Federal Court Tackles Probate Exception And Failure To Join Necessary Parties In Trust Dispute

Pursuing fiduciary litigation cases in federal court can be tricky. Not only does a plaintiff have to contend with the possibility of jurisdiction destroying defendants, but a plaintiff also has to deal with the ‘probate exception’ to federal jurisdiction.

In Downey v. Keltz, the United States District Court for the Northern District of Illinois did a succinct job of explaining that a petition for an accounting does not implicate the ‘probate exception’ and likely does not require that all trust beneficiaries be parties to the litigation. A petition to remove a trustee, however, likely would invoke the ‘probate exception’ and would require all trust beneficiaries to be parties to that litigation.

Let’s take a look at how the Court got there.

Two of thirteen contingent remainder beneficiaries of a trust filed a two-count complaint against the trustee in federal court. In count one, the beneficiaries sought a trust accounting. In count two, the beneficiaries sought to remove the trustee. The trustee sought to dismiss the case on the grounds that it fell within the ‘probate exception’ to federal jurisdiction and because the plaintiff failed to join all necessary parties (the remaining contingent beneficiaries of the trust). The Court made short work of these two grounds for dismissal.

Probate Exception to Federal Jurisdiction. The probate exception to federal jurisdiction is a judicially created doctrine that limits, in narrow circumstances, the jurisdiction of a federal court to hear certain cases. This 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.

The beneficiaries’ request to remove the trustee would affect the administration of the estate because the property in dispute – the trust – was also the subject of currently pending probate court litigation. In a separate suit, the trustee was being sued based on allegations of undue influence and tortious interference. Thus, the plaintiffs’ efforts to remove the trustee did fall within the probate exception.

The beneficiaries’ request for an accounting, however, did not fall within the probate exception because failure to provide an accounting would amount to a breach of fiduciary duty. Claims for a breach of fiduciary duty generally do not fall within the probate exception.

Failure to Join Necessary Parties. Not all of the contingent trust beneficiaries were parties to the lawsuit. If they were all joined to the lawsuit, the federal court would lack jurisdiction to hear the case because there would not have been diversity jurisdiction insofar as the suit wouldn’t have been between citizens of different states. The Court, therefore, had to determine whether all trust beneficiaries were required to be parties to a lawsuit for an accounting. By the very nature of the claim for an accounting, the other trust beneficiaries were not necessary parties. First, complete relief could be accorded among the plaintiffs and the trustee without joinder of the other beneficiaries. Second, the other beneficiaries’ ability to protect their interests would not have been impaired by their absence from the case.

Importantly, the Court did not have to consider whether all beneficiaries were necessary parties to an action to remove the trustee. The plaintiffs acknowledged that the claim to remove the trustee fell within the probate exception and, therefore, abandoned that claim. It is likely that all trust beneficiaries would have been necessary parties to an action to remove the trustee.