The Delaware Sequestration Case

The Delaware Sequestration Case

Shaffer v. Heitner began as an ordinary shareholder suit and became a jurisdiction case when the plaintiff had to explain why Delaware could hear it. Heitner, a nonresident of Delaware, owned one share of Greyhound Corporation, a Delaware corporation with its principal place of business in Phoenix, Arizona. On May 22, 1974, he filed a shareholder's derivative suit in the Court of Chancery for New Castle County against Greyhound, its wholly owned subsidiary Greyhound Lines, Inc., and 28 present or former officers or directors of one or both companies. A derivative suit is one a shareholder brings on the corporation's behalf against insiders who allegedly harmed it, so the injury to be redressed is the corporation's. Heitner alleged that the individual defendants had breached their duties to Greyhound by causing it and its subsidiary to engage in conduct that exposed the companies to substantial damages in a private antitrust suit and to a large fine in a criminal contempt action. The activities behind those penalties took place in Oregon.

The individual defendants lived and did business mainly in Arizona, and their only link to Delaware was ownership of stock in a corporation chartered there.¹ Heitner therefore had no ordinary way to bring them before a Delaware court, and he turned to the state's sequestration statute, Del. Code Ann., Tit. 10, § 366. With his complaint he moved for an order sequestering the defendants' Delaware property, supported by an affidavit of counsel stating that the individual defendants were nonresidents. The order was signed the day the motion was filed.

The sequestrator then "seized" approximately 82,000 shares of Greyhound common stock belonging to 19 of the defendants, and options belonging to 2 others, by placing stop-transfer orders or their equivalents on Greyhound's books. No certificate representing the seized property was physically present in Delaware, so the seizure was only constructive.² The stock counted as being in the state only because Del. Code Ann., Tit. 8, § 169 makes Delaware the situs of ownership of all stock in Delaware corporations. Delaware thus did for stock what courts had done for debts: it gave an intangible thing a location, so that a court could say it held property in the forum. The location was idiosyncratic. Unlike the 49 other states, Delaware treated the place of incorporation as the situs of the stock, even though both the owner and the custodian of the shares were elsewhere.³ The court's hold on the shares existed only because the statute said so. All 28 defendants were notified of the suit by certified mail to their last known addresses and by publication in a New Castle County newspaper.

The doctrinal question is classification: were the Greyhound shares what the lawsuit was about? They were not. Heitner's claim ran against the officers and directors personally for breach of duty, and the defendants held the shares for their own reasons. Delaware's own courts described the primary purpose of sequestration, as used here, not as holding property while a trial decides who has the right to keep it, but as a process to compel a nonresident defendant to appear and defend a suit in equity.⁴ That is the attachment device in its pure form: the plaintiff asserts a personal claim and uses the property only as a means to obtain jurisdiction over the defendant.⁵ The action was quasi in rem type II.

Heitner made no claim of that kind. He sought redress for the directors' alleged misconduct, and the shares mattered only because Delaware law placed them in Delaware. The same securities in the same forum thus support a type I action in Dana's suit and a type II action in Heitner's. The difference lies in what the plaintiff asks the court to decide.

The 21 defendants whose property was seized entered special appearances, which are appearances made only to contest the court's power, and moved to quash service and vacate the sequestration order. They argued that ex parte sequestration denied them due process, that their property could not be attached in Delaware, and that under International Shoe they lacked sufficient contacts with the state. The Court of Chancery rejected each argument. It held that the due process requirements of the Sniadach line of cases did not apply, given the limited purpose and duration of the seizure, and that the statutory Delaware situs of the stock supplied a sufficient basis for quasi in rem jurisdiction.⁶

The Delaware Supreme Court affirmed. Most of its opinion answered the Sniadach argument; the jurisdictional question received two paragraphs.⁷ Its position was that the International Shoe contacts standard did not apply, because jurisdiction under § 366 remained "quasi in rem founded on the presence of capital stock here, not on prior contact by defendants with this forum."⁸ The court added that Delaware could constitutionally fix the situs of such shares in the state, and it held that "seizure of the Greyhound shares is not invalid because plaintiff has failed to meet the prior contacts tests of International Shoe."⁹

That answer followed from the old theory. Under Pennoyer v. Neff, a state's authority to adjudicate rested on its power over either persons or property.¹⁰ Seize property in the state, and quasi in rem jurisdiction followed; the defendants' lack of contacts was beside the point. The gap in International Shoe made that reasoning possible. The decision was phrased as a test for judgments in personam, so a court that classified its proceeding as one against property could apply the label and skip the contacts inquiry. On that logic, the defendants' Arizona homes, the Oregon location of the conduct, and their absence of any activity in Delaware could not matter.

The procedure also placed the defendants in the dilemma that type II attachment had always created. Under Delaware's practice, a defendant who entered a general appearance would have the sequestered property routinely released unless the plaintiff applied to continue the seizure.¹¹ A general appearance, however, was the only way to defend the merits. A defendant therefore had to submit to the unlimited jurisdiction of a forum that could not otherwise reach him, or lose the attached securities.¹² These defendants chose to contest jurisdiction itself.

International Shoe poses two questions: whether the defendant has minimum contacts with the forum and, if so, whether jurisdiction is consistent with fair play and substantial justice. The second question calls for weighing factors such as the forum state's interest in regulating the activity or providing a forum for its residents, the convenience to the parties, whether an alternative forum exists, and the desire to avoid a multiplicity of lawsuits.¹³ The Delaware courts asked neither question. They treated the proceeding as one against property and held that minimum contacts were not a prerequisite for attachment jurisdiction, and the Supreme Court reversed.¹⁴ The next sections take up why.