US Industries, Inc. v. Gregg

• Decision Date: 29 September 1978
• Docket Number: Civ. A. No. 4431.
• Citation: 457 F. Supp. 1293
• Parties: U. S. INDUSTRIES, INC., a corporation, and Diversacon Industries, Inc., a corporation, Plaintiffs, v. F. Browne GREGG, Defendant.
• Court: U.S. District Court — District of Delaware

457 F. Supp. 1293

U. S. INDUSTRIES, INC., a corporation, and Diversacon Industries, Inc., a corporation, Plaintiffs, v. F. Browne GREGG, Defendant.

Civ. A. No. 4431.

United States District Court, D. Delaware.

September 29, 1978.

David A. Drexler of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., William F. Sondericker of Olwine, Connelly, Chase, O'Donnell & Weyher, New York City, for plaintiffs.

Thomas S. Lodge of Connolly, Bove & Lodge, Wilmington, Del., E. Earle Zehmer of Bedell, Bedell, Dittmar & Zehmer, Jacksonville, Fla., for defendant.

OPINION

STAPLETON, District Judge:

Presently before this Court is defendant F. Browne Gregg's "Motion for Order Granting Restitution and Indemnification by Plaintiffs for Defendant's Property Loss and Expenses of Litigation Incurred by Reason of the Unlawful Seizure of Defendant's Property" ("Motion for Restitution"). In order to understand the grounds for the motion, it is necessary to review the history of the case in some detail.¹

I. THE FACTUAL BACKGROUND.

The present action was commenced on June 19, 1972, when plaintiffs, U.S. Industries, Inc., a Delaware corporation, and Diversacon Industries, Inc., a Florida corporation (hereinafter referred to collectively as "USI"),² filed a complaint against Gregg in the Delaware Court of Chancery. USI alleged primarily that Gregg, a Florida citizen, had acted fraudulently and in breach of his fiduciary duty in connection with certain agreements between Gregg and USI for the exchange of all of the capital stock of three Florida construction companies controlled by Gregg in return for shares of USI common and special preference stock, and for the employment of Gregg as an executive of the three companies. USI sought a personal judgment of over $20 million from Gregg. On the day the complaint was filed, USI also filed a motion pursuant to 10 Del.C. § 366, seeking sequestration of the USI stock allegedly owned by Gregg, in an attempt to compel his appearance in the Court of Chancery. After an ex parte hearing, the Court of Chancery entered an Order of Sequestration appointing a sequestrator and directing him to seize Gregg's interest in 68,210 shares of USI common stock and 8,750 shares of USI special preference stock. The sequestrator accomplished the seizure of stock on June 19, 1972 by issuing notice to USI. Under the terms of the sequestration order, Gregg retained the power to sell the seized stock at any time, provided that the proceeds of the sale would be held by the sequestrator in lieu of the original property or reinvested as directed by Gregg.³

The certificates evidencing the sequestered USI stock were in the possession of the First National Bank of Leesburg in Leesburg, Florida (hereinafter "Bank"). Prior to the filing of this action, Gregg had pledged and delivered the stock certificates to the Bank in order to secure the repayment of a loan of $1,635,000 from the Bank to Gregg. However, 8 Del.C. § 169⁴ provides that the situs of the stock of a Delaware corporation is Delaware, regardless of the actual physical location of the stock certificates.

On July 28, 1972, the Court of Chancery permitted the Bank to intervene in this action. Later that day, Gregg removed the action to this Court. On August 4, 1972, Gregg filed a motion to quash sequestration and to dismiss for lack of jurisdiction and/or to stay the proceedings. Gregg alleged that the Delaware sequestration procedure under which his stock had been seized violated the Equal Protection and Due Process Clauses of the Fourteenth Amendment and that the Court lacked personal jurisdiction over Gregg. On August 11, 1972, in response to the Bank's application, this Court entered an order which amended the sequestration order of June 19, 1972, by allowing the sequestered stock to be transferred on the books of USI from Gregg's name to the name of the Bank or its nominee, as provided for in the prior loan documents between the Bank and Gregg.⁵ On October 13, 1972, the Court denied Gregg's motion to quash sequestration and dismiss the action.⁶ The Court held that it could exercise quasi in rem jurisdiction over the sequestered stock despite the sparsity of other contacts with Delaware, without violating the Due Process Clause. The Court further held that the sequestration procedure itself did not deny procedural due process. The Court denied Gregg's motion for certification of the issues to the Third Circuit pursuant to 28 U.S.C. § 1292(b).

Following its seizure on June 19, 1972, the market value of USI common stock began to decline. On October 13, 1972, the Court amended the sequestration order of June 19, 1972, in order to permit the Bank to transfer or sell, pursuant to the terms of the loan agreements between the Bank and Gregg, any or all of the shares of sequestered stock in satisfaction of Gregg's indebtedness to the Bank. The order required the Bank to file a notice and report on all such sales and to remit any excess net proceeds to the sequestrator. Pursuant to the Court's order, the Bank began to sell the stock to satisfy its lien. Between October 31, 1972, and February 22, 1973, the Bank notified the Court that it had sold 60,663 shares of common stock and 6,750 shares of special preference stock.

On October 26, 1972, Gregg filed a motion seeking leave to make a limited appearance to defend on the merits, with any liability on his part being limited to the value of his interest in the sequestered stock. The Court denied both Gregg's motion⁷ and his request for certification of the issues under 28 U.S.C. § 1292(b). On February 15, 1973, Gregg filed a notice of appeal and a petition for a writ of mandamus or prohibition in the Third Circuit Court of Appeals in an attempt to obtain review of this Court's Orders respecting its jurisdiction and the in personam character of the appearance required of him if he wished to defend. The Third Circuit dismissed Gregg's appeal on the ground that this Court's order was non-appealable, and denied the petition for a writ of mandamus or prohibition.

On March 6, 1973, the Clerk of the Court entered a default against Gregg, pursuant to Fed.R.Civ.P. 55(a), on the ground that Gregg had failed to appear personally and file an answer within the time provided in the Court's Order of February 12, 1973. On April 4, 1973, an inquest was held at which plaintiff Diversacon Industries, Inc., presented proof to support its claim in Count 8 of the complaint for $400,000 owed by Gregg on a note which he and his wife had signed. On June 8, 1973, the Court ruled that the Bank was entitled to collect attorneys' fees from the proceeds of the sale of the stock, as compensation for fees and expenses which it had incurred in order to protect its interest in the stock in this action. On July 27, 1973, the Bank reported that it had sold 800 additional shares of the common stock. On November 15, 1973, the Court entered an order directing the Bank to sell an additional 6,747 shares of common stock and directing the sequestrator to sell the remaining 2,000 shares of special preference stock held by him. On December 5, 1973, the Bank reported that it had sold the 6,747 shares of common stock, and on December 28, 1973, the Bank reported that it had sold 800 shares of special preference stock. Following this sale, the Bank's lien and its expenses of litigation, including attorneys' fees, were fully satisfied, and the Bank forwarded to the sequestrator excess proceeds in the amount of $123.44.

On December 13, 1973, Gregg filed a notice of appeal from the Court's Order of November 15, 1973, ordering the sale of the sequestered stock. On January 16, 1974, the Court stayed the sale of the remaining 1,200 shares of special preference stock then held by the sequestrator. On May 17, 1974, the Third Circuit dismissed Gregg's appeal, without prejudice to his right to appeal after a final judgment had been entered. Following this action, Gregg filed two motions seeking rehearing on this Court's Orders declining to quash sequestration. The Court denied both of these motions.

On May 28, 1975, the Court ordered that the remaining shares of special preference stock be sold. The judicial sale was conducted on June 25, 1975, and an Order confirming the sale for the price of $20,000 was entered on July 7, 1975. On August 20, 1975, the Court entered an Order of Default Judgment requiring disbursement of the proceeds of the sale to the sequestrator and to plaintiff Diversacon Industries, Inc. The Court allowed a sequestrator's fee and disbursements in the amount of $1,192.84, and granted to plaintiff Diversacon Industries, Inc., judgment in the amount of $18,481.20 and costs in the amount of $449.40.⁸ On September 10, 1975, Gregg filed a notice of appeal from the Final Judgment of this Court. On July 19, 1976, the Third Circuit Court of Appeals reversed the judgment of this Court,⁹ holding that the Delaware situs statute, 8 Del.C. § 169, as construed by the Delaware courts and as applied in this sequestration proceeding, did not comport with the constitutional requirement that jurisdiction be predicated on minimum contacts with the forum, citing International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945).

Following the reversal by the Third Circuit, USI filed a petition for writ of certiorari in the United States Supreme Court. On June 24, 1977, the Supreme Court held in Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977), that Delaware's assertion of jurisdiction based on the sequestration of a defendant's stock having a statutorily conferred situs in Delaware was inconsistent with the constitutional "minimum contacts" requirement expressed in International Shoe, supra. In so doing, the Supreme Court overruled its prior decisions in Pennoyer v. Neff, 95 U.S. 714, 24 L.Ed. 565 (1878), and Harris v. Balk, 198 U.S. 215, 25 S.Ct. 625, 49 L.Ed. 1023 (1905). Shaffer, supra, 433 U.S. at 212, n. 39, 97 S.Ct. 2569....