Baker v. Gotz

• Decision Date: 04 June 1976
• Docket Number: Civ. A. No. 4072,74-99 and 74-145.
• Citation: 415 F. Supp. 1243
• Parties: George P. BAKER et al., Plaintiffs, v. Fidel GOTZ et al., Defendants.
• Court: U.S. District Court — District of Delaware

415 F. Supp. 1243

George P. BAKER et al., Plaintiffs, v. Fidel GOTZ et al., Defendants.

Civ. A. Nos. 4072, 74-99 and 74-145.

United States District Court, D. Delaware.

June 4, 1976.

COPYRIGHT MATERIAL OMITTED

David A. Drexler, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for plaintiffs; Morris L. Weisberg, of Blank, Rome, Klaus & Comisky, Philadelphia, Pa., of counsel.

Arthur G. Connolly, and Arthur G. Connolly, Jr., of Connolly, Bove & Lodge, Wilmington, Del., for defendants; Saul L. Sherman, of Busby, Rivkin, Sherman, Levy & Rehm, New York City, of counsel.

OPINION

STEEL, Senior District Judge:

In each of the above three cases defendants have moved for orders protecting and effectuating the "judgments" of the Court entered January 9, 1975. These "judgments", which are in reality denominated "orders", vacated earlier invalid sequestration orders obtained by plaintiffs under which property of defendants consisting of notes, warrants and debentures (hereinafter "notes") issued by three Delaware corporations and the "rights belonging and appertaining" thereto had been purportedly sequestered. The sequestration orders had been held to be invalid in Baker v. Gotz, 387 F.Supp. 1381 (D.Del.1975), aff'd by "Judgment Order", 523 F.2d 1050 (3d Cir. 1976) ("Baker II").¹ Since the pending three motions involve substantially the same facts and their resolution involves the same principles, separate treatment of each motion is not required.

The sequestrator appointed under the invalid sequestration order was Jay H. Conner (hereinafter "federal sequestrator"). The monies which he received (interest, principal, etc.) on the sequestered notes were deposited by him in his name in the Wilmington Trust Company and for the most part were invested in securities. These securities were also held by the Wilmington Trust Company in the name of the federal sequestrator. The "monies" and "securities" are hereafter sometimes collectively referred to as "funds".

On February 18, 1976, this Court entered an order pursuant to defendants' motion which authorized the federal sequestrator to turn over to defendants the funds which he and the Wilmington Trust Company held on October 28, 1975, for the reasons stated in Baker v. Gotz, 408 F.Supp. 238 (D.Del. 1976) ("Baker III"). Defendants' present motion is for an order authorizing the federal sequestrator to turn over to defendants the funds which he has received since October 28, 1975, no action as yet having been taken by the sequestrator to advise the issuers of the notes to cease making payments to him.

At root, the resistance of plaintiffs to defendants' pending motion, insofar as it seeks authorization for the federal sequestrator to turn over to defendants the funds received since October 28, 1975, rests upon a sequestration order entered by the Court of Chancery of Delaware on October 28, 1975, denominated Blanchette, et al. v. Fidel Gotz, et al., Civil Action No. 4919, under which Jay H. Conner was appointed state sequestrator.² That order was obtained by plaintiffs in a suit brought by plaintiffs and those in privity with them against the defendants and a defendant in privity with them on substantially the same cause of action as the present litigation involves. The state court order purported to sequester the same notes as well as the "rights belonging and appertaining" thereto which were the subject of the sequestration order of this Court.

The funds which came into the possession of the federal receiver since October 28, 1975, have all been deposited in his name in the Wilmington Trust Company. None were deposited in his name as state sequestrator. Furthermore, apart from the purported sequestration of the notes themselves (including the "rights belonging and appertaining" thereto) plaintiffs have taken no action in the state court to independently sequester the post-October 28, 1975, funds. Plaintiffs' argument that the sequestration of the funds under the state court order should be honored by this Court, and as a consequence a turnover order in defendants' favor should be denied rests solely upon the claim that the sequestration of the notes themselves, including the "rights belonging and appertaining" thereto, was valid under Delaware law. This conclusion is contrary to this Court's decision in Baker II which was affirmed by the Judgment Order of the Court of Appeals. There it was held that the notes, being negotiable investment securities, were not sequesterable under the Uniform Commercial Code which was in effect in Delaware at the time when the purported sequestration was effected. The question of the propriety of entering a turnover order with respect to the funds held by the federal sequestrator on and prior to October 28, 1975, was sustained in this Court's opinion of January 14, 1976, and was never appealed from. The purported state sequestration cannot operate as a seizure of the post-October 28, 1975, funds, based as it is upon the alleged validity of the sequestration of the notes, for this Court has already held that the notes cannot be validly sequestered in Delaware. Since the federal sequestration was invalid and the notes and funds have not been validly sequestered in the state court, the turnover order which defendants now seek with respect to the post-October 1975 funds should be entered.

In addition to the turnover order which will be entered, defendants' motion seeks an injunction ordering plaintiffs and others identified with them:

"(a) Not to commence, maintain or prosecute any action or proceeding in the State of Delaware in which they seek to sequester, attach, or otherwise seize any of the notes, warrants, or debentures purportedly sequestered in this action;

(b) Not to hinder or prevent or refuse to cooperate with defendants and their agents and attorneys or this Court in effecting the release or transfer of such notes, warrants or debentures from any sequestration in this action or in Civil Action No. 4919, in the Court of Chancery in and for the County of New Castle, Delaware, entitled Blanchette, et al. v. Gotz, et al.;

(c) To abandon and withdraw said Court of Chancery action insofar as it seeks to sequester the property purportedly sequestered herein;

(d) To take any and all action necessary or appropriate to effectuate or implement the foregoing; . . .."

The plaintiffs argue that the Anti-Injunction Act, 28 U.S.C. § 2283, contains an absolute prohibition against this Court issuing the injunction which in effect will stay further proceedings in the state court under its sequestration order of October 28, 1975, as it applies to the notes involved in the present litigation. Section 2283 reads:

"A court of the United States may not grant an injunction to stay proceedings in a State Court except as expressly authorized by act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments." (Emphasis supplied.)

Defendants on the other hand contend that section 2283 is not a bar because the injunction sought falls within the exceptions of the statute and is authorized by the All Writs Statute, 28 U.S.C. § 1651(a), which provides:

"The Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law." (Emphasis supplied.)

Section 2283 (formerly section 265 of the Judicial Code of 1911) must be construed in connection with section 1651 (formerly section 262 of the Judicial Code of 1911). Kline v. Burke Construction Co., 260 U.S. 226, 229, 43 S.Ct. 79, 67 L.Ed. 226 (1922). Power to issue the injunction sought by plaintiffs is derived from the All Writs Statute. Although it in terms only refers to "all writs necessary or appropriate in aid of their respective jurisdictions", courts have interpreted it as authorizing injunctions to protect and effectuate their judgments. Toledo Scale Company v. Computing Scale Company, 261 U.S. 399, 426, 43 S.Ct. 458, 67 L.Ed. 719 (1923); Ward v. Pennsylvania New York Central Transportation Co., 456 F.2d 1046 (2d Cir. 1972), aff'g 328 F.Supp. 1245 (S.D.N.Y.1971); Kinnear-Weed Corp. v. Humble Oil & Refining Co., 441 F.2d 631, 637 (5th Cir. 1971), cert. denied, 404 U.S. 941, 92 S.Ct. 285, 30 L.Ed.2d 30, reh. denied, 404 U.S. 996, 92 S.Ct. 532, 30 L.Ed.2d 549; Teas v. Twentieth Century-Fox Film Corp., 413 F.2d 1263 (5th Cir. 1969); Clinton v. United States, 297 F.2d 899 (9th Cir. 1961); cf. Federal Home Loan Bank of San Francisco v. Hall, 225 F.2d 349, 385, n. 12 (9th Cir. 1955); see also Toucey v. N. Y. Life Insurance Co., 314 U.S. 118, 142, 62 S.Ct. 139, 86 L.Ed. 100 (1941) (Reed, J. dissenting).³

The reliance which the plaintiffs place upon the prohibition of state action in section 2283 warrants a brief discussion of its history.⁴ The origin of section 2283 is found in the Act of March 2, 1793; 1 Stat. 335. This provided that no "writ of injunction be granted by any federal court to stay proceedings in any court of a state." This law remained unchanged until 1874 when Rev.Stat. § 720 was enacted. This provided that a state proceeding could be enjoined "where such injunction may be authorized by any law relating to proceedings in bankruptcy." Despite this uncompromising language the courts recognized that, in addition to the bankruptcy law exception explicitly recognized in 1874, implied exceptions must be made to its blanket prohibition. One such implied exception was the "relitigation exception" under which a federal court was permitted to enjoin relitigation in a state court of issues already decided in federal litigation. This principle continued to be recognized until 1941, when Toucey v. New York Life Ins. Co., 314 U.S. 118, 62 S.Ct. 139, 86 L.Ed. 100, was decided. In it the court expressly disavowed the "relitigation exception" to the statute and held that section 265 of the Judicial Code of 1911 which embodied the 1874...