Challenging jurisdiction in fiduciary litigation.
There’s been a veritable explosion of fiduciary litigation in recent years, attributable to a host of factors, including the escalating amount of wealth at stake; the reduction in transfer taxes leaving larger inheritances to fight over; the lengthening of life spans causing beneficiaries to wait longer than ever to inherit; the changing nature of families with the legalization of gay marriage, adult adoption and other alternative family structures; and the ever more litigious society we live in. Because of these factors, it’s increasingly likely that fiduciaries (and particularly corporate fiduciaries, which often are perceived as deep pockets) will become embroiled in litigation or other contested legal proceedings.
Historically, fiduciary litigation has been the province of state courts, and, in particular, specialized state probate courts, such as the surrogate’s courts in New York and New Jersey, the orphans’ courts in Pennsylvania and Maryland and the probate courts in California and Illinois, all of which typically are devoted to the probate of wills, the administration of trusts and estates, guardianships/conservatorships and other matters dealing with the succession of wealth. Plaintiffs increasingly have been bypassing state courts in favor of a federal forum when they can assert a basis for the federal court’s jurisdiction, typically by alleging diversity of citizenship. The federal constitutional right to a jury trial, to which they might not otherwise be entitled in specialized state courts, is a frequent motivating factor. Another motivating factor is the hope that a court of general jurisdiction isn’t steeped in the arcana of the laws of descent and distribution.
If faced with federal litigation, and diversity of citizenship or another basis for federal jurisdiction is sufficiently pleaded, consider two strategies for challenging a federal court’s jurisdiction. The first, and most common, strategy is to seek dismissal of the federal suit based on the probate exception to federal jurisdiction, which reserves to state probate courts the probate or annulment of a will and the administration of a decedent’s estate, and precludes federal courts from interfering with a res in the custody of a state court. The second is to ask the federal court to abstain from exercising its jurisdiction if a related state court proceeding is already pending until that proceeding is resolved.
The Probate Exception
Federal courts have limited jurisdiction, meaning they can only hear cases authorized by the U.S. Constitution or federal statutes. It’s long been held that a federal court has no jurisdiction to probate a will or administer an estate because the equity jurisdiction conferred by the Judiciary Act of 1789, which is that of the English Court of Chancery, didn’t extend to probate matters.1 By a long series of decisions of the U.S. Supreme Court, as laid out in Markham v. Allen, it’s been established that:
. . . federal courts do have jurisdiction to entertain suits ‘in favor of creditors, legatees and heirs’ and other claimants against a decedent’s estate so long as the federal court does not interfere with the probate proceedings or assume general jurisdiction of the probate or control of the property in the custody of the state court.2
Similarly, the Markham court held that:
. . . while a federal court may not exercise its jurisdiction to disturb or affect the possession of property in the custody of a state court, ... it may exercise its jurisdiction to adjudicate rights in such property where the final judgment does not undertake to interfere with the state court’s possession save to the extent that the state court is bound by the judgment to recognize the right adjudicated by the federal court.3
Following Markham, although it was clear that federal courts couldn’t probate wills, courts puzzled over the meaning of the words “interfere with the probate proceedings” and struggled with where to draw the line in determining the scope of the probate exception, with varying and inconsistent results. Sixty years later, in Marshall v. Marshall,4 the Supreme Court sought to clarify the scope of the exception.
Marshall arose from claims asserted by Vickie Lynn Marshall, a/k/a Anna Nicole Smith, the widow of J. Howard Marshall II, who died without providing for her in his will. According to Anna Nicole, Howard intended to provide for her through a gift in the form of a “catch-all” trust.5 Howard’s son, E. Pierce Marshall, was the ultimate beneficiary of Howard’s estate plan.6 During the course of the proceedings in the Texas probate court, Anna Nicole filed for bankruptcy in California, where hotly contested litigation involving Pierce ensued. Following a trial, the bankruptcy court awarded Anna Nicole substantial compensatory and punitive damages on her claim that Pierce had tortiously interfered with a gift she expected to receive from her husband.7 Pierce then filed a post-trial motion to dismiss for lack of subject matter jurisdiction, asserting that Anna Nicole’s tortious interference claim could be tried only in the Texas probate proceedings.8 The bankruptcy court denied the motion.9 Relying on Markham, the bankruptcy court observed that a federal court has jurisdiction to adjudicate rights in probate property, so long as its final judgment doesn’t interfere with the state court’s possession of the property. Subsequently, the Texas probate court declared that Howard’s estate plan was valid.10
Pierce then sought district court review of the bankruptcy court judgment. The district court held that the probate exception didn’t reach Anna Nicole’s counterclaim because it wouldn’t “interfere” with the probate proceedings.11 It wouldn’t do so, the court concluded, because: (1) success on the counterclaim didn’t necessitate any declaration that Howard’s will was invalid, and (2) under Texas law, probate courts don’t have exclusive jurisdiction to entertain claims of the kind Anna Nicole asserted.12 Because the court also held that the claim didn’t qualify as a “core proceeding,” the district court undertook de novo review and determined that Pierce had tortiously interfered with Anna Nicole’s expectancy and awarded substantial compensatory and punitive damages.13
The U.S. Court of Appeals for the Ninth Circuit reversed.14 Although the Ninth Circuit recognized that Anna Nicole’s claim didn’t involve the administration of an estate, the probate of a will or any other purely probate matter, it nevertheless held that the probate exception barred federal jurisdiction.15 It read the exception broadly to exclude from the federal courts’ adjudicatory authority not only direct challenges to a will or trust, but also “questions which would ordinarily be decided by a probate court in determining the validity of the decedent’s estate planning instrument, whether those questions involve fraud, undue influence [, or] tortious interference with the testator’s intent.”16 The court also held that a state’s vesting of exclusive jurisdiction over probate matters in a special court strips federal courts of jurisdiction to entertain any probate-related matter, including claims respecting tax liability, debt, gift and tort.17
The Supreme Court reversed, holding that the Ninth Circuit had no warrant for its sweeping extension of the probate exception.18 It read Markham’s enigmatic words concerning interfering with the probate proceedings in sync with those that proscribe “disturb[ing] or affect[ing] the possession of property in the custody of the state court” and comprehended the language as 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.”19 Thus, the Court concluded, “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. But it does not bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction.”20 The Court determined that Anna Nicole’s claim didn’t “involve the administration of an estate, the probate of a will, or any other purely probate matter,” but rather alleged a tort for which Anna Nicole sought an in personam judgment against Pierce to which the probate exception didn’t apply.21
Following Markham, federal courts have more consistently applied the probate exception, adjudicating matters that fall outside of its confines but otherwise within federal jurisdiction and ceding jurisdiction to state courts over matters that fall within it. In doing so, courts closely scrutinize the claims asserted and parse them as necessary, as exemplified in the Second Circuit’s decision in Lefkowitz v. Bank of New York.22 In that case, a beneficiary brought claims arising out of the administration of the estates of her parents against the executor and the law firm representing those estates. The district court dismissed the action for lack of subject matter jurisdiction based on the probate exception.23 The plaintiff had alleged a dozen causes of action in her complaint, each sounding in tort seeking payment of monies allegedly owed, specific performance of certain consent orders or declaratory relief confirming her entitlement to estate assets.24 Certain of her causes of action sought, in essence, disgorgement of funds that remained under the control of the probate court.25 These claims included allegations that the executor wrongfully withheld estate funds from her, that defendants were unjustly enriched when they failed to distribute income belonging to her, that she had unpaid claims for monies owed with respect to legal fees she incurred in connection with determining her rights to payment from the estates and that the executor was obligated pursuant to consent orders to pay certain debts she owed.26 In scrutinizing these claims, the Court of Appeals determined that the plaintiff was seeking “to mask in claims for federal relief her complaints about the maladministration of her parent’s estates, which [had] been proceeding in probate courts.”27 The court determined that to provide the relief the plaintiff sought in connection with these claims, the federal court would have to assert control over property that remained under the control of the state courts, which it wasn’t permitted to do.28 Accordingly, the district court had determined correctly that under the probate exception, it lacked jurisdiction to consider these claims and properly dismissed them.29
However, as to the plaintiff’s in personam claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraudulent misrepresentation and fraudulent concealment, the Second Circuit determined that the probate exception didn’t apply because the plaintiff sought damages from the defendants personally rather than assets or distributions from either estate.30 The district court had concluded that the claims, “albeit ‘framed as in personam actions [that] do not directly implicate the res of either estate .... are entirely intertwined with nitty-gritty issues of estate administration”’ and were thus subject to the probate exception.31 It held that should it address the “substantive wrongs” asserted in these claims, it would impermissibly usurp the role of the probate court.32 The Second Circuit reversed, noting that, while the issues involved in these claims “undoubtedly intertwine” with the litigation proceeding in the probate courts, the federal court in addressing the claims wouldn’t be asserting control of any res in the custody of a state court.33 Accordingly, these claims couldn’t be dismissed under the probate exception.34
Thus, the probate exception is a valuable tool for challenging claims brought by a litigant against your fiduciary client in federal court and provides a compelling opportunity to revert claims concerning trust and estate administration to the specialized state courts.
Abstention Under Colorado River
If a proceeding is already pending in state court that concerns the fiduciary’s administration of the estate or trust, such as an accounting proceeding, federal abstention may be appropriate under the doctrine set forth in Colorado River Water Conservation Dist. v. U.S.,35 which permits a federal court to stay or dismiss an action in favor of a concurrent state court action based on considerations of “[w]ise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation.”36 For this type of abstention, the threshold requirement is that the state and federal actions be parallel, meaning that “substantially the same parties are contemporaneously litigating substantially the same issue in another forum.”37 Cases are parallel when the main issue in the case is the subject of already pending litigation.38 Complete identity of parties and claims isn’t required.39 Rather, “parallelism is achieved where there is a substantial likelihood that the state litigation will dispose of all claims presented in the federal case.”40
In the recent case of Phillips v. Citibank, N.A.,41 a scholarly decision that would be a model template for any Colorado River abstention motion, the federal court found this threshold requirement of parallelism satisfied because the federal action involved the same issues and events that had been the subject of: (1) litigation in the surrogate’s court dating back to the probate of the grandfather’s will nearly three decades earlier, and (2) the pending accounting proceeding for the trust created under the grandfather’s will, of which the plaintiffs were remainder beneficiaries. Those common issues included the intent and administration of the grandfather’s will; the administration of the trust created under the will; and the management of assets within the purview of that trust.42 Indeed, in the federal action, the plaintiffs sought an accounting despite the fact that the trustee had already voluntarily initiated an accounting in surrogate’s court, and the plaintiffs asserted breach of fiduciary duty and trust maladministration claims nearly identical to their objections to the accounting that they had filed in that court.43 Further, the plaintiffs’ complaint appeared to challenge positions taken by the trustee in the surrogate’s court without letting those positions resolve themselves in that court first.44 Although some of the allegations and requests for relief in the two actions differed or even conflicted, the court found that this was no bar to parallelism when the underlying events remained identical.45 Rather, the court determined that “the introduction of theories of recovery in [the federal court] that would necessarily interfere with the Surrogate’s Court proceedings demonstrates exactly why the two actions should not proceed contemporaneously.”46
Although the plaintiffs in Phillips didn’t contest that the proceedings were parallel, the court rejected the plaintiffs’ argument that the fact that two of the defendants in the federal action weren’t defendants in the accounting proceeding disfavored abstention.47 As to the one federal defendant, the court noted that he’d been named as an interested party as a representative of the father’s estate in the surrogate’s court proceeding and was served accordingly.48 Although this defendant was also named in the federal action in his individual capacity, the only claim against him in that capacity was “for aiding and abetting breach, a claim whose survival depends on whether [the father] committed a breach in the first instance.”49 Thus, the court concluded,
“[i]f the Surrogate’s Court determines that the Trust was dutifully administered, there will be no basis for a claim against [the defendant] in this Court either.”50 As to the other federal defendant, from whom the plaintiffs sought rescission of a contract by which the defendant purchased real estate from the trust, because the primary relief sought against it was equitable, which could be asserted more easily against the trust, the court determined that “not only could this relief be requested in Surrogate’s Court, it should be.”51 The court also noted that it was “far from clear that [it] even has jurisdiction to entertain claims implicating the property of a trust involved in ongoing accounting proceedings.”52 Thus, the inclusion of additional claims or parties in the federal action didn’t defeat the otherwise parallel nature of the two proceedings.53
Six Factors
After determining that the state and federal proceedings are parallel, the question becomes whether the federal court should exercise its discretion to abstain. This decision turns on consideration of six factors: (1) assumption of jurisdiction over any res, (2) inconvenience of the federal forum, (3) avoidance of piecemeal litigation, (4) order in which the actions were filed, (5) the law that applies the rule of decision, and (6) protection of the federal plaintiff’s rights.54 These factors must be weighed against a federal court’s “virtually unflagging obligation … to exercise the jurisdiction given them.”55 No one factor is determinative, and the balance is “heavily weighted in favor of the exercise of jurisdiction.”56 The first factor—assumption of jurisdiction over the res—weighs in favor of abstention when the state court has assumed jurisdiction over the trust or estate at issue, as it does in any proceeding involving the administration of a will or trust, such as a probate or accounting proceeding.57 The requirement here is that the state court is in fact exercising jurisdiction. If, for example, the account of a trustee has already been settled, then the corpus of the trust is returned to the hands of the trustee for further administration of the trust, and the court would no longer be exercising jurisdiction.58 Furthermore, even if the claims at issue, such as those for personal damages, don’t directly implicate a res, this factor may still favor abstention. In Phillips,59 the court held that although the personal damages claims didn’t implicate the trust res, they were inextricably linked with the issues of trust administration pending before the surrogate’s court and, in some cases, were only requested as an alternative to relief affecting property under the surrogate’s court’s jurisdiction, so this factor weighed in favor of abstention. Additionally, claims against trustees or executors in their fiduciary capacities could implicate the res because any relief ordered would necessarily implicate the distribution of a res that’s under the control of the state court.60
As to the second factor—the inconvenience of the federal forum—when the federal forum is equally convenient to the state forum, this factor tilts toward exercise of jurisdiction.61 However, federal courts have recognized that “there is plainly inconvenience in having to litigate actively in both state and federal courts at the same time.”62 In Phillips, the court found that this factor weighed “at least modestly” in favor of abstention.63
The third factor—the avoidance of piecemeal litigation—is the “paramount consideration” in the analysis due in part to the possibility of inconsistent disposition of claims.64 Although there’s generally no threat of piecemeal litigation when the issues in the two actions are separate and distinct,65 courts have held that this factor favors abstention even when the actions are “merely duplicative,” such that the availability of res judicata or collateral estoppel would mitigate the risk of inconsistent outcomes.66 This is because the “value of judicial economy … animates Colorado River” and thus the need to “avoid duplicative simultaneous litigation” supports abstention.67 In Phillips, the court found that this factor favored abstention because the claims in the complaint were inherently intertwined with issues that the surrogate’s court was better-positioned to decide, including the intent of the decedent’s will and the tumultuous history of family conflict.68 Further, the claims regarding the administration of the trust reached back over a decade, a period during which the surrogate’s court had jurisdiction over the estate and one encompassed by the pending accounting petition.69 Although the Phillips court recognized that the presence of additional defendants in federal court meant that the surrogate’s court action couldn’t be a “complete and perfect substitute” for the federal action, it determined that the resolution of the surrogate’s court action would “either preclude recovery completely or collectively estop the relitigation of substantive issues in [the federal] action, thus alleviating the risk of duplicative effort and varied results.”70 It also determined that, because the surrogate’s court action also involved allegations and remedies not raised in the federal action, proceeding forward with the federal case “would only lead to a heightened risk of inconsistent recovery, and not a complete resolution of the issues.”71
The fourth factor is concerned with the order in which jurisdiction was obtained and examines when each action began and the relative progress that’s been made.72 This factor weighs in favor of abstention when there’s been more substantive progress in the state court action than in the federal action.73 Thus, seeking Colorado River abstention at the outset of the federal case as part of a dispositive motion will postpone substantive action in the federal case until the jurisdictional issue is determined, tilting the scale toward abstention.74 Notably, federal courts particularly have been predisposed to abstaining in favor of pending accounting proceedings in which interim or final accountings and objections thereto have been filed, precisely the situation in Phillips.75
As to the fifth factor—the law that applies the rule of decision—the absence of a federal question may favor abstention.76 Although the absence of federal issues “does not strongly advise dismissal, unless the state law issues are novel or particularly complex,” it does favor abstention “where the bulk of the litigation would necessarily revolve around the state-law rights of numerous parties.”77 Additionally, federal courts regularly point to expertise of specialized state courts in interpreting state law as a key factor favoring abstention.78 In Phillips, the court determined that because the New York surrogate’s court has “special expertise” in “matters related to the probate and administration of wills”—not to mention the particular affairs of the parties—it was “better situated to resolve the controversy over the parties’ rights as … distributees or legatees of [the] estate.”79
The sixth factor—protection of the federal plaintiff’s rights—requires the federal court to determine whether the parallel state court litigation will be an adequate vehicle for the complete and prompt resolution of the issues between the parties.80 Generally, a plaintiff’s rights will be adequately protected if the plaintiff can assert the same claims in the state and federal actions.81 When seeking abstention in favor of a state court proceeding, the key question is whether the state court is able to entertain all of the claims.82 In Phillips, the court rejected the argument that the plaintiffs’ rights wouldn’t be protected because the federal case asserted claims and involved parties not involved in the state court proceeding because the primary relief sought against the additional federal defendant was reversal of a property sale and imposition of a constructive trust, forms of relief that may be sought in the state court proceeding.83 And, although the plaintiffs also sought damages in the event rescission wasn’t available, the Phillips court found this no bar to abstention because following the state court’s determination regarding liability and relief, the claim would either be foreclosed completely or the federal court would be left with very little to do, militating in favor of a stay.84 Finally, when no federal rights are at stake, this factor also favors abstention.85
Thus, Colorado River abstention is another valuable tool for challenging a federal court’s jurisdiction when a parallel state court proceeding already is pending, and, like the probate exception, provides a compelling opportunity to revert claims concerning trust and estate administration, no matter how characterized, to the specialized state courts that possess expertise in interpreting state law relating to trusts and estates.
Endnotes
1. Markham v. Allen, 326 U.S. 490, 494 (1946).
2. Ibid.
3. Ibid. (internal citations omitted).
4. Marshall v. Marshall, 547 U.S. 293 (2006)
5. Ibid., at p. 300.
6. Ibid.
7. Ibid., at p. 301.
8. Ibid.
9. Ibid., at pp. 301-02.
10. Ibid., at p. 302.
11. Ibid.
12. Ibid., at pp. 302-03.
13. Ibid., at p. 304.
14. Ibid.
15. Ibid.
16. Ibid. (internal quotations omitted).
17. Ibid., at pp. 299, 304-05.
18. Ibid., at pp. 299-300.
19. Ibid., at p. 311 (internal quotations omitted).
20.Ibid., at pp. 311-12.
21. Ibid., at p. 312.
22. Lefkowitz v. Bank of New York, 528 F.3d 102 (2d Cir. 2007).