Petition — U. S. Industries, Inc. v. Gregg
Supreme Court brief1977
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\ FILED
seP 8 1976
IN THE
Supreme Court of the UniteStates —
October Term, 1976.
No. 76-359
U. S. INDUSTRIES, INC. and DIVERSACON
INDUSTRIES, INC.,
Petitioners,
v.
F. BROWNE GREGG,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT.
Davip A. DREXLER,
P. O. Box 1347,
12th and Market Streets,
Wilmington, Delaware. ‘19899
WiLuiaM F. SONDERICKER,
299 Park Avenue,
New York, New York. 10017
Of Counsel:
Morais, NicHOoLs, ARSHT & TUNNELL,
P. O. Box 1347,
12th and Market Streets,
Wilmington, Delaware. 19899
OLwineE, CONNELLY, CHASE, O’DONNELL
& WEYHER,
299 Park Avenue,
New York, New York. 10017
International Printing Co., 711 So. 50th St., Phila., Pa. 19143 — Tel. (215) 727-8711
Os ER Oe re
INDEX.
EE cc Suc dukwadodkeGedbiehtaeceneeiceosageakes
REASONS FOR GRANTING THE WRIT .............ecccceeeees
I. The Decision Below Irreconcilably Conflicts With a
Contemporaneous Decision of the Supreme Court of
EE ib besdihsuwn cbeetiuetibesses onveeends
II. The Decision Below Irreconcilably Conflicts With
Decisions of Other Federal Courts ...............
III. The Opinion Below Disregards the Controlling
UN GE EE GAUIEE 6 cnc ccccccscccesescccees
IV. The Decision Below Represents a Novel Expansion
in an Important Area Which Requires the Definitive
Ee WE so odeddncctecécdeksncededs
AppENpix B—District Court Opinion (September 28, 1972) ..
Appenpix C—District Court Opinion (February 2, 1973) ....
AppeNpix D—District Court Memorandum Opinion and Order
SE SED suddneateanaeents kacsensekuneesbece
AppeNpix E—Court of Appeals Opinion (July 19, 1976) ....
AppEenpix F—Supreme Court of Delaware Opinion in the Case
of The Greyhound Corporation, et al. v. Heitner, et al.
CREE Bi BUD. 266600 ec csccdngevectescecocsesbecs
A60
A63
TABLE OF CITATIONS.
Cases: Page
Baker v. Gotz, affirmed en banc 492 F. 2d 1238 (3rd Cir.
SUMED dcvcctudsbsvunsnncetdseosseecueses4aceoenseas ll
Calero-Toledo v. Pearson Yacht Leasing Co., 416 U. S. 633
SEED sdentvadddnsconsccasewesscencacceuuaseunecsee 15
Carey v. Sugar, — U. S. —, 47 L. Ed. 2d 587 (1976) ........ 11,15
Connecticut General Life Ins. Co. v. Johnson, 303 U. S. 77
EE hnsad sdueucessesGhteeudeueed-easeduneuueees 13
Evans Theater Corp. v. Slaton, 180 S. E. 2d 712 (Ga. Sup.)
cert. den. 404 U. §. G50 (1G71) ......ccccccccccccsess 10
Farrell v. Piedmont Aviation, Inc., 411 F. 2d 812 (2d Cir.
SUE. dodbetednreisececeececosncusewesecuseucienees 13
Fauntleroy v. Lum, 210 U. S. 230 (1908) ................. 3, 16
Fuentes v. Shevin, 407 U. S. 67 (1972) .................. 5, 6, 15
The Greyhound Corporation et al. v. Heitner, Action No. 132,
See CHD ER GEOG ocdvccocccccceses sikeacks 1, 2,8, 10, 11
Grosjean v. American Press Co., 297 U. S. 233 (1936) ...... 13
Hanson v. Denckla, 357 U. S. 235 (1958) .............. 16, 17, 18
Harris v. Balk, 198 U. S. 215 (1905) ..........ccccccceeees 15, 16
Hughes v. Fetter, 341 U. S. 609 (1951) ................05. 14
International Shoe Co. v. Washington, 326 U. S. 310 (1945)
3, 5, 6, 9, 10, 13, 14, 15, 16, 17, 18
Jellesxik ve Huron Copper Mining Co., 177 U. S. 1 (1900) ...12, 18
Jonnet v. Dollar Savings Bank, 530 F. 2d 1123 (3rd Cir. 1976)
13, 15, 16
Lebowitz v. Forbes Financing & Leasing Corporation, 456 F.
Gee Ge canscncesadceceGnendnssendeseacenes 14, 15
Louis K. Liggett Co. v. Lee, 288 U. S. 517 (1933) ......... 13
McGee v. International Life Insurance Co., 355 U. S. 220
DEE -agcakeneascckaahaoneasaantackasessasaseeseks 16, 18
McKay v. McInnes, 279 U. S. 820 (1929) ................. 14
Mitchell v. W. T. Grant Company, 416 U. S. 600 (1974) .... 15
Minichiello v. Rosenberg, 410 F. 2d 106 (2d Cir. 1968) cert.
den. 396 U. S. 844 (1969) ................ eyoreT 12, 13, 14
TABLE OF CITATIONS (Continued).
Cases (Continued): Page
Mullane v. Central Hanover Bank & Trust Co., 339 U. S. 306
DE UeteeUedecssebdSdddovdessdodevetevesecaseaes 17, 18
North Georgia Finishing Inc. v. Di-Chem, Inc., 419 U. S. 601
PT civeGid Shed RNECROSSREdNSRCOTS CESS EEsCCKECCeS 15
Occhino v. Illinois Liquor Control Commission, 329 N. E. 2d
353, 128 Ill. App. 3rd O67 (1975) ...........ceeeeeees 10
Ownbey v. Morgan, 256 U. S. 94 (1921) ............ 10, 14, 15, 16
Owsley v. Peyton, 352 F. 2d 805 (4th Cir. 1965) ........... 10
Pennoyer v. Neff, 95 U. S. 714 (1877) ............ 3, 10, 15, 16, 19
Rogers v. Guaranty Trust Company, 288 U. S. 123 (1932) ..12, 18
Rohr Aircraft Corp. v. County of San Diego, 336 P. 2d 521
(Cal. Sup. 1959), rev'd on other grounds 362 U. S. 628
PD: (ddiieeeike pesedanepededooepecoveseneesoess 10
Shaffer et al., appellants v. Heitner, appellee, Appeal No.
ES ie de eet ic chee eESENEKSEOSSOeU NEON Seen 1
Watkins v. Conway, 358 U. S. 188 (1958) ................- 14
Miscellaneous:
Delaware Code:
ET 2
ee 2,4
SE 2
Te i i lund Cevesbenseeeeeeses 2,4
Delaware Court of Chancery, Rule 4(db) ................ 2,4
Federal Rules of Civil Procedure, Rule 4(e) .............. 2,11
ED cn ckecbodedenndceccecececccecsossvece 6
Supreme Court Rule 19(b) .............ceeeeeeeveeeeeees 14
EE cds cas¢osbbcssedouseseocoesesssenes 2
i scesceciecdudehoousd céceueeuseeteoretees 2
IN THE
Supreme Court of the United States
OcrosEer TERM, 1976.
No.
U. S. INDUSTRIES, INC. ann DIVERSACON
INDUSTRIES, INC.,
Petitioners,
v.
F. BROWNE GREGG,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT.
Petitioners respectfully pray that a writ of certiorari
issue to review the judgment of the United States Court of
Appeals for the Third Circuit entered in this action on
July 19, 1976. That judgment reversed a default judgment
based upon quasi-in-rem jurisdiction in favor of the peti-
tioner Diversacon Industries, Inc. which had been granted
by the United States District Court for the District of
Delaware and ordered that the action be dismissed for
want of jurisdiction over respondent, even though no such
jurisdiction had ever been claimed.
The decision of the Court of Appeals conflicts di-
rectly with a decision dated April 15, 1976 of the Supreme
Court of Delaware in The Greyhound Corporation et al. v.
Heitner, Action No. 132, 1975, from which an appeal to
this Court is presently pending sub nom. Shaffer et al.,
appellants v. Heitner, appellee, Appeal No. 75-1812.
Should this Court conclude that review is warranted, con-
solidation of this case with Appeal No. 75-1812 may appear
appropriate.
2 Petition for Writ of Certiorari
CITATIONS TO OPINIONS BELOW.
The United States District Court for the District of
Delaware rendered three opinions relevant to the issues
raised by this petition. The first, dated September 28, 1972
and reported at 348 F. Supp. 1004, is printed as Appendix
B. The second, dated February 2, 1973 and reported at
58 F. R. D. 469, is printed as Appendix C. The third, an
unreported Memorandum Opinion and Order dated April
24, 1975, is printed as Appendix D. The opinion of the
United States Court of Appeals for the Third Circuit, dated
July 19, 1976 and not yet officially reported, is printed as
Appendix E. The opinion of the Delaware Supreme Court
in The Greyhound Corporation v. Heitner (not yet officially
reported ) No. 132, 1975 (April 15, 1976) with which the
decision of the Court of Appeals herein directly conflicts
is printed as Appendix F.
JURISDICTION.
The judgment of the Court of Appeals for the Third
Circuit was entered on July 19, 1976.
The jurisdiction of this Court is invoked pursuant to
28 U.S. C. § 1254(1).
STATUTES AND RULES INVOLVED.
Statutes involved in this appeal include § 8-317(1) of
Title 6, Delaware Code, Sections 169 and 324 of Title 8,
Delaware Code, and § 366 of Title 10 Delaware Code.
Court Rules involved are Rule 4(db) of the Delaware
Court of Chancery and Rule 4(e) of the Federal Rules of
Civil Procedure. These statutes and rules are set out in
Appendix A.
Petition for Writ of Certiorari 3
QUESTION PRESENTED.
Has the power of state courts to exercise quasi-in-rem
jurisdiction over non-residents by seizure of their prop-
erty or control over their debtors, as recognized in Pen-
noyer v. Neff, ¥5 U. S. 714 (1877)—or to exercise in per-
sonam jurisdiction by personal service of process as
recognized in Fauntleroy v. Lum, 210 U. S. 230 (1908)
—been limited or replaced by requirements of “minimal
contacts’, as applied to “long-arm”, in personam jurisdic-
tion over foreign corporations in International Shoe Co. v.
Washington, 326 U. S. 310 (1945)?
STATEMENT OF THE CASE.
Review is sought of the reversal of a default judgment
entered when the defendant elected not to answer after his
challenges to the quasi-in-rem jurisdiction of the district
court had been rejected. The amount of the judgment was
the net value of the defendant’s property in Delaware
realized upon its sale pursuant to an order of foreign at-
tachment. The basis for reversal was the circuit court’s
conclusion that, notwithstanding that defendant’s property
had been lawfully attached, other sufficient “minimal con-
tacts” affiliating the suit to the forum were lacking. The
decision represents an unprecedented engrafting of prin-
ciples enunciated in International Shoe Co. v. Washington,
326 U. S. 310 (1945), with respect to the presence of a
defendant within a jurisdiction for purposes of in personam
jurisdiction, upon foreign attachment and quasi-in-rem
jurisdiction, as upheld in Pennoyer v. Neff, 95 U. S. 714
(1877).
This action was commenced in the Court of Chancery
in and for New Castle County, Delaware, on June 19, 1972,
4 Petition for Writ of Certiorari
by plaintiffs U. S. Industries, Inc. (“USI”), a Delaware cor-
poration, and its wholly owned subsidiary, Diversacon In-
dustries, Inc., a Florida corporation, against F. Browne
Gregg, who had in 1969 sold Diversacon to USI. As con-
sideration for its purchase, USI had issued to Gregg 100,962
shares of its common stock and 8750 shares of Special Pref-
erence Stock (Series M) and given Gregg a four-year em-
ployment contract. As part of the transaction Gregg,
among other things, gave to Diversacon a note for $500,000,
payable in five equal annual installments.
The complaint stated eight claims. Four claims al-
leged that Gregg had made false representations to USI
concerning the financial condition of his corporation con-
stituting common law fraud, violations of federal securities
law, and breaches of contract. Three claims dealt with
breaches by Gregg of his employment contract. The final
claim alleged that Gregg had defaulted on the second in-
stallment of the $500,000 promissory note.
Jurisdiction over Gregg, a resident of Florida, was
sought by attachment of his property pursuant to 10 Del. C.
§ 366 (A4) and procedures set out in Chancery Court Rule
4(db) (A5-A7), a process denominated “sequestration” in
Delaware. With the filing of the complaint plaintiffs
moved to provide for notice to Gregg of the suit by certi-
fied mail and publication, and to exercise control over his
property, identified by affidavit as 68,210 shares of com-
mon stock and 8750 shares of Special Preference Stock of
USI, the shares still held by Gregg from the 1969 transac-
tion. This intangible property had a situs in Delaware by
virtue of 8 Del. C. § 169 (Al), and was subject to judicial
control there by virtue of the court's control over the
Delaware domiciliary, USI, which controlled the record
transfer of its shares.
The Court of Chancery on June 19, 1972 issued an
Order of Sequestration which appointed a sequestrator to
“seize” the shares of stock identified in the affidavit. Pur-
Petition for Writ of Certiorari 5
suant to the Order, the sequestrator notified USI not to
recognize any attempt to transfer the shares except in ac-
cordance with the Order. The Order was duly published
and a copy together with the summons and complaint sent
to Gregg by certified mail. The Order in substance ad-
vised Gregg that should he default the “seized” property
could be sold in satisfaction of any judgment iv which
plaintiffs might be entitled. The Order of Sequestration
thus constituted a classic foreign attachment invoking
quasi-in-rem jurisdiction.
The Order required Gregg to appear and plead to the
complaint by July 31, 1972. On July 25, the First National
Bank of Leesburg, Florida (hereinafter “Intervenor
Bank”) moved to intervene and quash, averring that, by
reason of prior pledges by Gregg to it of all of the
sequestered shares as security for loans totalling
$1,635,000, it owned the whole of the interests in the
shares and, hence, nothing owned by Gregg had been
sequestered. On July 28, Gregg removed the case to the
United States District Court for the District of Delaware,
alleging diversity of citizenship, and on August 4, he too
moved to quash the sequestration. He joined with the
Intervenor Bank in claiming that nothing of his had been
seized. Secondly, he claimed that the sequestration was
unconstitutional.
Gregg’s constitutional challenge was twofold. First,
under principles established by International Shoe Co. v.
Washington, 326 U. S. 310 (1945), he assertedly lacked
sufficient “minimal contacts” with Delaware to permit its
courts to claim jurisdiction over him. Second, under
Fuentes v. Shevin, 407 U. S. 67 (1972), the sequestration
constituted an impermissible seizure without prior notice
or opportunity to be heard.
On September 28, 1972, U. S. District Judge Walter
K. Stapleton issued an opinion (Appendix B) in which he
6 Petition for Writ of Certiorari
held that, notwithstanding the prior pledges, defendant
Gregg owned an equity in the USI shares which had been
validly attached,’ and that the sequestration statute and
procedure were constitutional. His reasoning was, firstly,
that International Shoe Co. v. Washington, supra, was not
applicable to quasi-in-rem proceedings and, secondly, that
Fuentes v. Shevin, supra, had expressly exempted from its
strictures attachments to obtain jurisdiction.
Thereupon, Gregg filed a further jurisdictional chal-
lenge claiming the right to defend fully on the merits while
limiting a prospective judgment to the value of his interest
in the seized property. On February 2, 1973, after brief-
ing and argument, Judge Stapleton denied this motion for
limited appearance. His opinion (Appendix C) held that
Delaware law, which requires a defendant to enter a
general appearance as a condition of defending on the
merits in a quasi-in-rem case, to be both applicable and
constitutional.
Gregg filed both a Notice of Appeai and Petition for
Special Writ to the Third Circuit Court of Appeals. On
February 28, 1973, that Court denied the petition and
dismissed the appeal for want of jurisdiction, without
prejudice to Gregg’s right to appeal from a final order.
March 1, 1973 was finally the date for Gregg to
answer. Upon his failure to do so, plaintiffs on March 6
directed the entry of his default in accordance with
F. R. C. P. 55(a). Simultaneously they moved the Court
to take the several steps necessary to reduce Gregg’s de-
1. Since Gregg’s Special Preference Stock was by its terms
convertible into USI common stock at a ratio of 3.125 for one,
Gregg’s 8750 preference shares were equivalent to 27,344 common
shares. Thus, with the 68,210 shares of common stock seized, 95,554
common stock equivalents were subject to the Order of Sequestra-
tion. At $23 per share, the bid price at the date of seizure, the
total market value was approximately $2.2 million, $565,000 in ex-
cess of the Bank’s $1,635,000 loan.
Petition for Writ of Certiorari 7
fault to judgment. On March 16, the District Judge di-
rected the Intervenor Bank to record the status of its lien”
and fixed a date for inquest.
On April 4, 1973, at inquest plaintiff Diversacon
limited its proofs to establishing that Gregg had failed to
pay the second installment of his $500,000 promissory note
and that, as a consequence, it was entitled to a default
judgment in the amount of $400,000 plus interest, costs and
reasonable attorneys’ fees. Under quasi-in-rem principles,
however, the amount of the judgment was limited to the
value of the sequestered shares, as fixed by sale.
On November 15, 1973, the District Judge ordered the
_ sale of Gregg’s stock. He directed that, first, the remaining
common shares be sold on the New York Stock Exchange
and the proceeds applied to reduce the Bank’s lien. This
was done November 16, reducing the lien to $44,406.84.
The Order further directed public sale of the 2000 Special
Preference shares, subject to the Intervenor Bank’s lien as
it would then exist. However, the sale did not then occur.
On December 13, 1973, Gregg filed a notice of appeal and
moved for a stay of sale. Before this motion was heard,
the Bank sold privately 800 Shares for $44,800, discharging
in full its lien and generating a small excess ($123.44)
which was deposited with the sequestrator. Thereafter,
by mutual consent, sale of the remaining 1200 shares of
> Stapleton had provided the Intervenor Bank with a
non-judicial procedure for protecting its senior interest. The Bank
was authorized to sell shares if sale was permitted by its loan
agreements with Gregg. The only obligations imposed were to re-
port any sales and to apply the pr to reduce the loans.
Commencing in October, 1972, the market price of USI shares
began a steady decline. Because of this, the Bank undertook a
series of sales so that by March, 1973, the number of shares held
subject to the Order of Sequestration had been reduced to 7547
shares of common stock and 2000 shares of Special Preference
Stock, and the amount of the Bank's lien had been reduced from
the original $1,635,000 to $102,499.21 plus interest.
8 Petiiion for Writ of Certiorari
Special Preference Stock was stayed until disposition of
Gregg’s appeal. On May 30, 1974 Gregg’s appeal was
again dismissed as premature.
After remand, Gregg twice moved to vacate his de-
fault and quash the sequestration. Both motions were
denied. With the second denial, entered April 24, 1975,
Judge Stapleton issued a Memorandum Opinion dealing
with the new authorities which Gregg had urged upon him
(Appendix D).
On May 28, 1975, the District Judge entered a re-
newed order for sale of Gregg’s stock. On June 25, 1975,
the 1200 shares of Special Preference Stock were sold in
competitive bidding for $20,000, making the total amount
received from sale of the sequestered property $20,123.44.
The sale was confirmed on July 7, 1975. Thereafter, plain-
tiff Diversacon moved for a default judgment. After allow-
ing for costs totalling $1,642.24, the District Judge on
August 20, 1975 directed entry of judgment for Diversacon
in the amount of $18,481.20.
Gregg again appealed, renewing all of the substantive
and procedural arguments he had made in the district
court. While the case was awaiting argument, the Dela-
ware Supreme Court, confronted with virtually the iden-
tical legal and constitutional arguments, on April 15, 1976
decided The Greyhound Corporation v. Heitner (Appendix
F ), in which it held that the Chancery Court sequestration
procedure as applied to the attachment of shares of Dela-
ware corporations owned by non-residents was constitu-
tional in all respects. The Delaware Supreme Court spe-
cifically ruled that the “minimal contacts” approach to
long-arm in personam jurisdiction enunciated by this Court
in International Shoe Co. was not applicable to quasi-in-
rem jurisdiction invoked by foreign attachment.
The Third Circuit opinion (Appendix E), dated July
19, 1976, per Circuit Judges Aldisert and Weis and Senior
iy enenee~ we
Petition for Writ of Certiorari 9
Circuit Judge Kalodner, dealt with only two of. Gregg’s
points. Firstly, it affirmed that Gregg had owned an at-
tachable interest in the sequestered shares. Secondly, it
held, contrary to the Supreme Court of Delaware and the
district court, that foreign attachment and the exercise of
quasi-in-rem jurisdiction were subject to the “minimal con-
tacts” limitations of International Shoe Co. and that such
minimal contacts were here lacking. Accordingly, judg-
ment was reversed and dismissal ordered.
10 Petition for Writ of Certiorari
REASONS FOR GRANTING THE WRIT.
I. The Decision Below Irreconcilably Conflicts With a
Contemporaneous Decision of the Supreme Court of
Delaware.
The crux of the holding below is that control over
property lawfully subject to state power is not of itself
enough to base an assertion of judicial power over such
property for purposes of quasi-in-rem jurisdiction. There
must be some additional “minimal contacts” or “affiliating
circumstances” between the suit and the forum for such
assertion of jurisdiction to be constitutionally permissible.
In reaching this view, the Circuit Court expressly rejected
the opinion of the Delaware Supreme Court in The Grey-
hound Corp. v. Heitner, supra ( Appendix F ), which barely
two months earlier had upheld the traditional rule that
quasi-in-rem jurisdiction could be lawfully asserted by
proper attachment of property subject to the control by
the court.
The instant case thus presents a classic instance of a
conflict between jurisdictions interpreting decisions of this
Court—here, principally, Pennoyer v. Neff, 95 U. S. 714
(1877), Ownbey v. Morgan, 256 U. S. 94 (1921) and In-
ternational Shoe Co. v. Washington, 326 U. S. 310 (1945).
State courts are not bound by decisions of the federal
courts of appeals. See e.g., Evans Theater Corp. v. Slaton,
180 S. E. 2d 712 (Ga. Sup.) cert. den. 404 U. S. 950
(1971); Occhino v. Illinois Liquor Control Commission,
329 N. E. 2d 353, 128 Ill. App. 3rd 967 (1975); Rohr Air-
craft Corp. v. County of San Diego, 336 P. 2d 521 (Cal.
Sup. 1959), rev'd on other grounds 362 U. S. 628 (1960),
Owsley v. Peyton, 352 F. 2d 805 (4th Cir. 1965). Hence,
the courts of Delaware will continue to apply the law as
Petition for Writ of Certiorari 11
declared by the Delaware Supreme Court. On the other
hand, a plaintiff who seeks relief in the United States Dis-
trict Court or whose case is removed to that court from the
state courts will be subject to different rules.
The problem is not peculiar to Delaware. Virtually
every state has a foreign attachment statute, enabling
plaintiffs to invoke quasi-in-rem jurisdiction by seizure of
property within the jurisdiction. See e.g. Carey v. Sugar,
— U.S. —, 47 L. Ed. 2d 587 (1976). Until the decision
below, the presence of such property has been uniformly
held of itself sufficient to permit invocation of such juris-
diction. The conflict engendered by this case and Heitner
will inevitably spread to other jurisdictions. Assuming
federal courts adopt the Third Circuit’s approach, while
state courts follow Delaware’s, not only will the results
conflict, but also Rule 4(e) of the Federal Rules of Civil
Procedure (A7-8), which promotes conformity between
state and federal attachment procedures, will have been
nullified.
Moreover, in placing the limitations of “minimal con-
tacts” upon constitutional invocation of foreign attach-
ment, the court below raises numerous constitutional and
practical questions. What constitutes a “minimal con-
tact” or “affiliating circumstance”? Does the presence of a
resident plaintiff meet the test?* Does ownership of
realty, tangible personalty, or intangible personalty other
than stock within the jurisdiction qualify? If Gregg’s stock
certificates had been physically seized, would “minimal
contacts” have been met?‘ Is the rule different in a case
3. The court below distinguished an earlier unreported case,
Baker v. Gotz, affirmed en banc 492 F. 2d 1238 (3rd Cir. 1974), in
which a panel of the Third Circuit initially upheld a sequestration
under the Delaware procedure, by noting that, in the earlier case,
the plaintiff railroad had substantial assets in Delaware (See Foot-
note 10 at A88).
4. While the court below devoted many pages to questionin
the precedents under which Delaware has declared the shares of
12 Petition for Writ of Certiorari
purely in rem, where title to the property itself is to be
adjudicated? Lastly, is the presence of defendant's debtor
not enough and, if not, has not classic garnishment been
abolished? Until the decision below, the answers to these
questions were settled; now they are in doubt.
The decision below thus puts at sea concepts utilized
unquestioningly for centuries in the day-to-day adminis-
tration of justice. We respectfully urge that this Court
accept review in order to restore some balance and con-
formity to the law of foreign attachment.
Il. The Decision Below Irreconcilably Conflicts With
Decisions of Other Federal Courts.
Although the court below purported to distinguish it,
the decision below is in irreconcilable conflict with the
decision of the Second Circuit Court of Appeals~ in
Minichiello v. Rosenberg, 410 F. 2d 106 (2d Cir. 1968)
cert. den. 396 U. S. 844 (1969). In Minichiello, the court
held that the most tenuous of property subject to the writ
of a court—i.e., ownership of a liability insurance policy
issued by an insurance company qualified to do business
in New York and thereby subject to control by its courts—
was sufficient as a constitutional matter to permit those
courts to exercise quasi-in-rem jurisdiction by foreign at-
tachment over the non-resident policyholder to the extent
of the policy's value. The instant case holds that owner-
ship of stock in a Delaware corporation, the transfer of
4. (Cont'd. )
its corporations to have a situs in Delaware (Jellenik v. Huron
Copper Mining Co., 177 U. S. 1 (1900) and Rogers v. Guaranty
Trust Company, 288 U. S. 123 (1932) ), the court did not invalidate
those holdings. Nonethless, the attention devoted by the court to
the particular property here involved—corporate shares—leaves
open the questions of whether it would apply a different rule to
other types of intangibles and, if so, why.
Petition for Writ of Certiorari 13
which is controlled by a corporation which is subject to the
writ of the Delaware courts, is not of itself sufficient as a
constitutional matter to permit the Delaware courts to
exercise such jurisdiction over the non-resident stockholder
to the extent of the stock’s value.*
The purported basis for distinguishing Minichiello is
that in New York attachment of liability insurance is
limited to resident plaintiffs (A89). This distinction can-
not withstand analysis. First, it is not clear that the New
York law is so limited. The case generally cited to sup-
port that view, Farrell v. Piedmont Aviation, Inc., 411
F, 2d 812 (2d Cir. 1969), does not so hold. In Farrell
the plaintiff in fact was a New York administrator. More
importantly, whatever the rationale for its conclusion,
Farrell did not impose International Shoe Co. concepts of
“minimal contacts” upon use of foreign attachment;
International Shoe Co. is not even cited in the opinion.
But even if Minichiello be read as validating foreign
attachment only where invoked by a domiciliary, still
Minichiello cannot be reconciled. One of the plaintiffs
herein, USI, is a Delaware domiciliary, albeit a corporate
one. Denying corporate citizens remedies available to
individuals is impermissible. See, e.g., Connecticut Gen-
eral Life Ins. Co. v. Johnson, 303 U. S. 77 (1938); Louis
K. Liggett Co. v. Lee, 288 U. S. 517 (1933); Grosjean v.
American Press Co., 297 U. S. 233 (1936). Moreover,
Judge John J. Gibbons’ concurring opinion in Jonnet v.
Dollar Savings Bank, 530 F. 2d 1123, 1130 (3rd Cir. 1976),
5. There is a difference between the Delaware practice and the
ractice approved in Minichiello with respect to the limits of lia-
bility if the defendant appears. Delaware requires a general ap-
ance; the rule approved in Minichiello does not. However, this
ction raises questions not considered below which are not re-
lated to the constitutionality of the basic exercise of quasi-in-rem
jurisdiction.
14 Petition for Writ of Certiorari
adopted by the court below, involved Pennsylvania plain-
tiffs and is, on that™basis, indistinguishable from
Minichiello.
The purported distinction which the court below saw
in Minichiello, moreover, raises serious questions about
the extent to which states or state courts can constitu-
tionally limit the access of non-resident plaintiffs to their
courts unless dye on a case-by-case forum non conveniens
basis. See, e.g., Watkins v. Conway, 358 U. S. 188 (1958);
Hughes v. Fetter, 341 U.S. 609 (1951).
Hence, the decision below conflicts squarely with
Minichiello on the constitutional extent of quasi-in-rem
jurisdiction. Other federal courts faced with the two con-
flicting lines of authority could well reach inconsistent
results. Hence, Supreme Court Rule 19(b) seems directly
applicable, and this Court should grant review.
III. The Opinion Below Disregards the Controlling Prece-
dents of This Court.
In Lebowitz v. Forbes Financing & Leasing Corpora-
tion, 456 F. 2d 979 (1972), the Third Circuit invited this
Court's review of quasi-in-rem jurisdiction. There it up-
held the continuing validity of foreign attachment for
quasi-in-rem jurisdiction, stating with respect to Ownbey
v. Morgan, 256 U. S. 94 (1921) and McKay v. McInnes,
279 U. S. 820 (1929), cases which supported its conclu-
sion: “Any reexamination of the continuing vitality of these
cases must come from the Supreme Court” (456 F. 2d at
982) (emphasis added). In a concurring opinion, Circuit
Judge John J. Gibbons expressed doubts concerning the
continuing constitutionality of foreign attachment and
quasi-in-rem jurisdiction. He noted that the cases uphold-
ing such jurisdiction had preceded International Shoe Co.,
and he suggested some re-evaluation was warranted
ee ee ee Oe Se ny ens
Petition for Writ of Certiorari 15
(Ibid). Nonetheless, he too felt himself “bound by the
[governing] precedents” (456 F. 2d at 983) and joined
with the majority in upholding the attachment there in-
volved.
This Court twice declined to review Lebowitz (409
U. S. 843 and 409 U. S. 1049 (1972) ). Upon three sub-
sequent occasions—Fuentes v. Shevin, 407 U. S. 67 (1972);
Mitchell v. W. T. Grant Company, 416 U. S. 600 (1974);
and Calero-Toledo v. Pearson Yacht Leasing Co., 416 U. S.
633 (1974)—this Court cited Ownbey v. Morgan with ap-
parent approval, as upholding the continuing validity of
foreign attachment and quasi-in-rem jurisdiction. In no
case were the concepts even remotely questioned.* None-
theless, thereafter, Circuit Judge Gibbons, in a concurring
opinion in Jonnet v. Dollar Savings Bank, 530 F. 2d 1123,
1130 (3rd Cir. 1976), said that International Shoe Co.
had indeed overruled Ownbey v. Morgan and, with it, the
earlier landmark decisions of Pennoyer v. Neff, 95 U. S.
714 (1877) and Harris v. Balk, 198 U. S. 215 (1905). He
concluded that foreign attachment and quasi-in-rem juris-
diction were unconstitutional.
Subsequent to Jonnet, supra, this Court again con-
sidered the subject of foreign attachment. In Sugar v.
Carey, supra, it reversed a Second Circuit opinion which
had invalidated on procedural grounds New York's for-
eign attachment law, describing that remedy as “one un-
doubtedly of importance to the state” (47 L. Ed. 2d at
591).
Nonetheless, disregarding virtually without comment
these plain indications of this Court’s view of the continu-
ing efficacy of foreign attachment, the court below ex-
6. There was, of course, controversy over the procedures for
invoking such jurisdiction. Compare Mitchell v. W. T. Grant Com-
pany, supra, with North Georgia Finishing Inc. v. Di-Chem, Inc.,
419 U. S. 601 (1975).
16 Petition for Writ of Certiorari
pressly adopted Judge Gibbons’ concurring opinion in
Jonnet as its own, stating that Judge Gibbons had “de-
velop[ed] a thesis to which we perceive no effective re-
buttal” (A87).
The thrust of every pronouncement by this Court be-
fore and since International Shoe Co. has been to recog-
nize the continuing vitality of foreign attachment and
quasi-in-rem jurisdiction. Neither International Shoe Co.,
itself nor any other decision of this Court even remotely
suggests International Shoe Co., was intended in any way
to limit such jurisdiction.’ Yet, the Third Circuit has
slipped in five years from respectful adherence to the ex-
pressed views of this Court to utter disregard of them.
Proper administration of justice requires that this Court
put matters straight.
IV. The Decision Below Represents a Novel Expansion in
an Important Area Which Requires the Definitive
Attention of This Court.
Under our federal system, an important concern has
historically been, and continues to be, the proper consti-
tutional limitations upon exercise of jurisdiction by state
courts. Pennoyer v. Neff, 95 U. S. 714 (1878); Harris v.
Balk, 198 U. S. 215 (1905); Fauntleroy v. Lum, 210 U. S.
230 (1908); Ownbey v. Morgan, 256 U. S. 94 (1921); In-
ternational Shoe Co. v. Washington, 326 U. S. 310 (1945);
McGee v. International Life Insurance Co., 355 U. S. 220
(1957) and Hanson v. Denckla, 357 U. S. 235 (1958) are
landmark decisions. Each deals with one or more facets
of what has heretofore been recognized as three separate
aspects of such jurisdiction: in personam, in rem, and
quasi-in-rem.
7. International Shoe Co. itself cites Pennoyer v. Neff,
ba approval—hardly an indication that the latter was + t.
ee Se oe
ee a ee Se ee
Petition for Writ of Certiorari 17
The decision below forges a new rule expressly limit-
ing quasi-in-rem jurisdiction; its implications, as a mat-
ter of logical extension, read equally upon in personam
and in rem bases of state court jurisdiction and, in effect,
develop a new rationale and test for all assertions of juris-
diction. The court below obliterated with a broad brush
historical distinctions among the different kinds of juris-
diction which have been recognized for centuries. Wholly
new principles which demand careful scrutiny by this
Court were written.
The court below reached its novel conclusion by mis-
applying three decisions of this Court. International Shoe
Co., Hanson v. Denckla, 357 U. S. 235 (1958) and Mul-
lane v. Central Hanover Bank & Trust Co., 339 U. S. 306
(1950). Regarding these opinions, the court below states
as follows:
“We can only understand Mullane and Hanson
as establishing a constitutional limit to state court
jurisdiction wholly independent of the label—in rem,
quasi in rem, or in personam—that may be affixed to
that jurisdiction. And whether it be called affiliating
circumstances or minimum contacts, we must assume
that ultimately the test of International Shoe is deter-
minative: that there be sufficient connection with the
forum ‘such that the maintenance of the suit does not
offend “traditional notions of fair play and substantial
justice.”’ 326 U. S. at 316.” (A86)
These authorities, individually or read together, do
not support the conclusion asserted.
Contrary to the court below, the “minimal contacts”
test of International Shoe Co. is not a test of the contacts
of a case to the forum. It is a test of presence of a corpo-
rate defendant within a jurisdiction for in personam pur-
18 Petition for Writ of Certiorari
poses. International Shoe Co. does not establish limits
upon where transitory causes of action may be maintained;
it deals only with where defendants can be sued by use of
long-arm procedures. See Perkins v. Benguet Consolidated
Mining Co., 342 U. S. 437 (1952).
Secondly, the “affiliating circumstances” test of Han-
son v. Denckla is whether there is a sufficient “affinity” be-
tween a forum and an intangible res to support the forum’s
assertion of in rem jurisdiction over such res. It is not a
test of the “affinity” of a suit to the forum. In essence, it is
a test of what intangibles can be lawfully attached.
In the present case, the “affiliating circumstances”
test is whether the relationship of shares of Delaware cor-
porations to Delaware is sufficient to support a Delaware
court's claim of in rem jurisdiction over them. We submit
that it plainly is. See Jellenik v. Huron Copper Mining
Co., supra, Rogers v. Guaranty Trust, supra. In all events
it is a question which the court below did not address.
Moreover, the statement (Footnote 8, A86) that Hanson
v. Denckla used “minimum contacts” and “affiliating cir-
cumstances’ interchangeably is, bluntly, incorrect. This
Court carefully used each phrase to delineate two separate
subjects of inquiry.
Mullane is equally misused by the court below. It
holds that a state court is not precluded from entertaining
an essentially in rem proceeding involving a domestic
trustee merely because in some aspects it may grant in
personam relief. It is an expansion of, not a limitation
upon, state court jurisdiction. It does not hold that the
same constitutional test is applicable to the bringing of
in personam, in rem and quasi-in-rem suits.
In McGee v. International Life Insurance Co., 355
U. S. 220 (1957), this Court reviewed the authorities lead-
ing up to International Shoe Co. and discerned “a trend
. toward expanding the permissible scope of state
Petition for Writ of Certiorari 19
jurisdiction over foreign corporations and other non-
residents” (355 U. S. at 222). The decision below repre-
sents a plain repudiation of this trend. By redefining
“minimal contacts” to test something beyond the presence
of a defendant in the jurisdiction, and “affiliating circum-
stances” to test something other than the presence of an
intangible res within the jurisdiction, it has created con-
stitutional impediments to jurisdiction where none had
heretofore been discerned.
The court below reached its conclusion largely ipse
dixit. Not only does it develop its own thesis by miscon-
struction of the authorities relied upon, it gives back-of-
the-hand treatment to the contrary views of the district
court and the Supreme Court of Delaware, labelling them
“cryptic” (A77) and “truncated” (A84). However, no-
where does the court below come to grips with their rea-
soning. For example, the District Judge developed a sig-
nificant parallel between the constitutional reach of a state
court over a non-resident defendant personally served and
a non-resident defendant whose property is attached
(A75-76). The District Judge also saw in the doctrine of
forum non conveniens a utilitarian, non-constitutional
method by which courts might deal with the potential of
abuse which the circuit court perceived. The opinion is
silent on both of these subjects.
If the law of quasi-in-rem jurisdiction is to be changed
and Pennoyer v. Neff, supra, is to be discarded after a
century of heretofore uniform acceptability and prior
centuries of usage, it is a change to be imposed by this
Court after full consideration of all arguments. Peti-
tioners submit that such consideration must inevitably lead
to its reaffirmation. In all events, the subject is important
enough in its broad implications to warrant such con-
sideration, which, plainly, the court below failed to give it.
20 Petition for Writ of Certiorari
CONCLUSION.
For reasons set forth above, a writ of certiorari should
issue to review the judgment and opinion of the United
States Court of Appeals for the Third Circuit.
Respectfully submitted,
Davin A. DREXLER,
P. O. Box 1347,
12th & Market Streets,
Wilmington, Delaware. 19899
WILuiaM F. SONDERICKER,
299 Park Avenue,
New York, New York. 10017
Of Counsel:
Morais, NicHOLs, ARSHT & TUNNELL,
P. O. Box 1347,
12th & Market Streets,
Wilmington, Delaware. 19899
OLwInE, CONNELLY, CHASE, O’DONNELL
& WEYHER,
299 Park Avenue,
New York, New York. 10017
APPENDIX A.
Statutes and Rules Involved.
6 Del. C. § 8-317. Effect on attachment and sequestration
laws; attachment or levy upon
security.
(1) Nothing contained in this subtitle shall repeal,
amend or in any way effect the provisions of sections 169
and 324, title 8, or sections 365 and 366, and chapter 35,
title 10; and to the extent that any provision of this subtitle
is inconsistent with such sections, sections 169 and 324,
title 8, and 365 and 366 and chapter 35, title 10, shall be
controlling.
8 Del. C. § 169. Situs of ownership of stock.
For all purposes of title, action, attachment, garnish-
ment and jurisdiction of all courts held in this State, but not
for the purpose of taxation, the situs of the ownership of
the capital stock of all corporations existing under the laws
of this State, whether organized under this chapter or
otherwise, shall be regarded as in this State.
8 Del. C. § 324. Attachment of shares of stock or any
option, right or interest therein;
procedure; sale; title upon sale;
proceeds.
(a) The shares of any person in any corporation with
all the rights thereto belonging, or any person’s option to
acquire the shares, or his right or interest in the shares, may
be attached for debt, or other demands. So many of the
shares, or so much of the option, right or interest therein
(Al)
A2 Appendix A
may be sold at public sale to the highest bidder, as shall be
sufficient to satisfy the debt, or other demand, interest and
costs, upon an order issued therefor by the court from
which the attachment process issued, and after such notice
as is required for sales upon execution process. If the
debtor lives out of the county, a copy of the order shall
be sent by registered or certified mail, return receipt re-
quested, to his last known address, and shall also be pub-
lished in a newspaper published in the county of his last
known residence, if there be any, 10 days before the sale;
and if the debtor be a nonresident of this State shall be
mailed as aforesaid and published at least twice for 2 suc-
cessive weeks, the last publication to be at least 10 days
before the sale, in a newspaper published in the county
where the attachment process issued.
(b) When shares of stock, or any option to acquire
such or any right or interest in such, shall be so attached,
a certified copy of the process shall be left in this State
with any officer or director, or with the registered agent of
the corporation. Within 20 days after service of the proc-
ess, the corporation shall serve upon the plaintiff a cer-
tificate of the number of shares held or owned by the
debtor in the corporation, with the number or other marks
distinguishing the same, or in the case the debtor appears
on the books of the corporation to have an option to
acquire shares of stock or any right or interest in any
shares of stock of the corporation, there shall be served
upon the plaintiff within 20 days after service of the proc-
ess a certificate setting forth any such option, right or
interest in the shares of the corporation in the language
and form in which the option, right or interest appears on
the books of the corporation, anything in the certificate
of incorporation or bylaws of the corporation to the con-
trary notwithstanding. Service upon a corporate registered
Appendix A A3
agent may be made in the manner provided in § 321 of
this title.
(c) If the shares of stock or any of them or the option
to acquire shares or any such right or interest in shares,
or any part of them, be sold as provided in subsection (a)
of this section, any assignment, or transfer thereof, by the
debtor, after attachment so laid, shall be void. If, after
sale made and confirmed, a certified copy of the order of
sale and return be left with any officer or director or with
the registered agent of the corporation, the purchaser shall
be thereby entitled to the shares or any option to acquire
shares or any right or interest in shares so purchased, and
all income, or dividends which may have been declared,
or become payable thereon since the attachment laid.
Such sale, returned and confirmed, shall transfer the shares
or the option to acquire shares or any right or interest in
shares sold to the purchaser, as fully as if the debtor, or
defendant, had transferred the same to him according to
the certificate of incorporation or bylaws of the corpora-
tion, anything in the certificate of incorporation or bylaws
to the contrary notwithstanding. No order of sale shall be
issued until after final judgment shall have been rendered
in any case. The court which issued the levy and con-
firmed the sale shall have the power to make an order
compelling the corporation, the shares of which were sold,
to issue new certificates to the purchaser at the sale and to
cancel the registration of the shares attached on the books
of the corporation upon the giving of an open end bond
by such purchaser adequate to protect such corporation.
(d) The money arising from the sale of the shares
or from the sale of the option or right or interest shall be
applied and paid, by the public official receiving the same,
as by law is directed as to the sale of personal property in
cases of attachment.
A4 Appendix A
10 Del. C. § 366. Compelling appearance of nonresident
defendant.
(a) If it appears in any complaint filed in the Court
of Chancery that the defendant or any one or more of the
defendants is a nonresident of the State, the Court may
make an order directing such nonresident defendant or
defendants to appear by a day certain to be designated.
Such order shall be served on such nonresident defendant
or defendants by mail or otherwise, if practicable, and
shall be published in such manner as the Court directs, not
less than once a week for 3 consecutive weeks. The Court
may compel the appearance of the defendant by the seizure
of all or any part of his property, which property may be
sold under the order of the Court to pay the demand of
the plaintiff, if the defendant does not appear, or other-
wise defaults. Any defendant whose property shall have
been so seized and who shall have entered a general ap-
pearance in the cause may, upon notice to the plaintiff,
petition the Court for an order releasing such property or
any part thereof from the seizure. The Court shall release
such property unless the plaintiff shall satisfy the Court
that because of other circumstances there is a reasonable
possibility that such release may render it substantially less
likely that plaintiff will obtain satisfaction of any judgment
secured. If such petition shall not be granted, or if no
such petition shall be filed, such property shall remain sub-
ject to seizure and may be sold to satisfy any judgment
entered in the cause. The Court may at any time release
such property or any part thereof upon the giving of suf-
ficient security.
(b) The Court may make all necessary rules respect-
ing the form of process, the manner of issuance and re-
turn thereof, the release of such property from seizure and
for the sale of the property so seized, and may require the
Appendix A A5
plaintiff to give approved security to abide any order of
the Court respecting the property.
(c) Any transfer or assignment of the property so
seized after the seizure thereof shall be void and after the
sale of the property is made and confirmed, the purchaser
shall be entitled to and have all the right, title and interest
of the defendant in and to the property so seized and sold
and such sale and confirmation shall transfer to the pur-
chaser all the right, title and interest of the defendant in
and to the property as fully as if the defendant had trans-
ferred the same to the purchaser in accordance with law.
(Code 1852, § 1938; 17 Del. Laws, c. 215; Code 1915,
§ 3850; 34 Del. Laws, c. 216, § 2; 35 Del. Laws, c. 217; 36
Del.
DELAWARE CHANCERY COURT RULE 4
(db) Service by Publication and Seizure.
(1) No order shall be entered under 10 Del. C. § 366
unless it appears in the complaint that the defendant or
any one or more of the defendants is a nonresident of the
State of Delaware and the application therefor is ac-
companied by the affidavit of a plaintiff or other credible
person stating:
(a) As to each nonresident defendant whose ap-
pearance is sought to be compelled, his last known
address or a statement that such address is unknown
and cannot with due diligence be ascertained.
(b) The following information as to the property
of each such defendant sought to be seized:
(1) A reasonable description thereof.
(2) The estimated amount and _ value
thereof.
A6 Appendix A
‘
(3) The nature of the defendant’s title or
interest therein; and if such title or interest be
equitable in nature, the name of the holder of
the legal title.
(4) The source of affiant’s information as to
any of the items as to which the affidavit is made
on information and belief.
(5) The reason for the omission of any of
the required statements.
(2) Within 3 business days after the filing of such
bond or bonds as may be required or within such other
time as the Court may fix, the Register shall, in addition
to making the required publication, send by registered or
certified mail to each defendant whose appearance is
sought to be compelled a certified copy of the order and a
copy of the pleading asserting the claim.
(3) After the filing of such bond or bonds as may be
required by the order, but not later than 10 days after the
date of the order of seizure, the sequestrator shall serve a
certified copy of the order upon the person, persons or
corporation having possession or custody of the property
or control of its transfer, and shall seize the property. The
sequestrator shall seize property which is, or appears, not
to be susceptible of physical seizure within the State by
serving a direction in writing that the person, persons or
corporation having possessicn or custody of the property
or control of its transfer, shall:
(a) Retain the property and recognize no trans-
fer thereof until further notice from the sequestrator
or order of the Court;
(b) Forthwith make a notation upon any records
pertaining to the property that such property is held
pursuant to the order of the Court; and
Appendix A A7
(c) Within 10 days after the date of such service,
deliver a certificate under oath to the sequestrator,
specifying (i) such defendant's property, if any, of
which it has possession, custody or control or control
of its transfer; (ii) whether the title or interest of
each such defendant is legal or beneficial; and (iii)
if legal, the name and address of the holder of any
equitable title or interest therein, if known, and, if
beneficial, the name and address of the holder of the
legal title thereto, if known.
(4) Within 20 days after seizure, unless otherwise
specially ordered, the sequestrator shall make his return
to the Court, therein setting out all proceedings hereunder
to the date of said return, including the date and hour of
service and seizure pursuant to subdivision (3) hereof.
(5) The Court may in its discretion and subject to
statutory requirements dispense with or modify compli-
ance with the requirements of any part of this Rule in any
cause upon application to it stating the reasons therefor.
FEDERAL CIVIL RULE 4(e)
Summons: Service Upon Party Not Inhabitant of or
Found Within State. Whenever a statute of the United
States or an order of court thereunder provides for service
of a summons, or of a notice, or of an order in lieu of sum-
mons upon a party not an inhabitant of or found within the
state in which the district court is held, service may be
made under the circumstances and in the manner pre-
scribed by the statute or order, or, if there is no provision
therein prescribing the manner of service, in a manner
stated in this rule. Whenever a statute or rule of court
of the state in which the district court is held provides (1)
for service of a summons, or of a notice, or of an order in
A8 Appendix A
lieu of summons upon a party not an inhabitant of or found
within the state, or (2) for service upon or notice to him
to appear and respond or defend in an action by reason of
the attachment or garnishment or similar seizure of his
property located within the state, service may in either
case be made under the circumstances and in the manner
prescribed in the statute or rule.
Appendix B AQ
APPENDIX B.
U. S. INDUSTRIES, a CorporaTION AND DIvERSACON
INpustTRIES, INC., A CORPORATION,
Plaintiffs,
v.
F. BROWNE GREGG,
Defendant.
Civ. A. No. 4431.
United States District Court,
D. Delaware.
Sept. 28, 1972.
David A. Drexler, Morris, Nichols, Arsht & Tunnell,
Wilmington, Del., and Olwine, Connelly, Chase, O'Donnell
& Weyher, New York City, for plaintiffs.
Thomas S. Lodge, and John R. Bowman, Connolly,
Bove & Lodge, Wilmington, Del., and Bedell, Bedell,
Dittmar, Smith & Zehmer, Jacksonville, Fla., for defendant.
H. James Conaway, Jr., and Ben T. Castle, Young,
Conaway, Stargatt & Taylor, Wilmington, Del., for inter-
venor, First National Bank of Leesburg.
Opinion.
STAPLETON, District Judge.
U. S. Industries, Inc., a Delaware corporation having
its principal place of business in New York (“USI”), and
Diversacon Industries, Inc., a Florida corporation having its
principal place of business in Florida (“Diversacon” ), in-
Al0 Appendix B
stituted this action in the Court of Chancery of the State of
Delaware against F. Browne Gregg, a citizen of the State
of Florida. In the latter part of 1969 USI and Gregg en-
tered into an Agreement and Pian of Reorganization (the
“Agreement” ). In this Agreement USI committed itself to
purchase from Gregg all of the issued and outstanding
shares of capital stock of certain corporations controlled
by Gregg (the “Gregg corporations”) in exchange for
shares of USI voting common and special preference stock.
The Agreement also provided for the execution of an em-
ployment contract under which Gregg would commit him-
self to USI to serve as an executive of the Gregg corpora-
tions. Such a contract was entered into at the closing of
the transaction on October 20, 1969. Subsequent to that
closing and as contemplated by the Agreement, the busi-
nesses formerly conducted by the Gregg corporations were
transferred to the plaintiff Diversacon, a wholly owned
subsidiary of USI.
The complaint is divided into eight counts. Those
counts set forth the following claims:
1. A common law deceit claim by USI against Gregg
based on allegations that Gregg made representations of
material facts which were false and misleading and omitted
to state material facts necessary in order to make the state-
ments made not misleading in order to induce USI to enter
the Agreement.
2. A claim by USI against Gregg under Section 17(a)
of the Securities Act of 1933 based on the same factual
allegations stated in Count 1 plus the allegation that instru-
mentalities of interstate commerce were utilized by Gregg.
3. A common law breach of warranty claim by USI
against Gregg based upon the same factual allegations con-
tained in Count 1.
Appendix B All
4. A claim by USI against Gregg for the impressment
of constructive trust upon Gregg’s USI stock based upon
the foregoing factual allegations and an additional allega-
tion that Gregg intends to sell, transfer or otherwise dispose
of or encumber said stock and that this would irreparably
damage USI by rendering judgment ineffectual.
5. A common law rescission claim by USI against
Gregg based on the foregoing factual allegations and the
assertion that USI was fraudulently induced to employ
Gregg pursuant to the employment agreement.
6(a). A breach of contract claim by USI against
Gregg based on an allegation that Gregg breached his com-
mitment to devote his full business time and best efforts to
the business of the Gregg corporations or any successor
entity “by mismanaging Diversacon, as by, among other
things, undertaking contracts on the basis of estimates of
the corporation's ability to complete them which he knew
or should have known to be erroneous, thereby committing
the corporation to contracts on terms it could not meet.”
(b). A breach of fiduciary duty claim by Diversacon
against Gregg based on an allegation that the same “mis-
management’ constituted a breach of duty owed by Gregg
as an employee of Diversacon.
7. A breach of contract claim by USI against Gregg
based on an allegation that Gregg breached a covenant not
to compete “in that, while in the employ of USI, Gregg bid
successfully against USI for the acquisition of Can Con-
crete Rock Co., Inc., a Florida corporation, with actual or
constructive knowledge of USI’s bid.”
8. A breach of contract claim by Diversacon against
Gregg based on an allegation that Gregg has failed to pay
Diversacon on a $500,000 note executed by Gregg in favor
of the Gregg corporations, executed on October 20, 1969.
Al2 Appendix B
The complaint asks the following relief:
(a) Claims 1, 2 and 3—$20,000,000,
(b) Claim 4—the impressment of a trust,
(c) Claim 5—return of the compensation paid
Gregg,
(d) Claims 6 and 7—unspecified compensatory
damages, and
(e) Claim 8—$400,000 plus interest.
After filing its complaint, USI secured an order of the
Court of Chancery purporting to sequester all shares of
common and preferred stock of USI “owned, of record or
beneficially, by said defendant.” The sequestrator was
authorized “to seize and hold said property and any right,
title or interest, legal or equitable, which” Gregg had
therein.
The First National Bank of Leesburg, Leesburg,
Florida, intervened in the Chancery action and moved to
quash the order of sequestration on the ground that it held
the “equitable ownership” of the stock as a result of a
pledge thereof in December of 1971 as security for a loan.
The motion to quash was argued before the Court of
Chancery, but the case was removed by Gregg before any
decision on that motion was handed down. Following re-
moval, the bank renewed its motion to quash the sequestra-
tion ’ and plaintiffs moved to remand the case to the Court
1. Plaintiffs concede that the sequestration could not have
seized any interest which Gregg did not ess at the time of
sequestration in June of 1972 and that the bank's rights under its
pledge agreement are senior. The Court has offered to amend the
order of sequestration to permit the bank to exercise any of the
rights given to it by ~4 oo _—~—_ including the right of
sale subject to any right Gregg may have with respect to the
—~ exceeding the amount of the loan. The bank has thus
ar, however, asked for and received only an amendment to the
order of sequestration permitting the transfer of the stock into the
name of the bank on the records of the company as provided for
in the pledge agreement.
Appendix B Al3
of Chancery. Thereafter Gregg also moved to quash the
sequestration and to dismiss this action.
These motions present four issues for resolution. First,
is this case properly removable under § 1441 of Title 28 of
the United States Code? Second, if so, does the specific
non-removal provision of the Securities Act of 1933, 15
U. S. C. § 77a et seq., prevent removal? Third, is the
sequestration order, upon which the state court's jurisdic-
tion was predicated and from whence our jurisdiction
derives, valid? And, finally, if this Court has jurisdiction
should any of the claims asserted be remanded to the state
court?
I. REMOvAL UNpER § 1441.
In support of his removal, Gregg relies on § 1441(c)
of Title 28 of the United States Code which provides:
“Whenever a separate and independent claim or
cause of action, which would be removable if sued
upon alone, is joined with one or more otherwise non-
removable claims or causes of action, the entire case
may be removed and the district court may determine
all issues therein, or, in its discretion, may remand all
matters not otherwise within its original jurisdiction.”
Plaintiffs, in support of remand, assert that there is no
“separate and independent claim or cause of action” in
their complaint, “which would be removable if sued upon
alone.” They assert both that the complaint states no claim
or cause of action which is separate and independent of the
others, and, in the alternative, that if there is a separate and
independent claim or cause of action its removal is barred
either by want of complete diversity between adverse par-
ties or by Section 22 of the Securities Act of 1933, 15
U. S. C. § 77v(a), which provides in part:
Al4 Appendix B
“. . . No case arising under this subchapter [the Secu-
rities Act of 1933] and brought in any State court of
competent jurisdiction shall be removed to any court
of the United States... .”
Plaintiffs’ initial argument stresses that all claims in
the complaint arise as a result of USI’s acquisition of the
Gregg corporations. Plaintiffs correctly assert that the
diversity of legal theories supporting the various claims and
the fact that each does not rest upon the identical factual
allegations is not determinative.? Assuming, however, that
all the claims here asserted do arise out of the same “inter-
locked series of transactions” as that phrase is used in the
relevant legal standard, plaintiffs’ analysis ignores another
equally important element in that standard.
In American Fire & Casualty Co. v. Finn, 341 U. S. 6,
14, 71 S. Ct. 534, 540, 95 L. Ed. 702 (1951), the Supreme
Court held that “where there is a single wrong to plaintiff,
for which relief is sought, arising from an interlocked series
of transactions, there is no separate and independent claim
or cause of action under § 1441(c).” It is clear from this
statement, the Finn opinion as a whole, and the subsequent
cases applying its rationale that related transactions and
common questions of law or fact are not alone enough to
weld claims together for the purpose of applying § 1441(c).
The circumstances and character of the impact upon the
plaintiff or plaintiffs are also crucial.* Elsewhere in its
2. American Fire & Casualty Co. v. Finn, 341 U. S. 6, 71 S. Ct.
534, 95 L. Ed. 702 (1951).
3. See analysis in Mayflower Industries v. Thor Corp., 184
F. 2d 537 (3rd Cir. 1950); Twentieth Century Fox Film Corpora-
tion v. Taylor, 239 F. Supp. 913 (S. D. N. Y. 1965); Pinto v.
Maremont Corporation, 326 F. Supp. 165 (S. D. N. Y. 1971);
Greenshields v. Warren Petroleum, 248 F. 2d 61 (10th Cir. 1957%°
Unanue v. Caribbean Canneries, Inc., 323 F. Supp. 63 (D. Del.
1971); 1A Moore, Federal Practice, { 0.163[4-5], pp. 708, 712-713.
Appendix B Al5
opinion the Supreme Court suggests that inquiry must be
made of whether there was “a single wrongful invasion of a
single primary right of the plaintiff’—“one actionable
wrong for which plaintiff “was entitled to but one re-
covery —damage arising from “a single incident.” 341
U. S. at 13, 16, 71 S. Ct. at 540. As will appear hereafter
the second part of this test is important in the context of
this case and precludes a finding that no claim asserted is
separate and independent of the others.
I accept plaintiffs’ argument that Claims 1 through 5
are not separate and independent. All of these claims al-
lege facts occurring in connection with a single transaction
and assert but a single invasion of a single right, i. e., UST's
right to be free from deception in its business dealings with
others. The alleged damage to USI resulted from a single
incident, consummation of a fraudulently induced bargain.
Korber v. Lehman, 221 F. Supp. 358 (S. D. N. Y. 1963).
While the matter is not quite so clear, I agree with
plaintiffs that Claims 6(a) and (b) are not separate and
independent of each other. There is a split among the
commentators as to whether plaintiffs who do not rely upon
a right held jointly can ever be said to assert claims that are
not separate and independent. The cases show a greater
willingness to find separate and independent claims in
situations where multiple plaintiffs have claims against a
defendant or defendants than in situations where a single
plaintiff asserts several multiple claims against a defendant
or defendants. However, where the facts alleged arise out
of the same transaction and damage to the respective plain-
tiffs is similar in kind and arises from a single incident,
nothing in the Finn rationale would appear to dictate a
holding of separate and independent claims. While the
claims of the respective plaintiffs may be “separate,” they
Al6 Appendix B
are not “independent.” Fugard v. Thierry, 265 F. Supp.
743 (N. D. Ill. 1967); Rosen v. Rozan, 179 F. Supp. 829
(D. C. Mont. 1960); Wright, Federal Courts, § 39, n. 18
(1972 Supp.); Note, 52 Columbia L. Rev. 101, 106-107
(1952). a
While USI’s Claim 6(b) is for breach of contract and
Diversacon’s 6(a) claim is for breach of fiduciary duty,
both rest upon the same facts. Any injury to these plain-
tiffs would result from a single invasion of a same interest
and would “come from a single incident.” USI, as a sole
stockholder of Diversacon, had an interest in the quality of
the management of Diversacon which it sought to protect
by contract. Any invasion of that interest would be a
simultaneous invasion of an identical interest of Divers-
acon’s. While USI might conceivably be entitled to some
damage not recoverable by Diversacon, any damage would
necessarily stem from injury to Diversacon and any damage
for which Diversacon recovered would not be recoverable
by USI.
Since the claims stated in Claims 1 through 5 are not
removable by reason of Section 22(a) of the Securities
Act * and the claims stated in Claims 6(a), 6(b), and 8 are
not removable for want of either complete diversity or a
federal claim, the crucial question becomes whether Claim
7 states a claim separate and independent of the other
claims in the complaint. Plaintiffs argue that, at a min-
imum, Count 7 is not separate and independent of Claims
6(a) and (b). First, they suggest that Claim 7, fairly
read, alleges an injury to USI through competition by
Gregg with Diversacon, and that the interest allegedly in-
vaded in that claim is the same as the common interest of
USI and Diversacon allegedly invaded in Claim 6. Claim
4. Cf. Pate v. Standard Dredging Corp., 193 F. 2d 498
Cir. 1952). es
Appendix B Al7
7 in plaintiffs’ view is only a particularization of the “mis-
management of Diversacon, Inc.” alleged in Claims 6(a)
and (b). Accordingly, plaintiffs conclude that Claim 7 is
not a separate and independent claim. I do not agree with
this conclusion.
Assuming that competition with USI through appro-
priation of a corporate opportunity of Diversacon could
fairly be said to come within the conclusory allegation of
“mismanagement of Diversacon,” * this does not answer the
relevant question unless all claims against a single fiduciary
for corporate mismanagement necessarily constitute non-
separate, non-independent claims. I see no reason to so
hold. Here as in other areas the question must be whether
the facts relied upon by the pleader show separate and
independent claims.
Claim 6 alleges that Gregg committed Diversacon to
contracts which he knew or should have known would be
non-profitable to the detriment of USI and Diversacon.°
Claim 7, liberally construed in the context of the attach-
ments to the complaint, alleges a claim that Gregg damaged
USI by bidding for a company which competes with
Diversacon.
I conclude that these are separate and independent
claims. The only things which they have in common are
that they arise in the context of relationships initially estab-
lished in the USI acquisitions of the Gregg corporations,
5. This assumption, at the least, stretches the concept of mis-
management beyond its commonly accepted scope.
6. The general allegation that Cregg has been guilty of “mis-
managing” Diversacon to the extent it does more than characterize
the facts alleged in this claim, is no more than a conclusion which
can and should be disregarded for present purposes. “The subject
matter of the controversy is whatever the plaintiff in good faith
declares it to be in his pleadings, not by conclusions of law but
by well-pleaded allegations of fact.” Edwards v. E. I. DuPont de
Nemours & Co., 183 F. 2d 165, 168 (5th Cir. 1950).
Al18 Appendix B
and, that as to USI, they allegedly constitute breaches of
the same employment contract. Except for this common
background, the transactions from which these claims arise
are neither similar in character nor otherwise related. The
alleged injuries complained of in Claims 6 and 7 do not
result from a single incident or invasion. Moreover, the
impact on USI and Diversacon of the Diversacon contracts
referred to in Claim 6 and the impact on them of the Con-
crete Rock acquisition referred to in Claim 7 appear wholly
unrelated in time or character. USI could recover damages
for either wrong without recovering damages for the other
or could recover for both without creating any problem of
duplication of damages.
In view of the otherwise distinct character of these
claims, the question boils down to whether breach of con-
tract claims based on the sare contract are necessarily non-
separate, non-independent claims for purposes of Section
1441(c). Ihave found no case which directly passes upon
this question. A negative response is dictated, however, by
those authorities recognizing that the existence of common
questions of law or fact are not alone enough to preclude
removal under that section.
The only remaining question is whether Claim 7 is
separate and independent from Claims 1 through 5 and
from Claim 8. I conclude that it is. As heretofore noted,
the wrong to USI in Claims 1 through 5 flowed from the
consummation of a fraudulently induced bargain. It is
wholly unrelated to the wrong to USI flowing from the
alleged breach of the covenant not to compete and the
wrong to Diversacon flowing from the alleged default on
the note. While it is perhaps true that USI could not re-
cover on its fifth claim for rescission of the employment
contract and on its seventh claim for breach of the cov-
enant not to compete, this is because the claims are legally
Appendix B Al9
inconsistent and not because a monetary recovery on one
would compensate USI for the alleged injury arising from
the other.’
II. Secrion 22(a) oF THE SECURITIES ACT.
The conclusion that Claim 7 is a separate and inde-
pendent claim which because of diversity of citizenship
would be removable if sued upon alone necessitates an
examination of the relationship between § 1441(c) of Title
28 and Section 22 of the Securities Act of 1933. 15 U.S.C.
§ 77v.
Despite the separate and independent character of
Claim 7, Claim 2, arising under the Securities Act, never-
theless remains in the case. It can be argued that Section
22(a) precludes the removal of any action containing a
claim under the Securities Act and that such a construc-
tion of the relevant statutes comports with the general
policy favoring strict construction of the removal provi-
sions. 1A Moore, Federal Practice, {0.157 [1.3]. The
question presented by this argument appears to be one of
first impression although a few cases have considered sim-
ilar questions arising under statutes similar to Section 22 (a)
in language and purpose.
Both the Jones Act, 46 U. S. C. § 688, and the Fed-
eral Employers’ Liability Act, 45 U. S. C. §§ 51-56, sim-
7. Pinto v. Maremont Corporation, 326 F. Supp. 165 (S. D.
N. Y. 1971) is the only case found which arguably supports a
conclusion contrary to the one I here reach. That case does not
go as far, in my judgment, as plaintiffs suggest. The nature of the
misrepresentation in the Pinto case is not disclosed in the opinion.
However, the court's observation that “recovery could not be had
under both the Securities Act claim and the contract claims,”
together with its reliance at this point on Korber v. Lehman, 221
F. Supp. 358 (S. D. N. Y. 1963) leads me to believe the damage
to the plaintiff on the misrepresentation claims and those on the
contract claims was identical and recovery on either would com-
pensate plaintiffs for the same injury.
A20 Appendix B
ilarly prohibit removal of claims asserted thereunder. 28
U.S. C. § 1445(a). Since the 1948 revision of the Judicial
Code and the expansive reading given to § 1441(c) by the
Supreme Court in Finn, rarely has a court, faced with a
possible conflict between § 1441(c) and the applicable
nonremoval provision, found a “separate and independent”
claim. The question is thus avoided in the overwhelming
number of reported cases.* There are, however, a handful
of vintage district court opinions which decide that the
joinder of a state law cause of action with a F. E. L. A.
claim makes the whole case removable in the presence of
the requisite diversity. Strother v. Union Pac. R. Co., 220
F. 731 (W. D. Mo. 1915): Bedell v. Baltimore & O. R.
Co., 245 F. 788 (Ohio 1917); Givens v. Wight, 247 F.
233 (N. D. Tex. 1918). The legal theory upon which the
question is there resolved is that in joining removable
claims to a statutorily nonremovable one the plaintiff
“waived” his right to the forum of his choice. Other cases
from the same period, however, refer to the statutory pro-
visions restricting removability as “jurisdictional” and indi-
cate that there are no circumstances under which a case
falling thereunder could be removed. Mitchell v. South-
ern Ry. Co., 247 F. 819 (N. D. Ga. 1917); Jones v. South-
ern Ry., 236 F. 584 (N. D. Ga. 1916).
Only one modern case has squarely decided the ques-
tion. In Emery v. Chicago, B. & Q. R. Co., 119 F. Supp.
654 (S. D. Iowa 1954) plaintiff pleaded a cause of action
8. See e. g., Pate v. Standard Dredging Corp. 193 F. 2d 498
= Cir. 1952) (an action for negligence under the Jones Act and
or unseaworthiness under general maritime law did not state
separate and independent claims and was thus non-removable
under the Jones Act). Accord, Gutierrez v. Pacific Tankers, 81
F. Supp. 278 (S. D. Tex. 1948); Greene v. United Fruit Co., 85
F. Supp. 81 (S. D. N. Y. 1949); McKee v. Merritt-Chapman &
Scott . 144 F. Supp. 423 (N. D. Ill. 1956); Hall v. Illinois
Cent. R. Co., 152 F. Supp. 549 (W. D. Ky. 1957).
Appendix B AQ]
based on the Federal Employers’ Liability Act and joined
with it several claims based on breach of contract. The
court held that the claims were “separate and independ-
ent” and the entire case was removable under § 1441(c).
The court there seemed to adopt the waiver rationale of
the older cases cited above:
“, .. It rested with (plaintiff) whether he should state
a cause solely under the Act and therefor not remov-
able, or unite it with causes of action which might be
removed. When he adopted the latter course, de-
fendant then became entitled to exercise the right of
removal conferred upon it by the statutes as to the
causes of action properly removable. . . .” Id. at 657.
The commentators have spoken to the problem with
something less than unanimity. Professor Moore in speak-
ing of the non-removal provision of the Jones Act has said:
“Finally, there is one situation where a literal ap-
plication of the removal statute would effect the re-
moval of a Jones Act claim. Under the provisions of
§ 1441(c) where there is a removable separate and
independent claim joined with the nonremovable
Jones Act claim, the entire suit can be removed .. .”
(citing Emery) 1A Moore, Federal Practice {| 0.167
[3.2]
Professor Cohen has taken a different view:
“Thus, it is possible, in a case where two parties are
of diverse citizenship to encounter the joinder of an
unremovable claim with a totally disconnected claim
which would otherwise be removable. Assuming
that the nonremovable claim is sufficiently substantial
to pass muster under the fraudulent joinder rules, the
A22 Appendix B
combined force of the policies generally precluding
removal of the unremovable claim and those per-
mitting joinder argue for leaving the entire litigation
in the state court.” Cohen, Problems in the Removal
of a “Separate and Independent Claim or Cause of
Action,” 46 Minn. L. Rev. 1 (1961).
I find the waiver rationale of the Emery case unper-
suasive.” It assumes its own conclusion. The real question
is whether Section 22 of the Securities Act and § 1441 re-
flect a congressional intent to give a claimant under the
Securities Act his choice of forum even though he joins a
separate and independent claim. If Congress did so in-
tend, a Securities Act plaintiff cannot be said to have
waived his right to such a joinder.
Neither do I find, as Professor Cohen suggests, that
the policies underlying Section 22(a) and § 1441(c)
clearly dictate an answer. Section 22(a) reflects a con-
gressional solicitude for Securities Act claimants and
grants them their choice of forum for litigating their
claims. Conflicting with this policy is the apparent two-
told purpose of § 1441(c): (a) to assure that a defendant
entitled to a federal forum for the litigation of a federal
claim or a claim by a citizen of a different state will not
be deprived of that right by his adversary’s joinder of a
nonremovable, separate and independent claim and (b)
at the same time to assure that all claims which should be
9. While there is authc-ity for the proposition that an F. E.
L. A. plaintiff may waive his right to a state forum by his failure
to move for remand in the federal court, Bailey v. Texas Co., 47
F. 2d 153 (2nd Cir. 1931); Jacobson v. Chicago, M. St. P. & P. Ry.
Co., 66 F. 2d 688 (8th Cir. 1933); Woodward v. D. H. Overmeyer
Co., 428 F. 2d 880 (2nd Cir.), cert. denied, 400 U. S. 993,
." — = 27 ey 2d 441 (1970), such a waiver should
clearly distinguished from a waiver predicated upon the joinder
claims in the state court. 4
Appendix B A23
litigated together for reasons of judicial economy be liti-
gated in the same forum. Because of this conflict, the
problem resolves itself into drawing a line where Congress
intended the right granted a Securities Act claimant to
cease and the protection granted defendants to commence.
Congress could reasonably have drawn the line either to
include or to exclude this type of case from the removable
class.
The answer I believe is to be found in an analysis of
§ 1441." This statute contains two grants of removal
jurisdiction. Subsection (a) grants the general right of
removal to defendants in any case that could originally
have been brought in a district court of the United States.
The first clause of that subsection limits this authority to
cases where a contrary result has not been “otherwise ex-
pressly provided by Act of Congress.” This is a clear refer-
10. § 1441:
“(a) Except as otherwise expressly provided by Act of
any civil action brought in a State court of which
the district courts of the United States have original jurisdic-
tion, may be removed by the defendant or the defendants, to
the district court of the United States for the district and
division embracing the place where such action is pending.
(b) Any civil action of which the district courts have
original jurisdiction founded on a claim or right arising under
the Constitution, treaties or laws of the United States shall be
removable without regard to the citizenship or residence of
the parties. Any other such action shall be removable only if
none of the parties in interest properly joined and served as
defendants is a citizen of the State in which such action is
brought.
(c) Whenever a ate and independent claim or cause
of action, which would be removable if sued upon alone, is
joi with one or more otherwise non-removable claims or
causes of action, the entire case may be removed and the
district court may determine all issues therein, or, in its dis-
cretion, may remand all matters not otherwise within its
on.
A24 Appendix B
ence to statutes like Section 22(a). Subsection (b) fur-
ther limits this general removal jurisdiction in diversity
cases to cases where no defendant is a resident.”
Subsections (a) and (c) “refer to two completely
different situations.” Port of New York Authority v. East-
ern Air Lines, Inc., 259 F. Supp. 142, 145 (E. D. N. Y. 1966).
Subsection (c) grants additional removal jurisdiction in a
class of cases which would not otherwise be removable
under the prior grant of authority. It assumes the existence
of a separate and independent claim which would not be
removable under that prior grant. A literal reading of
Section 1441 demonstrates that Subsection (c) is not sub-
ject to the restriction contained in the first clause of Sub-
section (a). Moreover, nothing in the language of Sub-
section (c) suggests a Congressional distinction between
two classes of suits “otherwise non-removable” within the
contemplation of that subsection, i. e., those non-remov-
able because they fall completely without the original
jurisdiction of the federal district courts and those which,
although dealing with federal questions, are made non-
removable by Congressional pronouncement.
I, accordingly, conclude that Section 22(a) restricts
the grant of general removal jurisdiction found in Subsec-
tion (a). However, in a case where a separate and inde-
pendent claim, which would be removable if sued upon
alone, is joined with one or more otherwise removable
claims, whether made non-removable by Section 22(a)
or otherwise, Subsection (c) is the governing provision
and authorizes removal of the entire case.
11. Because Subsection (b) is a limitation on the grant of
authority contained in Subsection (a) and not a separate grant
of authority, the absence of an “except as otherwise provided”
claim in Subsection (b) is not significant for present purposes.
Appendix B A25
III. THe VALIDITY OF THE SEQUESTRATION.
The motions to quash the sequestration assert two
arguments common to both: (1) Gregg owned no sequest-
erable interest in the stock at the time of sequestration and
(2) Delaware’s sequestration statute as here applied is
violative of the Due Process Clause of the United States
Constitution.
Gregg executed a $1,500,000“demand note in favor
of the Bank on December 28, 1971. The note reflected
that the USI stock involved was pledged to secure this
indebtedness and gave the Bank the right, among other
things, (1) to pledge or transfer the note and collateral
to any other pledgee, (2) to transfer all-of the collateral
to its own name or to the name of its nominee, (3) to vote
the stock, (4) to direct that any dividend payments on the
stock be made to it, (5) to “demand, sue for, collect or
make any compromise or settlement it deems desirable
with reference to the collateral,” (6) to take control of
any proceeds of the collateral and (7) to exercise the
“remedies” of a secured party under the Uniform Com-
mercial Code, if the Bank “deemed itself insecure or upon
the occurrence of any default.”
The sequestration order was served upon USI on or
about June 19, 1972. The stock was then registered in the
name of Gregg. As of July 27, 1972, the collateral was
valued by the Bank at $2,066,333.62.
The loan transaction was negotiated and closed in
Florida. The law of Florida determines the nature and
extent of Gregg’s interest, if any, in the stock.’"* The law
of Delaware controls the question of whether any such
interest may be sequestered under 10 Del. C. § 366.
12. The relevant portions of Florida’s version of the Uniform
Commercial Code do not, however, differ from those of the Dela-
ware version.
A26 Appendix B
Cheff v. Athlone Industries, Inc., 233 A. 2d 170 (Del. Sup.
Ct. 1967); Nickson v. Filtrol Corporation, 265 A. 2d 425
(Del. Ch. 1970).
An examination of Florida law reveals that Gregg had
not transferred his entire interest in the stock to the Bank
at the time of sequestration. The rights retained under
Article 9 of Florida’s Unitorm Commercial Code by a
debtor who has conveyed a security interest in collateral
apply “whether title to collateral is in the secured party or
in the debtor.” 19C Fla. Siat. Ann. § 679.9-202 (West
1966). These rights include the right of return of the
collateral upon fulfillment of the debtor's obligations. Id.
§ 679.9-506. This right is expressly recognized in the
Gregg note; it is, in any event, unwaivable. Id. § 679.9-501.
The rights reserved to the debtor under Article 9
are rights in the collateral itself and may be transferred
voluntarily or involuntarily. Jd. § 679.9-311 provides:
“The debtor's rights in collateral may be volun-
tarily or involuntarily transferred (by way of sale,
creation of a security interest, attachment, levy,
garnishment or other judicial process) notwithstand-
ing a provision in the security agreement prohibiting
any transier or making the transier constitute a de-
fault.”
Stock in a Delaware corporation is personal property
having its situs in Delaware. 8 Del. C. § 169. Accord-
ingly, interests therein coming within the scope of 10
Del. C. § 366 are sequesterable in Delaware for the pur-
pose of compelling the appearance of non-resident de-
fendants. Hodson v. The Hodson Corporation, 32 Del.
Ch. 76, 80 A. 2d 180 (1951). Somewhat surprisingly there
is no reported Delaware case directly ruling on whether
one in Gregg’s position has an interest sequesterable under
BEST COPY AVAILABLE
Appendix B A27
10 Del. C. § 366." I am convinced, however, that a Dela-
ware court confronted with the question would rule in the
affirmative.
Section 366 authorizes the Court of Chancery to “com-
pel the appearance of the defendant by the seizure of all
or any part of his property.” The word “property” as here
used has “a broad and comprehensive meaning, including
legal and equitable interest in both real and personal prop-
erty,” and is not limited to property interests seizable by
foreign attachment at law. Blumenthal v. Blumenthal, 28
Del. Ch. 1, 35 A. 2d 831, 836 (1944), affd 28 Del. Ch.
448, 59 A. 2d 216 (1945); Sands v. Lefcourt Realty Corp.,
35 Del. Ch. 340, 117 A. 2d 365 (1955). With this under-
standing as a base, Delaware courts, confronted with ques-
tions of whether interests in stock were sequesterable, have
asked whether the specified interest was cognizable at law
or equity, whether it was susceptible of sufficient identi-
fication to permit seizure, and whether it was saleable.
Blumenthal v. Blumenthal. supra; Green v. Johnston, 34
Del. Ch. 115, 99 A. 2d 627 (Sup. Ct. 1953). Here Gregg’s
interest is so cognizable, so identifiable and so alienable.
Accordingly, I conclude that it is sequesterable."* Dela-
13. There have been a number of cases where pledged stock
has been sequestered, but in all to which this Court has been
referred, the pledgee has apparently been content with modifica-
tion of the sequestration order in a manner which recognized its
senior rights.
14. “Bare legal title” (i.e., registered ownership) is sequester-
able, the property being subject to release only upon a showing
that its retention or sale would defeat or interfere with equitable
interests therein. Rebstock v. Lutz, 39 Del. Ch. 25, 158 A. 2d 487
(Sup. Ct. 1960). Equitable interests of limited scope have been
held to be sequesterable. In the Blumenthal case the plaintiff
creditor had dened that there had been a fraudulent conveyance
of stock by the defendant Blumenthal to his sister, Miriam Rogers.
The court held:
“. . Miriam Rogers is the legal owner of the stock, and
Blumenthal has no equitable rights therein, as between them;
A28 Appendix B
wares Uniform Commercial Code confirms this conclu-
sion. Section 9-311 of Title 5A of the Delaware Code, like
its Florida counterpart quoted above, provides that a
“debtor's rights in collateral may be . . . involuntarily trans-
ferred (by way of sale . . . attachment, levy, garnishment
or other judicial process ).” ”
Winitz v. Kline, 288 A. 2d 456 (Del. Ch. 1971) does
not dictate a contrary conclusion. In that case an order
of sequestration had been entered directing the seizure of
shares of a Delaware corporation “registered in the name
of” the defendant Kline. Prior to the seizure, Kline and the
other twenty-nine holders of the corporation’s outstanding
stock had entered a voting trust agreement. The certifi-
cates were surrendered by the five voting trustees to the
corporation for cancellation and eight new certificates had
been issued in the name of the voting trustees. Under the
voting trust agreement the depositing stockholders were
issued voting trust certificates. The certificates evidenced
the holder’s right upon termination of the trust to receive a
specified number of “fully paid and nonassessable shares of
the capital stock” and his right to “receive payments equal
14. (Cont'd. )
but it appears that the complainant is a defrauded creditor
who stands in a very different position. As between her and
Blumenthal, the latter had property rights in the stock, subject
to seizure under the statute, which enabled valid substituted
service to be had on him. ...” 35 A. 2d p. 836.
The fact that an interest is contingent or unmatured does not
make it non-sequesterable. Weinress v. Bland, 31 Del. Ch. 269,
71 A. 2d 59 (1950).
15. Section 8-317 of Delaware’s Uniform Commercial Code
provides that nothing in the Code shall “amend or in any way
effect” the provisions of Section 366 and that to the extent that
any such provision is inconsistent with Section 366, it shall control.
Arguably this might preclude reference to Section 9-311 for the
purpose of defining property under Section 366. As the Study
Comment on Section 9-311 indicates, however, that Section is a
reflection of pre-existing Delaware law.
Appendix B A29
to the cash dividends received by the . . . [trustees] upon
a like number of shares of capital stock of . . . [the
corporation], less the amount of any expense chargeable
to the holder.”
The Chancellor noted initially that the case was not
identical to earlier Delaware cases which had held that a
trustee holds the entire interest in corporate stock con-
stituting the corpus of the trust and that the beneficiaries
of the trust, while possessing an equitable interest in the
trust, had no interest in the stock itself. E.g., Nickson v.
Filtrol Corporation, supra. The reason for this observation
was a line of Delaware cases which state that a stockholder
who deposits his stock in a voting trust retains “beneficial”
ownership of the stock for some purposes. Sundlun v.
Executive Jet Aviation, Inc., 273 A. 2d 282 ( Del. Ch. 1970);
Clarke Memorial College v. Monaghan Land Co., 257 A. 2d
234 (Del. Ch. 1969); Smith v. Biggs Boiler Works Co., 33
Del. Ch. 183, 91 A. 2d 193 (1952); Chandler v. Bellanca
Aircraft Corporation, 19 Del. Ch. 57, 162 A. 63 (1932).
The Chancellor held, nevertheless, that the holders of the
voting trust certificates in the case before him did not have
a sequesterable interest in the corporate stock held by the
trustees as a trust corpus.
Two reasons were cited by the Chancellor for his con-
clusions: (1) the order directed seizure only of common
stock registered in the name of Kline and at the time of the
seizure no shares were so registered and (2) any interest
which Kline had in the stock was neither capable of effec-
tive seizure nor capable of being sold. In connection with
the second point the Chancellor pointed out that effective
seizure requires that the stock in which the defendant has
an interest must be readily identifiable. Greene v.
Johnston, 34 Del. Ch. 115, 99 A. 2d 627 (Sup. Ct. 1953).
He observed that in the case before him any beneficial in-
A30 Appendix B
terest of Kline could not “be related to specific blocks of
stock or lots of shares held by the trustees.” The Chan-
cellor further found that any such interest could not be sold
without disregard of the rights of third parties in the voting
trust. In this connection he pointed out that while the
interest evidenced by the voting trust certificates might be
effectively transferred, seized and sold, the sequestration
had been directed to the corporate shares and not to the
voting trust certificates.
None of the deficiencies present in the Winitz case are
present here. The sequestration order directed the seizure
of shares held in the name of Gregg and shares held in the
name of Gregg were seized. As indicated above, Gregg
has an interest in all of those identifiable shares which is
expressly made transferable, either voluntarily or invol-
untarily, by Section 9-311. That interest can be sold with-
out “disregard to the rights” of the Bank.
Both Gregg and the Bank attack Delaware’s sequestra-
tion statute as here applied on constitutional grounds.
Gregg’s attack is two-pronged. First he asserts that the
sequestration of property of a non-resident defendant in a
case having no substantial contact with Delaware violates
due process. Additionally both Gregg and the Bank assert
that the sequestration of property without prior notice and
an opportunity to be heard violates due process.
Delaware's sequestration statute, 10 Del. C. § 366, au-
thorizes the Court of Chancery, after the filing in that court
of a complaint against a non-resident, to enter an order
directing the defendant “to appear by a day certain to be
designated.” It then provides:
“The Court may compel the appearance of the
defendant by the seizure of all or any part of his prop-
erty, which property may be sold under the order of
the Court to pay the demand of the plaintiff, if the
Appendix B A31
defendant does not appear, or otherwise defaults. Any
defendant whose property shall have been so seized
and who shall have entered a general appearance in
the cause may, upon notice to the plaintiff, petition the
Court for an order releasing such property or any part
thereof from the seizure. The Court shall release such
property unless the plaintiff shall satisfy the Court that
because of other circumstances there is a reasonable
possibility that such release may render it substan-
tially less likely that plaintiff will obtain satisfaction
of any judgment secured. If such petition shall not
be granted, or if no such petition shall be filed, such
property shall remain subject to seizure and may be
sold to satisfy any judgment entered in the cause. The
Court may at any time release such property or any
part thereof upon the giving of sufficient security.”
Rule 4(db) of the Rules of the Court of Chancery,
Del. C. Ann., which implements the provisions of the
sequestration statute provides in part as follows:
“(db) Service by Publication and Seizure. (1)
No order shall be entered under 10 Del. C. § 366
unless it appears in the complaint that the defendant
or anv one or more of the defendants is a non-resident
of the State of Delaware and the application therefor
is accompanied by the affidavit of a plaintiff or other
credible person stating:
16. Subsection (c) of Section 366 provides as follows:
“Any transfer or assignment of the ry so seized after
the seizure thereof shall be void and after the sale of the
property is made and confirmed, the purchaser shall be entitled
to and have all the right, title and interest of the defendant
in and to the property so seized and sold and such sale and
confirmation shall transfer to the purchaser all the right, title
and interest of the defendant in and to the property as fully
as if the defendant had transferred the same to the
in accordance with law.”
A32 Appendix B
(a) As to each non-resident defendant
whose appearance is sought to be compelled, his
last known address or a statement that such ad-
dress is unknown and cannot with due diligence
be ascertained.
(b) The following information as to the
property of each such defendant sought to be
seized:
(1) A reasonable description thereof.
'(2) The estimated amount and _ value
thereof.
(3) The nature of the defendant's title or
interest therein; and if such title or interest be
equitable in nature, the name of the holder of the
legal title.
(4) The source of affiant’s information as
to any of the items as to which the affidavit is
made on information and belief.
(5) The reason for the omission of any of
the required statements.
(2) Within three business days after the filing of such
bond or bonds as may be required or within such other
time as the court may fix, the Register shall, in addition
to making the required publication, send by registered or
certified mail to each defendant whose appearance is
sought to be compelled a certified copy of the order and a
copy of the pleading asserting the claim.
(3) After the filing of such bond or bonds as may be
required by the order, but not later than 10 days after the
date of the order of seizure, the sequestrator shall serve a
certified copy of the order upon the person, persons or
Appendix B A33
corporation having possession or custody of the property
or control of its transfer, and shall seize the property.
(5) The court may in its discretion and subject to
statutory requirements dispense with or modify compli-
ance with the requirements of any part of this rule in any
cause upon application to it stating the reasons therefor.”
Gregg’s first argument is based upon International
Shoe v. Washington, 326 U. S. 310, 66 S. Ct. 154, 90 L. Ed.
95 (1945) and its progeny. He asserts that “under mod-
ern concepts of due process, a court cannot assert juris-
diction unless either the defendant or the subject matter
of the action had at least minimal contacts with the forum.”
The “minimal contacts” doctrine to which Gregg re-
fers is not applicable where, as here, the plaintiff invokes
the quasi in rem jurisdiction of the court. While a con-
trary view has been urged as the wiser one,’ the courts
have accepted the view of Justice Holmes that the “foun-
dation of jurisdiction is physical power.” ** Just as a court
may exercise in personam jurisdiction in a suit on a transi-
tory cause of action where the only contact with the forum
state is personal service upon the defendant within that
state,"® so also may a court exercise jurisdiction over prop-
, Ehrenzweig, The Transient Rule of Personal
Jurisation 1 e “Power” Myth and Forum Non Conveniens, 65
ale L. Rev. 289 (1956); Carrington, The Modern Utility of Quasi
In Rem Jurisdiction, 76 Harv. L. Rev. 303 (1962). se com-
mentators, however, recognize the prevailing view.
18. McDonald v. Mabee, 243 U. S. 90, 91, 37 S. Ct. 343, 61
Y ios). 608 (1915). See also Goodrich, Conflicts of Law, § 73
(1
19. E. ooo & Lum, 210 U. S. 230, 28 S. Ct. 641, 52
Ed. 1039 (1908); Restatement, Conflict of Laws, §§77, 78;
Goodrich, Conflict of Laws, §73 (1964).
A34 Appendix B
erty within its control regardless of the presence or absence
of other contacts with the forum state.*” Where the court
has either of these foundations for the exercise of its power,
it may constitutionally proceed, though the absence of
substantia] contacts with the forum may lead it to decline
to do so under the familiar principles underlying the doc-
trine of forum non conveniens*' and the federal transfer
provisions of 28 U.S.C. § 1404.
The state of a corporation’s domicile may constitu-
tionally provide, as Delaware has done, that the situs of its
capital stock is in its home state.” Thus, where the stock
of a domestic corporation is brought before the court, this
provides a sufficient basis for the exercise of its quasi in
rem jurisdiction even though the defendant may be a non-
resident who has had no prior contacts with the forum
state. Breech v. Hughes Tool Co., 41 Del. Ch. 128, 189
A. 2d 428 (Del. Sup. Ct. 1963); Ownbey v. Morgan, 256
U. S. 94, 41 S. Ct. 433, 65 L. Ed. 837 (1920).”
Gregg attempts to distinguish the relevant authorities
by saying that this is not in reality a quasi in rem action.
He correctly points out that an avowed purpose of Dela-
20. Cf. Hanson v. Denckla, 357 U. S. 235, 246, 78 S. Ct. 1228,
2 L. Ed. 2d 1283 (1957); Beal, Conflicts of Laws, §§ 106.3, 107.3
(1935); Goodrich, Conflicts of Law, §70 (4th Ed. Scoles 1964).
21. E.g., Gulf Oil > rn Sr oS SS
839, 91 L. Ed. 1055 (1947); General Foods Corp. v —_.
Inc., 41 Del. Ch. 474, 198 A. 2d 681 (Del. Sup. Ct. 19 _ me ~
cases relied — by soategts o arise because of the difficulty
ing traditiona in personam jurisdiction over indivi nf
in suits against t foreign corporations. Even in such cases if the
corporation’s activities in a state are substantial enough it is ordi-
narily subject to suit there on causes of action unrelated to the
business conducted in the forum state. See e.g., Restatement
-_ Conflict of Laws, § 47 (1971).
Ge (1008), Jellent Trust Co., 288 U. S. 123, 53 S. Ct. 295,
77 L. ed (1932); ik v. Huron Copper Mining Co., 177
U. S. 1, 20 S. Ct. 30 44 Ed. 647 (1899).
23. See note 26 infra.
Appendix B A35
ware’s sequestration statute is to compel a general appear-
ance and thereby produce a basis for in personam
jurisdiction. While the statute is concededly designed to
produce this result, it does not follow that the action is not
one governed by the rules applicable to quasi in rem juris-
diction. Unless and until the non-resident defendant elects
to enter a general appearance, the power of the court is
limited to the application of the property before the court
to the plaintiffs’ claim.”
The second attack on the constitutionality of Dela-
ware’s sequestration procedure is grounded on Fuentes v.
Shevin, 407 U. S. 67, 92 S. Ct. 1983, 32 L. Ed. 2d 556
(1972). The reliance upon that case is misplaced.
In Fuentes the Supreme Court struck down Pennsyl-
vania and Florida replevin statutes under which personal
property had been seized without notice or an opportunity
to be heard. The court's holding was not, however, as
broad as Gregg and the Bank contend. It is significant
that the court noted:
“There are ‘extraordinary situations that justify
postponing notice and opportunity for a hearing. Bod-
die v. Connecticut, supra, 401 U. S. 371, at 379, 91
S. Ct. 780, 28 L. Ed. 2d 113. These situations, how-
ever, must be truly unusual. Only in a few limited
situations has this Court allowed outright seizure with-
out opportunity for a prior hearing. First, in each
case, the seizure has been directly necessary to secure
an important govermental or general public interest.
Second, there has been a special need for very prompt
action. Third, the State has kept strict control over its
monopoly of legitimate force: the person initiating the
24. 10 Del. C. § 366; Hanson v. Denckla, 357 U. S. 235, 78
S. Ct. 1228, 2 L. Ed. 2d 1283 (1958); cf. Jacobs v. Tenney, 316
F. Supp. 151 (D. Del. 1970); Restatement of Judgments, § 34
comment f (1942).
A36 Appendix B
seizure has been a government official responsible for
determining, under the standards of a narrowly drawn
statute, that it was necessary and justified in the par-
ticular instance... .”
In connection with these observations the Supreme
Court cited with approval Ownbey v. Morgan, 256 U. S.
94, 41 S. Ct. 433, 65 L. Ed. 837 (1920), describing it as a
case which “involved attachment necessary to secure juris-
diction in [a] state court—clearly a most basic and
important public interest.”* In Ownbey the Supreme
Court rejected a constitutional attack on the exercise of
quasi in rem jurisdiction based upon the seizure of stock
in a Delaware corporation under Delaware’s foreign at-
tachment statute. Under that statute, there was no pre-
seizure notice or hearing. While the opinion in the
Fuentes case should not be read as endorsing all of the
views stated in the Ownbey opinion, Fuentes does indicate
that seizures of the kind made here are constitutionally
permissible when the tripartite test set forth there is met.
The Supreme Court’s footnote characterization of the
attachment in the Ownbey case supplies the answer to
the initial inquiry of whether the seizure was “directly
necessary to secure an important governmental or general
public interest.” This is not a case like Fuentes where the
statutes allowed “summary seizure” when “no more than
[a] private gain is directly at stake.” Fuentes v. Shevin,
25. Fuentes v. Shevin, 407 U. S. 67, 91, n. 23, 92 S. Ct. 1983,
1999, 32 L. Ed. 2d 556 (June 12, 1972).
: 26. Although neither the Delaware court nor the United States
upreme Court considered it signi Ownbey case appears
to have been a suit by non-resi plaintiffs against a non-resident
defendant arising out of the latter's activities as general manager
of a Delaware corporation the activities of which were limited to
the States of Colorado and New Mexico. Morgan v. Ownbey, 29
Del. 379, 6 Boyce 379, 100 A. 411 (1916).
Appendix B A37
supra at 93, 92 S. Ct. at 2000. As previously noted a state
has a legitimate interest in the exercise of judicial jurisdic-
tion with respect to property within its borders. Seizure
for the purpose of securing such jurisdiction in a state
court, accordingly, serves, in the words of the Supreme
Court, “a most basic and important public interest.”
Fuentes v. Shevin, 407 U. S. 67, 92 S. Ct. 1983, 1999, 32
L. Ed. 2d 556, at n. 23. See also Lebowitz v. Forbes Leas-
ing & Finance Corp., 456 F. 2d 979 (3rd Cir. 1972).
Was there need for prompt action? Given the nature
of the interest served by the seizure, the answer here must
also be in the affirmative. Notice would afford the defend-
ant an opportunity to defeat the state's interest in securing
jurisdiction by the simple expedient of moving or trans-
ferring the property.” This distinguishes the present case
from the situation involved in Fuentes. Those in posses-
sion of the property seized in Fuentes were subject to the
in personam jurisdiction of the courts of Pennsylvania and
Florida respectively and could be compelled to attend a
hearing to make a preliminary determination of the rights
in the property. The state’s power to adjudicate was, ac-
cordingly, not in jeopardy. The interest served by the
replevin statutes there under attack was the plaintiff's
private interest in securing possession of personal property
in which they claimed a possessory interest.
Finally, Delaware has kept a “strict control over its
monopoly of legitimate force.” The court’s analysis of the
27. Gregg and the Bank seek to distinguish Lebowitz on the
that plaintiffs’ cause of action there arose in the forum
state. Under the rationale of the opinions in Lebowitz, Fuentes
and Ownbey, however, this does not appear to be a relevant con-
sideration. Moreover, there are more contacts between this litiga-
tion and the State of Delaware than were present in Ownbey.
28. In the case of seizure of stock in a Delaware corporation,
the latter would, of course, be the only option available for this
purpose.
A38 Appendix B
Pennsylvania and Florida statutes on this point is helpful
in understanding the purpose of this third requirement.
The court observed:
“The statutes, moreover, abdicate effective state
control over state power. Private parties, serving
their own private advantage, may unilaterally invoke
state power to replevy goods from another. No state
official participates in the decision to seek a writ; no
state official reviews the basis for the claim to re-
possession; and no state official evaluates the need for
immediate seizure. There is not even a requirement
that the plaintiff provide any information to the court
on these matters. The State acts largely in the dark.”
Here, unlike Fuentes, the order effecting the seizure
was issued by a state court judge. That judge had been
supplied with a complaint and with an affidavit which re-
vealed: (1) that Gregg was a non-resident and accordingly
not subject to the in personam jurisdiction of the court, (2)
that Gregg owned specifically described, alienable prop-
erty within the State of Delaware, (3) the value of that
property and (4) the source of the plaintiffs’ information
on these subjects. This information provided the basis for
a determination that the seizure would be in furtherance
of the “important public interest” underlying the seques-
tration statute and that prompt action would be required.”
29. Under the Delaware practice, a court presented with a
motion for the issuance of a sequestration order may also determine
from the complaint whether it is “bona fide on its face,” Hughes
v. Trans World Airlines, Inc., 40 Del. Ch. 552, 185 A. 2d 886
(1962), whether the action is of a kind where the exercise of
quasi in rem jurisdiction is appropriate, Steinberg v. Shields, 38
Del. Ch. 349, 152 A. 2d 113 (1959), and whether the value of the
property to be seized bears a reasonable relation to the amount
of the claim asserted. Trans World Airlines Cotp. v. Hughes, 40
Del. Ch. 523, 185 A. 2d 762, 765 (1962).
Appendix B A39
It may be argued that the defendant's interest might
be better protected if the statute or the rule required the
issuing court to make a preliminary finding, upon the basis
of an ex parte presentation, that the plaintiffs’ case has
some merit.*” However, as the Supreme Court noted in
Fuentes, the protection offered by such an ex parte deter-
mination is largely illusory. Fuentes v. Shevin, supra, 407
U. S. 67, at 80-82, 92 S. Ct. 1983, at 1994. I do not believe
such a procedure is constitutionally required where, as
here, the required presentation reveals to the issuing judge
a situation where immediate seizure will serve a legitimate
state interest.”
In short, this is not a situation where the State of
Delaware has abdicated “effective state control over state
power . . . [to] private parties serving their own private
advantage ....” Fuentes v. Shevin, supra, at 93, 92 S. Ct.
at 2001. The procedure here attacked serves a public
purpose as part of the ordered system of conflict resolution
which includes the exercise of judicial power over prop-
erty located within the state. Lebowitz v. Forbes Leasing
& Finance Corporation, 456 F. 2d 979 (3rd Cir. 1972).
IV. REMAND
Having decided that a separate and independent
cause of action, removable under 28 U. S. C. § 1441(a) and
30. This is not required under Delaware law. Hughes v.
Trans World Airlines, Inc., 40 Del. Ch. 552, 185 A. 2d 886 (1962).
31. The distinction between the public interest foundation of
the sequestration process and the private interest foundation of
the Fuentes replevin statutes is reflected in the effect of the
respective types of seizure. In Fuentes the state procedure had
deprived one party of possession and had made it available to
another without any determination regarding the merits of the
latter's claim. In a sequestration context, the practical effect of
the seizure is to immobilize the property and thereby protect the
court's jurisdiction. The property may not be applied to the claim
of the plaintiff until after there has been notice and an opportunity
for the defendant to be heard.
A40 Appendix B
(b), is stated in Claim 7, that the Court of Chancery had
jurisdiction under its Order of Sequestration and, accord-
ingly, that the derivative removal jurisdiction of this Court
has been properly invoked, the Court must finally decide
whether the claims “othetwise non-removable” ought to
remain in this Court or, in the exercise of the discretion
granted under 28 U. S. C. § 1441(c), ought to be remanded
to the state court. Notwithstanding the separate and in-
dependent character of the claims asserted, I conclude
that the public interest in the efficient administration of
justice as well as the convenience of the parties and the
witnesses will be best served by the litigation of all claims
in one proceeding. See Baltimore Gas & E. Co. v. United
States Fidelity & G. Co., 159 F. Supp. 738 (D. Md. 1958).
The motions to remand this case and to vacate the
sequestration order are denied. This Court will retain
jurisdiction of the entire case and determine all issues
raised.
Submit order.
f
Appendix C A4l1
APPENDIX C.
U. S. INDUSTRIES, INC., A CorporRATION AND
DrIvERSACON INDUSTRIES, INC., A CORPORATION,
Plaintiffs,
v.
F. BROWNE GREGG,
Defendant.
Civ. A. No. 4431.
United States District Court,
D. Delaware.
Feb. 2, 1973.
David A. Drexler, of Morris, Nichols, Arsht & Tunnell,
Wilmington, Del., and Olwine, Connelly, Chase, O’Don-
nell & Weyher, New York City, for plaintiffs.
Thomas S. Lodge, and John R. Bowman, of Connolly,
Bove & Lodge, Wilmington, Del., and Bedell, Bedell,
Dittmar, Smith & Zehmer, Jacksonville, Fla., for de-
fendant.
OPINION
STAPLETON, District Judge:
This action was originally filed in the Court of
Chancery of the State of Delaware. Plaintiff, U. S. In-
dustries, a Delaware corporation (“USI”), immediately
secured an order from that court which sequestered cer-
tain shares of USI stock owned by the defendant Gregg, a
A42 Appeiidix C
Florida resident, under Delaware’s sequestration statute,
10 Del. C. § 366. Gregg, before making any response in
the Court of Chancery, removed the case to this Court.
In subsequent proceedings, this Court held that the se-
questration was valid and that the case was properly re-
moved under 28 U.S. C. § 1441/c). The complaint asserted
both federal and state claims. The holding on the remova!
question, however, was based upon a finding that plaintiff
had alleged “a separate and independent claim” which
“would have been removable if sued upon alone” because
of diversity of citizenship and the presence of the requisite
jurisdictional amount. Sce U. S. Industries v. Gregg, 348
F. Supp. 1004 (D. Del. 1972).
Beiore the time for det:endant’s an.wer, he moved
for leave to enter @ “limiled’ or “restricied” appearance,
claiming the right to defend »laintif’s coins on the meriis
without subjecting himse!i to ihe in por-cnam jurisdiction
of the court and thus the rizht to linit the satisfaction of
any judgment obtained by the plaintiff wo ihe sequestered
property itseli. ‘This motion is now betore the Court for
decision.’
1. Plaintiff, relying on F. R. Civ. P. 12(g¢), maintains that
Cregg waived any right he may have had to the relief here soucht
by failing to request that relief in conjunction with his attack
upon the sequestration. { conclude, however, that Rule 12(g) is
inapplicable. While the motion is in a sense similar to a “defense
of lack of jurisdiction over the person,” at the time of the attack
on the sequestration the laintiff was not claiming, and the court
clearly did not have, jnrisdiction over defendant's person and there
was no need to challenge jurisdiction which had not been asserted.
While it would have perhaps been better practice to have joined
the current request as one for alternative relief, this motion never-
theless raises substantial and important issues from the defendant's
point of view in a largely uncharted area, and I conclude that
disposition on grounds of waiver would not be in the interest of
justice. Defendant's form of motion has been used in other cir-
cumstances to raise similar issues. E.g., Grant v. Kellogg Co., 3
F. R. D. 229 (S. D. N. Y. 1943); Sands v. Lefcourt Rea ty Corp.,
35 Del. Ch. 340, 117 A. 2d 365 (Sup. Ct. 1955).
—--_ --—- -
——
oe wens @
Appendix C A43
Under the Delaware rule, as announced in Sands. v.
Lefcourt Realty Corp.,? Gregz would concededly be de-
nied the permission he see's. He asserts, however, that
federal law controls the point and that, in any event, ap-
plication of the Delaware rule would violate his right to
due process of law under the Fourteenth Amendment to
the United States Constitution. In this context, a number
of questions are presented: (| ) whether any tederal statute
or any of the Federal Rules oi Civil Procedure decides
the point either by way of declaring, expressly or by neces-
sary implication, a federal rule or by incorporating the
state rule. (2) if not, whether this Court should apply
federal or state law, (3) if tederal law is to be applied,
what is the federal rule and (4) if Gregg’s choice is lim-
ited to one between default and ceneral appearance, wil
he be deprived of due process?
{. THe Feperat STATUTES AND RULES.
ue process questions aside, this is an area in which
Congress by statute, or the Supreme Court by rule, could,
consistent with Erie v. 7 onmkins * and the Constitution,
establish a controlling rule ior decision.’ Neither, how-
ever, has chosen to do so.
Section 1450 of Title 28 provides in part:
Whenever any aciion is removed from a State
court to a district court of the United States, any
attachment or sequestration of the goods or estate of
2. 35 Del. Ch. 340, 117 A. 2d 365 (Sup. Ct. 1955).
3. Erie R. Co. v. Tompkins, 304 U. S. 64, 58 S. Ct. 817, 82
L. Ed. 1188 (1938).
4. Hanna v. Plumer, 380 U. S. 460, 472, 85 S. Ct. 1136, 1144,
14 L. Ed. 2d § (1965) (holding that such power exists “to regulate
matters which. though falling within the uncertain area between
substance and p re, are rationally capable of classification as
either.” ).
;
;
A44 Appendix C
the defendant in such action in the State court shall
hold the goods or estate to answer the final judgment
or decree in the same manner as they would have
been held to answer final judgment or decree had it
been rendered by the State court.
USI urges that this statute incorporates Section 366
of Title 10 of the Delaware Code which, as the court in
the Sands case found, was drafted with the idea that lim-
ited appearances would not be available. The purpose of
Section 1450, however, is to give a state attachment the
same effect in a federal court after removal as it would
have had in the state court; it incorporates state law to
this extent.’ I find no suggestion in the text of the statute,
however, that it was intended to refer a federal court to
state law for a determination of when the federal court
obtains in personam jurisdiction and when it does not."
Federal Rule 81(c) provides that the Federal Rules
of Civil Procedure shall apply to removed actions and
shall “govern procedure after approval.” No other federal
rule, however, can be said to govern the question before
this Court either expressly or by necessary implication.
Rule 4(e) as amended in 1963, permits the institution of
actions in a federal court by attachment and provides that
“service shall be made . . . under the circumstances and
5. 1A Moore, Federal Practice, { 0.168 [4-5].
6. This reading does not produce the procedural quagmire
and jurisdictional dilemma which plaintiff predicts. Section 368
does require the Court of Chancery to release the seized property
upon the entry of a “general , absent a showin
release will make it ‘su tially less likely that laintiff i will ‘ob.
tain satisfaction of any judgment secured.” It not follow,
however, that this Court, in obeying the command of Section 1450
dd. a See would be required to act
y upon en a limit
a yt try o appearance and thereby lose
Appendix C A45
in the manner prescribed in . . . [a state] statute or rule.”
Its scope is thus limited to service of process and does not
extend further.’ The “legislative” history so indicate."
Rule 12 in describing the responses to a complaint
does not, it is true, refer to the possibility of a “limited
appearance.” This has helped one court to the conclusion
that the rule excludes this alternative.” Moreover, Rule
E(8) of the Supplemental Rules for Certain Admiralty
and Maritime Claims, by contrast, expressly provides for
limited appearances in the cases which it governs. But
the temptation to draw a negative inference from the
omission of a reference to limited appearances in Rule 12
should be resisted in light of the relevant advisory com-
mittee comments. The comments relating to Rule 12 do
not indicate that any judgment was made on the issue."
The comment in connection with the 1963 amendments
to Rule 4 likewise contained no mention of the problem."
The 1963 amendment to Rule 13 and the 1965 adpotion of
admiralty rule E(8), however, produced affirmative evi-
dence that the committee intended to “leave the matter
7. Cf. Arrowsmith v. United Press International, 320 F. 2¢ 219,
224 (2nd Cir. 1963).
8. See notes 10 and 11, infra; Kaplan, Amendments of the
Federal Rules of Civil Procedure, 1961-1963, 77 Harv. L. Rev. 601,
627-28 ( a ay Carrington has taken the position that since
the “whole thrust of the [proposed] Rule 4(a) amendment is a
reference to state law it may be presumed that the Committee
would contemplate . . . use [of the limited appearance only] in
states in which it is permitted in local courts.” Carrington, The
Modern poo of Quasi in Rem Jurisdiction, 76 Harv. L. Rev.
303, 314 (1962). The Comments seem to indicate that the Com-
mittee did not so contemplate, however.
9. Grant v. Kellogg Co., 3 F. R. D. 229 (S. D. N. Y. 1943).
10. Notes of the Advisory Committee, 28 U. S. C. Rule 12
(1972 Supp. ).
. “4 Notes of Advisory Committee, 28 U. S. C. Rule 4 (1972
upp. ).
A46 Appendix C
open.” "* The consensus has, accordingly, been that the
Federal Rules of Civil Procedure do not speax to the ques-
tion now before this Court."”
I]. WHETHER STATE OR FepERAL LAw GOvERNS
Upon analysis, this second question presents two sepa-
rate issues. While this Court's jurisdiction in this case is
founded solely on the presence of a separate and inde-
pendent diversity claim, plaintiff asserts a claim having its
source in federal law “ as well as claims grounded upon
state law, and it is the source of a claim, rather than the
basis of federal jurisdiction, which is relevant in determin-
ing the law applicable to that claim. As the court observed
in Maternally Yours, Inc. v. Your Maternity Shop, Inc.,
234 F. 2d 538, 540 n. 1 (2nd Cir. 1956):
. . . despite repeated statements implying the con-
trary, it is the source of the right sued upon, and not
the ground on which federal jurisdiction over the case
is founded, which determines the governing law. . .
12. Note, “The ‘Right’ to Defend Federal Quasi in Rem
Actions Without Submitting to the Jurisdiction of the Court,” 48
Iowa L. Rev. 441, 442 n. 8 (1963); Notes of Advisory Committee,
Admiralty & Maritime Rule E (Appendix to 28 U. S. C. A.).
13. 2A Moore, Federal Praciice, § 12.13 p. 2333; 4 Wright &
Miller, Fed. Prac. § 1123, p. 514. The situation here is different
from that which confronted the court in Neifeld v. Steinberg, 438
F. 2d 423 (3rd Cir. 1971). There the court held that the joinder
of a permissive counterclaim with a defense of lack of jurisdiction
over the person did not waive the latter defense where the de-
fendant had withdrawn the counterclaim without leave of court.
Rule 12, while not expressly reading on the relevant question,
was found to embody a scheme regarding responsive pleading and
waiver which was inconsistent with the view that a waiver had
14. Section 17(a) of the Securities Act of 1933, 15 U. S. C. A.
§77a( . nag .| gang 22(a) of that act would preclude re-
mov. c were the only one asserted. USI v. Gregg,
348 F. Supp. 1004 (D. Del. 1972).
Appendix C A47
Thus, the Erie doctrine applies, whatever the ground
for federal jurisdiction, to any issue or claim which
has its source in state law. See, e. g., Rotherberg v.
HH. Rothstein & Sons, 3 Cir., 1950, 183 F. 2d 524, 21
A. L. R. 2d 832. Cf. Wichita Royalty Co. v. City
National Bank. 1939, 506 U. S. 103, 107, 59 S. Ct. 420,
83 L. Ed. 515.
The converse is also true; where a diversity case includes a
federal claim, the source of that claim is the relevant
factor."
This Court must, accordingly, consider Gregg’s rights
with respect to the federal claim as well as with respect
to his state claims. While these choices of law involve
analyses which are similar in some respects, the controlling
principles and precedents are different.
A. The State Claims.
Under Erie v. Tompkins and its progeny " three
questions are now relevant in determining whether state
law or federal Jaw will govern a question arising in con-
nection with the assertion of a state created right: (1)
whether the state rule is “hound up with . . . [state
created] rights and obligations in such a way that its ap-
plication in the federal court is required,” '* (2) if not,
would failure to follow the state rule be “outcome deter-
minative”’—that is, would it so materially affect the char-
16. 34 U. S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938).
17. E.g., Guaranty Trust Co. v. York, 326 U. S. 99, 65 S. Ct.
1464, 89 L. Ed. 2079 (1945); Byrd v. Blue Ridge Rural Electric
Cooperative, 356 U. S. 525, 78 S. Ct. 893, 2 L. Ed. 2d 953 (1958);
Hanna v. Plumer, 380 U. S. 460, 85 S. Ct. 1136, 14 L. Ed. 2d 8
(1965).
18. Byrd v. Blue Ridge Rural Electric Cooperative, 356 U. S.
525, 535, 1s S. Ct. 893, 899, 2 L. Ed. 2d 953 (1958).
A48 Appendix C
acter or result of the litigation as to cause forum shopping
or inequitable administration of the laws, and (3) even if
failure to follow the state rule might produce either of
these undesirable consequences, is there, nevertheless, a
countervailing “strong federal policy” '* which requires the
application of federal law.”® If the state rule is closely
“bound up” with the state created claim, state law must be
applied. Even if the state rule is one of “form and mode,”
however, state law must be applied, in the absence of a
strong countervailing federal policy, where the choice of
federal law would lead to either of the aforementioned
“twin evils” denounced in Erie.”
To state the relevant inquiries in this fashion does not,
of course, close debate. There is no “automatic ‘litmus
paper criterion.” It does, however, provide the guide-
lines for decision.
The rule of Sands v. Lefcourt Realty Corp. is not inti-
mately bound up with the state rights which plaintiff here
seeks to enforce. The policy behind the rule, namely to
require that any adjudication on the merits of a claim per-
manently settle the rights of the parties with respect to
that claim,” “reflects essentially institutional considera- _
19. Id. at 536, 78 S. Ct. 893.
20. The Third Circuit Court of Appeals has read Erie and its
progeny to indicate that these are the relevant questions. Lynne
‘ashions, Inc. v. Cranston Print Works Co., 453 F. 2d 1177
135d Gir. BOUL}; Ades vs Seberete Decaelomty te. Gant as
. : ins v. utz ing Co., 435 F.
527 (4th Cir. 1970). sade
21. Hanna v. Plumer, 380 U. S. 460, 468, 85 S. Ct. 11 4
L. Ed. 2d 8 (1965). wade
22. Id. at 460, 85 S. Ct. 1136.
23. A -in- dgment does ha
uh © p thee een Gen 28 2 oe
—y yn ah A t ane aay Sane
ectatuanenl of at tthe ; 4 Wright a Maa person
Prac. & Proc. § 1070 (1969). > oa Oe
Appendix C A49
tions relevant to the administration of justice” within the
Delaware court system and is “unrelated to the basic rights
and obligations of the parties.” ™*
In a state which permits “limited appearances,” ” the
presence of a contrary rule in the federal courts of that
state would obviously be an important factor in the plain-
tiffs choice of forum.” Similarly, where a state, like
Delaware, does not permit limited appearances,” applica-
tion of a contrary rule in the federal court would undoubt-
edly affect the nonresident defendant's election under the
removal statute. 28 U. S. C. § 1441. While the choice
would here be made in a different context from that before
the court in Erie, the effect would be the same—the grant-
ing to a non-resident of a choice of law affecting the char-
acter and result of the litigation for reasons wholly unre-
lated to the purpose of diversity jurisdiction.
Since the choice of law on the question before this
Court would be “outcome determinative” as that phrase
enforce. The fact that Delaware classifies the right as “ al”
for this purpose, does not, of course, require this to so
characterize it for present purposes. Sampson v. Channell, 110
F. 2d 754 (1st Cir. 1940).
25. E.g., Maryland: Miller Brothers Co. v. State, 201 Md. 535,
95 A. 2d (1953); Massachusetts: Cheshire National Bank v.
a 224 Mass. 14, 112 N. E. 500 (1916); Oklahoma: Osborn v.
ite Eagle Oil Co., 355 P. 2d 1041 (Oki. 1960).
26. B. Currie, Attachment and Garnishment in the Federal
Courts, 59 Miah L. Rev. 337 (1961); 4 Wright & Miller, Federal
Prac. & Proc. § 1123 at 514-515. While the potential discrimination
here would be against a non-resident rather than a resident as in
Erie, the of that case may still apply. Note, 15 Corn. L. Q.
560, 563 (1963).
27. E.g., Oregon: State ex rel. Methodist Old People’s Home
v. Crawford, 159 Or. 377, 80 P. 2d 873 (1938); Rhode Island:
Industrial Trust Co. v. Rabinowitz, 65 R. I. 20, 13 A. 2d 259 (1940).
ASO Appe odin Cc
has been construed by the Supreme Court,” state law must
be applied unless there is a countervailing “strong federal
policy.” Whether such a policy exists is a question which
I believe the federal courts should approach with restraint.
If a federal rule exists or can be formulated. a federal
policy, in a sense. will be present by definition. A federal
rule of limited appearance could be said to rest upon a
federal policy against the dilemma in which a general ap-
pearance rule places the defendant. A federal rule of gen-
eral appearance could be said to rest on a federal policy
against re-litigation of issues. The “strong federal policy”
exception, however, should be limited to cases where the
federal policy is clearly established by the federal con-
stitution or a federal statute and where application of the
state rule would “alter the essential character of function
of a federal court.”* An extension of the exception be-
yond such cases would lead to a return to the philosophy
of the Swift v. Tyson era and, under the theoretical guise
of protecting an interest in uniformity among the federal
courts, create, in fact, as many different “federal rules” as
there are views on what constitutes “strong federal
policy.” *
In this instance. | find no clearly defined, federal
policy relating to the essential character of the federal
judicial system. As hereinafter indicated, the Constitution
neither dictates nor clearly embodies a policy supporting,
one rule or the other. The same is true of the federal
: > Hanna v. Plumer, 380 U.S. 460, 85 S. Ct. 1136, 14 L. Ed. 2d
(1965).
29. Byrd v. Blue Ridge Rural Electric ive, 356 U. S.
525, 539, 78 S. Ct. 893, 901, 2 L. Ed. 2d 953 (1958).
30. See Note, “State Statutes of Limitations in Federal Courts:
By Whom the Statute Tolled.” 1971 Duke L. J. 785, 790-799, 801-
803. While Supreme Court review would establish “uniformity”
coullict tn Do lower cout, peley GS Se eee
preme Court review. Stern, Denial of Certiorari Despite a
Conflict, 66 Harv. L. Rev. 465 (1953).
Appendix C A51
statutory law. The sparse federal case law is in conflict.”
Moreover, application of one rule or the other will not dis-
rupt or alter the essential character of the fed ral proceed-
ing. If the defendant defends on the merits, the issues will
be litigated and decided in precisely the same manner
whether the appearence is venera! or limited. If the de-
fendant fails to appear the case will also proceed in pre-
cisely the same manner. In short. there is an “absence of
any established federal principle or discernible federal
policy on the point.”
Accordingly, this Court con:iders itself hound to apply
the rule of Sands v. Lefcourt Realty Corp. to plaintiff's state
court claims.
B. The Federal Claim.
The Supreme Court of the United States has stated on
a number of occasions that the doctrine of Erie v. Tomp-
kins is inapplicable where 2 federally created right is
involved.” The meaning and ramifications of these state-
ments have not been fully articulated by that court, how-
ever, and are subjects about which there has been con-
siderable academic comment.” Some conclusieas may
31. See review of cases in 2A Moore, Federal Practice € 12.13
pp. 2330-2334.
32. 4 Wright & Miller, Fed. Prac. & Proc. § 1123 p. 515.
33. Board of Commissioners v. United States, 308 U. S. 343,
60 S. Ct. 285, 84 L. Ed. 313 (1939); Deitrick v. Greaney, 309
U. S. 190, 60 S. Ct. 480, 84 L. Ed. 694 (1940); D’Oench, Duhme
& Co. v. F. D. 1. C., 315 U. S. 447, 62 S. Ct. 676, 86 L. Ed. 956
peg) (Jackson, J., concurring); Levinson v. Deupree, 345 U. S.
. 73 S. Ct. 914, 97 L. Ed. 1319 (1953).
34. See e.g., Hill, State Procedural Law in Federal Non-
diversity Litigation, 69 Harv. L. Rev. 66 (1955); Mishkin, The
Variousness of “Federal Law:” Competence and Discretion in the
Choice of National and State Rules for Decision, 105 U. of Pa.
L. Rev. 797 (1957); Note, Rules of Decision in Nondiversity Suits,
69 Yale L. J. 1428 (1960); Note, The Competence of }!ederal
(1964) to Formulate Rules of Decision, 77 Harv. L. Rev. 1084
*
A52 Appendix C
nevertheless be drawn from the cases in this area. Legiti-
mate state interests, where they exist, may not be ignored
in making the choice of law even where a federal claim
is at issue.” In a few instances state rules have been ap-
plied even as to matters which would be “procedural” in
traditional conflicts terminology.” In cases where the
matter is one of procedure in that sense, however, rarely
will there be a significant state interest in having a state
rule applied to the enforcement of a federal claim even
though it be “outcome determinative” in Erie terms."
Ordinarily, such state rules are applied only when circum-
stances are such that Congress may fairly be said to have
intended their adoption.** Even where state interests
exist, however, they must yield to any federal interest
discernible from the federal legislation giving rise to the
claim,” from considerations involving executive adminis-
35. E.g., United States v. Yazell, 382 U. S. 341, 86 S. Ct. 500,
15 L. Ed. 2d 404 (1966). Whether this is dictated by the Rules
of Decisions Act, 28 U. S. C. § 1652, or is discerned from the
principles underlying our federal system has not been authorita-
tively determined. See Mishkin, supra, note 34; Hill, supra, note 34.
36. Camden & Suburban Ry. Co. v. Stetson, 177 U. S. 172, 20
S. Ct. 617, 44 L. Ed. 721 (1900) (applying state rule permitting
ye examination of a plaintiff); Campbell v. Haverhill, 155
. §. 610, 15 S. Ct. 217, 39 L. Ed. 280 (1895) (applying state
limitations statute); Hill, supra, note 34.
37. Hill, supra, note 34 at 91-94. Where a procedural rule is
“outcome determinative” it may be held that it conflicts with the
federal statute which created the right and, for that reason, must
not be applied even if a state court proceeding. E.g., Brown v.
Western Ry., 338 U. S. 294, 70 S. Ct. 105, 94 L. Ed. 100 (1949);
Dice v. Akron, C. & Y. R. Co., 342 U. S. 359, 72 S. Ct. 312, 96
L. Ed. 398 (1952).
38. E.g., Campbell v. Haverhill, 155 U. S. 610, 15 S. Ct. 217,
39 L. Ed. 280 (1900); Chattanooga Foundry and Pipe Works v.
Atlanta, 203 U. S. 390, 27 S. Ct. 65, 51 L. Ed. 241 (1906); Brazier
v. Cherry, 293 F. 2d 401 (5th Cir. 1961).
39. D’Oench, Duhme & Co. v. F. D. I. C., 315 U. S. 447, 62
S. Ct. 676, 86 L. Ed. 956 (1942); Clearfield Trust Co. v. United
States, 318 U. S. 363, 63 S. Ct. 573, 87 L. Ed. 838 (1943).
ee - oe
Appendix C A53
tration of the federal law *° or from the character of the
federal judicial system."'
Accordingly, while the guidelines of Erie and its
progeny are not applicable to the resolution of choice of
law problems in a federal claim context, the choice in that
context nevertheless also involves a process of ascertaining
any relevant state and federal interests. Here the problem
is not difficult of resolution because I perceive no Delaware
interest in whether this Court applies a limited or general
appearance rule in a case being litigated in this Court to
enforce a right created by the Securities Act of 1933.
I conclude, accordingly, that this Court is not required
to apply the Delaware appearance rule to USI’s federal
claim. This leaves the Court with the task of choosing one
of three alternatives based on what it is able to infer from
the federal statutory, regulatory, rule and case law: (1) a
general appearance rule, (2) a limited appearance rule, or
(3) arule of adoption of state law.
III. THe APPROPRIATE FEDERAL RULE.
It is unnecessary in this case to formulate a federal
rule applicable to all cases under the Securities Act of 1933
which are litigated in a federal court.** This case arises
under rather unusual circumstances and a choice for the
present case is sufficient.
40. United States v. Hext, 444 F. 2d 804 (5th Cir. 1971);
United States v. Sommerville, 324 F. 2d 712 (3rd Cir. 1963).
41. Monarch Insurance Co. v. Spach, 281 F. 2d 401 (5th Cir.
ty Dallas roy v. Commercial Union Assurance Co., 286
F. 2d 388 (5th Cir. 1961).
42. The present problem will arise rarely in a Securities Act
case institut originall in a federal court since the Act authorizes
rsonal service outside the forum district in such case in any
district where the defendant can be found. 15 U. S. C. A. §77v.
Ab4 Appendix C
Section 22/a) * of the Securities Act provides for con-
current state-federal jurisdiction over actions arising under
the Act. Moreover, that section expressly prohibits re-
moval of Securities Act claim brought in a state court. It
is clear that out of solicitude for Securities Act claimants
Congress intended one asserting a claim solely under the
Act to be entitled to have his claim litigated in a state
court. Delaware practice provides for in personam juris-
diction over the defendant if he appears to defend on the
merits. Presumably, Congress contemplated that such a
Securities Act plaintiff in Delaware would have the benefit
of this rule.“
In this case USI joined its Securities Act claim with a
“separate and independent’ state claim. In its earlier
opinion this Court noted the conflict between the policy
behind the non-removal provisions of Section 22(a) and
the twin policies of Section 1441(c): (1) to assure that a
defendant entitled to a federal forum for litigation of a
diversity claim or removable federal claim will not be de-
prived of that right by his adversary’s joinder of a non-
removable, separate and independent claim and (2) at the
same time, to insure that all claims which should be liti-
gated together for reasons of judicial economy be litigated
in the same forum. Based on the text of Section 1441, this
Court concluded that the policy of Section 22(a) must yield
to those of Section 1441(c). The policies of Section 1441(c)
do not, however, require that a suit which would be an in
personam: one in the forum of the plaintiff's choosing must
43, 15 U. S.C. A. § 77v.
44. Nothing in the Securities Act would provide a basis for
a claim that Delaware would be required to apply federal law on
this point, and in the absence of some such basis in the federal
law, a state court is free to follow its own rules in a concurrent
jurisdiction case. Brown v. Western Ry., 338 U. S. 294 70 S. Ct.
105, 94 L. Ed. 100 (1949); Dice v. Akron, C. & Y. R. Co., 342
U. S. 359, 72 S. Ct. 312, 96 L. Ed. 398 (1952).
Appendix C A55
become something entirely different if the suit is removed.
Those policies can be cffectuated without applying a
limited appearance rule.
If USI were asserting solely a Securities Act claim it
would be entitied, after litigating its claim on the merits
in Delaware, to receive an in personam judgment pursuant
to Delaware's general appearance rule. it would be
anomalous, indeed, to deprive USI of this result merely
because it also presses a “separate and independent” state
law claim as to which, as | have held above, USI has a
right to the application of the state rule.
In short, | conclude that a federal district court in a
case of this character shouid apply the state rule of general
appearance by adoption.
IV. THe CONSTITUTIONALITY OF THE RULE OF
SANbs v. LEFCOURT REALTY Corp.
Gregg correctly asserts that under the Due Process
Clause of the Fourteenth Amendment he has a right to de-
fend the property which has been seized. He concedes
that a general appearance rule would not deprive him of
an opportunity to defend but asserts that it would uncon-
stitutionally condition his right to defend on the merits by
requiring that he first submit himself to the in personam
jurisdiction of the Court.
Not all conditions on the exercise of a Fourteenth
Amendment right are constitutionally prohibited. Rule 13
and state compulsory counterclaim rules, for example, pro-
vide that a defendant, if he wishes to defend a plaintiff's
claim, must pay a price for being permitted to do so—he
must submit any claim he may have arising out of the
same transaction for disposition by the Court or lose that
claim.
The question, accordingly, is not whether Gregg’s
constitutional right to defend has been conditioned, but
A56 Appendix C
rather whether it has been unreasonably conditioned.“
What is reasonable or unreasonable in this context can
only be answered with reference to the public interest in-
volved in requiring a general appearance and the burden
which such a rule places upon the defendant.
There is, in my judgment, -. legitimate public interest
behind the general appearance rule. If a state or federal
court is required by a defendant's response to a complaint
to try and determine all of the issues upon which an in
personam claim turns, there is a public interest in having
that expenditure of judicial resources settle the rights of
the parties with respect to that claim and in not leaving
open the possibility of subsequent, duplicative litigation
45. Cf. York v. Texas, 137 U. S. 15, 20, 11 S. Ct. 9, 10, 34
sufficient ) :
The State has full power over remedies and procedure in its
dagen =f A. BG AD dE.
thereto, provided that substance of right is secured wi
unreasonable burden to parties and litigants.
Adam v. Saenger, 303 U. S. 59, 67-68, 58 S. Ct. 454, 458, 82 L. Ed.
649 (1938) ( ing that a state may condition a non-resident
laintiff's right to litigate in its courts by requiring that he submit
imself to in personam jurisdiction of its courts for the litiga-
tion of unrelated claims against him without personal service of
process on him):
. . . The plaintiff having, by his voluntary act in demanding
justice from the defendant, submitted himself to the jurisdic-
ytd mpd df my EY A...
Boy b, XR being o- all =
justice to t endant requires his presence. It is price
which the state may ounel as the condition of ing its
courts to the intiff. Frank L. Y Co. v. McNeal.
Edwards Co., U. S. 398, 400, 51 S. Ct. 538, 539, 75 L. Ed.
1140; cf. Chicago & N. W. Ry. Co. v. Lindell, 281 U. S. 14,
17, 50 S. Ct. 200, 201, 74 L. Ed. 670.
McGautha v. California, 402 U. S. 183, 91 S. Ct. 1454, 28 L. Ed. 2d
711 (1971).
Appendix C A57
in the same court or another.** This interest is similar to,
though stronger, than,’ the one reflected in compulsory
counterclaim rules.
One must still ask, however, whether the price which
a general appearance rule extracts from a defendant is ex-
cessive despite the countervailing public interest. Gregg
suggests that it is because the forum, by definition, is one
with which his only contact is the presence of his property
within its jurisdiction. Requiring him to litigate in such a
forum, he says, imposes an unconscionable burden. This
Court has already held, however, that the acquisition of
quasi-in-rem jurisdiction by sequestration is constitu-
tional.** Given the right of a court to require that a de-
fendant whose property is seized defend on the merits or
ant. If he defaults recovery will be limited to the property
seized. If he defends on the merits the trouble and ex-
pense of litigation will be no different whether a general
or limited appearance rule is applied.”
46. Note, The “Right” to Defend Federal Quasi in Rem Actions
Without Submitting to the Personal Jurisdiction of the Court, 48
Iowa L. Rev. 441 (1963); Moore, Federal Practice, § 12.13 n. 16;
4 Wright & Miller, supra, § 1123 at 514.
47. In a compulsory counterclaim context, the court, in the
absence of a com counterclaim rule, would not ordinarily
be required to try and determine all of the issues upon which the
terclaim rests. The potential for waste of judicial resources,
cour .
_while present, is accordingly, not as great. For this reason, the
1963 t to Rule 13(a) (ie. es a defendant
brought into court under Rule 4(e) to wi a compulsory
counterclaim) is not relevant to any question here It is
one thing to conclude that it is fai
CORE 9 Cage cate Sap Ceeiniis ane ate eneies &
A58 Appendix C
Also unpersuasive is Gregg’s argument that a general
appearance rule gives a plaintiff an unfair advantage by
allowing him to bring suit on a large claim in a jurisdiction
where the original basis for jurisdiction is the presence of
property having a comparatively small value. Any such
unfairness does not rise to constitutional proportions. A
similar phenomenon frequently occurs under compulsory
counterclaim rules.
Put in Gregg’s “contact” terminology, if he defends
upon the merits he has created an additional relationship
with the forum jurisdiction; he is present in the forum
court to litigate the factual and legal issues upon which a
claim turns. This is sufficient contact to permit the court
to adjudicate that very claim once and for all." The scant
to the question of chousing between a and limited -
£48 (1963). It is, sto,
worth, 417 F. 2d 231 (9th Cir. 1969); Bean v. Linden Crane
326 F. Supp. 995 (E. D. Pa. 1971). Cf. Hess v. Pawloski, 274
U. S. 352, 47 S. Ct. 632, 71 L. Ed. 1091 (1927). While the
Appendix C A59
judicial authority on the question supports this conclu-
sion." The Restatement of Judgments and Professors
Moore and Blume have reached similar conclusions.”
In short, weighing the public interest and the burden
imposed upon the defendant, I conclude that a general
appearance requirement does not violate due process.
The rule of Sands v. Lefcourt Realty Corp. is constitu-
tional. It will be applied with respect to all claims in this
action. While the defendant may file a limited appear-
ance if he deems it necessary to preserve any appellate
rights he may have, in that event any judgment awarded
to plaintiff will, nevertheless, be an in personam one.
50. (Cont'd. )
interests sought to be protected against the burden placed upon
sarees “chinks teoditieal notions of tak play sad
substantial justice”, International Shoe Co. v. Washington, 326
U. S. 310, 316, 66 S. Ct. 154, 158, 90 L. Ed. 95 (1945), to require
a defendant to litigate a claim in the forum state. McGee v.
International Life Ins. Co., 355 U. S. 220, 78 S. Ct. 199, 2 L. Ed. 2d
g
ij)
& er
ies
! 5
gst
foe
ah
oul
efekce
Epes
ys eaps So°
siseoke<®
portion of holding
would be relevant in this case only if G defaulted and this
oust puspested to enter an ts porsnam jelgnent.
2A
A60 Appendix D
APPENDIX D.
David A. Drexler, Esquire, of Morris, Nichols, Arsht
& Tunnell, Wilmington, Delaware; and Olwine, Connelly,
Chase, O'Donnell & Weyher, New York, New York, Attor-
neys for Plaintiffs.
Thomas S. Lodge, Esquire, and John R. Bowman,
Esquire, of Connolly, Bove & Lodge, Wilmington, Dela-
ware; and Bedell, Bedell, Dittmar, Smith and Zehmer,
Jacksonville, Florida, Attorneys for Defendant.
MEMORANDUM OPINION AND ORDER
Wilmington, Delaware
April 24, 1975
STaPLeToN, District Judge:
This matter is now before me on defendant's renewed
motion to reconsider his motion to quash the sequestration
of certain assets. Defendant's motion asserts that the Dela-
ware sequestration statute, 10 Del. C. § 366, unconstitution-
ally denies due process of law to non-resident defendants.
This Court has twice previously upheld these provisions in
this case. U. S. Industries v. Gregg, 348 F. Supp. 1004
(D. Del. 1972); U. S. Industries v. Gregg, 58 F. R. D. 469
(D. Del. 1973). Defendant now asks me to reconsider
these rulings in the light of two recently decided cases:
Garcia v. Krausse, 380 F. Supp. 1254 (S. D. Tex. 1974),
and North Georgia Finishing, Inc. v. Di-Chem, Inc., —
U. S. —, 43 U. S. L. W. 4192 (Jan. 22, 1975). For the
reasons which follow, I conclude that my previous rulings
remain correct.
Appendix D A61
Garcia v. Krausse, supra, held Texas’ sequestration
statutes unconstitutional on the authority of Fuentes v.
Shevin, 407 U. S. 67 (1972), and Mitchell v. W. T. Grant
Co., 416 U. S. 600 (1974). I have already analyzed the
Delaware sequestration statute under the principles of
Fuentes, see 348 F. Supp., at 1020-1023; Mitchell, if any-
thing, loosened the strictures of the Due Process Clause as
applied to the states in this context. See 416 U. S., at 634-
635 (Stewart, J., dissenting ); 623 ( Powell, J., concurring).
North Georgia Finishing, Inc. v. Di-Chem, Inc., supra, “ap-
pears to resuscitate Fuentes v. Shevin,” — U. S. —, 43
U. S. L. W., at 4194 (Powell, J., concurring), but it does
not appear to go beyond that case in any respect. Accord-
ingly, I see no necessity to focus again upon the reasoning
of these cases.° The motion will be denied.
* In view of the emphasis in the Mitchell and Di-Chem cases
on the need for a prompt hearing on the matter of possession
nte lite, see 416 U. S., at 610, 618; — U. S. —, 43 U. S.
W., at 4194, 4195, it bears noting here that the Delaware
statute and rules do permit a defendant whose property is seized
to obtain a speedy judicial determination of the propriety of
the sequestration. By ry | to quash the sequestration under
Chancery Rule 12(b)(1) to (5) or (7), the defendant may make
what is in effect a special a ance limited to this issue, and
receive plenary judicial consideration. See Schwartz v. Miner,
136 A. da 599 (Del. Ch. 1957); Sands v. Lefcourt Realty Corp.,
117 A. 2d 365 (Del. Sup. Ct. 1955). This procedure has been
followed in this case, see U. S. Industries v. Gregg, 348 F. Supp.
1004, 1016-1020 (1972), and in many others, see, e.g., Breech v.
Hughes Tool Co., 189 A. 2d 428 (Del. Sup. Ct. 1963), affg T. W. A.
vo. Hughes, 185 A. 2d 762 (Del. Ch. 1962); Gluck vo. Chashin,
210 A. 2d 805 (Del. Sup. Ct. 1965); Nickson v. Filtrol 7 265
A. 2d 425 (Del. Ch. 1 ; Baker v. Gotz, 336 F. Supp. 197 (D.
Del. 1971), of 4, 492 F. 2d 1238 (3rd Cir. 1974); U. S. v. Sinclair,
347 FF. pp. 1129 (D. Del. 1972); D'Angelo vw. Petroleos
Mexicanos, F. Supp. 1076 (D. Del. 1974).
The defendant cannot, however, challenge the legal sufficiency
of the complaint under Rule 12(b)(6) without entering a general
cmpoemtes, Hughes v. T. W. A., 185 A. 2d 886 (Del. . Ct.
1962); Widder v. Leeds, 317 A. 2d 32 (Del. Ch. 1974). T have
already held this requirement constitutional. U. S. Industries v.
=
62 Appendix D
ORDER
Tus 24th day of April, 1975, for the reasons appearing
above, defendant’s renewed motion for reconsideration of
his motion to quash the sequestration in this case is denied.
Watter K. STAPLETON,
United States District Judge.
* (Cont'd. )
Gregg, 58 F. R. D., at 478-481. Nor can the defendant, without
mee | pn Span mp by ay $e AS
property on the grounds that there is no “reasonable
eg i et pt. sp ht
Appendix E A63
APPENDIX E.
UNITED STATES COURT OF APPEALS
For tas Tarp Cracurr
No. 75-2177
U.S. INDUSTRIES, INC., a corporation, and
DIVERSACON INDUSTRIES, INC., a corporation
F. BROWNE GREGG,
Appellant.
AppeaL From tae Untrep Srares District Court ror THE
District or DeLawarRE
(D.C. Civil No. 4431)
Argued April 20, 1976
Before: Auprsert, Katopner and Weis, Circuit Judges.
Thomas 8S. Lodge, Esq.
Connolly, Bove & Lodge
1800 Farmers Bank Building
Wilmington, Delaware 19899
Of Counsel:
E. Earle Zehmer, Esq.
Bedell, Bedell, Dittmar & Zehmer
1500 Barnett Bank Building
Jacksonville, Florida 32202
Counsel for Appellant
A64 Appendix E
Morris, Nichols, Arsht & Tunnell
David A. Drexler, Esq.
1105 North Market Street
Wilmington, Delaware 19899
Of Counsel:
William F. Sondericker, Esq.
Judith S. Kaye, Esq.
Olwine, Connelly, Chase, O’Donnell
& Weyher
299 Park Avenue
New York, New York 10017
Counsel for Appellee
OPINION OF THE COURT
(Filed July 19, 1976)
A.pisert, Circuit Judge.
Unlike 49 other states that enacted the Uniform Com-
mercial Code, Delaware did not enact §8-317(1)' which
requires the actual seizure of stock certificates to effect a
valid attachment or levy upon an interest in corporate
stock. Rather, Delaware continued in force § 169? of its
General Corporation Law which provides that the situs of
ownership of stock in a Delaware corporation is Delaware
1. $ 8-317. Attachment or Levy Upon Security
(1) No attachment or levy upon a security or any share or
other interest evidenced thereby which is outstanding shall be
valid until the security is actually seized by the officer making the
attachment or levy but a security which has been surrendered to
the issuer may be attached or levied upon at the source.
2. & Del. C. § 169. Situs of ownership of stock.
For all purposes of title, action, attachment, garnishment
and jurisdiction of all courts held in this State, but not for
purpose of taxation, the situs of the ownership
stock of all corporations existing under
whether organized under this chapter or i
garded as in this State. (8 Del. C. 1953, § 169; 56
a
is"
2 2.
sf
:
Appendix E A65
—regardless of the actual location of the stock certificates.
In contrast to the Uniform Commercial Code procedure,
Delaware nonresident sequestration * practice permits the
‘‘seizure’’ of a defendant’s stock interest in a domestic
corporation merely by giving notice to the corporation in
Delaware. Seizure having been effected, Delaware case
law establishes that the defendant may not appear specially
to protect the seized property without subjecting himself to
full in personam liability. Sands v. Lefcourt Realty Corp.,
35 Del. Ch. 340, 117 A.2d 365 (1955). The major question
presented in this appeal from a default judgment approv-
ing the sale of defendant’s interest in the shares of a Dela-
ware corporation is whether the Delaware situs statute, as
construed by the Delaware courts and as applied in this
3. 10 - C. § 366. Compelling appearance of nonresident de-
fendant.
(a) If it appears in any complaint filed in the court of
Chancery that the defendant or any one or more of the defendants
is a nonresident of the State, the Court may make an order
directing such nonresident defendant or defendants to appear by
a day certain to be designated. Such order shall be served on
such nonresident defendant or defendants by mail or otherwise,
if practicable, and shall be published in such manner as the Court
directs, not less than once a week for 3 consecutive weeks. The
Court may compel the appearance of the defendant by the seizure
of all or any part of his property, which property may be sold
under the order of the Court to pay the demand of the plaintiff,
if the defendant does not appear, or otherwise defaults. Any
defendant whose property shall have been so seized and who shall
have entered a general appearance in the cause may, upon notice
to the plaintiff, petition the Court for an order releasing such
yd or any part thereof from the seizure. The Court shall
release such property unless the plaintiff shall satisfy the Court
that because of other circumstances there is a reasonable possi-
bility that such release may render it substantially less likely that
plaintiff will obtain satisfaction of any judgment secured. If
such petition shall not be granted, or if no such petition shall be
filed, such property shall remain subject to seizure and may be
sold to satisfy any judgment entered in the cause. The Court
may at any time release such property or any part thereof upon
the giving of sufficient security.
(b) The Court may make all necessary rules respecting the
form of process, the manner of issuance and return thereof, the
A66 Appendix E
sequestration proceeding, comports with the constitutional
requirement that jurisdiction be predicated on’ minimum
contacts with the forum. International Shoe Co. v. Wash
ington, 326 U.S. 310 (1945). In our view, it does not so
comport. Accordingly, we reverse and remand with a
direction to dismiss for want of jurisdiction over the
person.
I.
The issue is sharply drawn in this litigation initiated
by U.S. Industries, Inc. (USI), a Delaware corporation
having its principal place of business in New York, and
its wholly-owned subsidiary, Diversacon Industries, Inc.,
a Florida corporation having its principal place of business
in Florida. The sole defendant is F. Browne Gregg, a
Florida citizen and resident. In 1969 Gregg and USI en-
tered into an agreement in Florida for the sale of three
Florida construction companies controlled by Gregg. In
essence, USI agreed to exchange USI voting common and
special preference stock for the outstanding stock of the
Gregg companies, the business of those companies to be
transferred to USI’s subsidiary, Diversacon. In addition
to transferring the stock and business of his corporations,
Gregg contributed $1 million to the capital of the trans-
ferred corporations and, with his wife, gave a $500,000
3. (Cont’d.)
release of such property from seizure and for the sale of the
property so seized, and may require the plaintiff to give approved
security to abide any order of the Court respecting the property.
(c) Any transfer or assignment of the property so seized
after the seizure thereof shall be void and after the sale of the
operty is made and confirmed, the purchaser shall be entitled
to and have all the right, title and interest of the defendant in
and to the property so seized and sold and such sale and con-
firmation shall transfer to the purchaser all the right, title and
interest of the defendant in and to the property as fully as if the
defendant had transferred the same to the purchaser in accord-
ance with law. (Code 1852, § 1938; 17 Del. Laws, c. 215; Code
1915, § 3850; 34 Del. Laws, c. 216, §2; 35 Del. Laws, c. 217;
36 Del. Laws, c. 268, § 1; Code 1935, § 4374; 10 Del. C. 1953,
§ 366; 50 Del. Laws, c. 379, § 1.)
Appendix E A867
installment note to Diversacon. In return, Gregg received
100,962 shares of USI common stock and 8,750 shares of
USI special preference stock; he was to receive additional
common st
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