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[31 Del.Ch. 271] Hugh M. Morris and Edwin D. Steel, Jr. (of Morris, Steel, Nichols & Arsht), Wilmington, for plaintiff.
John Van Brunt, Jr. (of Killoran & Van Brunt), Wilmington for defendant Morris H. Gotthilf, appearing specially.
Clair J. Killoran (of Killoran & Van Brunt), Wilmington for defendant Universal Laboratories, Inc.
SEITZ, Vice Chancellor.
The issue for determination is the validity of an order of sequestration.
Plaintiff instituted a stockholder's derivative action against Universal Laboratories, Inc., a Delaware corporation (here called 'Universal') and a number of its officers and directors, one of whom is the defendant Morris H. Gotthilf (here called 'Gotthilf'). In three of the counts of the complaint, plaintiff seeks a money judgment in excess of $500,000.00 against the individual defendants for acts of malfeasance. In the fourth count plaintiff seeks, inter alia, cancellation of Universal's note held by Gotthilf and the return of the stock collateral.
Based on the allegation that the defendant Gotthilf was a nonresident of Delaware, plaintiff moved for and obtained an order of seizure (hereinafter called 'sequestration') under the second paragraph of Paragraph 4374 of the Revised Code of Delaware 1935. The order directed [31 Del.Ch. 272] Gotthilf to appear and answer the complaint on or before a fixed day, and appointed a sequestrator of all of the right, title and interest of Gotthilf in and to claims against Universal based upon a nonnegotiable promissory note dated January 31, 1949. The note was executed and delivered to Gotthilf by Universal in New York State and was payable both as to principal and interest in New York.
Universal delivered to Gotthilf in New York as security for such note certain collateral consisting of 1,000 shares of Sleight Metallic Ink Company of Illinois, Inc., stock (hereinafter called 'Sleight'). Sleight is a Delaware corporation and its stock is presumably subject to the provisions of our Uniform Stock Transfer Act, 45 Del. Laws, c. 159.
The principal terms of the note are as follows:
'The Payee may look only to the Collateral for the payment of this Note and the interest thereon, and may not look to the general assets of the Company for the payment thereof. * * *.
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'On July 31, 1950 and on July 31 in each year thereafter until this Note shall be paid in full, the Company shall apply to the prepayment of this Note, without premium an amount equal to the entire net earnings of Sleight Metallic in excess of $100,000 for the preceding fiscal year, provided that such prepayment shall in no event exceed $50,000 in any one year. 'Net earnings' of Sleight Metallic as used herein shall mean net earnings available for dividends on the Common Stock of Sleight Metallic on a non-consolidated basis, after deduction of all proper accounting charges, less the amount of interest payments made during such year by the Company under this Note; provided, however, that in computing the deduction for Federal and State income taxes the amount of such interest payments made by the Company shall be treated as an expense of Sleight Metallic.'
The note is payable at the maturity date, January 31, 1962, conditionally, to the extent of the value of the collateral only, since the general assets of the maker ...