Jurisdictional Issues for Corporate Trustees
Conducting Business on a National Level Opens the Door for Potential Litigation in ALL STATES
Through mergers and the growth of selling services across the country, banks and trust companies are establishing national footprints. A pitfall of such growth is defending against litigation in all states in which a trust has beneficiaries. A key to any defense is challenging a court's jurisdiction, particularly a federal district court.
While corporate trustees may seamlessly act in multiple jurisdictions through of the use of modern technology, including the Internet, a business' actual presence in a jurisdiction is determined by "actual business contact" with any state. This article attempts to review whether a corporate trustee will be subject to the jurisdiction of a particular state or federal district court because of its "contacts" with that particular "forum" and what contacts are sufficient to create jurisdiction. This discussion is not intended to be conclusive in all instances but is written to outline the substantive issues.
PROVING PERSONAL JURISDICTION
To attempt to quickly dismiss a case against you, a challenge with a "motion to dismiss for lack of personal jurisdiction" is advised. A plaintiff always has the burden of showing that jurisdiction over a defendant does exist, and, therefore, must provide competent evidence that establishes personal jurisdiction. The court will not credit conclusory allegations or draw farfetched inferences; rather, it will require the plaintiff to substantiate every fact required to satisfy both the forum's long-arm statute, which allows a jurisdiction to reach a plaintiff in another state, and the U.S. Constitution, which limits just how far a state's long-arm jurisdiction can extend.
When a plaintiff's evidence is conflicting or when its affidavits are patently incredible, the court may require an evidentiary hearing, holding plaintiff to the "preponderance of the evidence" standard.
CONSTITUTIONAL LIMITATIONS ON PERSONAL JURISDICTION
In an action brought under the court's federal question jurisdiction, the court will look to the Due Process Clause of Fifth Amendment of the United States Constitution in deciding whether to exercise personal jurisdiction over a non-resident defendant. By contrast, when parties in two states are involved, the court will consider state law when deciding whether to exercise personal jurisdiction over a non-resident defendant. While a state may independently define the circumstances that permit jurisdiction over a non-resident (typically through a so-called "long-arm statute"), the court may extend its reach only as far as the Due Process Clause of the Fourteenth Amendment of the U.S. Constitution will permit. Accordingly, personal jurisdiction over a non-resident is only appropriate when it complies with constitutional due process requirements.
Constitutional due process prohibits the assertion of personal jurisdiction over a non-resident defendant without proof that the defendant purposefully established minimum contacts with the forum state. These contacts have to be meaningful enough such that the defendant can be found to have purposefully availed itself of the privilege of conducting activities within the foreign state, thus invoking the benefits and protections of its laws. The constitutional limitation protects defendants against having to litigate in distant forums into which they could not have reasonably anticipated being haled.
A court cannot require a corporate trustee defendant to litigate in the forum unless the plaintiff demonstrates that the defendant's relationship with the forum state subjects it to either the general or specific jurisdiction of the court.
A defendant only brings itself within a court's general jurisdiction when it engages in "continuous and systematic" activities within the forum state. This standard is stringent and a simple showing of minimum contacts will not suffice.
The difficulty of establishing general jurisdiction is amply demonstrated in numerous decisions. In one, the First Circuit Court of Appeals held that a hockey league association did not have the type of contacts necessary for the exercise of general jurisdiction by Rhode Island courts even though it had supplied league officials at exhibition hockey games for a decade, scouted, provided television broadcasts and sold league products in Rhode Island. In another, the First Circuit characterized as "vestigial" contacts a defendant's in-state product advertisements, employment of eight sales representatives, and other business activities, all of which were insufficient to support general jurisdiction. Moreover, the unilateral activity of those who claim some relationship with a non-resident defendant cannot satisfy the requirement of contact with the forum state.
The exercise of specific jurisdiction over a corporate trustee defendant is appropriate only when the following three circumstances are present: 1) the claim(s) asserted must be related to the defendant's contacts with the forum; 2) the defendant's contacts with the forum must show purposeful availment of the benefits and protections of the forum state's laws; and 3) assuming the first two requirements are met, jurisdiction over the defendant must be fair. Analysis under these three factors will depend upon the nature of the claim.
Analysis of the three-part test for specific jurisdiction is illustrated in the case of Philips Exeter. In that case, a private secondary school located in New Hampshire sued a Florida charitable foundation for breach of trust and fiduciary duty. The foundation held certain stock of a lucrative Florida company, which it had received as a testamentary bequest from a Florida resident. The decedent conditioned his bequest on the requirement that the foundation share a percentage of the stock's profits with the school. The school's dissatisfaction with the allegedly paltry sums of money tendered by the foundation led to the filing of the lawsuit.
Affirming the district court's grant of the foundation's motion to dismiss, the U.S. Court of Appeals for the First Circuit held that the plaintiff's claims of breach of contract and breach of fiduciary duty were not related to the foundation's acts of transmitting checks into the forum state, sending a few letters to school, and visiting the school.
As to the plaintiff's tort claim, the court held that a breach occurs at the location where the fiduciary acts disloyally. Consequently, any breach by the foundation would have occurred in Florida when the foundation calculated the payments due to the plaintiff. The receipt of payments in New Hampshire was merely "an in-forum effect of an extra-forum breach" which was inadequate to support a finding of relatedness.
The court also rejected that the breach of contract claim could be related to the foundation's New Hampshire contacts because the breach was not "instrumental in either the formation of the contract or in its breach." The court explained that the execution of the will, the acceptance of the bequest of stock, and the payment decisions all occurred in Florida. Although the location of the payments (New Hampshire) constituted a "meaningful datum" for jurisdictional purposes, this factor was not in and of itself enough to support specific jurisdiction.
Since the foundation had not purposefully availed itself of the privilege of conducting activities in New Hampshire, its willing acceptance of a tendered relationship (the testamentary trust created in Florida) did not demonstrate that the foundation had voluntarily "reached out" to the forum to create that relationship. The mere existence of a contractual relationship with a resident of the forum is insufficient for specific jurisdiction. Moreover, its benefit under the trust (receipt of the stock), flowed from Florida, not New Hampshire. Accordingly, there was not "so much as a hint" that the foundation benefited from the protection of New Hampshire law in making the stock payments.
Under the reasoning of Philips Exeter, a federal court may not exert specific jurisdiction over a corporate defendant in the absence of any relatedness between the claims and the defendant's in-forum contacts and any purposeful conduct by the defendant toward the forum.
From a practical standpoint, while one can argue such issues in matters where a corporate trustee has been sued in a jurisdiction in which it believes it has no contact, the ultimate resolution may involve discerning the underlying reasons for the cause of action. Once determined, it is possible that the parties may come to an agreement or realization that the ultimate resolution may be a separate proceeding in another court or courts for purposes of settlement.
Other jurisdictional issues may arise in trust proceedings. For instance, should an action for an accounting be filed in a certain probate court in a particular state? Is there a need for a beneficiary to be under guardianship before distributions from a trust can be made? In some instances, there may be a dispute about real estate requiring a petition to partition the parcel among heirs. In cases where a trust is prepared for a decedent in one state but real estate in another state is held by the trust, the plaintiff may find a need to file causes of action in both states. Finally, if a breach of contract or other agreement entered into by a trustee is now in dispute, the trustee may have unwittingly become subject to a distant jurisdiction on a contract issue.
While these matters are not dispositive of all issues that may arise, this brief discussion is intended to highlight the issues for any trustee or corporate fiduciary.