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“Probate Exception” Precludes Federal Jurisdiction over ERISA Lawsuit

by | Sep 12, 2022 |

The Sixth Circuit Court of Appeals, in American Electric Power Service Corporation v. John K. Fitch et al., has affirmed a district court’s dismissal of a group health plan’s ERISA action seeking settlement proceeds from a wrongful death lawsuit involving a beneficiary insured by the plan. The district court initially dismissed the claim finding that the “probate exception” deprived the federal court of subject-matter jurisdiction over the settlement proceeds.

Law. The probate exception is a judicially created doctrine. Its origins trace back to the Judiciary Act of 1789, and cases construing the Act’s meaning. The original rationale for the probate exception was that the equity jurisdiction conferred by the Judiciary Act of 1789, which is that of the English Court of Chancery in 1789, did not extend to probate matters.

In 2006, the U.S. Supreme Court determined that the probate exception “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 at 311-12 (2006). Because probate issues are typically state matters, any disputes regarding the administration of a probate estate must be tried under state law.  Therefore, federal courts will typically abstain from intervening in state probate matters even when they would normally have jurisdiction.

Background. The defendant in the matter was employed by the plaintiff company and enrolled in the company’s self-funded group health plan. Her son, who was enrolled as a beneficiary, was critically injured in a car accident and died shortly thereafter.

The plan paid about $101,000 for the decedent’s medical care before his death. The plan document contained a provision that required that the plan be repaid from any recovery in the amount of benefits paid on a beneficiary’s behalf.

The administrator of the decedent’s estate obtained two settlements related to the accident: (i) $500,000 from the “at-fault” driver’s insurance on a wrongful death liability claim, and (ii) $100,000 from the decedent’s parents’ auto policy on a medical-payments claim. In probate court, the administrator for the decedent’s estate filed an application proposing that the $600,000 settlement proceeds be allocated to the wrongful death claims of the decedent’s family members. The probate court approved the administrator’s proposed settlement allocation.

As plan sponsor for the group health plan, the plaintiff subsequently filed an ERISA action in federal district court seeking an equitable lien by agreement over the wrongful death settlement funds in the possession of the decedent’s estate, in order to recoup the funds the plan paid for the beneficiary’s accident-related medical treatment.

District Court. At trial, the district court acknowledged the prior proceedings involving the decedent’s estate in state probate court and noted that the settlement proceeds were already in the custody of the probate court when the plaintiff’s ERISA claim was filed in federal court. Accordingly, the district court concluded that the relief the plaintiff’s ERISA claim sought would interfere with the distribution process approved by the probate court for the settlement funds, thus triggering the probate exception.

In addition, the district court found that the plaintiff’s ERISA claim invoked the federal court’s in rem jurisdiction over identifiable settlement proceeds (as opposed to an in personam claim which is brought against a person rather than property), which further supported its application of the probate exception to the instant matter. Therefore, the federal district court concluded that it lacked jurisdiction to hear the plaintiff’s claims over the wrongful death proceeds and it dismissed the case based on the probate exception.

The plaintiff appealed the district court’s decision to the Sixth Circuit.

Sixth Circuit. On appeal, the Sixth Circuit reviewed the district court’s application of the probate exception. The Sixth Circuit observed that the question before it was “simply whether this action seeks to reach the same res over which the probate court already has custody.”

To resolve this question, the Sixth Circuit first agreed with the district court’s finding that the plaintiff’s ERISA claim was in rem (and not in personam) in nature since a claim for reimbursement under ERISA is one for restitution in equity, not restitution at law. The Sixth Circuit noted that, “A court awards equitable restitution when it imposes a lien on ‘particular funds or property in the defendant’s possession’ but legal restitution when it holds the defendant liable for a sum of money.” As further support for determining that the plaintiff’s claim invoked in rem jurisdiction, the court explained that an ERISA remedy cannot be a judgment against a defendant’s general assets.

Next, the Sixth Circuit explained that under the probate exception a federal court may exercise in rem subject-matter jurisdiction over settlement proceeds unless the relief sought would intrude on the probate court’s jurisdiction over the estate and require that the court dispose of the property in a manner inconsistent with the probate court’s judgment. The Sixth Circuit noted that the district court had determined that the settlement proceeds were in the custody of the probate court when the plaintiff’s ERISA claim was filed in federal court, and that the plaintiff had failed to address on appeal why this conclusion was flawed. Based on these facts, the Sixth Circuit found that the plaintiff had forfeited the argument that the district court erred in applying the probate exception.

Therefore, the Sixth Circuit affirmed the district court’s decision to dismiss the plaintiff’s ERISA claim by applying the probate exception to the matter.