There are all sorts of reasons for why you may want to litigate your case in federal court. As explained in an excellent blog post by NY commercial litigator Will Newman:
Litigants often prefer federal court for several reasons. Many believe the judges are better. Federal courts also usually have fewer cases and more resources, and so they may handle cases more quickly than state courts. Federal courts may have broader jury pools that span multiple counties than state courts, which may limit their juries to residents of one particular county. And federal courts may be less political than state courts, since federal judges are not elected, are hard to remove from office, and are often not as connected to local political organizations as state judges.
But many litigants prefer state court. They may want a specific jury pool of county residents or a local judge who may be more sympathetic to the case than strangers from further away. Or they may prefer the procedures in state court, which may require the case proceed differently than in federal court. These differences may be a permissive attitude towards delays, an accelerated discovery schedule, or different discovery or disclosure rules altogether. They may also observe differences in how state and federal courts may interpret the same law and prefer the state court’s interpretation.
For trusts and estates litigators the key point is that federal court is a very real possibility for many of our cases if we can overcome two jurisdictional hurdles.
First, you’re not getting your inheritance case adjudicated in federal court if you can’t establish diversity jurisdiction under the special — and distinct — rules applied to trustees and personal representatives. Second, think “probate exception”. You’re not getting your inheritance case adjudicated in federal court if you can’t get past this roadblock to a federal court’s diversity jurisdiction.
What’s the “probate exception” and why should trusts and estates litigators care?
According to the U.S. Supreme Court’s 2006 decision in Marshall v. Marshall the probate exception to a federal court’s diversity jurisdiction applies only if a federal judge is being asked to: (1) probate a will, (2) administer a decedent’s estate, or (3) interfere with property already in the custody of a probate court. Marshall dramatically narrowed the probate-exception bar, opening the door to “federalized” inheritance litigation to an extent previously unimagined. Following Marshall, federal courts have continued to grapple with how narrowly or broadly to interpret the new ground rules, including in the two Florida cases discussed below.
Case Study No. 1
Can you ask a federal judge to administer a guardianship estate? NO
Baker, Donelson v. Chopin, 2022 WL 4090841 (11th Cir. September 07, 2022)
The backstory to this case involves an ugly guardianship battle for control of the care — and vast fortune — of the widow of automobile tycoon Henry Ford II. The widow’s daughter ultimately lost that guardianship case and appealed. All of this played out in Florida’s state court system.
While the guardianship-case appeal was pending the daughter filed a request with the guardianship court for a formal determination of entitlement to fees and costs for her counsel. F.S. 744.108 tells us this kind of a fee determination is “part of the guardianship administration process.”
The guardianship court stayed consideration of daughter’s fee request until the conclusion of the pending appeal. While that appeal was pending the widow died. Widow’s daughter then sued the estate in federal court seeking a ruling on her pending claim for guardianship fees. The estate sought to have the case dismissed on the grounds that this kind of fee claim was part of the guardianship administration process, which triggers the probate exception to the court’s federal diversity jurisdiction. At the hearing the federal trial judge observed he was being asked to step into the guardianship court’s shoes.
But for me to even know what amount is appropriate, I would essentially be doing the work of the probate court or the guardianship court in surveying all of the work that was done over the lengthy trial, et cetera.
Against this backdrop it probably surprised no one when the federal trial judge dismissed the case. Did the trial judge get this one right? Yup, so saith the 11th Circuit:
We conclude that the instant case falls within the probate exception. We conclude that determination of Baker Donelson’s claim for attorney’s fees is part of the guardianship administration process, and therefore falls within the second category of cases which the case law indicates is subject to the probate exception—i.e. cases in which the federal court is called upon “to administer an estate.” Florida Statute section 744.108(8) expressly provides “When court proceedings are instituted to review or determine a guardian’s or an attorney’s fees under subsection (2), such proceedings are part of the guardianship administration process.” Moreover, sections 744.108(1) and (2) clearly contemplate that the court which should determine entitlement to attorney’s fees and the amount thereof is the court which appointed the guardian—that is Probate Judge Suskauer in this case. This only makes common sense. …
Moreover, the Florida law contemplates that entitlement to attorney’s fees and the amount thereof should take into account the benefit to the ward provided by the services. Zepeda v. Klein, 698 So.2d 329, 330 (Fla. 4th DCA 1997). The guardianship court actually administering the estate is clearly the most appropriate court to evaluate the benefit to the ward resulting from the attorney’s services—i.e. to continue to handle this part of the administration of the estate.
Case Study No. 2
Can you ask a federal judge to adjudicate a creditor claim v. a probate estate? YES
Moore & Co., P.A. v. Kallop, 17-CV-24181-DPG, 2020 WL 4505645 (S.D. Fla. Aug. 5, 2020)
This case involved another attorney’s fee claim asserted against a probate estate, but this time the case turned on an alleged breach of contract. There’s nothing about a breach-of-contract claim that would involve a federal judge in the administration of an estate. However, at the end of that kind of case the plaintiff could be awarded a judgment against the estate’s assets (converting the plaintiff into a “creditor” of the estate). Does that count as “administering” an estate? Usually not, here’s why:
[F]ederal courts have the authority to “entertain suits to determine the rights of creditors, legatees, heirs, and other claimants against a decedent’s estate, ‘so long as the federal court does not interfere with the probate proceedings.’ ” Marshall, 547 U.S. at 310–11 (emphasis in original) (quoting Markham v. Allen, 326 U.S. 490, 494 (1946)). The Eleventh Circuit describes the scope of the probate exception as follows:
[A] creditor may obtain a federal judgment that he has a valid claim against the estate for one thousand dollars, or a devisee may obtain a declaratory judgment that a probated will entitles him to twenty percent of the net estate. What the federal court may not do, however, is to order payment of the creditor’s thousand dollars, because that would be an assumption of control over property under probate.
Stuart, 757 F. App’x at 809 (quoting Turton v. Turton, 644 F.2d 344, 347 (5th Cir. 1981)).
OK, so most creditor claims don’t trigger the probate exception because they don’t require a federal court to involve itself in the internal workings of the estate-administration process. Once your federal case is completed the best you can hope for is a judgment against the estate. After that it’s up to the probate judge to decide if and when that judgement is ever satisfied with assets of the estate. So is that what happened here? Yup, probate exception wasn’t triggered, so saith the court:
The Court does not find that the probate exception bars it from exercising jurisdiction over this case. While the resolution of this action in Plaintiff’s favor might result in a judgment against Decedent’s estate, “[t]he probate exception does not foreclose a creditor from obtaining a federal judgment that the creditor has a valid claim against the estate for a certain amount.” Mich. Tech. Fund, 680 F.2d at 740. Plaintiff claims that it is owed money for legal services rendered before Decedent’s death. Should Plaintiff prevail on its claims, it would stand as a creditor of the estate. Plaintiff would then, like any other creditor, submit its judgment to the Probate Court. Accordingly, Defendant’s motion to dismiss on the basis of the probate exception is denied.
Interpleader and federal jurisdiction: A more welcoming door to federal court
The two cases discussed above both dealt with existing estate proceedings, one a guardianship estate and the other a probate estate. This is familiar territory for most trusts and estates litigators. Perhaps not surprisingly, these estate cases receive most of our attention. That focus is outdated.
Today, life insurance and other beneficiary-designated non-probate assets such as annuities, pay-on-death accounts, and retirement planning accounts have become the dominant testamentary transfer mechanism for most middle class families (trusts remain favored by the wealthy). As reported in A Fair Presumption: Why Florida Needs a Divorce Revocation Statute for Beneficiary-Designated Nonprobate Assets:
Life insurance and other nonprobate assets such as annuities, pay-on-death accounts, and retirement planning accounts have become increasingly popular as estate planning tools. In 2004, Americans purchased $3.1 trillion in new life insurance coverage, a ten percent increase from just ten years before. Purchases made by Floridians accounted for nearly $154 million of this national total. At the end of 2004, there was $17.5 trillion in life insurance policy coverage in the United States.
So it’s not surprising that trusts and estates litigators are often involved in inheritance cases revolving entirely around life insurance proceeds and other non-probate assets having nothing to do with a contested estate. These non-probate cases often play out as interpleader actions, and usually in federal court. That’s not by accident.
The doors to federal court are especially welcoming for these cases under 28 U.S.C. § 1335, a special-purpose federal interpleader statute making it easier to invoke federal jurisdiction than in a typical diversity jurisdiction case. As explained in Interpleader and federal jurisdiction: A more welcoming door to federal court:
Many federal civil litigators are familiar with interpleader under Rule 22 of the Federal Rules of Civil Procedure, but the interpleader statute, 28 U.S.C. § 1335, exists independent of Rule 22. … [The interpleader statute] provides its own basis for federal jurisdiction. Rule 22 does not confer jurisdiction, and a party that uses Rule 22 interpleader still needs to establish jurisdiction on some other basis — usually diversity under 28 U.S.C. § 1332(a). But the interpleader statute provides jurisdiction and venue requirements that are more liberal than the familiar diversity jurisdiction statute: The amount-in-controversy requirement is only $500 rather than $75,000, and it requires only “minimal diversity” — meaning that there are at least two adverse claimants in the suit that are not citizens of the same state — rather than the familiar “complete diversity” requirement under 28 U.S.C. § 1332(a).