Shaffer v. Heitner

Brief Fact Summary.

Plaintiff Shaffer filed a class action suit in Delaware against 28 non-residents and simultaneously filed a motion to sequester property owned by those defendants located in the state of Delaware.

Synopsis of Rule of Law.

The minimum contacts standard for jurisdiction applies to proceedings in rem as well as proceedings in personam.

Facts.

Defendant Heitner, a non-resident of Delaware, is the owner of one share of stock in the Greyhound Corporation, a business incorporated in Delaware with its principal place of business in Arizona. In 1974, Defendant filed a shareholder’s derivative suit in the Court of Chancery in Delaware against 28 present or former officers or directors (including Plaintiff) of the Greyhound Corporation. The activities which led to the suit being filed took place in Oregon. Simultaneous with the suit Defendant filed a motion for sequestration of the property owned by the 28 individual defendants within the state of Delaware. A motion to sequester was ordered, and approximately 82,000 shares of Greyhound common stock belonging to 21 of the defendants was attached. Those defendants filed a motion to quash service of process and to vacate the sequestration order. The Delaware courts rejected all of the defendants’ arguments, and this appeal followed.

Issue.

Whether a court may take jurisdiction of a lawsuit by sequestering property of the non-resident defendant that happens to be located within the forum state, i.e.: Whether the Court should apply the minimum contacts test to in rem actions in addition to actions that are in personam

Held.

No, the judgment of the Delaware Supreme Court upholding jurisdiction was reversed. The Supreme Court of the United States decided to apply minimum contacts standard to actions in rem, in addition to those in personam, essentially overturning the rationale from Pennoyer v. Neff (995 U.S. 714 1877), holding that ownership of property in a state automatically gives rise to jurisdiction over the property in the forum state. Because the Delaware property was not the subject matter of the litigation, nor was the underlying cause of action related to the property, the defendants’ Delaware stock did not provide contacts with Delaware sufficient to support the jurisdiction of Delaware over the defendants.

Dissent.

Justice Brennan dissented in part. While fully agreeing that the minimum contacts standard should apply to actions in rem, he disagreed over what constituted such minimum contacts. Specifically, he found that as a general rule a state forum should have jurisdiction to adjudicate a shareholder derivative action centering on the conduct and policies of the directors and officers of a corporation chartered by that state. Concurrence. Justice Powell concurred. He reserved judgment however, on whether the ownership of some forms of property located within a state was sufficient by itself to expose the property holder to jurisdiction within the state, even where the litigation is limited to the extent of the value of the property. Justice Stevens also concurred. His distinction from the majority’s opinion dealt with his finding that the notice of service of process was deficient. Specifically, he found that the Delaware sequestration statute is unconstitutional on its face because it permits notifying a non-resident of a suit in a forum unrelated to the purchase of stock on the open market.

Discussion.

The Supreme Court in this case is essentially considering whether the standard of fairness and substantial justice, exemplified by minimum contacts, developed in International Shoe (362 U.S. 310, 1945) as applicable to in personam suits, should apply to actions in rem as well as in personam. In deciding making the minimum contacts standard applicable to actions in personam, the Supreme Court accepted that when claims to the property itself are the source of the controversy between the plaintiff and the defendant, it would be unusual for the state where the property is located not to have jurisdiction. However, here the Supreme Court was faced with a suit where the property serving as the basis for state-court jurisdiction was completely unrelated to the plaintiff’s cause of action. Thus the court reasoned that the minimum contacts standard was a better judge of whether jurisdiction would support traditional notions of fair play and substantial justice. In determining that sufficient minimum contacts did not exist in this case to expose the defendants to a suit in Delaware, the Supreme Court found that a person merely buying securities in a Delaware corporation does not impliedly consent to subject himself to Delaware’s jurisdiction.