How Federal And State Courts Can Get Intertwined In Probate Disputes

Probate is traditionally a function of state law in the United States. This means that as a general rule, a federal court will not exercise jurisdiction over probate litigation. This principle is known as the “probate exception.” This exception is limited, however, and does not prevent federal courts from hearing cases that may indirectly involve a probate estate. The exception is basically to ensure that federal courts do not dispose of property belonging to a probate estate.

New York Federal Court Declares Contractual Obligations Involving Florida Probate Estate

A recent decision from a federal appeals court in New York, Season v. Mann, illustrates how the probate exception applies–or does not apply–in practice. This case involved two brothers-in-law (the plaintiffs) who ran various companies together with their father-in-law. In 1997, the plaintiffs and the father-in-law restructured their business as a limited liability company (LLC).

The LLC’s operating agreement provided that when the father-in-law died, he would leave his membership interest in the LLC to the two plaintiffs. If he failed to do so, the plaintiffs would then have the option to purchase that interest from the father-in-law’s probate estate for $1,000.

The father-in-law died in 2014 in Florida. His will left his entire estate to his son. The plaintiffs then attempted to exercise their option to purchase the LLC interest. The son, who was also the personal representative of the estate, refused.

Litigation followed in Manhattan federal court. (The LLC operating agreement was governed by New York law.) A judge ruled in favor of the plaintiffs and held the plaintiffs had validly exercised their option to purchase the father-in-law’s LLC interest under the terms of the operating agreement. The son appealed, in part arguing the probate exception deprived the federal courts of deciding this issue.

The U.S. Second Circuit Court of Appeals disagreed. It explained that the parties’ rights under the LLC operating agreement fell outside the administration of the father-in-law’s probate estate. Indeed, the plaintiffs had previously filed a claim against the estate in Florida probate court. But under Florida law, once the estate refused the claim, the plaintiffs were required to file an independent civil action “to prove the validity of their claims.” Such independent actions cannot be filed in probate court.

More to the point, the Second Circuit said, the district court did not order the estate to actually sell the LLC interest to the plaintiffs. It simply declared the plaintiffs’ rights under the operating agreement. It would still be up to the Florida probate court to administer the property, although it will be required to give “full faith and credit” to the federal court’s decision declaring the plaintiffs’ rights in this area.

Speak with a Florida Business Succession Attorney Today

Disputes over business succession are not uncommon, especially when a family-owned business is involved. If such disputes spill over into the probate process, it is important to work with an experienced Florida estate and trust litigation lawyer who understands this area of the law. Contact Legacy Protection Lawyers, LLP, today to schedule a consultation with a member of our team.

Source:

scholar.google.com/scholar_case?case=4210172637582407649