Shaffer v. Heitner

Brief Fact Summary.

Plaintiff stockholder brought a shareholder’s derivative action in Delaware state court against Defendants, corporations incorporated in Delaware with their principal place of business in Arizona, and corporate officers of the corporations (Defendants). Plaintiff moved to sequester Defendants’ property, which was stock in the company, located in Delaware as defined by the Delaware statute. Defendants moved to quash the summons and to vacate the sequestration order, arguing that both exercising personal jurisdiction and seizing Defendants’ property violated due process.

Synopsis of Rule of Law.

When the only contact the defendant has with the forum state is the location of property as defined by statute in the forum state, the forum lacks personal jurisdiction over the defendant unless the minimum contacts test of International Shoe is satisfied.

Facts.

Plaintiff, a stockholder for Greyhound Corp., a company incorporated in Delaware with its principal place of business in Arizona, sued Greyhound Corp., Greyhound Lines, Inc., (a subsidiary of Greyhound Corp.) and present and former officers of the two companies for violating duties to Greyhound Corp. by causing it to be liable for damages in an antitrust suit and a fine in a criminal contempt action in Oregon. Plaintiff filed a motion for sequestration of the officers’ stock. Under a Delaware statute, Delaware is the site of all stock in Delaware corporations. The stock was seized. Defendants were notified by certified mail of the sequestration and notice was published in a Delaware newspaper. Defendants entered a special appearance so they could move to quash service of process and vacate the sequestration order. Defendant argued that the order violated due process and therefore the property could not be attached in Delaware.

In addition, Defendants argued that they did not have the minimum contacts with Delaware required to establish jurisdiction under International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945). Moreover, Defendants argued that the sequestration procedures were inconsistent with the Sniadach cases (see Sniadach v. Family Finance Corp., 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed.2d 349 (1969). The Court of Chancery found for Plaintiff and the Supreme Court of Delaware affirmed the Court of Chancery. The Supreme Court of Delaware reasoned that the Sniadach cases involved default judgments and not compelling a party to appear. This court furthered reasoned that sequestration procedures help to adjudicate claims of mismanagement against Delaware companies, and do not cause permanent deprivation of property to their shareholders. Defendants appealed.

Issue.

In order for the forum state to exercise in rem jurisdiction on a nonresident, must the nonresident have minimum contacts with the forum state such that the defendant has purposefully availed itself of the benefits of that state’s laws? If so, must the cause of action be sufficiently related to the contacts the nonresident has with the forum state?

Held.

Yes to both. Judgment reversed. In rem is not a proceeding against the property, it is a proceeding against a person’s interest in the property. You need to give an owner of property reasonable and appropriate notice of an in rem proceeding so that he or she recognizes that such a proceeding directly affects his or her interests. Having property in a state does not give the state jurisdiction over causes of action unrelated to the property unless the person also passes the minimum contacts test articulated in the International Shoe decision. If it is unconstitutional to exercise jurisdiction over the person directly then it should be unconstitutional to assert jurisdiction indirectly. Plaintiff’s argument that Delaware has an interest in asserting jurisdiction over corporate fiduciaries is not established by Delaware law.

Delaware law determines that it has jurisdiction over Defendants because Defendants’ property is in Delaware; and not due to their status as corporate fiduciaries. First, the statute authorizing jurisdiction does not specifically apply to stockholder derivative actions. Moreover, Plaintiff’s inability to secure jurisdiction over seven of the defendants because they didn’t have property in Delaware shows that there is no necessary relationship between corporate fiduciaries and stockholders. In addition, Plaintiff has not demonstrated that Delaware is a fair forum. Plaintiff must demonstrate more than the applicability of Delaware’s laws to the controversy to establish a basis for jurisdiction. Plaintiff’s argument that Defendants have received benefits from Delaware laws only demonstrates that it would be appropriate for Delaware law to govern obligations between Defendant and stockholders. This argument does not require that Delaware be permitted to exercise jurisdiction, especially considering its lack of a long-arm statute.

Concurrence. Justice Stevens: The majority should not broadly eliminate in rem jurisdiction by stating that there is no personal jurisdiction if the only contact the defendant has with the forum state is property located in the state. There are other means of acquiring jurisdiction over local actions that may be unintentionally limited by this broad language.

Justice Brennan (concurring in part and dissenting in part): The Delaware sequestration statute embodies quasi in rem jurisdiction that is no longer valid. The parties did not make the minimum contacts test an issue so the court should not have decided this issue. There is no proper factual record for determining the level of contacts in this case. This is also a constitutional question, and this decision will reach to all the state statutes that permit quasi in rem action through sequestration of property. The general rule is that the forum state has jurisdiction over the directors and  officers of a corporation chartered by the state in a shareholder derivative action. A state’s valid substantive interests are considerations in assessing the constitutionality of exercising jurisdiction. Delaware has interests in preventing local corporations from being victims of foreign stockholders and in regulating its own corporations.

In addition, jurisdiction can be based on out-of-state activities that have foreseeable effects in the forum state. Delaware’s failure to express an interest in corporate fiduciaries does not pertain to the minimum contacts analysis. Furthermore, there was purposeful availment of the forum’s laws because the corporate officers entered business relationships with Greyhound’s stockholders pursuant to the laws of Delaware.

Discussion.

As the concurring opinions illustrate, it is highly unlikely a court has personal jurisdiction over a non-resident defendant that is absent from the forum state when the only contact is property owned by the defendant located within the forum state. Even if the property is connected to the suit, minimum contacts must still be established in compliance with the International Shoe test.