Can You Challenge a Trust in Federal Court?

In Genovese v. Genovese, 2016 U.S. Dist. LEXIS 125998 (W.D. Pa 2016), a litigant filed a federal trust dispute while a state court trust dispute was pending.   The federal court dismissed most of the federal trust dispute based on two federal doctrines – the Princess Lida doctrine, and the Colorado River Absention Doctrine. To learn more about federal inheritance litigation, see How to Litigate An Inheritance Dispute in Federal Court.

Decedent, Frank Genovese, Sr. created a testamentary trust for his two children, Frank Genovese, Jr., and Francessca Genovese, the plaintiff. The trust named the Decedent’s father, Ralph Genovese, as trustee. The trust was the principal shareholder in a number of business owned by the Decedent.
After some disputes, including over an accounting waiver that the trustee allegedly used coercion to obtain from the plaintiff, the trustee filed some accountings with a state court. Plaintiff objected in state court.

Subsequently, the plaintiff filed suit in Federal court against the trustee, bringing four counts.

• Count I was against the trustee, individually and as trustee, for breach of fiduciary duty in the administration of the trust. Count I sought to remove the trustee, surcharge him for damages, and void all actions taken by him inconsistent with his fiduciary duty owed to Plaintiff.
• Count II seeks to void the prior accounting waivers.
• Count III was a direct shareholder suit against the companies owned by the trust, seeking voting rights, dividends, claw back of excessive compensation and other relief. Count III also seeks an order preventing any trust distribution to Plaintiff from being conditioned on restrictions on alienability of stock currently held within the trust.
• Count IV was against the trustee and Frank, Jr., claiming that, in their capacity as directors of the companies owned by the trust, they oppressed the plaintiff and defrauded her, failed to pay her appropriate dividends, and paid themselves excessive compensation.

Defendants moved to dismiss Counts I and II of the Federal complaint, contending that, because the state court has already taken jurisdiction over the trusts, the Federal court could not take concurrent jurisdiction over the same trust.

What is the Princess Lida Doctrine?

The Princess Lida doctrine prevents a Federal court from taking jurisdiction over a trust if the trust is already the subject of a state court action. But the rule only applies if the Federal court action is in rem, as opposed to in personam. As explained by the Court:

The Princess Lida Doctrine applies to divest a federal court of jurisdiction when “(1) the litigation in both the first and second fora are in rem or quasi in rem in nature, and (2) the relief sought requires that the second court exercise control over the property in dispute and such property is already under the control of the first court.” Dailey v. Nat’l Hockey League, 987 F.2d 172, 176 (3d Cir. 1993). An action is quasi in rem within the meaning of Princess Lida when it involves the “‘administration and restoration of corpus’ and [is] not ‘merely an adjudication of [a party’s] right or interest.'” See id. at 77 (quoting Princess Lida, 305 U.S. at 466-67). In determining whether jurisdiction exists, courts must “endeavor to distinguish between direct interferences with or control of the res and adjudication of the rights of individuals who have an interest in the res.” Bassler v. Arrowood, 500 F.2d 138, 142 (8th Cir. 1974). “Where the action is clearly in personam, federal courts have the power to adjudicate the controversy.” Id. at 141 (citing Princess Lida at 456, 466-67). However, “this line of distinction is not always clear.” Id. at 142.

The Court dismissed Count I and part of Count III of the federal trust dispute under the Princess Lida Doctrine, as follows:

The relief sought by Plaintiff would require this Court to exercise quasi in rem jurisdiction over the trust. An order compelling the trustee to perform various actions respecting his management of the trust goes to the heart of the administration of property already under control of the state court. Although the monetary relief sought by Plaintiff would be satisfied by Ralph Genovese’s personal funds, actions for restoration of misappropriated or mismanaged trust funds are nevertheless quasi in rem within the context of Princess Lida. See In re Solar Mfg. Corp., 200 F.2d 327, 332 (3d Cir. 1952) (holding, in bankruptcy context, that surcharge action was “quasi in rem for the benefit of the trust.”). Indeed, the plaintiff in Princess Lida also sought relief from the trustees’ personal funds, and the Supreme Court nevertheless concluded that “these contentions are solely as to administration and restoration of corpus.” Princess Lida, 305 U.S. at 467; see also Reichman v. Pittsburgh Nat. Bank, 465 F.2d 16, 18 (3d Cir. 1972) (noting, in dicta, that an accounting filed in state court before a federal court surcharge action would deprive the federal court of jurisdiction under Princess Lida). Any order by this court instructing Ralph Genovese to carry out particular actions with regard to the trust’s administration could directly conflict with the state court’s orders arising from the accounting. Because this Court cannot adjudicate these claims without interfering with the state court’s jurisdiction over the trust, Count I and the portion of Count III asking for an injunction regarding conditions of distribution of the trust corpus will be dismissed for lack of subject matter jurisdiction.

What Is The Colorado River Abstention Doctrine?

A Federal court may decline to exercise jurisdiction of a trust dispute if there is a parallel dispute in state court, under the Colorado River Abstention Doctrine. The Court refused to dismiss Count II (over the validity of certain waivers) on strict jurisdictional grounds, characterizing the dispute as an in personam contract dispute between the litigants, not subject to Princess Lida. The Court nevertheless dismissed Count II of the federal trust challenge on abstention grounds:

Based on the factors set out in Colorado River, the Court concludes that abstention from jurisdiction over Count II is warranted. The action for accounting in state court was filed prior to the commencement of this federal action. Moreover, the state court is traditionally the appropriate forum for matters concerning trusts, and the Orphans’ Division of the Court of Common Pleas has special expertise in the Pennsylvania law governing these issues. See Reichman, 465 F.2d at 18. Although Plaintiff’s request for a declaratory judgment would not require this Court to exercise jurisdiction directly over any res, it would greatly affect and could interfere with the state court’s prior jurisdiction over the trust. Plaintiff has filed objections to the accounting in state court, which center around and depend on the validity of the waiver. See Mot. to Dismiss, Ex. E. Plaintiff herself has recognized the overlapping nature of the two cases. She has moved for a stay in the state court case, asserting that the state court “cannot engage in a meaningful or comprehensive analysis of the accounting” until the issues Plaintiff has raised in federal court are resolved. Id., ¶ 27. Indeed, if the Pennsylvania court chose not to stay its proceedings, concurrent jurisdiction could result in conflicting orders from the state and federal courts. The Third Circuit in Reichman v. Pittsburgh Nat. Bank concluded that abstention was appropriate when an action for accounting of a trust was filed in federal court, and a similar accounting action was subsequently filed in state court. 465 F.2d at 18. Although the state and federal actions here are not identical, given the exceedingly close relationship between the controversies, as well as the potential for conflicting orders, abstention is merited under these circumstances. Count II will be dismissed.

The Court issued a stay of the remainder of Count III and all of Count IV of the federal trust dispute:

The issues underlying Plaintiff’s remaining claims in Counts III and IV bear a strong resemblance to the matters now committed to state court. Though styled as shareholder claims rather than beneficiary claims, Plaintiff’s allegations in Count III and IV concern whether Ralph Genovese has breached his duties to Plaintiff and mismanaged the very same property–corporations partially owned by Plaintiff’s trust. The factual issues in contention overlap significantly, and recovery on one set of claims could limit possibly duplicative recovery on the other. In light of these considerations, the Court finds that staying Plaintiff’s shareholder claims pending resolution of the accounting and petition for adjudication currently proceeding in state court would conserve judicial resources and reduce the litigation burden on the Parties.