## Facts

- Minority shareholders of Shores-Mueller Co., an Iowa pharmaceutical manufacturer, brought a stockholder derivative action against former officers/directors and a related entity, Shores Co.
- In 1933, a state court appointed a receiver for Shores-Mueller, and the corporation’s assets were sold at a receiver’s sale; the receiver filed a final report in October 1933 and the receivership ended.
- Shores-Mueller had been inactive since 1933, with no stockholder or director meetings held after the receivership.
- Plaintiffs alleged the receivership and sale were collusive and fraudulent, orchestrated by insiders to divert corporate assets.
- Plaintiffs further alleged the insiders formed Shores Co. to acquire and hold the diverted assets and that Shores Co. was owned or controlled by certain individual defendants.
- Defendants asserted res judicata based on the 1933 receivership and other related proceedings.
- The federal court bifurcated the case under Rule 42(b) and tried first the merits of the res judicata defense, including evidence on the corporation’s continuing legal status and prior litigation involving the corporation.

## Issues

1. Whether the shareholders’ derivative claims alleging insider fraud and diversion of corporate assets were barred by res judicata due to the prior receivership and related proceedings.
2. Whether the earlier proceedings produced a final merits adjudication of the same cause of action and bound the present plaintiffs as the same parties or privies.
3. Whether Shores-Mueller remained a legally existing entity such that corporate injury claims could proceed derivatively despite long inactivity after the receivership.

## Decision

- The court rejected the res judicata defense.
- The court held the prior receivership and related proceedings did not preclude the derivative claims asserting that insiders engineered a fraudulent receivership and asset transfer for their own benefit.
- The court determined that the earlier proceedings did not constitute a final, binding adjudication of the fraud-based claims now asserted, and the suit could proceed on the merits.

## Legal Principles

- Res judicata requires a final judgment on the merits by a court of competent jurisdiction involving the same cause of action and the same parties or their privies.
- An unlawful diversion of corporate funds or assets is an injury to the corporation; shareholders ordinarily must proceed derivatively to vindicate that injury.
- Approval of a receiver’s actions and closure of a receivership do not, by themselves, bar later claims that the receivership and asset sale were products of insider fraud, absent adjudication of that fraud within the prior proceedings.
- Shareholders may be bound by earlier corporate litigation only to the extent their interests were adequately represented and the earlier case actually resolved the claims later asserted.
- Corporate inactivity following receivership does not necessarily terminate the corporation’s legal existence for purposes of asserting corporate injury claims through a derivative action.

## Conclusion

The court held that earlier receivership-related proceedings did not bar minority shareholders from pursuing a derivative action alleging that insiders collusively used the receivership and receiver’s sale to divert corporate assets to a new, insider-controlled entity, because the prior proceedings did not adjudicate those fraud and fiduciary-breach claims with the requisites for claim preclusion.


Liken v. Shaffer, 64 F. Supp. 432 (N.D. Iowa 1946)