit was substantially the same as one for a liquidated sum and would entail no interference with the internal affairs of a foreign corporation.
We leave open the question of the proper construction of the "net earnings" covenant in the Class B debentures. Although we assume that the majority of the court below
was right in its interpretation of the covenant, we think it was improper to dismiss the case on the grounds of forum non conveniens.
Rogers v. Guaranty Trust Co., supra, is the only decision of this Court holding that a federal court should decline to hear a case because it concerns the internal affairs of a corporation foreign to the State where the federal court sits. A corporation chartered by one State commonly does business in the farthest reaches of the nation. Its business engagements -- the issuance of securities, mortgaging of assets, contractual undertakings -- frequently raise questions concerning the construction of its charter, by-laws and the like, or the scope of authority of its officers or directors, or the responsibility of one group in the corporate family to another group. All such questions involve in a sense the internal affairs of a corporation -- whether in a suit on a contract the corporation interposes the defense of ultra vires, or a bondholder sues on his bond or a stockholder asserts rights under his stock certificate. But a federal court which undertakes to decide such a question does not trespass on a forbidden domain. See Williamson v. Missouri-Kansas Pipe Line Co., 56 F.2d 503, 510. Under the rule of Erie R. Co. v. Tompkins, 304 U.S. 64, a federal court in a diversity case applies local law. In conflict of laws cases that may mean ascertaining and applying the law of a State other than that in which the federal court is located. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487. The fact that the corporation law of another State is involved does not set the case apart for special treatment. ...