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Baker v. Gotz

August 31, 1973

GEORGE P. BAKER, RICHARD C. BOND, JERVIS LANGDON, JR., WILLARD WIRTZ, TRUSTEES OF THE PROPERTY OF THE PENN CENTRAL TRANSPORTATION COMPANY, APPELLANTS
v.
FIDEL GOTZ, VOLKER GOTZ, FINANZ AKTIENGE-SELLSCHAFT, VILEDA ANSTALT, GOTZ AKTIENGESELLSCHAFT OF ST. GALLEN, (ALSO KNOWN AS GOTZ AG OF ST. GALLEN, OR GOTZ ANSTALT OF ST. GALLEN, OR GOTZ ETABLISSEMENT OF ST. GALLEN, OR GOTZ ESTABLISHMENT OF ST. GALLEN), INTER-INDUSTRY AKTIENGESELLSCHAFT OF ST. GALLEN (ALSO KNOWN AS INTER-INDUSTRY AG OF ST. GALLEN, OR INTER-INDUSTRY ANSTALT OF ST. GALLEN, OR INTER-INDUSTRY ESTABLISSEMENT OF ST. GALLEN, OR INTER-INDUSTRY ESTABLISHMENT OF ST. GALLEN), INTER-MARKETING CORP. ANSTALT (ALSO KNOWN AS INTER-MARKETING CORP. ETABLISSEMENT, OR INTERMARKETING CORP. ESTABLISHMENT), MINOLTA ANSTALT, AND FINANZ AG ST. GALLEN.



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE (C.A. No. 4072)

Author: Adams

Before: VAN DUSEN, ADAMS and GIBBONS, Circuit Judges.

Opinion OF THE COURT

ADAMS, Circuit Judge:

The Trustees of the Penn Central Transportation Company (Trustees) appeal to this Court from an order of the district court vacating a sequestration attempted by the Trustees against the property of defendant-appellees Fidel Gotz, his son Volker Gotz, and a number of corporations alleged to be controlled by Gotz.*fn1 All of the defendants "are citizens of foreign states and reside in Continental Europe." In granting the defendants' motion to vacate, the district court did so on the basis that the Trustees had failed to conform fully to the required procedures.

The underlying dispute, from which this case arose, involves an alleged conspiracy between Gotz and several of the defendant corporations. Through the conspiracy Gotz allegedly caused $4,000,000; belonging to the Penn Central, deposited in a Lichtenstein bank, to be converted to the use of Gotz and the corporations in which he had an interest. The activity involved occurred before the entry of the Penn Central into reorganization. The Trustees, not surprisingly, sought to recover this amount.

I.

To commence the recovery litigation, the Trustees filed a complaint in the federal district court, with jurisdiction based on diversity of citizenship. Rule 4(e) of the Federal Rules of Civil Procedure provides that:

"Whenever a statute or rule of court of the state in which the district court is held provides (1) for service of a summons, or of a notice, or of an order in lieu of summons upon a party not an inhabitant of or found within the state, or (2) for service upon or notice to him to appear and respond or defend in an action by reason of the attachment or garnishment or similar seizure of his property located within the state, service may in either case be made under the circumstances and in the manner prescribed in the statute or rule."

Because Rule 4(e) adopts for the district courts the rules of the state in which the district court in question is located, the Trustees sought to effect service on the defendants through the Delaware sequestration provisions.*fn2

In broad outline, the Delaware sequestration procedure is as follows: The sequestration statute, 10 Del. C. § 366, provides that if in a complaint filed in the Court of Chancery, it appears that the defendant is a non-resident of Delaware, the Court may order such defendant to appear. Such appearance may be compelled by the seizure of all or any part of the defendant's property. Such seizure is carried out by an officer of the court. The defendant whose property is seized is given notice of the commencement of the proceedings by mail, if feasible, and also by publication. If he does appear, the seizure may be dissolved, but the defendant has then submitted to in personam jurisdiction.

Delaware Chancery Rule 4(db), promulgated pursuant to section (b) of the statute, limits the use of the sequestration proceeding. To utilize sequestration, the plaintiff must supply an affidavit which is to include, inter alia, a description of the property to be seized, specifying the amount, the nature of defendant's title, and the source of the affiant's information. If any information is omitted, the affidavit must contain the reason therefor.

Sequestration in Delaware may be made of property not susceptible of physical seizure. And this provision has been interpreted to permit seizure of certain equitable interests, so long as the interests are capable of being sold.*fn3

Employing this Delaware procedure, the Trustees, on March 10, 1971, filed in the district court a complaint requesting sequestration of the property of the non-resident defendants. That same day, the district court entered a sequestration order and gave notice to the defendants that they were to appear to defend by April 22, 1971. Pursuant to the order, debentures, warrants and notes held by the defendants in Delaware corporations were seized.

On March 22, 1971, the Trustees filed an amended complaint, again seeking sequestration. Pursuant to the amended complaint, notice was sent to the defendants requiring that they appear on May 4, 1971. The defendants did not do so by April 22, 1971, the deadline established by the original complaint. They did, however, file a motion to quash the sequestration before May 4, 1971, the deadline created by the second, or amended, complaint. Between April 22nd and May 4th the Trustees obtained, from a deputy clerk, a default against the defendants who had failed to appear by April 22nd. The defendants moved to vacate that default, and such motion was granted by order of the district court dated December 3, 1971. In view of the confusion created by the two complaints served on defendants, and since the defendants did appear by May 4th, and bearing in mind this Court's "reluctance to permit the final disposition of substantial controversies by default"*fn4 and the high standard necessary to reverse an order in a default situation,*fn5 we affirm the vacation of the default.

Responding to the order to appear, the defendants on May 4, 1971, filed a motion to quash the sequestration or to dismiss the action for lack of jurisdiction. On December 20, 1971, the district court granted the motion to quash but denied the motion to dismiss. The Trustees appealed from the granting of the motion to quash. It is to that issue that we must address our attention.

II.

The able and experienced district judge, granting the motion to quash the sequestration, focused on a narrow question of Delaware law,*fn6 and found that the affidavit filed in support of the sequestration request was inadequate.

As stated earlier, the procedure to be employed in effectuating service under the sequestration statute, 10 Del. C. § 366, is set forth in Chancery Rule 4(db). In pertinent part, that Rule states:

"(db) Service by Publication and Seizure. (1) No order shall be entered under 10 Del. C. § 366 unless it appears in the complaint that the defendant or any one or more of the defendants is a non-resident of the State of Delaware and the application therefor is accompanied by the affidavit of a plaintiff or other credible person stating:

"(a) As to each non-resident defendant whose appearance is sought to be compelled, his last known address or a statement that such address is unknown and cannot with due diligence be ascertained.

"(b) The following information as to the property of each such defendant sought to be seized:

"(1) A reasonable description thereof.

(2) The estimated amount and value thereof.

(3) The nature of the defendant's title or interest therein; and if such title or interest be equitable in nature, the name of the holder of the legal title.

(4) The source of affiant's information as to any of the items as to which the affidavit is made on information and belief.

(5) The reason for the omission of any of the required statements.

(5) The court may in its discretion and subject to statutory requirements dispense with or modify compliance with the requirements of any part of this rule in any cause upon application to it stating the reasons therefor."

The two sections of the Rule most germane to this appeal are subsection (1) (b) (5) and section (5).

Pursuant to the Rule's directive, the Trustees submitted an affidavit. It set forth that defendant Fidel Gotz, his son, or one or more of his alter ego corporations held notes or shares in thirteen Delaware corporations. Regarding several but less than a majority of these corporations, the affidavit stated the estimated amount and value of the defendants' holdings. The exact nature of the defendants' title was not specified, and the identity of which specific defendant was the holder of the interest in any of the corporations was not stated.

Affiant sought to overcome these deficiencies by furnishing, as provided for in section (1) (b) (5), a statement of the reasons for the omissions. Aware of the shortcomings of his affidavit, the affiant ascribed the omissions to the complete control over the information retained by Fidel Gotz.*fn7

The property located and seized by the sequestrator was possessed by Inter-Marketing Corp., Minolta Corp. and Vileda Corp., three of the defendant corporations.

The district court, noting that the affidavit did not specify that any of the three named corporate defendants did possess the specific property seized, ruled that the affidavit was insufficient to support the sequestration.

Holding that section (1) (b) (5) permitted only the omission of statements required by subsections (1) (b) (1) (4), the district court concluded that denominating the specific possessor defendant was a requirement not of those subsections but a general requirement of section (1) (b) and therefore not curable under (1) (b) (5). That subsection being unavailable to the plaintiffs, the district court then turned to section (5) of the Rule which gives the court discretion, upon application by the plaintiff, to dispense with other requirements.

The district court refused to consider whether it was proper to dispense with other requirements because it found that application had not been made for the dispensation. This finding was made by the district court despite the fact that a different judge of the district court had granted the original sequestration request. Underlying the action of the second district judge in quashing the sequestration was a desire to prevent the use of the sequestration statute for "fishing expeditions," attempts by individuals to commence harassing litigation by making sweeping claims and alleging that the defendant owns property in one or more of a large number of companies. Such abuse had been common prior to the adoption of Rule 4(db),*fn8 and the district court expressed a fear that if this affidavit were held adequate because of either section (1) (b) (5) or section (5), there would be a return to dragnet-type seizures.

This Court holds that, under the circumstances of this case, the affidavit submitted was sufficient to support the sequestration.*fn9 The danger of a "fishing expedition" is not present when, as in this case, the affiant endeavors to attain the maximum possible degree of specificity, and additional precision is beyond the affiant's facilities, because of the complex inter-corporate activities of multiple inter-related defendants. Along much the same line, the affiant has asserted that the corporations holding the legal title of the shares are but alter egos of the principal defendant. Thus, for the purpose of protecting against dragnet seizures, there may be considered to be one defendant with many facets. On these bases, the fears of the district court would not appear to be well-founded in this case.

Further, a reversal of the order quashing the sequestration appears supported in part by our reading of Delaware case law, specifically Rebstock v. Lutz, 158 A.2d 487 (1960). In that case, the plaintiffs, minority shareholders, commenced a suit against directors of a corporation by seeking to sequester shares held by the directors in three Delaware corporations. The complaint named nineteen individual defendants, but the accompanying affidavit specified neither who among defendants held shares in the three corporations nor the amount of the holdings of any of the defendants. The affidavit alleged, pursuant to subsection (1) (b) (5):

"Deponent cannot state or estimate the number of shares owned by each of the individual defendants and the defendants named as co-partners in Model, Roland & Stone because the information is available only to the respective defendants or to the corporation whose shares are involved."*fn10

The subsequent seizure revealed that five of the individual directors held shares in the three designated corporations.

Under these facts, the defendants moved to vacate the seizures. Their motion was denied by the Chancellor,*fn11 and the denial was affirmed by the Supreme Court of Delaware. The Supreme Court held that (1) (b) (5) was designed to allow omissions if explained, and in Rebstock, as in this case, one of the omissions was the failure to specify which among numerous defendants possessed shares of any of three corporations. The Delaware court further held that section (5) was not the sole remedy for this type of omission.

It is with some hesitancy that this Court reverses a ruling on Delaware law made by an experienced Delaware district court judge. Nonetheless, given the resemblance between Rebstock and the present case, this Court holds that the affidavit filed here is sufficient under Delaware law.*fn12

The defendants have asserted several other grounds on which the vacation of the sequestration order can be sustained.*fn13 One of these grounds, that the Delaware sequestration statute is unconstitutional, raises difficult questions dealt with in section III. One other ground appears not insubstantial, and we shall now consider it briefly.

The return of the sequestrator showed that the following securities had been seized:

(a) 30,000 SSI Computer Corp. common stock purchase warrants.

(b) $1,000,000 principal amount 7% subordinated note, SSI Computer Corp. (now Itel ...


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