For trust and estate litigators, the federal court experience invariably begins – and sometimes ends — with an analysis of the probate exception to federal diversity jurisdiction. Two recent Southern District cases examine the probate exception. Part 1 of this blog series introduces the probate exception and discusses an “easy” case; Woitovichv. Schoenfeld. Part 2 of this series, coming soon (hopefully), examines the tougher case of Bulgariv. Bulgari.
The Probate Exception
Theprobate exception proscribes federal courts from hearing “probate matters” even if subject matter jurisdiction would otherwise lie. It “reserves to state probate courts the probate or annulment of a will and the administration of a decedent’s estate [, and] also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court.” In the Second Circuit, the widely cited Lefkowitz v. Bank of N.Y., and the more recent unpublished opinion, Mercer v. Bank of N.Y. Mellon, N.A., provide a two-part test for whether the probate exception applies: 1) does the plaintiff ask that “the federal court administer a probate matter?” and, 2) if not, would the federal court nevertheless still be “exercis[ing] control over a res in the custody of a state court.” The application of that two-part test has sometimes proven difficult.
In December 2022, the United States District Court for the Southern District of New York examined and applied the probate exception under relatively straightforward facts in Woitovich. The opinion provides a good starting point for understanding the exception. Woitovich arose out of a testamentary trust (a credit shelter trust) created under the will of a decedent probated in the Surrogate’s Court in 2016. The Surrogate’s Court issued letters of trusteeship to the plaintiff and defendant, and they administered the trust until the lifetime beneficiary’s death in 2020. A dispute then arose as to the proper disposition of the trust remainder. Plaintiff urged a construction of the will that would result in her receiving the entire corpus of the trust, and the defendant disputed the plaintiff’s construction. Plaintiff thus asked the federal court to construe the will in accordance with her interpretation and order distribution of the entire trust corpus to her, to compel the defendant to account, to monitor the continuing administration of the trust, and to award damages against the defendant for mismanaging the trust assets and violating the will’s terms. Defendant moved to dismiss on the grounds that the probate exception divested the court of subject matter jurisdiction over plaintiff’s claims.
The court first dispensed with the plaintiff’s contention that the probate exception does not apply to trusts, and that the probate exception only divests the federal court of jurisdiction over claims within the Surrogate’s Court’s exclusive jurisdiction.
The court then applied the two-part probate exception “test” to each of Plaintiff’s claims and dismissed most of them. The court dismissed plaintiff’s request that the court monitor the co-trustee’s administration of the trust, finding that it sought to have the court to do precisely what the probate exception prohibits, to wit, to “step into the shoes of the probate court and administer the Trust.”
Plaintiff’s request that the court construe the will, order the co-trustees to distribute the trust assets in accordance with her preferred construction, and compel the defendant to account, fared no better. The court held that it could not grant that relief without directly interfering in the administration of the trust and exercising jurisdiction over the trust property in the custody of the Surrogate’s Court. In doing so, the court rejected plaintiff’s argument that the Surrogate’s Court’s probate of the will and appointment of the co-trustees in 2016, without further or pending Surrogate’s Court proceedings, meant that the trust was no longer in the “custody” or under the jurisdiction of the Surrogate’s Court. The court embraced a full understanding of the Surrogate’s Court and its jurisdiction, explaining as follows:
Woitovich argues otherwise on the ground that the Trust is no longer in the Surrogate’s Court’s “custody.” “The only action that the . . . Surrogate’s Court has taken regarding the [Trust],” she asserts, “was to appoint the trustees,” and there are no proceedings relating to the Trust currently pending. True, but that does not change the fact that the Trust remains under the Surrogate’s Court’s jurisdiction. See, e.g., Byers v. McAuley, 149 U.S. 608, 615 (1893) (“An administrator appointed by a state court is an officer of that court. His possession of the decedent’s property is a possession taken in obedience to the orders of that court. It is the possession of the court, and it is a possession which cannot be disturbed by any other court.”); accord Groman, 2007 WL 3340922 at, *6. Indeed, “New York law gives Surrogate’s Courts extensive powers over testamentary trusts,” Mercer, 609 F. App’x at 679, even after termination of the trust through final distribution, see, e.g., In re Hug’s Est., 107 N.Y.S.2d 664, 666 (N.Y. Sur. Ct. 1949) (“This court has jurisdiction of all further proceedings in this estate”).
The court further dismissed plaintiff’s claims for damages arising out of defendant’s breach of the will’s terms and failure to distribute the trust corpus to defendant. The court held that while plaintiff pleaded these claims as in personam claims, plaintiff was essentially seeking distribution of the trust’s corpus under her preferred construction. The court held that the claims thus fell with the ambit of the probate exception, as the court would assert control over the trust’s assets under the Surrogate’s Court’s jurisdiction by adjudicating them.
The court however, declined to dismiss the plaintiff’s claims for damages arising out of defendant’s alleged poor investment decisions which allegedly devalued the trust. The court labeled those claims “quintessential” in personam claims not barred by the probate exception. According to the court, and consistent with prevailing authority, those claims did not implicate interference with the trust’s res under the Surrogate’s Court’s jurisdiction.
The line the Woitovich court drew between probate exception barred claims and “in personam” claims follows prevailing authority. But in many instances, discerning the underlying nature of claims and whether they affect the administration of, and interfere with, an estate under the Surrogate’s Court’s control is a challenge. For example, many claims for breach of fiduciary duty against an estate fiduciary pleaded as in personam claims might augment or deplete an estate under the Surrogate’s Court jurisdiction or order rights among estate beneficiaries in a manner that could trigger the probate exception.
The foregoing principle becomes clear by analogy to the pro tanto rule applicable in Surrogate’s Court proceedings. Pursuant to the rule, a beneficiary who does not object to an estate fiduciary’s conduct, cannot share in any recovery by the objecting party. Thus, a beneficiary who prevails on a claim for damages flowing from a fiduciary’s breach of fiduciary duty will receive the benefit of any damages surcharge against a fiduciary (but only in proportion to his or her interest in the estate); but a non-objecting party will receive nothing. In such a case, the claim against the fiduciary is in the nature of a pure personal claim for damages.
But the pro tanto rule is generally inapplicable to claims seeking to augment the estate – for example, a claim to recover excessive attorney’s fees paid from the estate, to recover damages for interest and penalties arising from late payment of estate taxes, for omitting an asset from the account (a recoupment of property), or a successful claim that the fiduciary was in possession of monies that belong to the estate that the fiduciary alleged was an inter vivos gift (see Zalaznick). Such claims are more in the nature of representative or derivative claims brought on behalf of the estate and result in a benefit to all those interested in the estate.
Further, probate exception “line-drawing” can create inefficient and potentially inconsistent piecemeal litigation. For example, a beneficiary’s claim that a trustee breached his fiduciary duty by imprudently managing a trust-owned business, resulting in a diminution of the business’s value or performance, would likely be viewed as an in personam claim falling outside the probate exception. But a claim that the trustee improperly arrogated the trust’s interest in the business by way of a self-dealing buy-sell and seeking to set aside that transaction and restore the trust’s interest in the business would likely fall within the probate exception as it would seek to have the federal court undo a specific action taken by the trustee. Where both claims exist, a federal action could proceed on the former but not on the latter, with the Surrogate’s Court adjudicating the latter. Thus, the Surrogate’s Court and the federal court would make findings of fact and legal conclusions that could conflict and vary substantially.