Cohen v. Beneficial Loan Corporation

United States District Court · 1946 · Corporations

69 F. Supp. 297 (1946)

Updated August 22, 2026

CorporationsStockholder derivative suitsPleadingderivative suitRule 12(b)(6)Rule 8(a)(2)no-par stockcorporate injury

Facts

Plaintiff stockholders brought a derivative suit alleging, among other things, that corporate officers and directors diverted assets, caused payment of salary to a person who rendered no services, manipulated valuations in a consolidation that led to issuance of no-par stock on inflated asset values, and caused large payments to an affiliate. The fifth cause alleged that 449,209 shares were fraudulently and unlawfully issued in a 1929 consolidation and that dividends paid on those shares from 1929 to 1945 were unlawful. The sixth, seventh, and ninth causes alleged broadly that payments and wrongdoing were illegal or ultra vires, but plaintiff asserted that examination of officers and directors before trial would disclose the details. Defendants argued these causes failed to state claims upon which relief could be granted.

Issue

Whether the challenged causes of action in this derivative suit stated claims upon which relief could be granted. More specifically, whether allegations concerning issuance of no-par stock and dividends showed damage to the corporation, and whether broadly conclusory allegations of illegal payments and wrongdoing satisfied federal pleading requirements.

Rule

In a stockholder derivative suit, the plaintiff's claim exists only if the corporation itself has a cause of action based on an invasion of corporate rights causing damage to the corporation. Under Delaware law, for an original issue of no-par stock, the amount of consideration is not controlling so long as the consideration is lawful in quality; therefore, disproportionate issuance based on inflated valuation does not by itself show corporate damage. Under the Federal Rules, a complaint must give fair notice through facts, not merely broad conclusory accusations or allegations made in hopes that discovery will uncover a claim.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Wilmington, a shareholder of Harbor Crest Finance, Inc., files a derivative action alleging that the company’s board approved a reorganization in which too many newly issued no-par shares went to one group of preexisting owners because a contributing division’s assets had been overstated. The complaint alleges that the plaintiff’s ownership percentage was diluted, but it does not allege that Harbor Crest lost assets or took on additional liabilities.

Should the court most likely dismiss the derivative claim for failure to state a claim?

Explanation. A derivative suit exists only if the corporation itself has a cause of action based on invasion of corporate rights causing damage to the corporation. Under the majority opinion, alleged over-issuance of original no-par shares based on inflated values may alter shareholders’ relative positions, but without corporate loss or increased liabilities it does not show damage to the corporate entity. (Derived from Cohen v. Beneficial Loan Corporation (1946).)