Nicholas J. P. Tryforos and Bebe Spanos Ikaris, Plaintiffs-appellants,andvasillios G. Spanos, Appellant, v. Icarian Development Company, S. A., et al., Defendants-appellees, 518 F.2d 1258 (7th Cir. 1975)

These consolidated appeals seek reversal of orders dismissing a shareholder derivative action with prejudice and awarding defendants a judgment of $92,500 for their attorneys' fees. The three appellants include two former shareholders of Icarian Development Company, S.A. ("Icarian"), a Panamanian corporation, who initiated this action back in 1968, and Vasillios G. Spanos, a resident of Greece, who, on March 11, 1974, responded to a notice to shareholders for the purpose of objecting to the proposed dismissal of the action.¹  We must consider (1) the appellants' standing; (2) whether it was proper for the dismissal to be with prejudice; and (3) whether, as a matter of Illinois law, the district court's findings support the award of fees.

The complaint filed by appellants Tryforos and Ikaris²  on April 8, 1968, alleged that the 13 defendants,³  other than Icarian, had misappropriated $285,000 in corporate assets. Process was purportedly served on Icarian by delivering a copy of the summons to the wife of Icarian's president at his residence. No attorney ever entered an appearance on behalf of Icarian. All other defendants did appear and have been represented by the same counsel throughout the bitter and protracted pretrial proceedings.⁴ 

Plaintiffs however, changed their attorneys frequently,⁵  and thereby, according to the district court's findings, added to the complexity of the matter unnecessarily, prolonged the action, and increased the time which defendants' counsel were required to spend.⁶  The extensive discovery and preparation culminated in the entry of a 77-page Final Pretrial Order on February 20, 1973.⁷  The court found, however, that plaintiffs deliberately sought to avoid a trial on the merits in the Northern District of Illinois, having determined some time in 1972 that it would be more advantageous to litigate in another forum.⁸ 

On November 8, 1973, plaintiffs advised the court that they had disposed of their stock in Icarian. After requiring them to submit evidence that a bona fide sale had been made, the court concluded that plaintiffs could not maintain the derivative action on behalf of the corporation and directed the clerk to mail a written notice of a proposed dismissal with prejudice to all shareholders or persons claiming to be shareholders. Such a notice was sent to appellant Vasillios G. Spanos. The notice stated that any person desiring to appear on behalf of Icarian should so indicate in writing on or before March 4, 1974, and appear in person or by counsel in open court on March 11, 1974.⁹  The notice made no reference to the procedure to follow if a shareholder merely wanted to object to the form of the dismissal.

On March 11, 1974, Sean M. O'Hara, a member of the California Bar, who represented that he was counsel for Vasillios G. Spanos, an Icarian shareholder, appeared before the district court¹⁰  and tendered written objections to the proposed dismissal with prejudice. He asserted that the record disclosed that Icarian had never been made a party to the litigation and therefore that it would be improper to dismiss the action with prejudice. The district court authorized O'Hara to appear on behalf of Mr. Spanos and granted him leave to make the objections a part of the record.¹¹  He stated, however, that he wanted Spanos "to subject himself to the jurisdiction of the court individually so that if there is anything in the way of contempt or otherwise growing out of this, he will be subject to the jurisdiction of this court," and directed that within two weeks he file a petition unambiguously stating that he was not a participant in pending New York litigation or in any way in collusion with the plaintiffs.¹²  After further colloquy, the judge stated that he would deny O'Hara's right to appear,¹³  that he wanted further evidence of Spanos' stock ownership, and that he was denying Spanos' objections.¹⁴ 

Subsequently, on March 25, 1974, a member of the local Bar who did not enter a formal appearance for Spanos, tendered another set of written objections prepared by O'Hara; he again relied on the failure to serve Icarian as a reason for not dismissing the action with prejudice. He also tendered the affidavit of Vassilike G. Spanos, wife of V. G. Spanos, which stated that her husband was a shareholder of Icarian but was unable to file a personal affidavit within the time limits set by the court because he was residing in Greece. Two days later, on March 27, 1974, the district court ordered the appearance of O'Hara stricken from the files of the court¹⁵  and granted defendants' motion to deny O'Hara leave to file the further objections of V. G. Spanos. The order stated that filing was denied because O'Hara was not a member of the Bar of the State of Illinois or of the district court and because O'Hara had failed to file a petition signed by V. G. Spanos himself as ordered by the court.¹⁶ 

Thereafter, on March 27, 1974, the case was dismissed with prejudice for failure of the plaintiffs to prosecute.¹⁷  Jurisdiction was retained for the purpose of assessing attorneys' fees, which were awarded the defendants on April 10, 1974, in the amount of $92,500.

O'Hara filed a notice of appeal on April 25, 1974, from the two district court orders on behalf of the two plaintiffs and V. G. Spanos (No. 74-1591). In response to defendants' motion, the district court on May 7, 1974, quashed this notice of appeal, ruling that O'Hara was not an attorney of record for any of the three appellants, that he had not filed the affidavit required by District Court Rule 39,¹⁸  and that appellants were not represented by counsel having an office within the district.¹⁹  In response, Tryforos and Ikaris filed a pro se notice of appeal on May 10, 1974 from the dismissal with prejudice and award of attorneys' fees (No. 74-1590), and O'Hara filed a notice of appeal on June 4, 1974, from the order quashing his first notice (No. 74-1676).

Before this court all three appellants contend that the district court erred in entering the dismissal with prejudice because the court lacked in personam jurisdiction over Icarian, an indispensable party to the derivative action. They allege that Icarian was never served with process and never appeared to submit itself to the court's jurisdiction. Tryforos and Ikaris also challenge the lower court's jurisdiction and authority to award the attorneys' fees.

Although all three appellants challenge the district court's jurisdiction because of the alleged failure to obtain in personam jurisdiction over Icarian, their interests in the appeal are quite different. Appellants Tryforos and Ikaris are, of course, vitally interested in the judgment awarding $92,500 in fees to the defendants. Since they have sold their Icarian stock, however, they have no interest in the judgment dismissing Icarian's claim with prejudice unless that action was a necessary predicate to the fee award. We think it plain, however, that the character of the dismissal as either with or without prejudice is irrelevant to the question whether the fee award was proper.²⁰  We conclude that appellants Tryforos and Ikaris have standing to attack the judgment for fees but no standing to challenge the dismissal with prejudice.

On the other hand, appellant Spanos has no personal stake in the fee award, but as a shareholder of Icarian does have an interest in the character of the dismissal.²¹  His standing is questionable not because of his lack of interest but rather because it is unclear, as a matter of procedure, that he sufficiently subjected himself to the jurisdiction of the district court to entitle him to prosecute this appeal.²²  That question is not an easy one.

The question breaks into two parts: whether Spanos complied with the conditions imposed by the district court for filing objections to the proposed dismissal, and whether those conditions were appropriate. The district court found Spanos' objections unacceptable because (a) no member of the local Bar had entered an appearance on his behalf, and (b) the objections were not supported by a sworn "petition" executed by Spanos himself. The court's reasons for insisting on such conditions were the expressed desire to be able to hold Spanos accountable for costs or contemptuous conduct if such should thereafter occur. In addition, the district court wanted assurance that Spanos was not merely trying to protect the ability of other interests further to pursue their claim in another forum.

If Spanos had requested leave to appear for the purpose of further prosecuting the litigation on behalf of Icarian, there could be no question about the reasonableness of the conditions imposed by the court. In view of the unstable and transitory character of the representation of the interests of Icarian shareholders throughout the litigation, the court was understandably concerned about the quality of a Greek shareholder's representation by California counsel in Chicago litigation involving an inactive Panamanian corporation. The objection which Spanos sought to raise, however, merely went to the form of the dismissal and did not raise the possibility of further protracted proceedings before the district court. Spanos' attorney merely endeavored to direct the court's attention to a defect in the record which, as he argued, made it inappropriate to dismiss the action with prejudice.

In his initial presentation of the objection, Spanos complied with the local rules of court,²³  as well as the conditions set forth in the notice to shareholders. His written objections though signed by O'Hara as his attorney, contained an unqualified representation that he was the owner of 950 shares of Icarian stock. That representation was corroborated, though not proved beyond a reasonable doubt, by the affidavit, to which a copy of Spanos' stock certificate was attached, subsequently executed by Spanos' wife.

We are persuaded that the underlying purpose of the Rule 23.1 requirement of notice to shareholders as a precondition to the dismissal of derivative litigation would be frustrated if the showing made by Spanos in this case was considered insufficient to entitle him to file his objections to the form of dismissal. For granting leave to file objections does not involve any determination of their factual or legal sufficiency. Insofar as the conditions imposed by the court in its notice to shareholders were appropriate to the mere filing of objections to the form of the proposed dismissal, they were met by Spanos; the additional conditions subsequently imposed an appearance by local counsel, a "petition" personally executed by Spanos and a denial of association with a plan to pursue litigation in another forum were not appropriate conditions to the filing of Spanos' objections. We conclude that Spanos adequately raised the questions of the district court's jurisdiction over Icarian and, since Icarian was admittedly an indispensable party, the propriety of dismissing the action with prejudice.

We are also satisfied that the district court exceeded its power when, on May 7, 1974, it entered an order purporting to quash the notice of appeal filed on April 25, 1974, by O'Hara on behalf of appellant Spanos. Even if that notice was defective because not signed by a member of the local Bar, such a defect was surely not jurisdictional. Power to quash the notice was therefore vested in this court rather than the district court. No motion to dismiss the first appeal having been made in this court, we need not consider the significance of the failure to have the notice executed by a member of the local Bar.²⁴  Accordingly, we turn to the merits.

In a shareholders' derivative action brought on its behalf Icarian was certainly an indispensable party. No judgment could effectively bind the corporation unless the court first acquired in personam jurisdiction over it. Davenport v. Dows, 85 U.S. (18 Wall.) 626, 627, 21 L. Ed. 938. Since no appearance was filed on behalf of Icarian, it was not a party unless it was validly served with process. Service on the wife of the president of the corporation does not constitute effective service under Rule 4(d) (3) of the Federal Rules of Civil Procedure.²⁵ 

There is nothing in the record, including the Marshal's Return, to identify the individual to whom the summons was delivered as an agent authorized to receive service of process on behalf of the corporation. Moreover, since the record discloses that there was a subsequent unsuccessful attempt to effect service on the corporation, and since one of the contested issues identified in the Final Pretrial Order was the sufficiency of the service of process on Icarian, the ambiguous Marshal's Return provided an inadequate basis for the court's conclusion that all defendants had been served with process.

Inasmuch as Icarian was not a party to the litigation, the order of dismissal was necessarily without prejudice to the rights of the corporation.

We do not accept appellants' contention that the failure to join an indispensable party deprived the district court of power to award fees.²⁶  On the other hand, the Supreme Court's recent decision in Alyeska Pipeline Service Co. v. Wilderness Society, --- U.S. ---, 95 S. Ct. 1612, 44 L. Ed. 2d 141 n. 31 (1975), requires us to reject appellees' position that we should look to federal law as authority for the award. Since this is a diversity case, the question of plaintiffs' liability for defendants' fees must be determined by the law of Illinois. Trust Co. of Chicago v. National Surety Corp., 177 F.2d 816, 818 (7th Cir. 1949).²⁷ 

As we concluded in Trust Co., the law of Illinois in this respect is well settled.

At common law costs were never recoverable, and they can be recovered only in cases where there is statutory authority therefor. Any party claiming a judgment for his costs against his adversary must bring himself within the operation of some statutory provision, and courts have no power to adjudge costs against anyone on merely equitable grounds.

177 F.2d at 818, quoting Patterson v. Northern Trust Co., 286 Ill. 564, 568, 122 N.E. 55, 57 (1919). See also House of Vision, Inc. v. Hiyane, 42 Ill. 2d 45, 61-62, 245 N.E.2d 468, 472 (1969), appeal dismissed & cert. denied, 396 U.S. 8, 90 S. Ct. 26, 24 L. Ed. 2d 8.

The only Illinois statutory authorization for the award of attorneys' fees that is arguably relevant is § 41 of the Civil Practice Act, Ill.Rev.Stat. 1973, ch. 110, § 41:

Allegations and denials, made without reasonable cause and not in good faith, and found to be untrue, shall subject the party pleading them to the payment of reasonable expenses, actually incurred by the other party by reason of the untrue pleading, together with a reasonable attorney's fee, to be summarily taxed by the court at the trial.

In discussing the purpose of § 41, the Illinois Appellate Court in Ready v. Ready, 33 Ill.App.2d 145, 161, 178 N.E.2d 650, 658 (1961), explained:

Section 41 is an attempt of the legislature to penalize the litigant who pleads frivolous or false matters or brings a suit without any basis in law and thereby puts the burden upon his opponent to expend money for an attorney to make a defense against an untenable suit.

See also Theodorou v. Community Builders, Inc., 6 Ill.App.3d 277, 280, 285 N.E.2d 474, 476 (1972); Manchester Insurance & Indemnity Co. v. Strom, 122 Ill.App.2d 183, 190, 258 N.E.2d 150, 153 (1970); Hearst Corp. v. Associated Trade Press, Inc., 98 Ill.App.2d 360, 365-366, 240 N.E.2d 386, 389 (1968). Thus, § 41 has been construed to authorize fees in cases which were instituted in bad faith, or in which untrue matter was alleged in the pleadings.

Appellees do not argue that the fee award may be supported under § 41. The district court's findings clearly do not bring this case within that section. The court concluded that fees were awardable because of the "opressive and vexatious manner in which (appellants) have prosecuted the action and unecessrarily prolonged it. . . . " Nowhere in the findings or order, however, is there any suggestion that Tryforos and Ikaris did not institute the suit in good faith, or that the cause of action was essentiallly frivolous.²⁹  Accordingly, the award of fees must be set aside.

The judgment of dismissal entered on March 27, 1974, as amended on April 10, 1974, must be modified to provide that it is without prejudice to the rights of Icarian, and to eliminate the award of fees.

So ordered.