Lefkowitz v. Bank of New York

Opinion

04-0435-cv Lefkowitz v. Bank of New Yo rk

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

August Term, 2006

(Argued: February 12, 2007 Decided: June 28, 2007)

Docket No. 04-0435-cv

--------------------------------------------------------------------x ADRIENNE MARSH LEFKOWITZ,

Plaintiff-Appellant,

-v.-

THE BANK OF NEW YORK, THE BANK OF NEW YORK, AS EXECUTOR OF THE ESTATES OF NICHOLAS AND IRENE MARSH, McCARTHY, FINGAR, DONOVAN, DRAZEN & SMITH FRANK STRENG

Defendants-Appellees, -------------------------------------------------------------------x

Before: HON. JOHN M. WALKER, JR., HON. PETER W. HALL, Circuit Judges, HON. DENISE COTE, District Judge.*

Plaintiff-Appellant Adrienne Marsh Lefkowitz appeals from an order of the United States District Court for the Southern District of New York (Marrero, J.) dismissing her complaint pursuant to the probate exception. AFFIRMED in part, REVERSED in part, and REMANDED.

Adrienne Marsh Lefkowitz, pro se, Los Angeles, California, for Plaintiff-Appellant.

Robert M. Redis, McCarthy Finger LLP, White Plains, New York, for Defendants-Appellees.

* The Honorable Denise Cote, United States District Judge for the Southern District of New York, sitting by designation. HALL, Circuit Judge:

Plaintiff-Appellant Adrienne Marsh Lefkowitz (“Plaintiff”) raises several claims against

the Defendants relating to the administration of her parents’ estates. Plaintiff, one of three

daughters, holds a thirty-percent interest in both estates. The litigation regarding these estates

spans many years and includes a deluge of actions in state court as well as in the courts of Hong

Kong. The specific facts of the lengthy proceedings are described in the district and magistrate

decisions. Here, we recite only those facts necessary to our analysis.

Plaintiff filed this diversity action in the Southern District of New York. In her amended

complaint she alleged, generally, that the Bank of New York (“BNY”) improperly paid inflated

and fraudulent legal bills of McCarthy, Fingar, Donavan, Drazen & Smith (“McCarthy Fingar”)

for services rendered from August 1990 to 1999; BNY refused to distribute to her certain

personal property from her parents estate; violated terms of a Hong Kong consent order; the

Surrogate Court incorrectly surcharged her for loans she made while executrix of Nicholas

Marsh’s estate and BNY refused to pay Plaintiff’s legal fees for the probate contests of the

estates.

Plaintiff based her amended complaint on these general allegations. The complaint set

forth a total of twelve counts against the Defendants, all of which were ultimately dismissed by

the district court. Plaintiff has explicitly abandoned her first three claims on appeal; the district

court’s dismissal of those counts is, therefore, affirmed. Of the remaining counts, Counts IV and

V allege breach of fiduciary duty and aiding and abetting breach of fiduciary duty; Count VI

alleges conversion; Counts VII and VIII allege fraudulent misrepresentation and fraudulent

concealment; Count IX alleges unjust enrichment; Counts X, XI, and XII are not distinct causes

2 of action, but seek payment for monies allegedly owed, specific performance of the Hong Kong

consent orders, and declaratory relief confirming entitlement to estate assets, respectively.

Plaintiff seeks various forms of relief, including specific performance, declaratory judgment,

injunction, and compensatory, punitive, and treble damages.

Citing Federal Rules of Civil Procedure 12(c) and 12(h)(3), Defendants moved to dismiss

the complaint. They asserted (1) the federal court lacked subject-matter jurisdiction as a result of

the “probate exception” to federal jurisdiction, (2) the federal court should refrain from

exercising jurisdiction under the principles of abstention and international comity, and (3) the

federal court should refrain from exercising jurisdiction because of principles of res judicata.

The district court dismissed the case solely on lack of subject-matter jurisdiction under

the probate exception to federal jurisdiction. See, e.g., Moser v. Pollin, 294 F.3d 335, 340 (2d

Cir. 2002); Beach v. Rome Trust Company, 269 F.2d 367, 371 (2d Cir. 1959). For the reasons

that follow, based on the clarification recently provided by the Supreme Court last term in

Marshall v. Marshall, 126 S.Ct. 1735, 1746 (2006), we reverse, in part, the district court’s

decision and remand for further proceedings with respect to Counts IV, V, VII and VIII.

I.

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

3 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. See id. This Circuit’s

expanded approach was laid out most specifically in Moser, 294 F.3d at 340. There we

established a two-part inquiry to determine whether the controversy at issue implicates probate

matters such that the probate exception to federal jurisdiction applies. Id. The first part of the

inquiry questions whether the matter to be litigated is purely probate in nature—i.e. whether the

federal court is being asked to probate a will or administer an estate directly. Id. “[S]ince few

practitioners would be so misdirected as to seek, for example, letters testamentary or letters of

administration from a federal judge,” the first prong of the analysis is rarely violated. Id. The

second part of the inquiry focuses on whether the matter is “probate related,” requiring the

federal court to question whether the action would: (1) interfere with the probate proceedings; (2)

assume general jurisdiction of the probate; or (3) assume control of property in the custody of the

state. Id. (citing Markham, 326 U.S. at 494). We held in Moser that if the answer to any of these

questions is yes, then the probate exception applies. We also noted that, in practice, the

“‘interference prong’ is . . . the workhorse of the probate exception.” Id.

The complaint in Moser alleged several counts of fraudulent concealment and

constructive fraud in connection with probate of the decadent’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. Noting that the federal court’s determination of whether the

defendants acted fraudulently would predetermine the result to be reached in the Surrogate’s

4 Court—the petitioner would be able to set aside the Probate Decree in state court only if she

could show her consent had been obtained by fraud—we concluded that the action in federal

court would “interfere with probate proceedings” and dismissed the case under the probate

exception. Id. at 342.

In deciding Marshall, the 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 (emphasis added) (citing to,

inter alia, cases regarding breach of fiduciary duty by executor and breach of fiduciary duty by

trustee as examples of applications of the exception to matters outside its province). 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.” Id. (emphasis added and internal quotation marks omitted); see also Princess Lida

of Thurn & Taxis v. Thompson, 305 U.S. 456, 466 & n.15 (1939) (reiterating established

principle that no two courts may exercise simultaneous jurisdiction over the same res). 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

5 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.

Thus, insofar as our Court’s decision in Moser purported to direct courts to decline to

exercise subject-matter jurisdiction over in personam and other claims that might “interfere” with

probate proceedings only, see 294 F3d at 341, that holding was overly-broad and has now been

superseded by Marshall’s limitation of the exception. See Marshall, 126 S.Ct. at 1748.

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. See id. at

1741 (quoting Chief Justice Marshall in Cohens v. Virginia, 6 Wheat. 264, 404 (1821), for the

maxim that while “[i]t is most true that this Court will not take jurisdiction if it should not . . . it

is equally true, that it must take jurisdiction, if it should . . . . We have no more right to decline

the exercise of jurisdiction which is given, than to usurp that which is not given”); see also, e.g.,

Jones v. Brennan, 465 F.3d 304, 307-08 (7th Cir. 2006) (concluding probate exception does not

bar federal jurisdiction for claim of estate administrator’s breach of fiduciary duty with respect to

estate pending in state court); McAninch v. Wintermute, 478 F.3d 882, 889 (8th Cir. 2007) (same

as to claim for breach of contract and libel by administrator).

6 A.

In the case at bar, Plaintiff asserted numerous causes of action in her complaint. Based

primarily on this Court’s analysis of the probate exception in Moser, the district court dismissed

those claims for lack of subject-matter jurisdiction. We review questions of subject-matter

jurisdiction de novo, see Sol v. I.N.S., 274 F.3d 648, 650 (2d Cir. 2001), and conclude the probate

exception cannot be applied to bar all of Plaintiff’s claims.

In Counts VI, IX, X, XI, and XII, Plaintiff seeks, in essence, disgorgement of funds that

remain under the control of the Probate Court. Specifically, in Count VI, Plaintiff alleges BNY

is guilty of conversion because it “wrongfully withheld [Estate] funds from plaintiff,” apparently

seeking reimbursement of those funds. Similarly, in Count IX, Plaintiff alleges Defendants were

unjustly enriched when they failed to distribute income belonging to her and asks the court to

order Defendants “to disgorge all property and income held by them and the estates . . . which

rightfully belongs to plaintiff.” Count X of Plaintiff’s complaint is for “unpaid claims for

moneys owed” with respect to legal fees Plaintiff asserts she incurred addressing issues involving

both estates for which she seeks a “determination of her rights to payment.” In Count XI,

Plaintiff seeks “specific performance” of the November 29, 1999 Consent Orders issued in Hong

Kong as part of the proceedings in that court. These orders enumerated specific dollar amounts

to be distributed from Plaintiff’s share of the Marsh estates to her adversaries to settle the

approximately $900,000 in costs imposed on her from the Hong Kong court. BNY had agreed to

make distributions from Plaintiff’s shares in the United States estates to satisfy her liability to the

Hong Kong estates. The Consent Orders at issue specified that the parties agreed that

approximately 93% of Plaintiff’s liability was to be paid out of her share of her father’s estate,

7 and the remaining 7% was to be paid by her share of her mother’s estate. On February 1, 2000,

BNY settled Plaintiff’s debt to the Hong Kong estates but not in the same proportions as above.

Plaintiff objects to the variation from the original agreed proportions. Thus, with respect to this

claim, Plaintiff is apparently seeking an order that BNY pay off the debt in the percentages

enumerated in that initial order. An order of specific performance would necessarily require

BNY to make specific distributions from the Marsh estate funds, which remain under control of

the probate court. Finally, in Count XII, Plaintiff seeks declaratory relief by way of a judgment

that certain assets of the Marsh estates “are plaintiff’s property.”

With these counts, Plaintiff seeks to mask in claims for federal relief her complaints

about the maladministration of her parent’s estates, which have been proceeding in probate

courts. See Jones, 465 F.3d at 307. To provide the relief Plaintiff seeks in Counts VI, IX, X, XI,

and XII the federal court would have to assert control over property that remains under the

control of the state courts. Because a federal court may neither “dispose of property that is in the

custody of a state probate court,” nor take over the administration of estate assets pending in

probate courts, the district court correctly determined that under the probate exception it lacks

jurisdiction to consider these claims and properly dismissed them. See Marshall, 126 S.Ct. at

1748.

B.

We now turn to Plaintiff’s in personam claims for breach of fiduciary duty (Count IV),

aiding and abetting breach of fiduciary duty (Count V), fraudulent misrepresentation (Count VII),

and fraudulent concealment (Count VIII). For each of these claims, Plaintiff seeks damages from

Defendants personally rather than assets or distributions from either estate. The district court

8 concluded, relying on our decision in Moser, and without the benefit of Marshall, 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 are thus subject to

the probate exception. It held that should it address the “substantive wrongs” asserted in these

claims, it would impermissibly usurp the role of the probate court.

While the issues involved in Plaintiff’s remaining claims undoubtedly intertwine with the

litigation proceeding in the probate courts, in addressing the claims, the federal court will not be

asserting control of any res in the custody of a state court. Marshall, 126 S.Ct. at 1748. A

federal court properly “exercise[s] its jurisdiction to adjudicate rights in [property in the custody

of a state court] 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.” Marshall, 126 S.Ct. at 1747 (citing Markham, 326 U.S. at 494)

(internal quotation marks omitted). 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. Id. at 1748.

Accordingly, these claims may not be dismissed under the probate exception.1

To conclude, Plaintiff’s claims as to Counts I, II, and III, abandoned on appeal, are

dismissed. Plaintiff’s claims as to Counts VI, IX, X, XI, and XII were properly dismissed under

1 Below, the Magistrate rejected Plaintiff’s fraud charges because they lacked the requisite degree of specificity to sustain those claims under Federal Rule of Civil Procedure 9(b). The district court did not address this issue because it concluded that it lacked jurisdiction under the probate exception. Accordingly, in order to allow the district court to consider the issue in the first instance, we do not address, and we express no opinion on, the merits of this issue.

9 the probate exception. Plaintiff’s remaining Counts IV, V, VII, and VIII do not fall within the

probate exception to federal subject-matter jurisdiction. We note that Defendants assert that

Plaintiff’s claims are precluded also on other grounds, including estoppel, abstention, and

international comity. We do not address, and express no opinion on, the merits of these

alternative arguments and leave the remaining issues for the district court to decide in the first

instance.

Affirmed in part; reversed in part, and remanded.