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Krizanek v. Smith

Supreme Court of Delaware

April 4, 1952


Page 872

[32 Del.Ch. 515] William E. Taylor, Jr., of Wilmington, for defendants-below, appellants.

David Snellenberg, II, and John Van Brunt, Jr., of the firm of Killoran & Van Brunt, of Wilmington, for plaintiff-below, appellee.

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

TUNNELL, Justice.

Although the merits of the action are not now before us, it is, nevertheless, necessary to understand something of the nature of the whole case in order to dispose of the instant appeal.

The Biggs Boiler Works Company is a Delaware corporation. One-half of all its outstanding common stock is owned by plaintiff, the other half by Theofil E. Krizanek, who, in the capacity of a voting trustee, is one of the defendants. On the 6th day of December, 1950, at Cleveland, Ohio, the plaintiff and Krizanek executed an instrument purporting to be a voting trust agreement, under the terms of which an attempt was made to transfer the voting rights of the said stock to three trustees, namely, the plaintiff, one Charles W. Steadman, and Krizanek. Under the terms of the said agreement any two of the three named trustees would have the power to vote all the stock. The plaintiff is a resident

Page 873

As the above-mentioned agreement notes, the certificates of stock are not in the possession of the registered owners, but are deposited with the First National Bank of Akron, Ohio, in escrow, in connection with a transaction with the details of which we here have no concern. The shares are registered on the books of the company, and the [32 Del.Ch. 516] certificates stand, in the names of plaintiff and Krizanek as individuals, not in the names of the trustees. The agreement of December 6th, 1950, attempts, however, to cause the shares to be considered and treated for all purposes as if they had actually been transferred to the voting trustees, until the termination of the escrow arrangement, at which time, if the certificates are re-delivered to plaintiff and Krizanek, they are then in turn to be actually assigned and delivered to the voting trustees.

In a companion action to this one, where the relief sought was to review an election in which an effort had been made to vote the stock covered by the above-mentioned trust agreement, the Court of Chancery has already found the agreement invalid in so far as it applies to a period of time limited by the nature of that proceeding. Smith v. Biggs Boiler Works Co., Del.Ch., 82 A.2d 372. In the present action, however, the direct relief sought is to have the agreement permanently set aside. The defendants being outside the court's jurisdiction, an order was entered in the court below on the 7th day of May, 1951, requiring the defendants to appear by the 31st day of May, 1951, and also requiring that the order for appearance be duly published in conformity with the rules of court and the provisions of Paragraph 4374, R.C.1935, which apply in cases of substituted service. Having obtained permission to appear specially, the defendants thereupon came into court and moved to vacate the said order for substituted service. Acting Vice-Chancellor Layton denied the motion, and from this order of denial the moving defendants have appealed.

The appellants assail the order for service on several grounds, but all of the more serious ones are variations of, or result from, their central theme that the Court of Chancery has no jurisdiction because the nonresident defendants have no property here so as to sustain jurisdiction under the provisions of Para. 4374, R.C. 1935. The first portion of that statute, which admittedly is the sole basis for the service attempted, is as follows: [32 Del.Ch. 517] '4374. Sec. 8. Orders for Appearance; Upon Failure of Service and Affidavit; Publication of; Upon Default; Decree Pro Confesso; Enforcement by Seizure or Delivery of Property Demanded; Payment Upon Security for Restitution; Proceedings if Security Not Given; Foreign Attachment:--If, after subpoena or other process issued, any defendant therein named shall not appear in obedience to said process and according to the rules of the Court, the Court may, on affidavit that such defendant is out of the State, or cannot be found to be served with process and that there is just ground to believe that he intentionally avoids such service, make an order for his appearance on a certain day and publish such order as the Chancellor shall direct not less than once a week for three consecutive weeks. And if the defendant shall not appear, after such publication, according to such order, the Court may order the plaintiff's bill to be taken pro confesso, and may thereupon issue process to compel the performance either by seizure of the real and personal property of such defendant or part thereof, sufficient to satisfy the plaintiff's demand, or by causing possession of the estate, or effects, demanded by the bill, to be delivered to the plaintiff, or otherwise, as the case requires. And the Court may also order the plaintiff to be paid his demand out of any property so seized, upon his giving approved security, in a sufficient sum, to abide any order of the Court for the restitution thereof upon the defendant's appearing to defend the suit, and paying such costs as the Court shall order. If such security be not given, the property seized, or whereof possession shall be decreed to be delivered, shall remain under

Page 874

the direction of the Court in the hands of a receiver or otherwise, until the defendant's appearance, or until such order shall be made therein as the Court shall think just.'

Appellants first adopt this line, that the traditional jurisdiction of Chancery over a res within the bounds of the forum has now been displaced by a statutory jurisdiction more restricted in scope. Even the most casual reading of the statute, they say, shows that it contemplates a seizure of property. Before property can be seized, obviously it must be present. These voting trustees, however, admittedly have no stock registered in their names, and, so far as the record shows, no property of any kind in this jurisdiction in their capacity as trustees. It is elementary that they are indispensable parties. Therefore, they conclude, certain indispensable parties not being before the court, it follows that there is no jurisdiction over the cause. In this fashion appellants[32 Del.Ch. 518] frankly challenge the soundness of the ruling of Chancellor Josiah O. Wolcott in Perrine v. Pennroad Corp., 19 Del.Ch. 368, 168 A. 196.

The appellants have misconceived the meaning of Para. 4374 and have then further confused the issue by failing to observe the distinction between the first portion of Para. 4374, which we quoted above, and the second portion, which we did not quote because it deals with actions for money decrees and is not applicable to such a matter as the one before us.

They have misconceived the meaning of Para. 4374 of our Code in taking it to be an attempt to define the types of actions which Chancery will entertain against nonresidents. It does no such thing. A preceding paragraph, 4367, gives the Court of Chancery 'power to hear and decree all matters and causes in equity * * *'. Para. 4374 simply establishes the mechanics of service upon nonresidents. Nothing in the statute repeals or purports to affect the traditional jurisdiction of the court to deal with the title to or status of property within the same geographical unit as the forum.

Further, appellants have confused actions for money decrees against nonresidents, which are akin to foreign attachments at law, with actions to adjudicate the status of things in loco fori as to which the powers of equity are required. The two statutory provisions presently appear in the same numbered paragraph of our Code, to be sure, but they were adopted at different times [1] to answer entirely different purposes. The distinction between them was well illustrated in Wightman v. San Francisco Bay Toll-Bridge Co., 16 Ch. 200, 142 A. 783. There the relief prayed for was a fair re-distribution of certain stock owned by nonresidents [32 Del.Ch. 519] in a domestic corporation. Complainant made the same mistake as these appellants and acted upon it by preliminarily attaching all the stock standing on the books in the name of the defendants. Upon application of the defendants, the Chancellor dissolved the order of sequestration, still allowing complainants, however, to go forward to adjudicate the status of the res under the authority of that language of our Para. 4374 which applies to the matter before us.

Appellants seek to inject into the first portion of Para. 4374 of our Code the proviso that jurisdiction is not entertainable until the court first establishes that there is property of the defendants in the jurisdiction, and the words so injected are at the same time emphasized. They, therefore, choose to look upon the agreement of December 6, 1950, merely as an ordinary contract executed in Ohio, involving the privately owned personalty of parties living in Connecticut and Ohio, respectively. Hence, they characterize any action by the courts of the State of Delaware in the premises as nothing more than interference in affairs with which they have no concern. They err in failing to concede relevance to Para. 2105, R.C.1935, which is confirmatory of the common law principle

Page 875

Even if we were free to adopt the view of appellants, and were otherwise disposed to do it, we should regret its paralyzing consequences. As Chancellor Josiah Wolcott observed in Perrine v. Pennroad Corp., supra: 'But it has never been held that a court is powerless to bring non-residents before it by constructive service unattended by seizure, if the suit is one wherein the relief sought relates to the status, title [32 Del.Ch. 520] or ownership of property actually located within its jurisdiction. This principle is recognized in Cantor v. Sachs, et al., supra [18 Del.Ch. 359, 162 A. 73], and is too well settled to call for extended discussion. If such were not so, then a variety of suits which courts of equity repeatedly take jurisdiction of could never be entertained. Bills for the removal of clouds upon title, for the foreclosure of mortgages, for the establishment of trusts, and the like, have long been recognized as properly tenable in equity to the point of a final decree when the property which is the subject matter of their controversy is located within the jurisdiction and when non-resident defendants who are concerned therein have been brought before the court by constructive service only, * * *.' 19 Del.Ch. 368, 168 A. 201.

Moreover, the State of Delaware has a statute requiring certificates to be deposited with a voting trustee or trustees, without which deposit or transfer the trust itself is invalid. Para. 2050, Sec. 18, R.C.1935. Thus, if this contention of the appellants were to prevail, the anomaly would appear that while the state would have jurisdiction to pass upon the validity of a trust if this particular requirement for validity were met, it would, nevertheless, be helpless to cope with the situation if the defendants, in addition to any other violations they had in mind, would take the added precaution of ignoring Para. 2050.

What agency can more reasonably supervise the voting rights in stock, and hence protect the elections of the directors who control a corporation, than the state which created the corporation? Any other conclusion would appear to be awkward indeed, in that in order to set aside an invalid voting trust in any corporation where the stock was widely dispersed, multiple litigation might be necessary in very many states, whereas in the state of the corporation's domicil the matter could be settled at a single stroke. Until the statutes of this state should so order in unmistakable language, we should be most reluctant to come to any conclusion which would put litigants and courts alike to such a burden. We take the conclusions reached in Jellenik v. Huron Copper Mining Co., 177 U.S. 1, 20 S.Ct. 559, 44 L.Ed. 647, to be an indication of what a state has the power to do in bringing nonresidents into court to settle the title or status of stock in [32 Del.Ch. 521] corporations created by that state, and we have no doubt whatever as to the soundness of Perrine v. Pennroad Corp., supra, and Wightman v. San Francisco Bay Toll-Bridge Co., supra, as indications of what our particular state has done.

The appellants next seek to distinguish the Perrine case, supra, from the one sub judice, because there the certificate was in the name of the voting trustees, while in our case it was not. The appellants' comment is accurate, but the distinction is without force. The reasoning of the learned Chancellor was unquestionably based upon the fact that the res was in Delaware, for the cause concerned the validity of a voting trust over stock in a Delaware corporation, and it could have no more than incidental interest in whose name the stock was registered.

But, as we previously noted, the appellants say that there is still another requirement of jurisdiction under Para. 4374. That is, they say, there is no jurisdiction unless the defendants' property not only is in the

Page 876

state, but is actually seized. This argument is simply an extension of their original errors. The statute, having laid down the requirements for service upon nonresidents so as to obtain a valid decree, then goes on to specify what may be done for the enforcement thereof. To that end it directs that after a decree is taken, even pro confesso, any property of defendant may be seized and disposed of in aid of the decree. But obtaining a degree and enforcing it are two wholly different matters. We do not have before us here any question of enforcement. This phase of the problem, therefore, is also concluded by Perrine v. Pennroad Corp., supra.

Appellants next declare that even if the established Delaware view, which the foregoing portions of this opinion have attempted to re-state, was at one time sound, it is not here applicable, because of the Uniform Stock Transfer Act, Chap. 159, Vol. 45, Laws of Delaware, which was in force during the time to which this suit relates. The contention is that this act, requiring, as it did, that stock could not be [32 Del.Ch. 522] transferred except by delivery of the certificate, and that no attachment of stock could be made until the certificate was either seized, surrendered, or its transfer enjoined, amounted to a repeal for all purposes of Para. 2105 of our Code, which we quoted above in this opinion, and which theretofore had fixed the situs of the stock of domestic corporations as in this ...

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