Seventh Circuit Considers Diversity Jurisdiction in Trust Dispute

12 March 2018 Wisconsin Appellate Law Blog
Authors: Thomas L. Shriner Jr

In Doermer v. Oxford Fin’l Group, Ltd., No. 17-1659 (7th Cir. Mar. 7, 2018), the Seventh Circuit had before it an example of what Chief Judge Diane Wood called a “depressingly common” type of litigation: “[f]amily disputes over who owns what.” In resolving the appeal, the court resolved a couple of interesting diversity jurisdictional issues that such disputes can present.

Brother Richard and sister Kathryn don’t get along. Richard previously sued Kathryn over control of a family foundation, but the case was dismissed because Richard lacked capacity under Indiana law to bring a derivative action; the Seventh Circuit affirmed in Doermer v. Callen, 847 F.3d 522 (7th Cir. 2017).

This time Richard sued Kathryn’s financial advisor for allegedly giving her negligent advice that caused her to mismanage a family trust, of which they are the two beneficiaries, as well as two of the three trustees. Richard, a citizen of Illinois, sued the advisor in state court in that state. The advisor, a citizen of Indiana, removed to federal court, invoking diversity jurisdiction. Richard objected to removal on two grounds—that he had named Kathryn (also a citizen of Indiana) as an “involuntary plaintiff,” so that there were Indiana citizens on both sides of the litigation; and that the “real party in interest” is the trust, which takes its citizenship from that of both trustees, so that (again, in his view) there were Indiana citizens on both sides of the litigation. The Seventh Circuit rejected both arguments.

First, the court noted that joinder of parties is a procedural matter governed by federal law in federal courts, and that law doesn’t permit a plaintiff to compel another party to join the litigation as an involuntary plaintiff. Nothing in Fed. R. Civ. P. 19 would allow Richard to join Kathryn as a party, and, to the extent that the issue is one of capacity rather than joinder, state law also would not permit him to make her a plaintiff involuntarily.

On the second issue, Richard fared no better. Traditional trusts like the one involved here cannot sue or be sued in their own name, so they are not “real parties in interest.” Litigation involving such trusts must be brought by or against the individual trustees. So, even though Richard claimed to be suing on behalf of the trust, his citizenship was all that mattered, and it was diverse from that of the advisor. Diversity jurisdiction was secure.

Ultimately, the court affirmed dismissal of this case for essentially the same reason as in the foundation case: Richard lacked capacity, either as a beneficiary or as one of the trustees, to bring this action on behalf of the trust.

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