Future View: Fiduciaries in Federal Court

On June 28, 2007, the United States Court of Appeals for the Second Circuit issued a decision & opinion in Lefkowitz v Bank of New York (Docket No. 04-0435-cv), which addressed the status of the "probate exception" to federal court jurisdiction.

Although Pennsylvania is under the jurisdiction of the U.S. Court of Appeals for the Third Circuit, this case from the well-regarded Second Circuit is nevertheless instructive on this issue.

The pervasive "probate exception" had severely limited federal civil court jurisdiction in probate matters conducted in state courts. For previous commentaries about the "probate exception", see: "Understanding the Anna Nicole Smith Case: Dissecting the Probate Exception", by John T. Brooks, Esq. (PDF, 4 pages); and "Fighting the Probate Mafia: A Dissection of the Probate Exception to Federal Court Jurisdiction" (PDF, 70 pages), by Peter Nicolas, published in the Southern California Law Review, in Vol. 74, at Page 1479 (2002).

However, on May 1, 2006, the Supreme Court of the United States revised the rules applicable to this exception in Marshall v. Marshall, (No. 04–1544) (PDF, 28 pages). That case involved Anna Nicole Smith as a plaintiff.

A thumbnail description of the Marshall case, with reference links, is found on Wikipedia here:

[T]he United States Supreme Court held that a federal district court had equal jurisdiction with state probate (will) courts over tort claims under state law. The case drew an unusual amount of interest because the Petitioner was former Playboy Playmate and controversial celebrity Anna Nicole Smith (legal name Vickie Lynn Marshall).

The four specific questions presented in the Marshall case all related to the effect of the "probate exception" to limit federal court jurisdiction. See: Duke Law's "Supreme Court Online".

The U. S. Supreme Court noted the general issue in the opening paragraph of its Opinion:

Among longstanding limitations on federal-court jurisdiction otherwise properly exercised are the so-called “domestic relations” and “probate” exceptions.

Neither is compelled by the text of the Constitution or federal statute. Both are judicially created doctrines stemming in large measure from misty understandings of English legal history. In view of lower federal-court decisions expansively interpreting the two exceptions, this Court reined in the domestic relations exception in Ankenbrandt v. Richards, 504 U. S. 689 [1992], and endeavored similarly to curtail the probate exception in Markham v. Allen, 326 U. S. 490 [1946)].

[Unofficial links & re-paragraphing added for readability]

In ruling that the federal courts had jurisdiction over the matters raised by Vicki Lynn Marshall (a/k/a/ Anna Nicole Smith), the Court stated:

This Court therefore comprehends Markham’s “interference” language as essentially a reiteration of the general principle that, when one court is exercising in rem jurisdiction over a res, a second court will not assume in rem jurisdiction over the same res. See, e.g., Penn General Casualty Co. v. Pennsylvania ex rel. Schnader, 294 U. S. 189, 195–196.

Thus, the probate exception reserves to state probate courts the probate or annulment of a will and the administration of a decedent’s estate; it also precludes federal courts from disposing of property that is in the custody of a state probate court. But it does not bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction.

In light of this recent high court precedent, the Second Circuit Court of Appeals reconsidered the previously-applied limitations of the "probate exception" in a case on appeal. For a report & commentary about the case of Lefkowitz v. Bank of New York, see: "2nd Circuit Re-Examines Standard for Probate Exception", by Mark Hamblett, published on July 3, 2007, by the New York Law Journal. The article notes that the plaintiff argued the case pro se, and that the case began in 1988.

In that case, the plaintiff, Adrienne Lefkowitz, was one of three daughters with a one-third interest in her parents' estates. She filed several claims in federal court (Southern District, New York) against the executor and counsel relating to the estates' administrations.

After asserting "diversity" of the parties to obtain federal court jurisdiction, she alleged, generally, that:

• the executor improperly paid inflated and fraudulent legal bills of a law firm for services rendered from August 1990 to 1999;
• the executor refused to distribute to her certain personal property from an estate;
  
• the executor violated terms of a Hong Kong consent order;
• the New York Surrogate Court incorrectly surcharged her for loans she made while executrix of one estate; and
• the bank refused to pay her legal fees for the probate contests of the estates.
  

Some of these claims were abandoned by her. But other counts remained in the nature of:

• breach of fiduciary duty, and aiding & abetting breach of fiduciary duty;
• conversion;
• fraudulent misrepresentation and fraudulent concealment;
• unjust enrichment; and
  
• claims for payment for monies allegedly owed, specific performance of consent orders, and declaratory relief confirming entitlement to estate assets.
  

The plaintiff sought various forms of relief from a federal court, including specific performance, declaratory judgment, injunction, and compensatory, punitive, & treble damages.

Based on the clarification recently provided by the U.S. Supreme Court in Marshall, the Second Circuit Court of Appeals reversed the trial court's dismissal (based on the prior application of the "probate exception") of the claims, and remanded the case to the district court for further proceedings on those claims.

Following are instructive excerpts from the Second Circuit Court's Opinion that explain its disposition:

The “probate exception” is an historical aspect of federal jurisdiction that holds “probate matters” are excepted from the scope of federal diversity jurisdiction. See Marshall, 126 S.Ct. at 1746 (citing Markham v. Allen, 326 U.S. 490, 494 (1946)).

As the Supreme Court recently clarified, the probate exception “reserves to state probate courts the probate or annulment of a will and the administration of a decedent’s estate; it also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court.” Marshall, 126 at 1748.

The probate exception does not, however, “bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction.” Id.

Before Marshall, most federal courts, including ours, had interpreted the probate exception more broadly than the Supreme Court has now defined it. * * *

This Circuit’s expanded approach was laid out most specifically in Moser [v. Pollin, 294 F.2d 335 (2002)], at 340. * * *

The complaint in Moser alleged several counts of fraudulent concealment and constructive fraud in connection with probate of the decedent’s will. After analyzing the probate exception, we held that the action pending in the federal court was “nothing more than a thinly veiled will contest.” Id. at 340-41. * * *

In deciding Marshall, the [United States] Supreme Court acknowledged that the oft-quoted language relied on in Moser from the 1946 Markham decision, that federal courts may not “interfere with the probate proceedings,” is not a model of clarity. Marshall, 126 S.Ct. at 1747-48.

The Court recognized that the ambiguity of the language had caused federal courts to “puzzle[] over the meaning of the words [interfere with]” and confirmed that, indeed, some courts had “read those words to block federal jurisdiction over a range of matters well beyond probate of a will or administration of a decedent’s estate.” Marshall, 126 S.Ct. at 1748 * * *

In response to this overly-broad application, the Supreme Court reigned in the boundaries of the probate exception, articulating its limited application. The Court explained that in Marshall the probate exception did not apply because plaintiff sought neither to (1) “administ[er] an estate, . . . probate . . . a will, or [do] any other purely probate matter,” nor (2) “to reach a res in the custody of a state court.” * * *

From these statements, we discern that under the clarified probate exception a federal court should decline subject-matter jurisdiction only if a plaintiff seeks to achieve either of these ends in federal court.

As now defined, that exception ensures that certain matters are left to state courts to resolve and that no federal court will interfere with state courts’ jurisdiction over those matters properly confided to them. This limited application of the exception also ensures that where exercise of federal jurisdiction will result in a judgment that does not dispose of property in the custody of a state probate court, even though the judgment may be intertwined with and binding on those state proceedings, the federal courts retain their jurisdiction. * * *

Following Marshall we must now hold that so long as a plaintiff is not seeking to have the federal court administer a probate matter or exercise control over a res in the custody of a state court, if jurisdiction otherwise lies, then the federal court may, indeed must, exercise it. * * *

The probate exception can no longer be used to dismiss “widely recognized tort[s]” such as breach of fiduciary duty or fraudulent misrepresentation merely because the issues intertwine with claims proceeding in state court. * * * Accordingly, these claims may not be dismissed under the probate exception.

[Text compacted & re-paragraphed for readability.]

Based on these holdings, I offer this observation: Fiduciaries charged with fault likely will find themselves in federal court much more often in the future.