Greene v. Johnston

• Decision Date: 16 October 1953
• Citation: 34 Del.Ch. 115,42 A.L.R.2d 906,99 A.2d 627
• Parties: , 42 A.L.R.2d 906 GREENE et al. v. JOHNSTON et al.
• Court: United States State Supreme Court of Delaware

Page 627

99 A.2d 627

34 Del.Ch. 115, 42 A.L.R.2d 906

GREENE et al. v. JOHNSTON et al.

Supreme Court of Delaware.

Oct. 16, 1953.

Robert C. Barab, of Wilmington, and Paul Roberts, of New York City, for appellants.

Caleb S. Layton (of Richards, Layton & Finger), of Wilmington, and Simpson, Thacher & Bartlett, of New York City, for appellees.

SOUTHERLAND, C. J., and WOLCOTT and TUNNELL, JJ., sitting.

SOUTHERLAND, Chief Justice.

The essential question before us is whether an equitable interest in shares of stock, not appearing of record on the books of the issuing corporation, may be seized in the Court of Chancery by the mesne proceedings authorized by 10 Del.C. § 366.

This is a minority stockholders' derivative action on behalf of Airfleets, Inc., a Delaware corporation, against five individuals, directors of the corporation, to redress wrongs alleged to have been committed by them upon the corporation. The complaint includes a prayer for an accounting in respect of certain profits and damages.

All of the directors are nonresidents. In order to subject three of them, Odlum, Johnston and Rockefeller, to the jurisdiction of the court the complaint invoked the provisions of 10 Del.C. § 366, providing for the seizure of the property of nonresidents to compel appearance, and prayed for a writ of sequestration.

The Chancellor entered an order providing in substance (so far as here pertinent) as follows:

The three defendants were directed to appear and answer the complaint; a sequestrator was appointed for all of the shares of stock of Airfleets standing in their names 'or in or to which all or any of them may have or hold any right, title or interest'; the sequestrator was directed to notify Airfleets of his appointment and to demand from Airfleets a statement of the number of shares of stock held or owned or standing in the names of any of the three defendants 'or in or to which all or any of them have any right, title or interest, with the number or numbers of the certificate or certificates or other marks distinguishing the same'; and appropriate entries were directed to be made on the books of Airfleets showing that all such shares, rights and interests were held by the sequestrator. Subsequently a second order of seizure, not here important, was entered.

These orders followed the established practice of the Court under the statute. Cf. Wightman v. San Francisco Toll-Bridge Co., 16 Del.Ch. 200, 142 A. 783.

The sequestrator duly served upon the corporation a notice of seizure and a demand for the statement required by the Chancellor's order. The resident agent delivered a certificate showing that the defendant Rockefeller held certain shares of Airfleets in his own name and the defendants Odlum and Johnston held no shares of record. Thereafter these two defendants by leave of the court appeared specially and filed a motion to vacate the seizure orders of the Chancellor on the ground that they were nonresidents and that neither of them was a stockholder of record of shares of stock in Airfleets. They will be hereafter referred to as 'the defendants'.

Thereafter the defendants, over objection, were required to answer interrogatories with respect to their beneficial ownership of shares of stock of Airfleets. The answers to these interrogatories disclosed that each defendant was the beneficial owner of certain shares of Airfleets registered in the names of brokers in New York City. On January 2, 1953, the sequestrator gave to Airfleets further notices of seizure. These notices set forth the number of shares beneficially owned by Odlum and Johnston, the names of the holders of record, and the numbers and dates of issuance of the certificates representing the shares.

The defendants' motion to vacate came on to be heard. Defendants urged that the court was without jurisdiction to seize their equitable interests in the stock because such interests did not appear on the books of the corporation. This question the Chancellor found it unnecessary to decide. He held that no effective seizure of stock beneficially owned had been made by the notices of the sequestrator given prior to January 2, 1953, because the sequestrator in such notices had done nothing to identify the stock interests to be seized except by reference to the names of the defendants and thus had failed sufficiently to identify the shares of stock intended to be seized. As to the attempted seizure by the notice of January 2, 1953, he held first, that it had not been authorized by any order of court, and second, that the information obtained had been elicited from answers to interrogatories propounded solely for the purpose of determining whether jurisdiction had been established and that information so obtained could not be used to create jurisdiction.

He accordingly held that the attempted seizure by the notice of January 2, 1953, was also ineffectual and that the orders of seizure should be vacated. See Greene v. Allen, Del.Ch., 96 A.2d 349.

Thereafter plaintiffs moved for an alias order of sequestration directing the seizure of the beneficial interests of the defendants Odlum and Johnston in the specific shares identified by the answers to the interrogatories above referred to. This motion was denied and an order was entered in accordance with the Chancellor's opinion.

Plaintiffs appeal. They assert (1) that the Chancellor erred in vacating the orders of seizure, and (2) that even if the orders were properly vacated, the Chancellor erred in refusing to issue an alias order.

The first question we must decide is whether the Chancellor was correct in holding that the information respecting the defendants' equitable ownership of stock elicited by the interrogatories could not be used to support either the seizures already attempted or an alias order directing a further seizure. If so, that is the end of the case here.

The reason for the Chancellor's conclusion is that the interrogatories to the defendants were allowed to establish jurisdiction but not to create it. But we find no order so limiting the use of the information sought. Defendants moved for a protective order postponing the answers until a time subsequent to the decision upon their motion to vacate the orders of seizure; but this motion was denied, and defendants do not seek to review it here. Thus plaintiffs obtained information upon which, in their view, jurisdiction could by further proceedings be established. We are at a loss to see how in law they can be barred from using it. And even if, as held by the Chancellor, it is improper to use the information in the pending suit, what would prevent the plaintiffs from dismissing it and filing another? And what would prevent another stockholder from using the information in another and similar suit? We see no escape from the conclusion that the only result of the holding below is to invite circuity of action--certainly a result to be avoided in a court of equity.

The upshot of the matter is that the plaintiffs have the information they sought; they obtained it lawfully under a court order; and they are not prevented by any known principle of law from making use of it.

We are accordingly compelled to disagree with the reasoning upon which the Chancellor based his conclusion to refuse the issuance of an alias writ of sequestration. Even so, if the result reached is correct, the order must be affirmed. Maurer v. International Re-Insurance Corp., Del.Ch., 86 A.2d 360, 365.

This brings us to the defendants' principal contention, viz., that the Chancellor's order should be affirmed because the court below is without power to seize an equitable interest in shares of stock unless such interest appears of record on the stock books of the corporation. This contention requires an examination of the statutes pertinent thereto.

Mesne attachment (or, more properly, 'sequestration') in equity was formerly unknown under Delaware law. Skinner v. Educational Pictures Corp., 14 Del.Ch. 417, 129 A. 857. In 1927 the General Assembly conferred this power upon the court. 35 Del.L.Ch. 217. This statute, as amended, is now 10 Del.C. § 366, which reads:

' § 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 non-resident of the State of Delaware, the Court may make an order directing such non-resident defendant or defendants to appear by a day certain to be designated. Such order shall be served on such non-resident 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 three 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. Such property shall remain subject to seizure and may be sold to satisfy any judgment entered in the cause, unless security sufficient to the Court is given to secure the release thereof.

'(b) The Court may make all necessary rules respecting the form of process, the manner of issuance and return thereof, the 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 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...