SHAFFER v. HEITNER United States Supreme Court 433 U.S. 186 (1977)

Mr. Justice Marshall delivered the [7-1, with two separate concurring] opinion[s] of the Court. The controversy in this case concerns the constitutionality of a Delaware statute that allows a court of that State to take jurisdiction of a lawsuit by sequestering any property of the defendant that happens to be located in Delaware. Appellants contend that the sequestration statute as applied in this case violates the Due Process Clause of the Fourteenth Amendment [§1] both because it permits the state courts to exercise jurisdiction despite the absence of sufficient contacts among the defendants, the litigation, and the State of Delaware…. I Appellee Heitner, a nonresident of Delaware, is the owner of one share of stock in the Greyhound Corp., a business incorporated under the laws of Delaware with its principal place of business in Phoenix, Ariz. … [H]e filed a shareholder’s derivative suit in ... Del., in which he named as defendants Greyhound … and 28 present or former officers or directors of one or both of the [Greyhound] corporations. In essence, Heitner alleged that the individual defendants had violated their duties to Greyhound by causing it and its subsidiary to engage in actions that resulted in the corporations being held liable for substantial damages in a private antitrust suit2 and a large fine in a criminal contempt action.3 The activities which led to these penalties took place in Oregon. Simultaneously with his complaint, Heitner filed a motion for an order of sequestration of the Delaware property of the individual defendants pursuant to Del. [Corporations] Code s[ection] 366.4 This motion was accompanied by a supporting affidavit of counsel which stated that the individual defendants were nonresidents of Delaware. The affidavit identified the property to be sequestered as “common stock … [issued by] the Defendant Greyhound Corporation, a Delaware corporation, as well as all options and all warrants to purchase said stock issued to said individual Defendants and [italics added].” The requested sequestration order … was signed the day the motion was filed. Pursuant to that order, the sequestrator “seized” approximately 82,000 shares of Greyhound common stock belonging to 19 of the defendants,7 and options belonging to another 2 defendants.8 These

2 2 A judgment of $13,146,090 plus attorneys fees was entered against Greyhound in … [that prior case]. 33 [In other cases] …Greyhound was fined $100,000 and Greyhound Lines $500,000. 4 4 Section 366 provides: “(a) If it appears in any complaint … that the defendant or any one or more of the defendants is a nonresident of the State, the Court may make an order directing such nonresident defendant or defendants to appear by a day certain to be designated. Such order shall be served on such nonresident defendant or defendants by mail or otherwise, if practicable, and shall be published in such manner as the Court directs…. 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. Any defendant whose property shall have been so seized and who shall have entered a general appearance in the cause may, upon notice to the plaintiff, petition the Court for an order releasing such property or any part thereof from the seizure.… (c) Any [purported] transfer or assignment of the property so seized after the seizure thereof shall be void….” …………………………………………. ……………………………………. 7 7 The … value of the sequestered stock was approximately.$1.2 million. 8 8 Debentures, warrants, and stock unit credits belonging to some of the defendants who owned either stock or options were also sequestered. …

Page 1 of 7 seizures were accomplished by placing “stop transfer” orders or their equivalents on the books of the Greyhound Corp. So far as the record shows, none of the certificates representing the seized property was physically present in Delaware. The stock was considered to be in Delaware, and so subject to seizure, by virtue of [the] Del. Code …, which makes Delaware the situs of ownership of all stock in Delaware corporations.9 All 28 defendants were notified of the initiation of the suit by certified mail directed to their last known addresses and by publication in a New Castle County newspaper. The 21 defendants whose property was seized (hereafter referred to as appellants) responded by entering a special appearance for the purpose of moving to quash service of process and to vacate the sequestration order. They contended that the ex parte sequestration procedure did not accord them due process of law and that the property seized was not capable of attachment in Delaware. In addition, appellants asserted that under the rule of International Shoe Co. v. Washington, they did not have sufficient contacts with Delaware to sustain the jurisdiction of that State’s courts. . . . The Court … rejected these arguments in a letter opinion which emphasized the purpose of the Delaware sequestration procedure:

The primary purpose of ‘sequestration’ … is not to secure possession of property pending a trial … on the issue of who has the right to retain it. On the contrary, … ‘sequestration’ is a process used to compel the personal appearance of a nonresident defendant to answer and defend a suit brought against him…. It is accomplished by the appointment of a sequestrator by this Court to seize and hold property of the nonresident located in this State subject to further Court order. If the defendant enters a general appearance, the sequestered property is routinely released, unless the plaintiff makes special application to continue its seizure, in which event the plaintiff has the burden of proof and persuasion [italics added].

This limitation on the purpose and length of time for which sequestered property is held, the court concluded, rendered inapplicable the due process requirements enunciated in Sniadach v. Family Finance Corp.; Fuentes v. Shevin; and [other cases]. … Finally, the court held that the statutory Delaware situs of the stock provided a sufficient basis for the exercise of quasi in rem jurisdiction by a Delaware court. On appeal, the Delaware Supreme Court affirmed…. Most of the [Delaware] Supreme Court’s opinion was devoted to rejecting appellants’ contention that the sequestration procedure is inconsistent with the due process analysis developed in the Sniadach [and Fuentes] line of cases. . . . We …12 reverse. II

9 9 Section 169 provides: “For all purposes of title, action, attachment, garnishment and jurisdiction of all courts held in this State, but not for the purpose of taxation, the situs of the ownership of the capital stock of all corporations existing under the laws of this State, whether organized under this chapter or otherwise, shall be regarded as in this State.” 12 12 Under Delaware law, defendants whose property has been sequestered must enter a general appearance, thus subjecting themselves to in personam liability, before they can defend on the merits. …

Page 2 of 7 The Delaware courts rejected appellants’ jurisdictional challenge by noting that this suit was brought as a quasi in rem proceeding. Since quasi in rem jurisdiction is traditionally based on attachment or seizure of property present in the jurisdiction, not on contacts between the defendant and the State [as with IPJ], the courts considered appellants’ claimed lack of contacts with Delaware to be unimportant. This categorical analysis assumes the continued soundness of the conceptual structure founded on the century-old case of Pennoyer v. Neff. [In] Pennoyer … the Court focused on the territorial limits of the States’ judicial powers. … Mr. Justice Field found that their jurisdiction was defined by the “principles of public law” that [similarly] regulate the relationships among independent nations. The first of those principles was “that every State possesses exclusive jurisdiction and sovereignty over persons [IPJ] and property [in rem jurisdiction] within its territory.” The second was “that no State can exercise direct jurisdiction and authority over persons or property without its territory.” … [A]ny attempt “directly” to assert extraterritorial jurisdiction over persons or property would offend sister States and exceed the inherent limits of the State’s power. A judgment resulting from such an attempt … was not only unenforceable in other States, but was also void in the rendering State because it had been obtained in violation of the Due Process Clause of the Fourteenth Amendment. . . . [U]nder Pennoyer state authority to adjudicate was based on the jurisdiction’s power over either persons or property. … If a court’s jurisdiction is based on its authority over the defendants person, the action and judgment are denominated “in personam” and can impose a personal obligation on the defendant in favor of the plaintiff. If jurisdiction is based on the court’s power over property within its territory, the action is called “in rem” or “quasi in rem.” The effect of a judgment in such a case is limited to the property that supports jurisdiction and does not impose a personal liability on the property owner, since he is not before the court. 17 In Pennoyer’s terms, the owner is affected only “indirectly” by an in rem judgment adverse to his interest in the property subject to the court’s disposition. By concluding that “(t)he authority of every tribunal is necessarily restricted by the territorial limits of the State in which it is established,” Pennoyer sharply limited the availability of in personam jurisdiction over defendants not resident in the forum State. … On the other hand, since the State in which property was located was considered to have exclusive sovereignty over that property, in rem actions could proceed regardless of the owner’s location. … The Pennoyer rules generally favored nonresident defendants by making them harder to sue. This advantage was reduced, however, by the ability of a resident plaintiff to satisfy a claim against a nonresident defendant by bringing into court any property of the defendant located in the plaintiff’s State. For example, in the well-known case of Harris v. Balk …, [t]his Court reasoned that the debt Harris owed Balk was an intangible form of property belonging to Balk, and that the location of that property traveled with the debtor. By obtaining personal jurisdiction over Harris, Epstein had “arrested” his [Harris’s] debt to Balk, and brought it into the Maryland

17 17 “A judgment in rem affects the interests of all persons in designated property. A judgment quasi in rem affects the interests of particular persons in designated property. The latter is of two types. In one the plaintiff is seeking to secure a pre-existing claim in the subject property and to extinguish or establish the nonexistence of similar interests of particular persons. In the other the plaintiff seeks to apply what he concedes to be the property of the defendant to the satisfaction of a claim against him.” … [W]e will for convenience generally use the term “in rem” in place of “in rem and quasi in rem.”

Page 3 of 7 court. . . . No equally dramatic change [referring to Shoe’s substitution of fairness for presence—as the yardstick for measuring Due Process] has occurred in the law governing jurisdiction in rem. … Well-reasoned lower court opinions have questioned the proposition that the presence of property in a State gives that State jurisdiction to adjudicate rights to the property regardless of the relationship of the underlying dispute and the property owner to the forum. The overwhelming majority of commentators … urge that the [Shoe] “traditional notions of fair play and substantial justice” that govern a State’s power to adjudicate in personam should also govern its power to adjudicate personal rights to property located in the State. Although this Court has not addressed this argument directly, we have held that property cannot be subjected to a court's judgment unless reasonable and appropriate efforts have been made to give the property owners actual notice of the action. Mullane v. Central Hanover Bank & Trust Co . This conclusion recognizes, contrary to Pennoyer, that an adverse judgment in rem directly affects the property owner by divesting him of his rights in the property before the court. Moreover, in Mullane we hold that Fourteenth Amendment rights cannot depend [merely] on the classification of an action as in rem or in personam, since that is “a classification for which the standards are so elusive and confused generally and which, being primarily for state courts to define, may and do vary from state to state.” It is clear, therefore, that the law of state-court jurisdiction no longer stands securely on the foundation established in Pennoyer. We think that the time is ripe to consider whether the standard of fairness and substantial justice set forth in International Shoe should be held to govern actions in rem as well as in personam. III The case for applying to jurisdiction in rem the same test of “fair play and substantial justice” as governs assertions of jurisdiction in personam is simple and straightforward. It is premised on recognition that “(t)he phrase, ‘judicial jurisdiction over a thing,’ is a customary elliptical way of referring to jurisdiction over the interests of persons in a thing.”22 This recognition leads to the conclusion that in order to justify an exercise of jurisdiction in rem, the basis for jurisdiction must be sufficient to justify exercising “jurisdiction over the interests of persons in a thing.” The standard for determining whether an exercise of jurisdiction over the interests of persons is consistent with the Due Process Clause is the minimum-contacts standard elucidated in International Shoe. This argument, of course, does not ignore the fact that the presence of property in a State may bear on the existence of jurisdiction by providing contacts among the forum State, the defendant, and the litigation. For example, when claims to the property itself are the source of the underlying controversy between the plaintiff and the defendant, it would be unusual for the State where the property is located not to have jurisdiction. … It appears, therefore, that jurisdiction over many types of actions which now are or might be brought in rem would not be affected by a holding that any assertion of state-court jurisdiction must satisfy the International Shoe standard. For the type of quasi in rem action typified by Harris v. Balk and the present case, however, accepting the proposed analysis would result in significant change. These are cases where the property which now serves as the basis for state-

22 22 “All proceedings, like all rights, are really against persons. Whether they are proceedings or rights in rem depends on the number of persons affected.”

Page 4 of 7 court jurisdiction is completely unrelated to the plaintiff’s cause of action. Thus, although the presence of the defendant’s property in a State might suggest the existence of other ties among the defendant, the State, and the litigation, the presence of the property alone would not support the State’s jurisdiction. If those other ties did not exist, cases over which the State is now thought to have jurisdiction could not be brought in that forum. … [W]e note that this type of case also presents the clearest illustration of the argument in favor of assessing assertions of jurisdiction by a single standard. For in cases such as Harris and this one, the only role played by the property is to provide the basis for bringing the defendant into court. Indeed, the express purpose of the Delaware sequestration procedure is to compel the defendant to enter a personal appearance.33 In such cases, if a direct assertion of personal jurisdiction over the defendant would violate the Constitution, it would seem that an indirect assertion of that jurisdiction should be equally impermissible. . . .37 … The fiction that an assertion of jurisdiction over property is anything but an assertion of jurisdiction over the owner of the property supports an ancient form without substantial modern justification. Its continued acceptance [as permitted under cases like Harris] would serve only to allow state-court jurisdiction that is fundamentally unfair to the defendant. . . . We therefore conclude that all assertions of state-court jurisdiction must be evaluated according to the standards set forth in International Shoe and its progeny.39 IV The Delaware courts based their assertion of jurisdiction in this case solely on the statutory presence of appellants’ property in Delaware [italics added]. Yet that property is not the subject matter of this litigation, nor is the underlying cause of action related to the property. … … But as Heitner’s failure to secure jurisdiction over seven of the defendants named in his complaint demonstrates, there is no necessary relationship between holding a position as a corporate fiduciary and owning stock or other interests in the corporation. … Moreover, … Heitner’s … argument fails to demonstrate that Delaware is a fair forum for this litigation. The interest appellee has identified may support the application of Delaware law to resolve any controversy over appellants’ actions in their capacities as officers and directors.44 But we have rejected the argument that if a State’s law can properly be applied to a dispute, its courts necessarily have jurisdiction over the parties to that dispute. . . . Delaware’s assertion of jurisdiction over appellants in this case is inconsistent with that constitutional limitation on state power. The judgment of the Delaware Supreme Court must, therefore, be reversed. 3333 This purpose is emphasized by Delaware’s refusal to allow any defense on the merits unless the defendant enters a general appearance, thus submitting to full in personam liability. ……………………….. 37 37 This case does not raise, and we therefore do not consider, the question whether the presence of a defendant's property in a State is a sufficient basis for jurisdiction when no other forum is available to the plaintiff. 39 39 It would not be fruitful for us to re-examine the facts of cases decided on the rationales of Pennoyer and Harris to determine whether jurisdiction might have been sustained under the standard we adopt today. To the extent that prior decisions are inconsistent with this standard, they are overruled. 44 44 In general, the law of the State of incorporation is held to govern the liabilities of officers or directors to the corporation and its stockholders. The rationale for the general rule appears to be based more on the need for a uniform and certain standard to govern the internal affairs of a corporation than on the perceived interest of the State of incorporation. …

Page 5 of 7 It is so ordered. . . . Mr. Justice Powell, concurring. . . . I would explicitly reserve judgment, however, on whether the ownership of some forms of property whose situs is indisputably and permanently located within a State may, without more, provide the contacts necessary to subject a defendant to jurisdiction within the State to the extent of the value of the property. In the case of real property, … [it would] arguably would avoid the uncertainty of the general International Shoe standard without significant cost to “‘traditional notions of fair play and substantial justice.’” . . . Mr. Justice Stevens, concurring in the judgment. . . . If I visit another State, or acquire real estate or open a bank account in it, I knowingly assume some risk that the State will exercise its power over my property or my person while there. My contact with the State, though minimal, gives rise to predictable risks. . . . One who purchases shares of stock on the open market can hardly be expected to know that he has thereby become subject to suit in a forum remote from his residence and unrelated to the transaction. As a practical matter, the Delaware sequestration statute creates an unacceptable risk of judgment without notice. Unlike the 49 other States, Delaware treats the place of incorporation as the situs of the stock, even though both the owner and the custodian of the shares are elsewhere. Moreover, Delaware denies the defendant the opportunity to defend the merits of the suit unless he subjects himself to the unlimited jurisdiction of the court. … How the Court’s opinion may be applied in other contexts is not entirely clear to me. I agree with Mr. Justice Powell that it should not be read to invalidate quasi in rem jurisdiction where real estate is involved. …

Mr. Justice Brennan, concurring in part and dissenting in part. I join Parts I-III of the Court’s opinion. I fully agree that the minimum-contacts analysis developed in International Shoe Co. v. Washington, represents a far more sensible construct for the exercise of state-court jurisdiction than the patchwork of legal and factual fictions that has been generated from the decision in Pennoyer v. Neff. It is precisely because the inquiry into minimum contacts is now of such overriding importance, however, that I must respectfully dissent from Part IV of the Court’s opinion. . . . II … I am convinced that as a general rule a state forum has jurisdiction to adjudicate a shareholder derivative action centering on the conduct and policies of the directors and officers of a corporation chartered by that State. Unlike the Court, I therefore would not foreclose Delaware from asserting [personal] jurisdiction over appellants were it persuaded to do so on the basis of minimum contacts [thus obviating the need to reach the question of in rem jurisdiction, in a way that will conceivably impact the laws of all 50 states].

Notes and Questions:

Page 6 of 7 1. The property seized in Harris was not the actual $180.00 in Harris’s pocket. It was, instead, the intangible obligation to repay it to Balk. What property of the defendants was seized in Shaffer? Where was that property deemed to be located under the Delaware statute (which was amended ten days after Shaffer was decided)? ………………………………………. ………… 2. Pennoyer established the two types of territorial jurisdiction that exist today: in personam and in rem. The in personam wing of Pennoyer was overruled in Shoe, which abandoned the required presence of the person for service in the forum (to establish IPJ). What did Shaffer do to the in rem wing of Pennoyer? What rule might one articulate as the “result” in Shaffer? 3. Does Shaffer impact cases where the property is the subject of the litigation? Or is Shaffer’s impact most felt in cases where the property to be seized—prior to judgment, because Shaffer has no cogizable impact on post-judgment enforcement remedies—has little if anything to do with the underlying in case? What exceptions does: (a) footnote 37 suggest?; and (b) the concurring opinions?

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