Uzielli v. Frank

NOT FOR PUBLICATION
File Name: 05a0510n.06
Filed: June 15, 2005
No. 03-1671
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
ALESSANDRO F. UZIELLI,
Plaintiff-Appellant,
v. ON APPEAL FROM THE
UNITED STATES DISTRICT
SETH E. FRANK; JOSEPH COOPER, COURT FOR THE EASTERN
preliminary personal representative of the DISTRICT OF MICHIGAN
estate of Philip A. Uzielli,
Defendants-Appellees.
____________________________________/
BEFORE: SUHRHEINRICH and BATCHELDER, Circuit Judges; and MCKEAGUE,
District Judge*
SUHRHEINRICH, J: Plaintiff-Appellant Alessandro F. Uzielli, (“Plaintiff”), appeals from
the decision of the district court dismissing his complaint for lack of subject matter jurisdiction
based on the probate exception. For the following reasons, we AFFIRM, although for reasons
different than those stated by the district court.
I.
Plaintiff resides in the State of California. On January 25, 2001, Plaintiff and his uncle,
Philip Uzielli, formed Alph Company, LLC (“Alph”), under the Michigan Limited Liability
Company Act, Mich. Comp. Laws § 450.4101, et seq. Alph’s principal place of business is Detroit,
Michigan.
*
The Honorable David W. McKeague, United States District Judge for the Western District
of Michigan, sitting by designation.
Plaintiff and Philip Uzielli operated Alph pursuant to an Operating Agreement whereby
Plaintiff contributed 60% of the company’s initial capital and received 600 Membership Units in the
company (representing a 60% ownership in the company), and Philip Uzielli contributed 40% and
received 400 Membership Units (representing a 40% ownership interest). The Operating Agreement
designated Plaintiff as Manager of Alph and granted him control over its daily operations.
The Operating Agreement also provided that upon the death of one member, the surviving
member could elect to purchase the deceased member’s shares in the company as long as the option
was exercised in writing within one year of the deceased member’s death. The Agreement states
that when the surviving member elects to purchase the deceased member’s shares, the price of the
membership unit “shall be their fair market value as determined by the Company’s accountants.”
Despite this mandate, the parties disagree as to the date on which Alph’s value is to be determined,
i.e., the date of Philip’s death or the date of the election to purchase. They also disagree as to the
methodology that Alph’s accountant, PricewaterhouseCoopers, LLP (“PWC”), is to use.
On August 25, 2001, Philip Uzielli died suddenly. On October 26, 2001, the Surrogate’s
Court of the State of New York exercised its jurisdiction over Philip Uzielli’s will, which named
New York residents Seth E. Frank and Joseph Cooper, (“Defendants”), as preliminary personal
representatives of the estate of the deceased. On August 23, 2002, Plaintiff contacted Defendants’
counsel and exercised his option to purchase the deceased’s Membership Units. Plaintiff then hired
Alph’s accountants, PricewaterhouseCoopers, LLP (“PWC”), to perform a valuation of Alph in
order to determine the company’s fair market value.
On September 30, 2002, PWC prepared an engagement letter in preparation to perform the
valuation of Alph. The letter stated that PWC would establish fair market value using one or more
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of the following approaches depending on its understanding of the factual information provided:
(1) income approach, using the Discounted Cash Flow method, 2) cost approach, and 3) market
comparison approach. The letter also stated that PWC would determine the fair market value of
Alph as of two dates: 1) August 25, 2001 (the date of Philip Uzielli’s death); and 2) August 25,
2002 (the date Plaintiff exercised his option to purchase Philip Uzielli’s interest in Alph). PWC
indicated that the assets would be valued under the premise of “fair market value in continued use,”
which reflects the continued utilization of the assets in connection with all other assets. PWC then
requested that Defendants sign the letter prior to beginning work on the valuation.
Defendants refused to sign the engagement letter but instead requested that PWC perform
the valuation as of August 25, 2001, and that events and transactions occurring after that date be
excluded from such valuation. They also indicated that they would not share in the cost of a
valuation as of any other date. They further requested that PWC’s analysis take into account the
capital withdrawal of $1,536,184 by Alessandro Uzielli and the payment of United Kingdom
withholding tax of 52,632 British pounds. In addition, Defendants requested that specific reference
be made to existing or liquidated inventory in the company. Finally, Defendants requested that, in
performing the valuation, PWC not apply “any discount for non-marketability, minority interest or
otherwise,” as such a discount would be inappropriate in the context of a buy-out between the
parties.
On or about December 12, 2002, Defendants filed a motion in the Surrogate’s Court of the
State of New York seeking a determination of the appropriate valuation date and valuation criteria
to be applied in determining the market value of Philip Uzielli’s interest in Alph. The Surrogate’s
Court issued a citation to notify Plaintiff that it would be adjudicating those issues. On January 10,
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2003, Plaintiff filed a diversity action in the United States District Court for the Eastern District of
Michigan requesting declaratory relief as to the proper valuation of Philip Uzielli’s Membership
Units. On January 15, 2003, the district court issued a show cause order as to why the case should
not be dismissed for lack of subject matter jurisdiction.
On February 7, 2003, Plaintiff filed an amended complaint. On March 3, 2003, Defendants
filed a motion to dismiss Plaintiff’s amended complaint for lack of subject matter jurisdiction. On
May 1, 2003, the district court granted Defendants’ motion to dismiss, stating that the action would
interfere with the pending New York probate court proceedings. On May 21, 2003, Plaintiff
appealed the decision of the district court. To date, this matter is still pending in the Surrogate’s
Court.
II.
This Court reviews de novo a district court’s decision to grant a motion to dismiss for lack
of subject matter jurisdiction. Joelson v. United States, 86 F.3d 1413, 1416 (6th Cir. 1996). When
a defendant moves to dismiss for lack of subject matter jurisdiction “the plaintiff has the burden of
proving jurisdiction in order to survive the motion.” Moir v. Greater Cleveland Reg’l Transit Auth.,
895 F.2d 266, 269 (6th Cir. 1990).
III.
Plaintiff contends on appeal that the district court erred in dismissing his cause of action for
lack of subject matter jurisdiction. A district court lacks subject matter jurisdiction over an action
that is purely probate, even when the traditional requirements of diversity jurisdiction have been
met. Lepard v. NBD Bank, A Division of Bank One, 384 F.3d 232, 237 (2004) (citing Storm v.
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Storm, 328 F.3d 941, 943 (7th Cir. 2003)). This so-called “probate exception” to diversity
jurisdiction dates back to the Judiciary Act of 1789, which conferred on the federal courts the
jurisdiction that existed in the English ecclesiastical courts at that time. Markham v. Allen, 326 U.S.
490, 494 (1946). This excluded the probating of wills and administration of estates from the federal
courts’ equitable jurisdiction. Markham v. Allen, 326 U.S. 490, 494 (1946).
The starting point in any probate exception analysis is Markham.1 In Markham, the Supreme
1
Lower courts have struggled to apply this Markham test. See Dragan v. Miller, 679 F.2d
712, 713 (7th Cir. 1982) “(probate exception is one of the most mysterious and esoteric branches
of the law of federal jurisdiction”); Georges v. Glick, 856 F.2d 971, 973 (7th Cir. 1988) (“the
contours of the exception are vague and indistinct”); Rice v. Rice Foundation, 610 F.2d 471, 475
(7th Cir. 1979) (“Despite its long and undisputed viability, the probate exception is not easily
applied to particular cases.”); Foster v. Carlin, 200 F.2d 943, 948 (4th Cir. 1952) (the line of
demarcation between jurisdiction of state and federal courts in probate matters is often difficult to
draw); Kittredge v. Stevens, 126 F.2d 263, 265 (1st Cir. 1942) (as to jurisdiction in suits against
executors, administrators, guardians and trustees, “not infrequently the results seem inconsistent and
the language confusing”).
Our Circuit stated recently in Lepard that “[t]he standard for determining whether federal
jurisdiction may be exercised is whether under state law the dispute would be cognizable only by
the probate court.” 384 F.3d at 237 (quoting McKibben v. Chubb, 840 F.2d 1525, 1529 (10th Cir.
1988)). Under this holding, if the probate court has exclusive jurisdiction, the federal court cannot
assume jurisdiction. Although at first blush Lepard also seems to indicate that the reverse is true
– that the federal court can assert jurisdiction over any case over which the probate court does not
have exclusive jurisdiction – such a reading would be inconsistent with Markham. Under
Markham, the fact that the probate court does not have exclusive jurisdiction does not necessarily
give the federal court concurrent jurisdiction. The federal court may only exercise jurisdiction if it
would not interfere with probate, or assume general jurisdiction or control over probate property.
Markham, 326 U.S. at 494.
We have also outlined factors that courts generally consider important in determining
whether a suit falls inside or outside the probate exception: (1) whether the action attacks the
validity of the will; (2) whether the state court proceeding has been closed; (3) whether the suit
could be brought in a state court other than the probate court; and, (4) whether the suit can be
characterized as in personam, or in rem or quasi in rem. Bedo v. McGuire, 767 F.2d 305, 307 (6th
Cir. 1985) (Engel, J., dissenting). Although these factors were not set forth in the majority opinion,
of Bedo, and the dissent is not clear as to whether our Circuit utilizes this approach, our probate
cases suggest that we vary our analysis depending on the fact scenario and the jurisdiction involved.
See, e.g., Lepard, 384 F.3d at 237 (holding that federal jurisdiction could not be exercised because
claims for breach of fiduciary in the administration of a trust duty fall within the exclusive
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Court held that a federal court may not exercise jurisdiction over a claim, even where all the normal
jurisdictional requirements are met, if the court would be put in the position of probating a will or
administering an estate. Id. at 494. However, the Court also stated that the federal courts are able
to handle suits establishing the claims of claimants against a decedent’s estate as long as the federal
court does not interfere with the probate proceedings themselves or generally take jurisdiction over
the probate itself or of the property in the custody of the state probate court. Id. (citations omitted).
The federal court’s jurisdiction also extends to situations where the district court’s judgment will
not interfere with the state court’s possession of the probate property, except to the extent that the
state court must abide by the judgment of the federal court regarding the right it adjudicated. Id.
jurisdiction of the Michigan probate courts and claims for theft and undue influence are inextricably
connected both to probate and to issues ancillary to probate); Bedo, 767 F.2d at 395 (holding that
the district court lacked subject matter jurisdiction over estate beneficiaries’claim against executrix
for breach of fiduciary duty because, under Ohio law, “exclusive jurisdiction of probate matters,
including breach of fiduciary duty, is vested in the Probate Court”); Starr v. Rupp, 421 F.2d 999,
1007, (6th Cir. 1970) (holding that the probate exception barred diversity jurisdiction over Plaintiff’s
claims that executor breached his fiduciary duties because federal jurisdiction would interfere with
the prior jurisdiction of the Probate Court and conflict with the probate court’s decision to approve
sale of stock and a partial account, and because under Ohio law, jurisdiction of an action involving
an alleged breach of fiduciary duties is lodged in the Probate Court in a quasi in rem proceeding);
Chubet v. Huntington Trust Company, N.A., 1993 WL 513914, 14 F.3D 600 (1993) (table)
(recognizing that state probate court had ongoing jurisdiction and that the law of Ohio vested
exclusive jurisdiction of probate matters to the probate court); Ewald v. Citizens Fidelity Bank and
Trust Co., 242 F.2d 319, 321 (6th Cir. 1957) (concluding that the appellants claims as to the manner
in which trust property was being administered were addressed solely to the administration of the
estate (in rem), and not to the party’s right or interest in funds (in personam)); Spears v. Spears, 162
F.2d 345, 349 (6th Cir.), cert. denied, 332 U.S. 768 (1947) (holding that although a federal court
cannot properly decline to hear issues merely because the same question is pending in a state court
between the same parties, the authority to contest a will in Michigan is part of the probate procedure
and not a suit inter partes, and a federal court has no jurisdiction in the accounting of an estate by
executors or administrators) (citing Waterman, 215 U.S. at 45)); Rogers v. Girard Trust Co., 159
F.2d 239, 242 (6th Cir. 1947) (holding that the federal court had diversity jurisdiction because an
action for right to damages for fraud and wrongful performance of fiduciary duty is an in personam
action to establish a personal right against a fiduciary and does not in any way affect possession of
and control over the res by the Orphans Court)).
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Under the facts in Markham, the plaintiff-petitioner sought to have the entire proceeds of the
final estate paid over to it once the probate court concluded its work of paying taxes and settling
debts, so the Court found that nothing in the petitioner’s cause of action would interfere with the
probate court’s ability to perform those tasks and allowed the district court to exercise jurisdiction.
Id. at 495. Cf. Waterman v. Canal-Louisiana Bank & Trust Co., 215 U.S. 33, 43 (1909) (holding
that although the federal court could find the amount of the residue of the estate belonged to the
complainant and could be held in trust for her, it could not interfere with the probate court in
determining that amount); Turton v. Turton, 644 F.2d 344, 346-47 (5th Cir. 1981) (distinguishing
the permissible action of a federal court in issuing a declaratory judgment as to the right to a percent
of the net estate from the impermissible action of that same court in determining the dollar amount
of the net estate).
According to Markham, then, the three instances where courts should decline jurisdiction
under the probate exception are: (1) where the federal court action would interfere with the probate
proceedings in state court; (2) where the federal court action would assume general jurisdiction of
the probate; and (3) where the federal court action would assert control of property in the custody
of the state court. Moser v. Pollin, 294 F.3d 335, 340 (2d Cir. 2002) (citing Markham, 326 U.S. at
494).
It is undisputed that Plaintiff has the right to purchase the stocks of the deceased, and the
parties do not dispute that this matter is “related to” probate.2 However, Plaintiff contends that his
2
New York law applies in this case. Under New York law, the state’s probate court, the
Surrogate Court, does not have exclusive jurisdiction. Moser, 294 F.3d at 341. Thus, as Moser
points out, “the Surrogate’s Courts share concurrent subject matter jurisdiction with the state’s court
of general jurisdiction, the Supreme Court. . . . There thus exists no probate jurisdiction belonging
exclusively to the Surrogate’s Court for the District Court improperly to usurp.” Id. (citing N.Y.
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case does not fall within the probate exception because he is merely asking the district court to
adjudicate his rights under the Operating Agreement. He claims that he is simply asking the district
court to decide the proper date and method of valuation of Alph’s assets, and not the valuation of
assets itself. Defendants counter that the district court correctly declined to exercise subject matter
jurisdiction because the assertion of jurisdiction over this matter would affect the administration of
the decedent’s estate, and create the danger of inconsistent rulings between the courts.
Although, as Defendants point out, a federal court’s direct determination of the method and
date of valuation would very likely interfere with the probate proceedings because it would affect
the manner in which the estate assets are valued, our adjudication of Uzielli’s rights under the
contract does not require us to make such determinations. While the language of the contract does
not specify the date or method of valuation, it clearly leaves those determinations to “the Company’s
accountants” in determining the stock’s fair market value. Therefore, a declaratory judgment by the
federal court as to Plaintiff’s rights under the contract need only determine that Plaintiff has a right
to have Alph Accountants, PWC, determine the date and method of valuing the Alph stocks.
Although a prior federal court judgment on the issues of the date and method of valuation would be
binding on the state court, the judgment, in itself, is not interference. See Markham, 326 U.S. at 494.
The district court’s conclusion to the contrary was erroneous. Thus, we hold that the probate
exception to federal jurisdiction does not bar Plaintiff’s request for a declaration of his rights under
the Operating Agreement.
Const. art. VI, §§7, 12). Therefore, federal jurisdiction is not barred on this basis. See Lepard, 384
F.3d at 237 (stating that “[t]he standard for determining whether federal jurisdiction may be
exercised is whether under state law the dispute would be cognizable only by the probate court”).
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However, we abstain from exercising our jurisdiction to render a declaratory judgment in this
case. Title 28 of the United States Code, § 2201, provides that a federal court’s power to give a
declaratory judgment is permissive, not mandatory. See Grand Trunk Western R.R. Co. v. Consol.
Rail Corp., 746 F.2d 323, 325 (6th Cir. 1984) (citing 28 U.S.C. § 2201). “Where a district court is
presented with a claim . . . it should ascertain whether the questions in controversy between the
parties to the federal suit, and which are not foreclosed under the applicable substantive law, can
better be settled in the proceeding pending in the state court.” Brillhart v. Excess Ins. Co. of Am.,
316 U.S. 491, 495 (1942). In deciding whether to exercise its discretion, this Court has considered
the following factors: (1) whether the declaratory action would settle the controversy; (2) whether
the declaratory action would help clarify the legal relations in issue; (3) whether the declaratory
remedy is being used merely for the purpose of “procedural fencing” or “to provide an arena for a
race for res judicata;” (4) whether the use of a declaratory action would increase friction between
our federal and state courts and improperly encroach upon state jurisdiction; and (5) whether there
is an alternative remedy which is better and more effective. Grand Trunk R.R. Co., 746 F.2d at 326
(citations omitted). See also Cenker v. Cenker, 660 F. Supp. 793, 795 (E.D. Mich. 1987) (abstaining
on the basis of Brillhart although probate exception to diversity jurisdiction was inapplicable).
Applying the relevant factors to the present case, we conclude on balance that abstention is
appropriate. Although the declaratory action would clarify the legal relations here, it would not
settle the controversy, which in essence is the valuation of the assets. Further, Defendants asked the
New York Surrogate’s Court to address the stock valuation issue prior to Plaintiff filing his action
in federal court, and that court has already endeavored to resolve the issue. Although the state law
under which the estate is being administered is not exclusive, cf. Lepard, 384 F.3d at 237 (holding
9
that probate exception applies if under state law dispute would be cognizable only by the probate
court; concluding probate exception applied because Michigan vests exclusive jurisdiction of trust
in Michigan probate courts), “as a practical matter, ‘it is the policy of the New York courts to
concentrate in the hands of the Surrogate all matters affecting the administration of estates.’” Moser,
294 F.3d at 341 (quoting Beach v. Rome Trust Co., 269 F.2d 367, 372 (2d Cir.1959)). Nor is
Plaintiff asking the district court to decide a matter over which it has a particular expertise that the
probate court does not. Probate courts routinely interpret contracts and can do so in this case.
Finally, judicial economy would be promoted by having the issue decided in the probate court,
which will otherwise be administering the estate. For these reasons, we deny Plaintiff the
declaratory relief he requests. See also Rice v. Rice Found., 610 F.2d 471, 477-78 (7th Cir. 1979)
(explaining that discretionary abstention applies to probate-related matters “[w]here the state courts
are already familiar with the litigation before the district court and the federal suit is intertwined with
the state court proceedings”).
In sum, although Plaintiff’s request for a declaration of his rights under the Operating
Agreement is not barred by the probate exception to diversity jurisdiction, we decline to exercise
our subject matter jurisdiction because this matter would be better handled in the pending probate
proceeding in the New York Surrogate’s Court.
IV.
For the foregoing reasons, the judgment of the district court is AFFIRMED.
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