I have tried to teach Shaffer in-class several times, and it never goes well. Learning from my mistakes I am giving you this walk-through (to use video-game language) of the case and we can take up questions in class.  The most important thing I can tell you is that I have never tested In-Rem jurisdiction on a final exam and think it highly unlikely I would ever do so, so from my perspective Shaffer’s importance has more to do with the problem it creates for the court in Burnham which we will soon read.

Facts

Heitner, a nondelaware resident, owns one miserable share of Greyhound Corp, incorporated in Delaware with principal place of business Az..  He brings a shareholder derivative suit in a Delaware state court against Greyhound Corp., it wholly owned subsidiary Greyhound Lines (incorporated in Cal and with its principal place of business in Az), and significantly for the purposes of this case all of the officers and directors of the Greyhound Corporation, none of whom lived in Delaware.

This is important in understanding the case, it is against the directors in their personal capacity that PJ is a problem, not against the Corp, for the Corp we’d have simple traditional basis.[1]

His claim (you will learn more about this in Corps) is that these officers and had mismanaged Greyhound by causing the Corp and its subsidiary to engage in an antitrust violation, activity that apparently occurred in Oregon.  The antitrust violation had been prosecuted and it produced a multi-million dollar judgment against Greyhound, which came out of the corporation’s coffers.  So the corporation had been damaged.  All the shareholders were damaged.  And Heitner, this one share owner, wanted the officers and directors to reimburse the corporation for this big loss.  The activities that lead to this loss occurred in Oregon, 3,000 miles away from Delaware.

How does he get jurisdiction to do this?  It is a QIR action based on the court having physical control of the stock.  He moves to sequester the property of these defendants.

What is the property? Stock and stock options.  How is the seizure accomplished? Through a “stop transfer” order in the books of the corp.  The actual stock certificates were not actually in Delaware, but Delaware is the only state in the union that says stock is in Del if the Corp is incorporated there.  Every other state says the stock is where the stockholders. So you’ve got this odd Delaware principle giving it jurisdictional power over property against these non-Delaware defendants.

Delaware also has a nasty rule noted in footnote 12 that says to challenge the sequestration of property you have to file a general appearance, and thus subject yourself to in personam jurisdiction. Thus, it looked like the plaintiff was getting indirectly (through QIR) what it could not get directly through in personam jurisdiction, Consent!

The directors and owners are notified by the initiation of suit by certified mail to their last known address and by publication in the newspaper of the county in Del where the case was brought.

The defendants file a special appearance to quash service of process and get the sequestration order vacated.  Essentially they are pushing two arguments: (1) Ex parte sequestration process violates the Opportunity to Be Heard jurisprudence discussed earlier. (2) Assertion of PJ by Del would violate the constitution.

Proceedings

Del chancery court (remember equity! And it is a stop transfer order, injunction-like).  The Del. S. Ct. spends some time on the Opportunity to be Heard question, ultimately finding the sequestration procedure as constitutionally permissible, but rejects the personal jurisdiction issue in a very cursory fashion.

United States Supreme Court (Marshall, J., for the Court)

Jurisdiction here violated DP.[2]

But the state argued this is just Pennoyer, we’ve got power over the property.

Well, says Justice Marshall, we’ve done a lot on the in personam side since Pennoyer and the question is whether International Shoe and its progeny applies to QIR and In Rem cases as well.  That is does the mere presence of property in the state automatically justify PJ regardless of the relationship of the property owner or underlying dispute to the forum?

Over the years, commentators (and ourselves indirectly in Mullane [this was the part of that opinion I didn’t have you read you can go back to it now if you want]) have recognized that at the heart of QIR is a legal fiction.  Yes, it is an action against the property in QIR is really an action against the property owner.  Really to say you have jurisdiction over X is to say you have jurisdiction  “over the interests of persons in a thing.”  That sense of jurisdiction is clearly governed by International Shoe, minimum contacts + fair play and substantial Justice.

And in a very famous line in the opinion, Justice Marshall said: From now on “all assertions of state-court jurisdiction must be evaluated according to the standards set forth by INTERNATIONAL SHOE and its progeny.” 

Now the property can count as one of the contacts to form the basis of minimum contacts. When the suit is about the property it will be very unusual for that NOT to be enough to satisfy the minimum contacts. The plaintiff owning the property would be thought to be benefiting from the protection of the state (reciprocity), the state has an interest in making sure property is marketable, in making sure disputes are settled.  Records and witnesses are going to be in state. 

So for true in rem actions it seems like they will usually easily satisfy International Shoe. [QIR-1 actions too].  The same is true for an action for injury by someone on the property who is suing the absentee landlord.

But what about QIR actions, especially of the kind where you are getting at the defendant through his property?  Here adopting the Shoe test will create a major change, because in QIR actions of this type the property may be completely unrelated to the Pl’s cause of action.  The presence of property in the forum state might suggest other ties among the state, defendant and litigation, but the property alone is not enough.  So a number of QIR actions that would be OK in the pre-Shoe world will not be OK in the post-Shoe one.

Obj: If you can’t get PJ through the property in this kind of QIR suit the defendant will just move his assets when you sue him to a place where he is not subject to in personam PJ.

Reply: At most suggests you need to have an early attachment device by which you can attach the property in a forum where Shoe is satisfied.  Moreover, you can get in personam jurisdiction over him in a forum where Shoe test is satisfied, and then seek full faith and credit over the judgment to enforce it in the state where he moves the property. 

Obj: The status quo PJ treatment of QIR is more predictable than the Shoe test and assures the Pl a forum.

Reply: In most cases the Shoe standard will be easy to apply.  In the cases where it is not, we don’t want simplicity if the cost is unfairness, we won’t sacrifice “Fair play and substantial justice.”[3]

Obj: Long history of jurisdiction based on property.

Reply: this is an ancient form without substantial modern justification, it is a fiction.  And one that is fundamentally unfair to the defendant. Commit it to the flames!

Apply: If the property does not satisfy minimum contacts, does something else?[4] No.  Defendants never set foot in Del, and Pl has not suggested any act relating to cause of action that occurred in Del  “nor is the underlying cause of action related to the property”  [NB: Even for PJ, the party seeking to establish jurisdiction has burden of pleading, producing, and proving it]

Obj: They are directors and officers of a Del Corp.  Surely Del has strong interest in supervising the management of a Del corp.

Reply: (this part gets very complicated, don’t dwell on it) (1) The actual sequestration statute would let the Pl do what he did here (sequester stock) not just to officers or directors, but to any Del property holder, so the “fiduciary duty” theory at can’t be what’s doing the work.  So it is overinclusive.  It is also underinclusive in that it only reaches corporate fiduciaries who happen to own stock (or other property) in State.  No necessary relationship between being an officer/director and owning stock in that company.  Indeed 7 directors and officers he named in his complaint did not have stock in the corp so could not  be reached through this theory of PJ.  “If Del perceived its interest in securing jurisdiction over corp fiduciaries to be as great as Heitner suggest, we would expect it to have enacted a statute more clearly designed to protect that interest.” (2) Also, even if Del has interest that does not mean it would be fair to subject defendants to PJ here.   These interests may be a good reason to apply Del law in in the choice of law analysis, but that does not answer the jurisdictional question.

Obj: But says, Heitner, Del law provides substantial benefits to officers and directors, that’s one of the reasons why they agreed to the position, it is only fair that they stand and defend there.

Reply: No, says the court. (1) Again maybe a good reason for choice of law but not PJ. (2) They did not “purposefully avail themselves” of the privileges of the forum state.  They never had anything to do with Del, or any reason to expect to be hailed into court there.  Del could have passed a statute treating accepting a directorship as requiring consent to jurisdiction in the state but did not.  The Pl’s theory suggests that anyone who buys stock in a Del corp would subject himself to Del jurisdiction, which is crazy.

Powell, J., Concurring

I agree but want to reserve the question of whether the same rule should apply for QIR cases involving real property which cannot move.  For real property cases, the uncertainty associated with the International Shoe test may not be worth it.

Stevens, J., Concurring in Judgment

[this means he votes for the result but doesn’t sign on to the actual opinion]

Like Powell I don’t think the decision should reach real estate, and maybe other stuff too.  The opinion speaks more broadly than it has to, and for that reason I concurring only in the judgment not in the opinion because I don’t know how far I’d extend it.  This is an easy case because of two elements of the statute that are particularly odd/problematic.  (1) As the only state statute that treats the place of incorporation of the corp as the situs of the stock, even though both the owner and custodian of shares is elsewhere, it seems to create an unacceptable threat of not getting proper notice.  (2) The nasty element of Del law whereby to contest sequestration you have to appear generally, not specially, and thus consent to PJ adds to the risk to the average stock purchaser.  You would have to know both the state of incorporation of the stock you are buying, and this idiosyncracy of its laws, or you would be subjecting yourself unknowingly to a large risk of  litigation.

Brennan, Concurring in Part, Dissenting in Part

I agree that minimum contacts analysis applies to these cases, I just disagree with how Ct analyzed the matter, and whether the court should have even gone there. 

Critique of this as an “advisory opinion,” about something not in controversy.  The parties never briefed minimum contacts below (and indeed he sees Del as having denied passing a minimum contacts type law, so this is a pure “advisory opinion”.)  Hence the court’s duplicity in treating the limited Del long-arm as though it were the “co-extensive with DP” kind of long arm (like the one we saw they have in Rhode Island).  Further, minimum contacts analysis always requires a close fact sifting, but here the parties didn’t brief it, the lower court didn’t analyze it, so not clear how they can do it.  Further, this is a constitutional holding that will freeze the other 49 states, so Court should show some restraint in reaching out to reach an issue that has not “ripened for review” through percolation in the state courts.

But if the Court is going to go there, I feel the need to do so too.  I would find that as a general matter there are minimum contacts to adjudicate a shareholder derivatitve suit relating to the actions of officers or directors of a corp chartered in that state.  S/H derivative suits are about the corp and its shareholder’s interests, and the chartering state has a strong interest in that.  (1) It has an interest in restitution to its local corps that have been harmed (connecting it back to Hess era cases, and non-resident motorist statutes concerned with making sure citizens can recover in-state for harms). (2) It has a regulatory interest in the behavior of corporate fiduciaries.  (3) Finally, because the corp is a creature of state law, it has an interest in providing a convenient forum to it and supervising its activities.

The majority notes these concerns but say they go to choice of law not jurisdiction.  I would not compartmentalize so much, both are a fairness analysis.  Besides, another state applying your law is not a complete substitute for doing it yourself (they may be less expert and/or may not have the same desire to further the authoring state’s interest in interpreting that law).[5]

Two parts of the Majority’s reasoning seems bizarre: (1) I can’t see how Del’s statute is controlling at all of the constitutional question, all it shows is perhaps Del’s statute did not reach out to the constitutional limit. (2) The failure of Del to extract from defendant’s consent to suit also seems unimportant, let’s not indulge in one more legal fiction

It is enough to satisfy the minimum contacts here that the directors and officers voluntarily associated themselves with the state and invoked the protection of its laws, by  entering into a long-term arrangement with a Del Corp (and thus getting interest free loans and indemnification).  They have to pay the price!