Litigating trust matters in the federal courts (U.S.): A jurisdiction primer

Charles E. Rounds, Jr.

The diversity jurisdiction of the federal courts generally does not extend to state probate matters. However, this so-called “probate exception to federal diversity jurisdiction” does not apply to trust disputes. See generally §8.15.19 of Loring and Rounds: A Trustee’s Handbook, which is attached below to this posting as an Appendix. So we have a trust exception to the probate exception.

Federal courts generally have jurisdiction over controversies between “Citizens of different States” by virtue of 28 U.S.C. § 1332(a)(1) and U.S. Const., Art III, § 2. The citizens upon whose diversity a plaintiff grounds federal jurisdiction must be real and substantial parties to the controversy. For a federal court to take jurisdiction of a dispute between citizens of different states there must be “complete diversity.” In other words, “no plaintiff may be from the same state as any defendant.” See Smart v. Local 702 International Brotherhood of Electrical Workers, 562 F.3d 798 (2009). Or to put it another way, “[c]omplete diversity ‘requires that all persons on one side of the controversy be citizens of different states than all persons on the other side.’” See Harvey v. Grey Wolf Drilling, Co., 542 F.3d 1077 (2008). In determining whether there is complete diversity among the litigants in a given trust matter are only the trustees’ domiciles taken into account, or must the beneficiaries’ as well? If the latter then the chances of a disqualifying overlap are generally greater. The U.S. Supreme Court determined back in 1808 that trustees of a traditional express trust are entitled to bring diversity actions in their own names and upon the basis of their own citizenships. See Chappedelaine v. Dechenaux, 4 Cranch 306, 8 U.S. 308 (1808). In 1845, the Court confirmed that the residences of those who may share the equitable interest are irrelevant. See Bonnafee v. Williars, 3 How. 574, 44 U.S. 577 (1845). A traditional express trust is a trust that lacks “juridical person status” but under which the trustee “possesses certain customary powers to hold, manage, and dispose of assets for the benefit of others,” as opposed to, say, a nominee trust under which the trustee’s actions are fully controlled by those in whom the transferable shares of beneficial/equitable interest are vested. See Wang. v. New Mighty U.S. Trust, 843 F.3d 487 (2016). Such agency-like trusteeships are taken up generally in §9.6 of Loring and Rounds: A Trustee’s Handbook.

In addition, for a trust matter to be eligible for litigation in the federal courts, the matter in controversy must exceed the sum or value of $75,000. See 28 U.S. Code § 1332(a). In the trust context, much will depend upon whether the focus of the litigation is an alleged breach of some duty of the trustee, such as to invest prudently, or whether the litigation is ownership-focused, such as a competition among individuals for various packets of equitable interests. If the former, then the damages sought are computed with reference to the value of the underlying entrusted assets; if the latter, then things aren’t so simple. Take the case of a vested equitable property interest subject to a condition subsequent, say, a future exercise of the trustee’s discretion to invade principal. The condition subsequent would make any valuation of the discrete packets of equitable interests that are at stake speculative at best. For the difference between a vested (transmissible) contingent equitable property interest and one that is vested subject to complete divestment, see §8.30 of Loring and Rounds: A Trustee’s Handbook.

The probate exception to federal diversity jurisdiction is taken up in §8.15.19 of Loring and Rounds: A Trustee’ Handbook, which section is attached immediately below as an appendix to this posting.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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