Just because the bankruptcy court was called upon to base a decision on a state’s trusts and estates law does not oust the federal courts of subject matter jurisdiction under the probate exception to federal jurisdiction, as explained by the Sixth Circuit in a per curiam opinion.

An individual filed a chapter 7 petition and did not schedule his home as being among his assets. He contended that his deceased wife had owned the home and that she had transferred the home to their children before her death.

The Intestacy Decision in Bankruptcy Court

The chapter 7 trustee commenced an adversary proceeding where he contended that the home was property of the bankrupt estate because ownership transferred to the debtor through the wife’s intestacy. The trustee obtained a default judgment, bringing the home into the bankruptcy estate.

The children moved in bankruptcy court to set aside the default judgment and endeavored to prove that their mother had deeded the property to them.

Bankruptcy Judge Thomas J. Tucker of Detroit found that the deed was a fraud and that the bankruptcy estate owned the property. He rejected the children’s contention that the probate exception to federal jurisdiction precluded the bankruptcy court from deciding the question of ownership.

The children appealed and won. The district court believed that the probate exception applied, giving the bankruptcy court no subject matter jurisdiction because the bankruptcy court was making decisions based on the state’s trusts and estates law.

The trustee appealed to the Sixth Circuit and won in a nonprecedential opinion on February 7.

The Probate Exception Is Circumscribed

The circuit panel quoted the Supreme Court for saying:

The probate exception to federal jurisdiction “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.

Marshall v. Marshall, 547 U.S. 293, 311-12 (2006).

Citing the circuit’s own authority, the panel said that the probate exception is “of distinctly limited scope” and applies in three circumstances: (1) when the federal court is asked to probate a will; (2) when the federal court is asked to annul a will; and (3) when the federal court is asked to assert jurisdiction over property in custody of the state probate court.

The panel said “none of those circumstances” were present in the case on appeal.

The panel again quoted the circuit’s authority for the proposition that the probate exception does not divest a federal court of jurisdiction unless the probate court is already exercising in rem jurisdiction over the subject property. Correctly, the panel said, Judge Tucker found that the state probate court did not have “custody over the property.”

Also, the panel said, the exception would not apply if, as the children argued, the mother had transferred the property to them before her death.

The district court believed that the exception applied because the outcome turned on the state intestacy statute, but that was also the case in Marshall before the Supreme Court. The panel quoted the Supreme Court for saying that states cannot give their probate courts exclusive jurisdiction for claims of the type. Id. at 314.

The appeals court vacated the district court’s opinion and remanded for the district court to consider other matters that the district court had not reached on the appeal.