Bank of America Nat. Trust and Sav. Ass'n v. GAC Properties Credit, Inc.

• Decision Date: 26 June 1978
• Citation: 389 A.2d 1304
• Parties: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION et al., Plaintiffs, v. GAC PROPERTIES CREDIT, INC., et al., Defendants. Leo W. FARLAND, Plaintiff, v. S. Hayward WILLS et al., Defendants.
• Court: Court of Chancery of Delaware

Page 1304

389 A.2d 1304

BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION et

al., Plaintiffs, v. GAC PROPERTIES CREDIT, INC., et al., Defendants.

Leo W. FARLAND, Plaintiff, v. S. Hayward WILLS et al., Defendants.

Court of Chancery of Delaware, New Castle County.

Submitted March 30, 1978.

Decided June 26, 1978.

A. Gilchrist Sparks, III, Morris, Nichols, Arsht & Tunnell, Wilmington, Attorneys for Plaintiff Bank of America National Trust and Savings Association, Russell J. Willard, Jr., Hastings & Willard, Wilmington, Stanley Nemser, Nemser & Nemser, New York City, for plaintiff Leo W. Farland.

Martin I. Lubaroff, Richards, Layton & Finger, Wilmington, for intervening plaintiff Chemical Bank.

Michael D. Goldman, Potter, Anderson & Corroon, Wilmington, for defendants GAC Properties Credit, Inc., GAC Properties, Inc., GAC Rental Corp., GAC Corp., S. Hayward Wills, Russell E. Kemmerer, James F. Ring and James R. Powell.

HARTNETT, Vice Chancellor.

These two actions, commenced in 1975, were previously consolidated for trial. In Farland v. Wills, C.A. # 4888 (Farland case), the action was brought by Leo W. Farland, a non-resident of Delaware, who was a holder of GAC Properties Credit, Inc. (Credit) 12% debentures, on his behalf and on behalf of all similarly situated holders of debentures, against four corporate defendants (three of which are Delaware corporations, including Credit) and five individual non-resident defendants (Wills, Kemmerer, Ring, Stuken, and Powell). The corporate defendants are interconnected in a manner which does not need to be set forth here. The Complaint in Farland was filed on September 22, 1975, and a Sequestration Order was entered that same day pursuant to 10 Del.C. § 366 ¹ directing the five individual defendants to appear on or before November 3, 1975. Pursuant to the Sequestration Order, securities owned by the individual defendants in Credit were seized by the sequestrator to compel the appearance of defendants. Thereafter, on October 9, 1975, well before the November 3 deadline, all the individual defendants, except Stuken, stipulated to enter a general appearance ² and an Order was entered directing the sequestrator to release any property which had been seized. The time within which individual defendants were given to file an answer was extended to November 3, 1975. Defendant Stuken has not appeared in these actions.

On October 23, 1975, after the entry of the appearances in the Farland case, Bank of America National Trust and Savings Association, a foreign corporation, (Bank of America), the indenture trustee for Credit's 12% debentures, filed suit against the same individual and corporate defendants named in the Farland case; and on November 6, 1975, Chemical Bank, a foreign corporation, in its capacity as indenture trustee for Credit's 11% debentures, intervened as plaintiff in that case.

Unlike the Farland case, in Bank of America v. GAC Properties Credit, Inc., C.A. # 4914 (Bank of America case), an Order of Sequestration was not sought by the plaintiffs. Instead, counsel for the four appearing defendants voluntarily accepted service of the Complaints, and on November 5, 1975, and November 26, 1975, defendants answered the respective Complaints of Bank of America and Chemical Bank, stating in both answers that they ". . . hereby appear generally and through . . . their attorneys . . .." Extensive discovery then took place in the two cases and trial was scheduled to convene in the fall of 1976 but then was continued by the Court because of a vacancy in this Court.

On June 24, 1977, the United States Supreme Court in Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977) ruled that the Delaware sequestration statute 10 Del.C. § 366, had been applied unconstitutionally in that case to obtain substituted service of process against non-resident defendants. On July 29, 1977, some thirty-five days after the Shaffer opinion was released but before the mandate was issued by the U. S. Supreme Court, the individual defendants in the two cases before this Court filed a Motion To Dismiss under Chancery Court Rule 12(b)(2) and (5) on the grounds that this Court lacked jurisdiction over the persons and that service of process was insufficient. Individual defendants subsequently indicated that their Motion To Dismiss was based on the ruling in Shaffer.

The acts of defendants complained of in the Complaints, in essence, are that corporate defendants and individual defendants made false statements in connection with a tender offer made by Credit, a Delaware corporation, for its debentures, and that there were certain fraudulent transfers of assets among the various corporate defendants.

The individual defendants, at or shortly before the time the tender offer was made, were directors of Credit and one or more of the other corporate defendants.

This is my decision on the Motion To Dismiss following briefing and argument.

The issues to be decided at this stage are:

(1) Was 10 Del.C. § 366, the Delaware sequestration statute, declared unconstitutional and void by the U. S. Supreme Court in Shaffer v. Heitner, supra?

(2) If 10 Del.C. § 366 is not void, did the individual defendants have sufficient minimum contacts with Delaware as to render them amenable to service by substituted service of process pursuant to 10 Del.C. § 366 in these cases?

(3) If defendants' contacts with Delaware were insufficient to uphold substituted service of process upon them by use of 10 Del.C. § 366, did they nevertheless waive their right to object to the personal jurisdiction of this Court?

Each issue will be discussed separately.

IS 10 DEL.C. § 366 VOID?

I

The first question to be addressed is whether 10 Del.C. § 366 is now unconstitutional and void.

There is nothing in Shaffer v. Heitner which indicates that the U. S. Supreme Court found 10 Del.C. § 366 ³ to be unconstitutional per se.

As stated in footnote number 40 in Shaffer v. Heitner, 433 U.S. at 213, 97 S.Ct. at 2585:

In these circumstances (actual notice to defendants sent by Register in Chancery), we will assume that the procedures followed (pursuant to 10 Del.C. § 366) would be sufficient to bring appellants before the Delaware courts, If minimum contacts existed. (Language in parenthesis and emphasis added).

It is not the procedures provided in 10 Del.C. § 366 which were held to be constitutionally unpermissive but rather the fact that these procedures had been used to compel appearance in Delaware of nonresidents who had little or no contact with Delaware prior to a suit being filed.

In Shaffer the U. S. Supreme Court said "We . . . conclude that all assertions of state court jurisdiction must be evaluated according to the standards set forth in International Shoe and its progeny." 433 U.S. at 212, ⁴ 97 S.Ct. at 2584.

I therefore hold that 10 Del.C. § 366 is not unconstitutional per se and may still be utilized in appropriate circumstances to compel the appearance of a non-resident defendant if the defendant had sufficient minimum contacts with Delaware to support the jurisdiction of this Court. ⁵ Grynberg v. Burke, Del.Ch., 388 A.2d 443 (1978).

II

Nothing contained in the recently enacted Service of Process on Nonresident Directors Act (10 Del.C. § 3114 enacted by 61 Del.L., Ch. 119) is inconsistent with this holding.

10 Del.C. § 3114(d) states:

(d) Nothing herein contained limits or affects the right to serve process in any other manner now or hereafter provided by law. This section is an extension of and not a limitation upon the right otherwise existing of service of legal process upon nonresidents.

That language specifically preserves the right to use 10 Del.C. § 366 in appropriate circumstances. The Synopsis attached to the Bill also is not inconsistent with this holding. The Synopsis stated Inter alia :

The purpose and intent of this legislation is to fill a void in enforcement and interpretation of Delaware corporation laws created by the decision of the United States Supreme Court on June 24, 1977 in Schaffer (sic) V. Heitner. In that case the Court struck down 10 Del.C. § 366 which until now has frequently been the only means whereby nonresident corporate directors of Delaware Corporations could be brought before the courts of this State to answer for their conduct in managing the affairs of the corporation. . . .

I do not read the Synopsis as saying that 10 Del.C. § 366 has been struck down in its entirety but only that it was struck down as it was utilized in Shaffer v. Heitner. In any case, a Synopsis cannot change the meaning of an unambiguous statute. 10 Del.C. § 3114(d) is clear and unambiguous. There is therefore no room for judicial interpretation of it. Sutherland Statutory Construction (4th Ed.) § 45.02. See Council 81, Am. F. of S., C & M Emp. v. State, Dept. of Finance, Del.Supr., 293 A.2d 567 (1972). The new Act does not limit or affect any existing method of service of process, including 10 Del.C. § 366.

III

The standard for judging whether a state statute providing for substituted service of process on a nonresident is constitutionally applied under the rule of law set forth in Shaffer v. Heitner is the standard enunciated in International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), and restated in McGee v. International Life Insurance Co., 355 U.S. 220, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957). That standard is that all assertions of state-court jurisdiction must be supported by the presence of a connection between the forum, the litigation and the defendant. ⁶

As stated in Shaffer v. Heitner, 433 U.S. at 204, 97 S.Ct. at 2580:

Thus, the relationship among the defendant, the forum, and the litigation, rather than the mutually exclusive sovereignty of the States on which the rules of Pennoyer rest (after International Shoe) became the central concern of the inquiry into personal jurisdiction.

In judging whether particular acts are sufficient minimum...