Commercial Litigation and Arbitration

Federal Jurisdiction — Probate Exception Doesn’t Apply to Case Seeking in Personam Judgment, Not Seeking to Reach a Res in the State Court, Nor to Fiduciary Duty Claims — Lists of Actions over Which Federal Jurisdiction Exists

Osborn v. Griffin, 865 F.3d 417 (6th Cir. 2017):

Defendants John M. Griffin, the Estate of Dennis B. Griffin, the Dennis B. Griffin Revocable Trust, and Martom Properties, LLC (“Defendants”), appeal from the judgment entered by the district court on April 26, 2016, requiring Defendants to pay roughly $584 million in wrongful profits disgorgement and prejudgment interest to Plaintiffs Elizabeth A. Osborn, Linda G. Holt, Judith E. Prewitt, and Cynthia L. Roeder (“Plaintiffs”). Plaintiffs, four sisters, essentially allege that Defendants, two of their brothers and a related entity called Martom Properties, cheated them out of stock and real property related to the family’s business that they should have inherited under the terms of their parents’ estate plans. The district court agreed with Plaintiffs after a bench trial, finding that Defendants’ conduct in managing the family business and their parents’ estates and trusts violated their fiduciary duties to Plaintiffs under Kentucky law. Defendants appeal, raising a litany of challenges to the district court’s jurisdiction, legal conclusions, remedy, and decision to conduct a bench trial. The district court exercised subject matter jurisdiction over Plaintiffs’ state law claims pursuant to 28 U.S.C. § 1367, and we have jurisdiction over this appeal pursuant to 28 U.S.C. § 1291. For the reasons set forth below, we AFFIRM the district court’s judgment.


I. Factual History

A. Parties and Other Griffin Family Members

This litigation concerns a multi-million dollar inheritance dispute among the children of John L. Griffin (“John”), a long-deceased Kentucky businessman. During his lifetime, John and his wife Rosellen Griffin (“Rosellen”) had twelve children. Plaintiffs are four of the couple’s daughters: Elizabeth Osborn, Linda Holt, Cynthia Roeder (“Cyndi”), and Judith Prewitt (“Judy”). Id. Mirroring the parties and the district court, we refer to Elizabeth Osborn as “Betsy,” and the remaining three sisters as the “Holt Plaintiffs.”

Defendants are, in effect, two of John and Rosellen’s sons—Dennis B. Griffin1 and John M. Griffin (“Griffy”)—plus an entity they created called Martom Properties, LLC (“Martom”).

The Griffins were a patriarchal family. “The Griffin children were taught that the older siblings were in charge and that the younger siblings had to respect them.” (R. 856, Findings of Fact and Conclusions of Law, ¶ 4.) In practical effect, this meant that Dennis and Griffy—the eldest brothers—wielded the respect of and exercised authority over the younger children, including Plaintiffs.

B. Griffin Industries

In 1943, John founded Griffin Industries, a rendering company that primarily hauls away animal carcasses and other waste and converts this material into useful products. Griffin Industries was a family business in the truest sense of the term. “All [of] the Griffin children worked in the business after school and in summers, with the girls doing primarily office work and the boys working in the plants.” (Id. ¶ 5.) “When the girls married, their husbands usually worked in the company.” (Id.) Over the second half of the twentieth century, Griffin Industries grew into a prosperous enterprise with operations in several states. Eventually, when the children were all adults, four of them (including Dennis and Griffy) worked full-time at Griffin Industries, while the others did not.

In the 1960s and 1970s, John purchased several real estate parcels in Kentucky that were used by Griffin Industries in its operations. These properties were titled in John’s name. In 1981, Griffin Industries purchased Craig Protein, another rendering company based in Georgia. John personally held 1,000 shares of Craig Protein stock. At its core, this dispute concerns the ownership of: (i) John and Rosellen’s Griffin Industries stock; (ii) John’s real estate; and (iii) John’s Craig Protein stock.

C. John’s and Rosellen’s 1967 Estate Plans

In 1967, both John and Rosellen prepared separate wills and revocable trusts. Rosellen’s will specified that when she died, all of her Griffin Industries stock would pass first to John, and then to her trust (along with the remainder of the residue of her estate). Rosellen named the First National Bank of Cincinnati (later known as Star Bank) as her trustee, and her trust instruments provided that all assets of the trust would be divided among her eleven then-living children.

The district court described John’s estate plan as follows:

[John] executed a Last Will and Testament in 1967, which provided that all his chattel property would pass to [Rosellen] and, if she predeceased him, to his eleven children in equal amounts. A first codicil in 1967 bequeathed his stock to [Rosellen], then to his 1967 Trust if she predeceased him. [John’s] second codicil, executed in 1974, bequeathed his stock to [Rosellen], with the stock to be purchased by Griffin Industries if she predeceased him. In 1974, [John] executed a third codicil changing his alternate beneficiary to his children, equally. In 1975, [John] executed a fourth codicil that left his stock to [Rosellen], except for any stock purchased by Griffin Industries. If [Rosellen] predeceased [him], then the stock would be distributed equally to his children. A fifth codicil was executed in 1981 that made no changes to the distribution of the stock.

[John] also created a Trust in 1967 which, under a First Amendment executed on October 2, 1978, provided that its assets would be distributed among seven of the children when they turned thirty (or, if deceased, their living issue, if any): Cyndi, Marty, Tommy, Linda, Judy, Janet, and Betsy. These children were the seven who were not then working full-time for Griffin Industries. A further amendment in 1981 did not alter the distribution of the trust’s assets.

(Id. ¶¶ 11–12.)

In sum, from the late 1960s to the early 1980s, both John’s and Rosellen’s respective estate plans expressed a clear and consistent desire to bequeath their property equally to their eleven living children. There was only one deviation from this intention. In the early 1980s, John recognized that because Griffin Industries was a Subchapter S corporation, “the four working children were receiving more income from Griffin Industries tha[n] the seven non-working children.” (Id. ¶ 13.) John wanted to “adjust this result” by making additional stock gifts to the non-working children to restore equality amongst his heirs. (Id.) John’s intention was that if Rosellen predeceased him, “the non-working children would end up with more shares than the working children” to account for the fact that the working children received direct income from Griffin Industries. (Id. ¶ 14.)

D. Disputed Griffin Industries Stock Transactions

The events that gave rise to this lawsuit began in the mid–1980s. In 1983, John suffered a massive stroke that left him partially paralyzed and unable to speak, write, care for himself, drive, or walk without assistance. After the stroke, John had a functional IQ of 67, and the mental age of an eight-year-old. Dennis recognized his father’s infirmity, and told one of his sisters to not let John “sign anything because you know he doesn’t understand.” (Id. ¶ 23.)

Exacerbating the family upheaval, Rosellen died in 1985 of Parkinson’s disease. At the time of Rosellen’s death, she owned roughly 13% of Griffin Industries’ stock. In accordance with the terms of her estate plan, her stock passed to John, who owned roughly 53% of Griffin Industries’ stock, giving him a combined total of 66% of the company.

In September 1985, Dennis and Griffy successfully petitioned a Kentucky probate court to: (i) make them executors of Rosellen’s estate; and (ii) give them power of attorney over John. On November 14, 1985, John executed a Third Amendment to his 1967 Trust that made Dennis and Griffy his trustees. Four days later, he transferred his 53% of Griffin Industries’ stock to his trust.

Dennis and Griffy then effectuated the following elaborate series of stock transactions using their authority as trustees of John’s trust and executors of Rosellen’s estate:

• John’s six sons (but none of his daughters) purchased all of Rosellen’s Griffin Industries shares;

• John’s trust sold 5% of his shares to his grandchildren’s trusts, who in turn gave his six sons (but none of his daughters) the opportunity to buy-back the shares at 60% of their value;

• John disclaimed all interest in the shares Rosellen had left to him;

• John’s six sons purchased all of the remaining Griffin Industries shares in John’s trust.

The net result of these machinations was that the six sons obtained ownership of all of John and Rosellen’s shares, while the daughters received no stock beyond what they already owned through various gifts in the 1960s and 1970s. The sons thereafter controlled roughly 87% of Griffin Industries’ stock.

After planning these maneuvers, Dennis called a pair of family meetings in November 1985 to discuss his mother’s estate. At the meetings, Dennis lied to his siblings by claiming that Griffin Industries was on the verge of bankruptcy (it was actually profitable), and that their parents’ estate plans called for the six sons to own all of the parents’ Griffin Industries stock. Dennis did not show any of his sisters his mother’s estate or trust documents, and when one of the sisters (Linda) tried to ask about her mother’s will, Dennis told her “to shut up and sit down.” (Id. ¶ 40.) Reflecting the patriarchal nature of the family, Plaintiffs trusted and “relied on Dennis and Griffy to handle their parents’ estate matters.” (Id. ¶ 45.)

On two subsequent occasions, Linda visited Dennis and asked to view Rosellen’s estate documents. Each time, Dennis became angry and abusive, and refused to show her the relevant documents.

E. Betsy’s 1990 Lawsuit

One of the sisters—Betsy—proved more insistent than Linda. In the late 1980s, she learned that Dennis planned to transfer some of the Griffin Industries stock to his children. When Betsy asked Dennis how he had the legal authority to do this, Dennis became angry “and told her that stock ‘didn’t concern’ her.” (Id. ¶ 67.) When Betsy asked Griffy about the transfers, he lied, telling Betsy that he was not familiar with Rosellen’s estate plan, and “that if she didn’t like what [Dennis and Griffy] were doing, she should ‘sue them.’ ” (Id.)

On January 20, 1990, Betsy wrote a letter to Dennis and Griffy informing them that she had read their mother’s will, and that under the will’s terms she was entitled to one-eleventh of Rosellen’s Griffin Industries stock. None of the Holt Plaintiffs saw or reviewed this letter.

After Dennis and Griffy rebuffed her, Betsy filed a federal lawsuit against Dennis and Griffy in the Eastern District of Kentucky. The suit challenged Dennis and Griffy’s 1986 stock machinations, and also asserted a derivative claim on behalf of all Griffin Industries shareholders (nominally including the Holt Plaintiffs).

Dennis responded to the suit by berating Betsy in front of her family members, alleging that the suit had no merit and was purely motivated by greed. Dennis told the Holt Plaintiffs that the suit did not involve them, and declined to give any details about the nature of the suit. The Holt Plaintiffs believed what Dennis told them about Betsy and the suit, and stopped speaking with Betsy until the mid–2000s. Prior to the present lawsuit, the Holt Plaintiffs never learned the nature of or participated in that suit.

On November 30, 1991, John executed both a Sixth Codicil to his will (“Sixth Codicil”), and a Fourth Amendment to his trust (“Fourth Amendment”), both of which: (i) retroactively approved Dennis and Griffy’s 1986 stock transactions; and (ii) provided that the remainder of John’s property would be split equally by his five living daughters upon his death. These estate changes came shortly after John underwent a doctor’s examination which revealed his low functional IQ and mental age. On January 20, 1992, John purportedly executed an affidavit which also retroactively approved Dennis and Griffy’s stock sales.

Eventually, in 1993, Betsy negotiated a settlement agreement with Dennis and Griffy that gave her a large number of Griffin Industries shares, plus roughly $100,000 to cover past distributions. However, because there was an outstanding derivative claim, Dennis and Griffy were required to separately settle with the other Griffin Industries shareholders, including the Holt Plaintiffs. Dennis called the Holt Plaintiffs into his office and ordered them to sign a document. He did not explain that the document was a settlement agreement, and when Cyndi asked if she could read it, Dennis refused. The Holt Plaintiffs executed a final settlement with Dennis and Griffy on September 10, 1993 that settled their derivative claims and released all possible tort claims against Dennis and Griffy for $10,000. Dennis lied to the Holt Plaintiffs and told them that they had received as much compensation as Betsy received for her claims, and that Betsy got “very damn little” from the 1990 lawsuit. (Id. ¶ 112.) The Holt Plaintiffs were never told the terms of Betsy’s settlement.

F. Disputed Real Estate and Craig Protein Stock Sales

John died on April 9, 1995, and Dennis and Griffy became the executors of his estate. At the time of his death, John’s estate still possessed the Craig Protein stock (the Georgia company John bought in 1981), as well as the real estate assets he purchased before his stroke. In accordance with the terms of John’s Sixth Codicil and Fourth Amendment, these assets should have been divided equally amongst his five daughters. Nevertheless, Dennis and Griffy sought legal advice about how to acquire this property without either obtaining the prior consent of their sisters, or violating Kentucky’s prohibition against self-dealing by fiduciaries.

Eventually, Dennis and Griffy settled on the following plan: First, they directed two of their younger brothers (“Marty” and “Tommy”) to buy the Craig Protein stock at a substantially undervalued price. Later, in 2002, Marty and Tommy traded the Craig Protein stock back to Griffin Industries in exchange for Griffin Industries stock. The Griffin Industries stock they acquired netted them more than $30 million in distributions over the succeeding years. Dennis and Griffy never offered their sisters the opportunity to buy the Craig Protein stock, because they wanted the stock to remain in the hands of their brothers.

Dennis and Griffy then created a new corporation, Defendant Martom,2 which purchased all of John’s real estate, and then leased the property back to Griffin Industries. Although Dennis and Griffy owned no shares in Martom, they effectively controlled Martom through their ownership of Griffin Industries, as Martom had no employees of its own and was staffed entirely by Griffin Industries personnel. Marty and Tommy—Martom’s owners—each testified that they exercised virtually no management or control over Martom.

The net result of these transactions was that Dennis and Griffy maintained effective control and ownership over all of the Craig Protein stock and Martom real estate. “The proceeds from the sale of the Craig Protein stock to Marty and Tommy and the real properties to Martom were paid into [John’s] estate and Trust and were distributed to the five sisters equally.” (Id. ¶ 142.) Thus, although the sisters received the proceeds of these transactions, they never had the opportunity to take the stock or real-estate in-kind—something that wound up costing them millions of dollars.

G. Genesis of This Litigation

Griffin Industries prospered greatly throughout the 1990s and 2000s. In 2010, Griffin Industries was purchased by a company called Darling International for $840 million. While the merger was closing, Cyndi was mistakenly faxed a document listing Griffin Industries’ shareholders and detailing the amount of stock each shareholder owned. Cyndi was shocked to discover that she and her other sisters owned substantially less stock in the company than their brothers (as well as Betsy, due to the 1993 settlement).

During the due diligence for the merger, Griffy became aware that he and Dennis had forgotten to transfer one of their father’s properties (“Cold Spring”) to Martom during their 1995 real estate transactions. Using his power as John’s trustee, he conveyed the overlooked real estate parcel to Griffin Industries for $1.

Betsy learned of Griffy’s Cold Spring transaction, and on April 27, 2011, filed suit against Dennis and Griffy in the Eastern District of Kentucky. Betsy spoke to Linda, Judy, and Cyndi about Dennis and Griffy’s various self-dealing transactions at a Christmas party in December of 2011. After learning why they possessed so little Griffin Industries stock, Linda, Judy, and Cyndi filed their own lawsuit in the Eastern District of Kentucky on March 8, 2013. The Holt Plaintiffs’ suit alleged various state and federal law causes of action against Dennis, Griffy, and Martom. Betsy and the Holt Plaintiffs’ respective lawsuits were consolidated into the instant action.

II. Procedural History

Because the district court record is particularly voluminous, we will summarize the proceedings below.

Following initial motion practice and extensive discovery, the parties filed several cross-motions for summary judgment. After hearing oral argument on the various motions, the district court issued a summary judgment order on September 29, 2014. Osborn v. Griffin, 50 F.Supp.3d 772 (E.D. Ky. 2014).

In its summary judgment order, the district court dismissed all of Plaintiffs’ various state and federal claims except for their claims for breach of fiduciary duties under Kentucky law; however, the district court largely found in Plaintiffs’ favor with respect to the fiduciary duty claims. The district court concluded that there were genuine disputes of material fact as to whether Dennis and Griffy breached their fiduciary duties with respect to the 1986 stock transactions. Id. at 794–97. The district court further determined that there was no genuine dispute of material fact that Defendants breached their fiduciary duties with respect to: (i) the Craig Protein stock sale; (ii) the Martom real estate conveyances; and (iii) Griffy’s decision to convey the Cold Spring property to Griffin Industries for $1 dollar in connection with the 2010 merger. Id. at 800–03. The district court determined that the only triable issues with respect to these claims were on Defendants’ various affirmative defenses. Id.

The parties then proceeded to a bench trial. On March 21, 2016, the district court issued findings of fact and conclusions of law that rejected each of Defendants’ affirmative defenses and held Defendants liable for breaches of fiduciary duties. In essence, the district court found that all of the disputed stock sales and real estate conveyances were self-dealing transactions in violation of Defendants’ fiduciary duties and Kentucky law. The district court further found that Defendants had abused their position of trust with their sisters and covered up their misdeeds to prevent the sisters from learning of their claims. The court determined that under Kentucky law, this abuse of trust excused Plaintiffs’ failure to bring their claims within the applicable statute of limitations. Finally, the district court accepted the testimony and methodology of Plaintiffs’ damages expert, finding his reasoning sound, and noted that Defendants had failed to offer their own expert to contradict his testimony.

The district court entered judgment on April 26, 2016, awarding Plaintiffs roughly $584 million in equitable disgorgement of wrongful profits and prejudgment interest. This award consisted of: (i) $10,355,925 to each Plaintiff stemming from Defendants’ Craig Protein stock sales, including prejudgment interest running from May 1995 until April 2016; (ii) $1,959,397 to each Plaintiff stemming from Defendants’ Martom real estate sales, including prejudgment interest running from July 1995 until April 2016; and (iii) $178,128,949 to each of the Holt Plaintiffs stemming from Defendants’ illicit Griffin Industries stock transactions, including prejudgment interest running from January 1986 until April 2016. Defendants were held jointly and severally liable for the entire award, and the award assessed prejudgment interest at a rate of 8% compounded annually.

After post-trial motion practice did not alter the district court’s judgment, Defendants filed timely notices of appeal.


I. Subject Matter Jurisdiction

A. Standard of Review

[1]“We review de novo the existence of subject-matter jurisdiction.” Watson v. Cartee, 817 F.3d 299, 302 (6th Cir. 2016).

B. Probate Exception

[2]The district court originally asserted federal question jurisdiction over this dispute because Plaintiffs alleged a federal RICO claim. See 18 U.S.C. § 1962, 1964(c). However, the district court granted summary judgment dismissing the RICO claim, leaving only Kentucky tort claims for breach of fiduciary duties. Osborn, 50 F.Supp.3d at 809. The district court asserted supplemental jurisdiction over these remaining state law claims pursuant to 28 U.S.C. § 1367(a). This use of § 1367(a) was proper because the state law claims were part of the same Article III case or controversy as the federal RICO claim, and the parties do not argue otherwise. See, e.g., Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 558, 125 S.Ct. 2611, 162 L.Ed.2d 502 (2005).

[3]Where the parties disagree is whether the district court was divested of subject matter jurisdiction by the so-called “probate exception” to federal jurisdiction. Under the probate exception, federal courts are prohibited from exercising jurisdiction over certain conflicts involving property subject to a state court probate proceeding. See generally Charles A. Wright & Arthur R. Miller, et al., 13E Federal Practice and Procedure § 3610 (3d ed. 2017 supp.).

[4] [5] [6]The Supreme Court has held that this exception is “of distinctly limited scope.” Marshall v. Marshall, 547 U.S. 293, 310, 126 S.Ct. 1735, 164 L.Ed.2d 480 (2006). The exception is “essentially a reiteration of the general principle that, when one court is exercising in rem jurisdiction over a res, a second court will not assume in rem jurisdiction over the same res.” Id. at 311, 126 S.Ct. 1735. It “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. But it does not bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction.Id. at 311–12, 126 S.Ct. 1735. Thus, the probate exception generally does not apply when a plaintiff: (i) “seeks an in personam judgment against [the defendant], not the probate or annulment of a will;” and (ii) does not “seek to reach a res in the custody of a state court.” Id. at 312, 126 S.Ct. 1735.

We have further limited the probate exception’s reach. In Wisecarver v. Moore, we held “that causes of action alleging breach of fiduciary duties ... do not necessarily fall within the scope of the probate exception.” 489 F.3d 747, 751 (6th Cir. 2007) (collecting cases). We reasoned that “the principles underlying the probate exception are not implicated when federal courts exercise jurisdiction over claims seeking in personam jurisdiction based upon tort liability because the claims do not interfere with the res in the state court probate proceedings or ask a federal court to probate or annul a will.” Id.

We then distinguished the sorts of remedies implicated by the probate exception from the remedies outside of its reach. We held that the probate exception bars a plaintiff from seeking: “(1) an order enjoining Defendants’ disposition of assets received from [the decedent’s] estate, (2) an order divesting Defendants of all property retained by them [from the estate] ... and (3) a declaration that [the decedent’s] probated will be declared invalid [.]” Id. We also held that the probate exception bars a plaintiff from seeking “money damages equal to the amount of the probate disbursements [.]” Id. n.1. We reasoned that granting such relief “is precisely what the probate exception prohibits because it would require the district court to dispose of property in a manner inconsistent with the state probate court’s distribution of the assets.” Id. at 751. However, we further held that plaintiffs may, without implicating the probate exception: (i) challenge inter vivos transfers; and (ii) seek disgorgement of monies improperly removed from the decedent’s estate during his or her lifetime. Id.

Defendants argue that the district court should have invoked the probate exception and declined to hear this case because: (i) Plaintiffs sought money damages equal to the value of the property probated pursuant to John’s will, violating Wisecarver; and (ii) the 1986 Griffin Industries stock sales were ratified in John’s will, and therefore Plaintiffs’ claims challenging those sales necessarily sought to invalidate the will.

We disagree, for several reasons. First, we note that John’s Griffin Industries stock was not part of any res distributed by a probate court. The October 20, 1995 Inventory and Appraisement Form prepared by Dennis and Griffy for John’s probate proceedings shows that John’s estate did not hold any Griffin Industries stock at the time of his death. As we have recounted, John did not possess this stock in 1995 because Dennis and Griffy transferred it out of his estate in the mid–1980s.

[7]We thus agree with the district court that, with respect to John’s Griffin Industries stock, Plaintiffs sought and obtained “compensation for the value of property allegedly wrongfully transferred out of their father’s estate by [D]efendants in breach of their fiduciary duties.” (R. 612, PageID #28041 (emphasis added, footnote omitted).) We have expressly held that such relief does not implicate the probate exception. See Wisecarver, 489 F.3d at 751 (holding that “the removal of [contested] assets from [the decedent’s] estate during his lifetime removes them from the limited scope of the probate exception”). The reasoning for this rule is simple: property that a party removes from a decedent’s estate prior to his death is not part of the res that is distributed by the probate court. Thus, ordering a defendant to disgorge the profits acquired from such property does not require either setting aside the decedent’s will, or redistributing assets that were parceled out by the probate court.

[8]That John’s Sixth Codicil and Fourth Amendment—which purported to ratify Dennis and Griffy’s 1986 stock transactions—were included in the estate documents submitted to the probate court does not change this analysis. The mere fact that assets are tangentially mentioned in probated estate and trust documents is irrelevant. See Lefkowitz v. Bank of N.Y., 528 F.3d 102, 108 (2d Cir. 2007) (After Marshall, the “probate exception can no longer be used to dismiss widely recognized torts such as breach of fiduciary duty ... merely because the issues intertwine with claims proceeding in state court.” (citation, quotation marks, and alteration omitted)). Federal jurisdiction is only destroyed when a plaintiff seeks to set aside a will or appropriate assets that were distributed by a probate court (or their cash equivalents). Marshall, 547 U.S. at 311–12, 126 S.Ct. 1735; Wisecarver, 489 F.3d at 751 n.1. Accepting Defendants’ arguments and dismissing this suit because Plaintiffs sought the value of assets that Defendants took out of John’s estate merely because those assets were mentioned in John’s estate plan would require expanding the probate exception beyond its “distinctly limited scope.” Marshall, 547 U.S. at 310, 126 S.Ct. 1735.

Second, with respect to Rosellen’s Griffin Industries stock, John’s Craig Protein stock, and the real estate acquired by Martom, the district court correctly found that Plaintiffs did not “seek money damages equal to the amount of the probate disbursements.” Wisecarver, 489 F.3d at 751 n.1. Rather, the district court ordered Defendants to disgorge the profits they obtained from their wrongful conduct, and used those funds to compensate their sisters—the victims of Defendants’ scheme. These wrongful profits were significantly greater than the value of John and Rosellen’s assets at the time their estates were probated, confirming that the district court’s monetary award was not just a proxy for the value of probated assets. See S.E.C. v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006) (explaining that a “district court order of disgorgement forces a defendant to account for all profits reaped through his [wrongful conduct] and to transfer all such money to the court, even if it exceeds actual damages to victims”); see also id. (“Upon awarding disgorgement, a district court may exercise its discretion to direct the money toward victim compensation....”).

[9] [10]While the probate exception prevents a federal court from de facto redistributing probated property by granting a plaintiff its equivalent cash value, Wisecarver, 489 F.3d at 751 n.1, it does not prevent a court from disgorging the profits that a defendant obtains through his wrongful possession of such property. Thus, for example, if a defendant forges a will to bequeath himself a lottery ticket worth $1 dollar, and obtains the ticket through probate proceedings, a federal court can neither set aside the will, nor order the defendant to pay a plaintiff $1 in compensatory damages. But, if the defendant wins the lottery, a federal court can use any equitable authority it possesses under the relevant substantive law it is applying to force the defendant to disgorge his lottery winnings. The probate exception is narrowly focused on preventing federal courts from upending probate proceedings; any profits a defendant may obtain after acquiring probated assets are “matters outside [its] confines.” Marshall, 547 U.S. at 311–12, 126 S.Ct. 1735.

[11]Third, none of the relief sought by Plaintiffs required invalidating John’s will. Plaintiffs do not argue that the will should be set aside; they merely argue that the will was not sufficient to ratify Defendants’ breaches of their fiduciary duties under Kentucky law. Put differently, Plaintiffs accept (as they must) the validity of John’s will, but argue that the will is insufficient proof that John intended to ratify Defendants’ wrongful conduct. This distinction is decisive, as federal courts are only prohibited from setting aside a will, and not from determining its legal effect on an affirmative defense. Id.; see also Markham v. Allen, 326 U.S. 490, 494, 66 S.Ct. 296, 90 L.Ed. 256 (1946) (holding that the probate exception does not prevent a federal court from exercising “its jurisdiction to adjudicate rights in [probated] property where the final judgment does not undertake to interfere with the state court’s possession”).

In sum, the probate exception does not apply here because Plaintiffs: (i) sought “an in personam judgment against [Defendants], not the probate or annulment of a will;” and (ii) did not “seek to reach a res in the custody of a state court.” Marshall, 547 U.S. at 311, 126 S.Ct. 1735. We therefore hold that the district court properly exercised subject matter jurisdiction over this dispute.

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