Bagdon v. Bridgestone/Firestone, Inc.

United States Court of Appeals for the Seventh Circuit · 1990 · Corporations

916 F.2d 379 (7th Cir. 1990)

Updated August 22, 2026

Corporationsshareholder derivative suitsdiversity jurisdictioninternal affairs doctrinederivative actiondirect actionspecial injuryindispensable party

Facts

Firestone and Edward Bagdon had incorporated the Ford City West Firestone store, with Firestone owning 51% and Bagdon 49%. After Firestone acquired J.C. Penney auto centers, it reopened a former Penney center 700 yards away as another Firestone store, Ford City East, which Bagdon claimed diverted business from Ford City West. Bagdon's complaint sought damages for reduced profits at Ford City West, as well as for alleged personal fraud and loss of bonus. The store-corporation was incorporated in Delaware and had its principal place of business in Illinois, so if it had to be joined as a defendant, diversity would be destroyed.

Issue

Whether Bagdon's claim that Firestone wrongfully competed with Ford City West by opening Ford City East was a derivative claim belonging to the corporation or a direct claim belonging to Bagdon individually. If derivative, the further issue was whether the corporation had to be joined as an indispensable party, defeating diversity jurisdiction.

Rule

When a shareholder can prevail only by showing injury or breach of duty to the corporation, the action is derivative. Under Delaware law, a claim is derivative if the shareholder's injury is mediated through the corporation, subject to a narrow 'special injury' exception for distinct and disproportionate personal injury; in derivative suits, an unwilling corporation must be aligned as a defendant and is an indispensable party for diversity purposes.

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In Detroit, Lakeshore Tool Supply, Inc., a Delaware corporation, is owned 52% by Nolan Pierce and 48% by Maya Rios. Nolan causes a separate company he controls to open across town and route several profitable commercial accounts away from Lakeshore, reducing Lakeshore's earnings; Maya sues Nolan personally in federal court seeking damages for the drop in her dividends and the decline in the value of her shares.

Under the governing rule, Maya's claim is most likely

Explanation. A claim is derivative when the shareholder can prevail only by showing an injury or breach of duty to the corporation. Here, Maya's alleged loss of dividends and share value is mediated through Lakeshore's lost business, so the duty runs to the corporation and the claim is derivative. The majority rejected efforts to relabel reduced corporate profits as a personal shareholder injury. (Derived from Bagdon v. Bridgestone/Firestone, Inc. (1990).)