## Facts

- A small shareholder’s estate brought a shareholder derivative action on behalf of Beneficial Industrial Loan Corp., a Delaware corporation doing business in New Jersey, in federal court based on diversity jurisdiction.
- The complaint alleged long-running mismanagement and fraud by managers and directors that wasted or diverted substantial corporate assets.
- The plaintiff owned 100 shares out of more than two million outstanding; the plaintiff and an intervenor together held about 0.0125% of the shares, with a market value never exceeding \$9,000.
- While the action was pending, New Jersey enacted a statute allowing courts, in derivative suits by small shareholders (under 5% ownership and under \$50,000 market value), to require the plaintiff to post security for the corporation’s reasonable expenses, including counsel fees; the statute applied to pending and future actions.
- The corporation moved to require a \$125,000 bond as security for potential defense expenses.

## Issues

1. Whether an order denying or granting security for expenses under the New Jersey statute is immediately appealable as a “final decision” under 28 U.S.C. § 1291.
2. Whether the New Jersey security-for-expenses statute is constitutional as applied to derivative plaintiffs, including challenges under the Contract Clause, Due Process Clause, Equal Protection Clause, and retroactivity limits.
3. Whether a federal court sitting in diversity must apply the New Jersey statute or may disregard it as a procedural rule displaced by federal procedural law.
4. Whether the statute applies when the corporation is incorporated in another state (Delaware) but sued in New Jersey.

## Decision

- The Supreme Court held the security order is immediately appealable under 28 U.S.C. § 1291 because it conclusively resolves a separable claim of right independent of the merits.
- The Court upheld the New Jersey statute against federal constitutional attack, including Contract Clause, due process, and equal protection challenges.
- The Court held the statute applies in federal diversity litigation because it creates a state-law liability for litigation expenses and a condition on maintaining the derivative action, not merely a court-management rule.
- The Court held Delaware incorporation did not prevent New Jersey from applying its security-for-expenses statute to a derivative suit brought in New Jersey involving a corporation doing business there.

## Legal Principles

- An order that finally determines a claimed right separate from the merits, and not reviewable effectively after final judgment, may be treated as appealable under § 1291 (collateral-order rationale).
- A state may condition the maintenance of shareholder derivative suits on the posting of security for reasonable defense expenses when the plaintiff’s ownership stake falls below specified thresholds.
- In diversity cases, federal courts must apply state laws that create or define substantive liabilities and conditions affecting the enforcement of state-created rights, even if federal procedural rules do not impose the same requirement.
- A forum state may apply its security-for-expenses requirement to derivative actions filed in its courts involving foreign-incorporated corporations doing business within the state.
- Applying such a statute to pending cases is not unconstitutional retroactivity when construed not to impose liability for expenses incurred before enactment or before security is ordered in the case.

## Conclusion

The Court treated a security-for-expenses ruling in a derivative suit as an immediately appealable collateral order and required federal courts sitting in diversity to apply the forum state’s security statute, upholding the statute’s constitutionality and its application to a foreign-incorporated corporation sued in the forum.


Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541 (1949)