Prof. John Langbein recently wrote, “In modern American practice the state-operated court system for transferring wealth on death, called probate, is being displaced. The wealth-transfer process has been increasingly privatized, conducted now mostly in the back offices of financial institutions rather than in the probate courts.” Referred to as the “nonprobate revolution” (a term Langbein coined over 30 years ago), this paradigm shift has profound implications for how inheritance disputes are prosecuted. Case in point: the increased “federalization” of inheritance litigation.
So when can you litigate your inheritance case in federal court?
There are all sorts of reasons for why you may or may not want your case litigated in federal court. The point is to realize this is a very real possibility in an increasingly post-probate world, and plan accordingly. So the question then becomes, when can you litigate your inheritance case in federal court?
First, think diversity jurisdiction. You’re not getting your inheritance case adjudicated in a federal court if you can’t establish diversity jurisdiction under the special — and distinct — rules applied to trustees and personal representatives.
Then, think “probate exception.” You’re not getting your inheritance case adjudicated in a federal court if you can’t get past this jurisdictional hurdle. Ever since the U.S. Supreme Court dramatically narrowed the probate-exception bar to diversity jurisdiction in Marshall v. Marshall, opening the door to “federalized” inheritance litigation to an extent previously unimagined, Florida’s federal courts have grappled with how narrowly or broadly to interpret the new ground rules. The Fisher case is the latest example of that process.
Joint accounts are commonly used to avoid probate. This case dealt with a joint account owned by a mother and her daughter. Before mom died, her son allegedly took control of the account with the bank’s knowledge and acquiescence, resulting in the account being re-titled in mom’s name alone. Sound familiar? If you’re a trusts and estates litigator you’ve heard some version of this story a thousand times before.
After mom’s death daughter filed a five-count complaint against the bank in the United States District Court for the Southern District of Florida. Complete diversity existed because daughter is a citizen of New York and the bank is a citizen of Delaware. Demonstrating how skittish federal judges are about getting drawn into a category of litigation they all learned pre the U.S. Supreme Court’s ruling in Marshall belonged exclusively in state court (i.e., inheritance disputes), the federal judge dismissed the case, concluding that daughter was “ultimately attempting to circumvent the normal probate process by bringing an individual claim against [the bank].”
The court also held that mother’s sole ownership of the investment account at the time of her death meant that her daughter lacked standing to bring claims relating to the account.
On appeal the 11th Circuit reversed, disagreeing with the trial judge’s ruling on both counts. As always, the interesting question isn’t what happened, but why? So here goes.
Should the “probate exception” be applied broadly or narrowly? Answer: Narrow (as in, more of these cases should be in federal court)
In Florida, our “probate” courts are just another division of our state circuit courts, with the same jurisdictional authority to adjudicate just about any case you can imagine all circuit courts have.
So if the federal standard is that no dispute that might possibly be litigated within the context of a state probate proceeding should be litigated in federal court, then the probate exception is going to be applied broadly (barring most inheritance cases from federal court). On the other hand, if we limit the probate exception to a probate court’s core function, i.e., probate wills and administer assets of the decedent’s “probate” estate, then the probate exception is going to be applied narrowly (allowing most inheritance cases into federal court, assuming you otherwise have diversity jurisdiction).
According to the 11th Circuit, federal courts don’t get to opt out just because they’d really rather not adjudicate inheritance cases. In other words, federal courts are required to apply the probate exception narrowly.
[T]he probate exception does not justify dismissing any case that might impact a decedent’s estate. Instead, because of our unflagging obligation to exercise our jurisdiction, we must apply the probate exception narrowly. See Glickstein v. Sun Bank/Miami, N.A., 922 F.2d 666, 672 (11th Cir. 1991), abrogated on other grounds by Saxton v. ACF Indus., Inc., 254 F.3d 959 (11th Cir. 2001) (en banc); see also Georges v. Glick, 856 F.2d 971, 973 (7th Cir. 1988) (“The [probate] exception is created by the judiciary, not by Congress. Consequently, we must construe the exception narrowly.”). Accordingly, the probate exception applies in only three circumstances. It “reserves to state probate courts  the probate or annulment of a will and  the administration of a decedent’s estate[.]” Marshall v. Marshall, 547 U.S. 293, 311, 126 S.Ct. 1735, 164 L.Ed.2d 480 (2006). It also bars federal courts from  “dispos[ing] of property that is in the custody of a state probate court.” Id. at 312, 126 S.Ct. 1735. Other than that, federal courts retain jurisdiction “to entertain suits ‘in favor of creditors, legatees and heirs’ and other claimants against a decedent’s estate.” Id. at 296, 126 S.Ct. 1735(quoting Markham v. Allen, 326 U.S. 490, 494, 66 S.Ct. 296, 90 L.Ed. 256 (1946)). See also Mich. Tech Fund, 680 F.2d at 741 (explaining that a main purpose of the probate exception is to preclude valuation of estate assets or the actual transfer of property under probate).
Can challenges to nonprobate transfers only be litigated by the decedent’s personal representative? Answer: NO
The bank argued that daughter’s case should be dismissed because the contested account was now owned by the estate alone, which meant only the estate’s personal representative had standing to sue with regard to this probate asset. And the trial court agreed. Here again the 11th Circuit rejected the trial court’s ruling.
Whenever nonprobate transfers are challenged, be it in federal or state court, these standing issues are going to come up for reasons not addressed in this case, but explained in depth in this excellent Florida Bar Journal article by Cady Huss and Elizabeth Hughes. So you’ll want to anticipate these arguments and note how they’re handled in this federal case.
First, daughter — not the estate — was the real party in interest under Federal Rule of Civil Procedure 17(a)(1). Why? Because daughter was suing the bank directly for damages payable solely to daughter, not the estate. So saith the 11th Circuit:
According to [daughter], the only reason the investment account was titled solely in [her mother’s] name at the time of her death is because [the bank] failed to retain [daughter] as a co-owner. She alleges that [mother] instructed [bank] that [daughter] was to remain a named titleholder on the account after the account was transferred to [bank]. [Daughter] further alleges that [bank] representatives confirmed “both orally and in writing on numerous occasions” their understanding of those instructions. [Daughter] alleges that [bank] wrongly removed her from the investment account and that this removal ultimately resulted in the loss of [daughter’s] $150,000. [Daughter] repeats this allegation under all five counts in the complaint, stating that [bank] had “first-hand knowledge” that her money was in the account before “unilaterally remov[ing] her” in order to facilitate the loan with [mother]. Thus, the action is being brought by the person “entitled to enforce the right.” Payroll Mgmt., Inc. v. Lexington Ins. Co., 815 F.3d 1293, 1299 n.10 (11th Cir. 2016) (quoting 6A Charles Alan Wright, Arthur R. Miller, Mary Kay Kane, Federal Practice and Procedure § 1543 (3d ed. 1998)).
Second, daughter — not the estate — was the person harmed by bank’s conduct, which means she’s the one with standing to prosecute this lawsuit, not the estate’s personal representative. So saith the 11th Circuit:
[Daughter] has Article III standing. [Daughter’s] standing depends on whether her allegations satisfy three elements: (1) injury in fact, (2) causation, and (3) redressability. See Sierra v. City of Hallandale Beach, Fla., 996 F.3d 1110, 1112–13 (11th Cir. 2021) (citing Lujan v. Defs. of Wildlife, 504 U.S. 555, 560–61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)). We think they do. [Daughter] repeatedly alleges that [the bank] injured her because its conduct cost her the money in the account. As to causation: if [the bank] had retained [daughter] as a co-owner, [daughter] would not have lost access to her money and, upon [her mother’s] death, the investment account would have passed to [daughter] as a joint tenant with right of survivorship. And the harms [daughter] alleges are redressable in the form of an award of damages against [the bank]. Accordingly, [daughter] has standing.