United States v. Sinclair

• Decision Date: 14 September 1972
• Docket Number: Civ. A. No. 4113.
• Citation: 347 F. Supp. 1129
• Parties: UNITED STATES of America, Plaintiff, v. Eleanor P. SINCLAIR, as Executrix of the Estate of Claude Beresford Pearce, et al., Defendants.
• Court: U.S. District Court — District of Delaware

347 F. Supp. 1129

UNITED STATES of America, Plaintiff, v. Eleanor P. SINCLAIR, as Executrix of the Estate of Claude Beresford Pearce, et al., Defendants.

Civ. A. No. 4113.

United States District Court, D. Delaware.

September 14, 1972.

COPYRIGHT MATERIAL OMITTED

Norman Levine, U. S. Atty., Wilmington, Del., and John M. Wood, Trial Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., of counsel, for plaintiff.

Bruce M. Stargatt, and Ben T. Castle, of Young, Conaway, Stargatt & Taylor, Wilmington, Del., appearing specially for the Estate of Claude Beresford Pearce, and Robert H. Kapp, of Hogan & Hartson, Washington, D. C., of counsel.

James M. Tunnell, Jr. of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for defendant, U. S. Steel Corp. McMillan, Binch, Toronto, Ontario, for defendants, The Royal Bank of Canada, and Roytor & Co.

OPINION

LATCHUM, District Judge.

This case is presently before the Court on the motion¹ of the Estate of Claude Beresford Pearce ("the Estate") to quash the Court's order of April 30, 1971 which sequestered shares of common stock of the United States Steel Corporation ("U.S. Steel") registered in the name of the Estate. The Estate advances four grounds for the invalidity of the sequestration order: (1) The shares of stock which this Court ordered sequestered are in custodia legis of the Surrogate Court of Simcoe County, Ontario, Canada. (2) Since the decedent was domiciled in Ontario, both the Dominion of Canada and the Province of Ontario have an interest in the disposition of his estate, and to allow the United States to satisfy its estate tax claims through the use of a sequestration order without regard to the competing tax claims of Canada and Ontario would amount to an abuse of process. (3) The originally named defendant, the "Estate of Claude Beresford Pearce," is incapable of being sued and hence its property is not susceptible to sequestration. (4) The complaint fails to allege the nonresidency of the named defendant as required under the Delaware sequestration procedure.

The relevant facts are as follows: The decedent, Claude Beresford Pearce, a domiciliary of Canada, died on May 9, 1965, leaving a will in which Eleanor P. Sinclair and Paul Claude Pearce were named as co-executors of the Estate. Paul Claude Pearce has since died, leaving Sinclair as the sole executrix of the Estate. The principal asset of the Estate is several thousand shares of common stock in U.S. Steel, a Delaware Corporation. Pursuant to 26 U.S.C. § 2101, which imposes a tax on the estates of nonresident aliens to the extent that their property is situated within the United States,² the Government made a federal estate tax assessment against the Estate of $503,232.96. Payments and credits reduced the amount due to $268,876.18³ plus statutory interest.⁴ Upon failure by the co-executors to pay the amount alleged to be due, the United States instituted this action on April 30, 1971 to satisfy its claim for federal estate taxes. To prevent a transfer of the U.S. Steel stock from the Estate's name, the United States concurrently moved for, and was granted, a sequestration order by this Court under authority of 10 Del.C. § 366.⁵ The complaint as originally filed named the Estate of Claude Beresford Pearce and U. S. Steel as co-defendants along with several others.⁶ After the Estate moved to quash, on February 28, 1972 the United States filed an amended complaint naming Eleanor P. Sinclair, Executrix of the Estate, as a party defendant, and alleging her to be a nonresident of the State of Delaware.

In addition to the United States' estate tax claims, the Dominion of Canada and the Province of Ontario have also asserted tax claims against the Estate. The Estate continues to be administered for the purposes of succession and distribution under the decedent's will by the Surrogate Court of Simcoe County, Ontario, the domicile of the decedent.

First, the Estate maintains that since it is presently under the administration of the Surrogate Court, its assets including the U.S. Steel stock, are in custodia legis and therefore immune from the sequestration order entered by this Court. The doctrine of custodia legis has long been recognized in Delaware as creating an immunity to the seizure of property being administered in a decedent's estate by a Delaware executor. See, e.g. Marvel v. Houston, 2 Del. 349 (1838). The doctrine is based on the general principle that one tribunal will not interfere with the orderly administration and settlement of a decedent's estate by a probate court in order to avoid the diversion of assets from their lawful course of application. See: Cheff v. Athlone Industries, Inc., 233 A.2d 170, 174 (Del.1967); 2 Woolley On Del. Practice § 1173. Where, however, a decedent owns property situate in more than one state, one of which was his domicile, in order to protect local interests the situs non-domicile state may require that its own forum determine the disposition of the property within its borders, notwithstanding that the decedent's will is subject to probate in his domicile. New York Trust Co. v. Riley, 24 Del.Ch. 354, 16 A.2d 772, 785 (1940); 95 C.J.S. Wills § 352. Thus, where a decedent's property is located in different states, competing local interests may render the doctrine inapplicable. Applying this last mentioned principle on a multi-national scale, where property is situate in the United States, the United States' federal estate tax is a local interest relative to any foreign claims, and an American court may grant appropriate relief to protect that local interest regardless of other actions to be taken by a foreign court administering the estate. Thus, it can be seen that the potential applicability of the custodia legis doctrine in the instant case depends on whether the situs of the stock is the United States.

Rule 64, F.R.Civ.P., under which this Court is authorized to use the Delaware sequestration procedure, provides that any federal statute will govern to the extent that it is applicable; and 26 U.S.C. § 2104(a) provides that, for purposes of federal estate taxation, shares of stock held in a domestic corporation by a nonresident alien of the United States shall be deemed property within the United States. Hence, for the purposes of this suit, the U.S. Steel stock is deemed to have its situs in the United States, and this Court, having jurisdiction over the stock,⁷ may properly issue an order of sequestration to protect the tax lien of the United States, a legitimate local interest.⁸ Consequently, the Court finds no merit to the Estate's first contention.

Second, the Estate contends that the Dominion of Canada and the Province of Ontario also assert tax claims against it, and for this Court to issue an order of sequestration without regard to these competing claims amounts to an abuse of process.

According to the terms of the Convention Between the Government of Canada and the Government of the United States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to the Taxes on the Estates of Deceased Persons ("the Convention"), Canada has no interest in the sequestered shares of stock. According to Article V, § 1 of the Convention,⁹ Canada must allow 100% credit against the estate tax owed to it by a decedent's estate for any estate tax imposed by the United States on property owned by the decedent having a situs in the United States. Under another Article of the Convention, the stock is expressly deemed to have a situs in Delaware within the United States.¹⁰ Since the estate tax imposed by the United States on the U.S. Steel stock exceeds the tax imposed by Canada on the entire estate,¹¹ there is no Canada estate tax due on the sequestered stock and therefore the Government of Canada has no interest in it.

As for the succession duty imposed by the Province of Ontario, it should be noted that if Ontario brought suit to enforce its tax claim in this Court, no constitutional provision would require this Court to entertain that suit.¹² Nor does the policy of the State of Delaware require such suits to be heard in its courts.¹³ Thus, neither federal nor state law mandate this Court to entertain a foreign tax suit, and since the Court could properly refuse to recognize foreign tax claims even if brought before it directly, it can grant the relief sought by the United States here without considering a foreign state tax claim not formally before the Court. Therefore, the Court did not abuse the process of sequestration in granting the United States' application without considering the competing tax claims of Ontario.¹⁴

Third, the Estate asserts that the complaint originally filed by the Government named the "Estate of Claude Beresford Pearce" as a defendant, an entity legally incapable of being sued and hence whose property is not susceptible to sequestration.

The executor or administrator is ordinarily the proper and necessary party to a suit in which a decedent's estate is involved. 1 Woolley On Del.Practice § 133; 34 C.J.S. Executors and Administrators § 737. Where a complaint names as defendant a party who is incapable of being sued, the complaint must be dismissed as to that party. In the instant case the Government's original complaint named both the Estate and U.S. Steel as defendants and sought the seizure of shares of U.S. Steel stock owned by the Estate under authority of Delaware's sequestration procedure. Subsequently, the United States amended its complaint to name Eleanor P. Sinclair, Executrix of the Estate as a party defendant. The United States contends that Rule 15, F.R.Civ.P.,¹⁵ permits the filing of an amended complaint as a matter of course, prior to the filing of a responsive pleading. The Estate contends that the amended complaint actually seeks to add a new party and that Rule 21¹⁶ should govern, which requires leave of court even if filed before a responsive pleading is served. The Court is...