Three Keys Ltd v. SR Util Holding Co

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit

8-20-2008

Three Keys Ltd v. SR Util Holding Co
Precedential or Non-Precedential: Precedential

Docket No. 07-1005

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________

No. 07-1005
___________

THREE KEYS LTD.,
a Maryland Corporation,
Appellant

v.
SR UTILITY HOLDING COMPANY, a New Jersey
Corporation; THE ESTATE OF SAMUEL RAPPAPORT,
Deceased, as the majority shareholder of SR Utility Holding
Company; WIL WES RAPPAPORT, individually and as
Administrator d.b.n.c.t.a. of the Estate of Samuel Rappaport,
Deceased; TRACY RAPPAPORT SCOTT, individually and as
Administrator d.b.n.c.t.a. of the Estate of Samuel Rappaport,
Deceased; MELLON BANK N.A., as Administrator d.b.n.c.t.a.
of the Estate of Samuel Rappaport, Deceased; RITA
RAPPAPORT, an individual; CARL CORDEK, an individual,

___________

On Appeal from an Order of the United States District Court
for the District of New Jersey
(No. 06-cv-664)

District Judge: Honorable Jerome B. Simandle
___________
Argued January 7, 2008

Before: FUENTES, JORDAN, Circuit Judges, and
O’NEILL, JR,* District Judge.

*
Honorable Thomas N. O’Neill, Jr., United States District
Judge for the Eastern District of Pennsylvania, sitting by
designation.
 (Opinion Filed: August 20, 2008)

John A. Guernsey (argued)
Kevin D. Kent
Mark E. Seiberling
Conrad, O’Brien, Gellman & Rohn
1515 Market Street 16th Floor
Philadelphia, PA 19102

Thomas A. Leonard
Louis B. Kupperman
Obermayer, Rebmann, Maxwell & Hippel
1617 John F. Kennedy Boulevard
One Penn Center, 19th Floor
Philadelphia, PA 19103

Counsel for Appellants

Ronald J. Shaffer (argued)
Fox Rothschild
2000 Market Street
10th Floor
Philadelphia, PA 19103

Eric M. Wood
Horn, Goldberg, Gorny, Plackter, Weiss & Perskie
1300 Atlantic Avenue
Suite 500 Citicenter Building
Atlantic City, NJ 08401

Allison L. Kashon
Fox Rothschild
1301 Atlantic Avenue
Suite 400, Midtown Building
Atlantic City, NJ 08401

Counsel for Appellees

2
 OPINION OF THE COURT

FUENTES, Circuit Judge:

Samuel Rappaport died in 1994 leaving an estate valued at
over $58 million to his wife and two children. In 2002, the
Pennsylvania Orphan’s Court removed the estate executors,
Richard Basciano and Lois Palmer, after finding that they engaged
in multiple acts of mismanagement, conversion of estate assets, and
self-dealing. The present action was initiated in the United States
District Court for the District of New Jersey by Three Keys LTD,
a company created by Basciano, to gain access to estate property
transferred in one of his self-dealing transactions. The District
Court exercised diversity jurisdiction and dismissed the complaint
on the ground of issue preclusion. Because the District Court
lacked the power to entertain this matter in the first instance, under
the probate exception to federal courts’ diversity jurisdiction, we
will remand the case with instructions to dismiss for lack of
jurisdiction.

I.

A.

At the time of his death, Samuel Rappaport owned 100% of
the shares in SR Utility Holding Company (“SR Utility”), whose
principal asset was the Atlantic City Sewer Company. SR Utility
was part of Samuel’s estate (the “Estate”), to be administered for
his wife, Rita, and two children, Wil Rappaport and Tracy
Rappaport Scot (collectively, the “Beneficiaries”).1 However, two
and a half years after Samuel’s death, on March 31, 1997, Basciano
negotiated the sale of 24% of the Estate’s interest in SR Utility to
Three Keys LTD (“Three Keys”), an entity created by Basciano for

1
The Estate also included commercial properties not at issue
in this appeal, such as parking garages and shopping centers.

3
his children’s benefit (the “SR Utility Stock Transfer”).2 Basciano
and Palmer, Basciano’s personal assistant and paramour, who he
appointed to be the second executor required under Samuel’s will,
signed the purchase agreement (the “Purchase Agreement”) on
behalf of the Estate. However, contrary to Pennsylvania law for
transactions between an estate and an estate’s “personal
representative,” Basciano and Palmer failed to obtain court
approval before negotiating the agreement. 20 Pa. Cons. Stat. §
3356 (“[T]he personal representative, in his individual capacity,
may . . . purchase . . . property belonging to the estate, subject,
however, to the approval of the court . . . .”).

On February 23, 2001, suspicious about the Estate’s
transactions with Basciano’s companies, the Beneficiaries
petitioned the probate court—the Court of Common Pleas of Bucks
County, Pennsylvania, Orphans’ Court Division (the “Orphans’
Court”)—to compel Basciano and Palmer to file an accounting. In
response, the Executors filed a final accounting on April 25, 2001,
setting forth all of the Estate’s transactions. The Beneficiaries filed
objections to the final accounting, alleging numerous instances of
self-dealing, including the SR Utility Stock Transfer.
Simultaneously, the Beneficiaries brought an action in the
Orphan’s Court to remove Basciano and Palmer as executors of the
Estate under the Pennsylvania Probate, Estates and Fiduciary Code,
which provides for the removal of an executor if he or she “is
wasting or mismanaging the estate, . . . has failed to perform any
duty imposed by law,” or when “the interests of the estate are likely
to be jeopardized by his [or her] continuance in office.” 20 Pa.
Cons. Stat. § 3182.

While the action to remove Basciano and Palmer as
executors was pending, Basciano personally received a payment of
$220,000 that was due to the Estate for the sale of an Estate-owned

2
The transaction also included the sale of SR Utility stock to
Wil Rappaport (12%), Tracy Rappaport Scot (12%), and Carl
Cordek, the Chairman of the Board of Directors of SR Utility (1%).
After the SR Utility Stock Transfer, the Estate was left with 51%
of SR Utility’s shares.

4
shopping center, again without obtaining approval from the
Orphans’ Court. The Beneficiaries responded by filing an
additional petition with the Orphans’ Court seeking the executors’
immediate removal.

On August 23, 2002, the Orphans’ Court removed Basciano
and Palmer as executors.3 In its opinion, the Orphans’ Court made
100 “Findings of Fact,” including:

61. On March 31, 1997, Richard Basciano, as
buyer, purchased for his children 24% of the
outstanding shares of SR Utility Holding
Company, a company owned by Samuel
Rappaport before his death and which is now
owned by the Estate.

***

71. Richard Basciano did not seek or obtain court
approval to acquire on behalf of his children
a 24% interest in SR Utility from the Estate.

(App. 96-97.) The Orphans’ Court also made seven “Conclusions
of Law,” including:

2. The Will of Samuel Rappaport did not
authorize the Executors to engage in self-
dealing without obtaining Court approval
pursuant to 20 Pa.C.S.A. § 3356.
3. Richard Basciano breached his fiduciary duty
to the Estate when he engaged in multiple
self-dealing transactions with assets of the
estate without obtaining prior court approval.

3
While the Orphans’ Court ruled on the Beneficiaries’
motion to remove Basciano and Palmer as executors, it did not rule
on their objections to the final accounting. Those objections are
still pending in the Orphans’ Court.

5
 ***

5. Richard Basciano and Lois Palmer have
wasted and mismanaged the assets of the
Estate.
6. The interests of the Estate are likely to be
jeopardized by the continuance in office of
Richard Basciano and Lois Palmer as
Executors . . . .

(App. 102-103.)

Thereafter, on October 4, 2002, the Orphans’ Court ordered
that letters of administration be issued to Wil, Tracy, and Mellon
Bank to settle the remainder of the Estate.4

The Orphans’ Court refused to certify its order removing
Basciano and Palmer as “final and appealable.” Under
Pennsylvania law, absent a trial court’s determination of finality,
an order removing a fiduciary is not an appealable order. In Re
Estate of Sorber, 803 A.2d 767, 769 (Pa. Super. 2002). Because
Basciano could not challenge his removal through an ordinary
appeal, he petitioned the Pennsylvania Supreme Court to grant
extraordinary relief pursuant to its “King’s Bench” power.5 The

4
Letters of administration are formal documents appointing
administrator(s) of an estate, issued when a will fails to name an
executor or if the executor appointed is disqualified or removed by
court order. See 20 Pa. Cons. Stat. § 3155; Black’s Law Dictionary
925 (8th ed. 2004).
5
The Pennsylvania Supreme Court has “the power generally
to minister justice . . . as fully and amply, to all intents and
purposes, as the justices of the Court of King’s Bench, Common
Pleas and Exchequer, at Westminster, or any of them, could or
might do on May 22, 1722.” 42 Pa. Cons. Stat. § 502. The King’s
Bench power has been interpreted in Pennsylvania as “the power
of general superintendency over inferior tribunals,” Carpentertown
Coal & Coke Co. v. Laird, 61 A.2d 426, 428 (Pa. 1948), and
permits the exercise of jurisdiction even if “there is no final order

6
Supreme Court granted the petition, and asked Pennsylvania’s
intermediate appellate court, the Superior Court, to determine
whether Basciano’s removal as executor was proper.

On December 23, 2003, the Superior Court applied the same
standard of review as it would for a regular appeal of an order
removing an executor, and found that the Orphans’ Court did not
err by removing Basciano. In so doing, it concluded that the
Orphans’ Court’s findings of fact were supported by substantial
evidence, including that “Basciano, without court approval,
purchased 24% of the shares of an estate-owned holding company
for his children.” (App. 125.) These findings of fact “relat[ed] to
waste of estate assets, self-dealing and mismanagement, which, .
. . must be seen as harmful to the estate.” (App. 124-25.) The
Superior Court’s decision was then appealed to the Pennsylvania
Supreme Court, which summarily affirmed on April 11, 2005.

B.

In 2002, under the threat of litigation, Basciano’s company,
Three Keys, agreed to place all of its SR Utility dividends into an
escrow account. On February 10, 2006, in an effort to gain access
to the dividends, which had reached approximately $900,000,
Three Keys initiated the present action by filing a complaint in
District Court against SR Utility, the Estate, the Beneficiaries,
Mellon Bank, and Carl Cordek (collectively, the “Defendants”).
Three Keys’ complaint enumerates five counts, each of which is
premised on Three Keys’ alleged ownership interest in SR Utility.
The complaint contends that the Defendants “den[ied] Three Keys
of its fair and equitable interest in [SR Utility], along with access
to approximately $900,000 of its SR Utility dividends currently
being unjustly held in an escrow account at the demand of the
Defendants.” (App. 31.) The primary relief sought is the release
of the SR Utility dividends to Three Keys.

as to which [the Pennsylvania Supreme Court] can exercise
appellate jurisdiction.” In re Avellino, 690 A.2d 1138, 1140-41
(Pa. 1997).

7
 Count One is labeled “Minority Shareholder Oppression,”
and asserts that the Defendants, who collectively own 76% of SR
Utility’s shares, are preventing Three Keys, the minority
shareholder, from accessing its dividends. (App. 39-43.) As relief,
Three Keys requests a declaration that the Purchase Agreement was
valid; the release of the SR Utility dividends held in escrow; and an
order enjoining the Defendants from escrowing future dividends,
requiring that future dividends be paid to Three Keys, appointing
a receiver for SR Utility, and awarding Three Keys compensatory
and punitive damages.

Count Two is labeled “Declaratory Judgment,” and seeks
resolution of the dispute between Three Keys and the Defendants
“as to their legal relations with respect to the . . . Purchase
Agreement.” (App. 43-44.) As relief, Three Keys requests a
declaration that the Purchase Agreement is valid, that the
Defendants have no right to the 24% interest in SR Utility
transferred to Three Keys, and that the Defendants’ potential
claims against Three Keys are time-barred. It also seeks the
release of the dividends from the escrow account.

Count Three is for “Breach of Fiduciary Duty,” and alleges
that the Defendants, in their capacity as majority shareholders and
thus fiduciaries, have unfairly prevented Three Keys from
accessing its interest in SR Utility. (App. 45.) For relief, Three
Keys seeks the release of the $900,000 in SR Utility dividends, an
order enjoining the Defendants from continuing to insist on
escrowing the dividends, the payment of future dividends directly
to Three Keys, and compensatory and punitive damages.

Count Four alleges “Breach of [the] Covenant of Good Faith
and Fair Dealing.” (App. 48.) In particular, this Count alleges that
the Defendants, who were parties to the Purchase Agreement,
breached the implied covenant of good faith and fair dealing,
resulting in financial losses. As relief for this loss, Three Keys
requests the release of the SR Utility dividends currently in escrow,
the payment of future dividends directly to Three Keys, and
compensatory and punitive damages.

Finally, Count Five is for “Civil Conspiracy,” and alleges

8
that the Defendants conspired to force Three Keys into escrowing
its SR Utility dividends and as a result “Three Keys suffered
substantial financial hardship, including the inability to access
approximately $900,000 of its rightfully earned and accrued SR
Utility dividends.” (App. 50-51.) As relief for Count Five, Three
Keys seeks compensatory and punitive damages.

In response to Three Keys’ complaint, the Defendants filed
a motion in the District Court to dismiss the complaint, asserting
three alternate theories: the probate exception to federal
jurisdiction, the Rooker-Feldman doctrine, and issue preclusion
based on the removal proceedings.

On December 8, 2006, the District Court concluded that it
had jurisdiction to rule on the complaint under 28 U.S.C. § 1332,
but nevertheless dismissed the action based on issue
preclusion—that is, the District Court concluded that Three Keys
could not relitigate the validity of the SR Utility Stock Transfer, an
issue that had been resolved in the removal proceedings.6 Three
Keys filed a timely notice of appeal. We have appellate
jurisdiction pursuant to 28 U.S.C. § 1291.

II.

In any appeal, “the first and fundamental question is that of
jurisdiction.” Storino v. Borough of Point Pleasant Beach, 322
F.3d 293, 296 (3d Cir. 2003) (citation omitted). We must assess
our jurisdiction regardless of whether a district court correctly
disposed of a case on the merits, and regardless of whether the

6
While Three Keys was not a party to the proceedings to remove
Basciano and Palmer, the District Court reasoned that issue preclusion
barred the action because Three Keys “is clearly in privity with
Basciano,” considering that Three Keys is an entity associated with
Basciano’s children and appears to have been created, funded, managed,
and controlled by Basciano. Three Keys, Ltd. v. SR Utitlity Holding
Co., 464 F. Supp. 2d 388, 397 (D.N.J. 2006).

9
issue was raised by the parties on appeal. See id.7 Therefore, our
analysis begins by determining whether the “probate exception” to
diversity jurisdiction prevents consideration of any or all of the
complaint.

The probate exception is a jurisdictional limitation on the
federal courts originating from the original grant of jurisdiction in
the Judiciary Act of 1789. As the Supreme Court observed in
Markham v. Allen, the “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.” 326 U.S. 490, 494 (1946)
(citation omitted). While the general idea that federal courts lack
jurisdiction to adjudicate “probate matters” has been invoked
frequently by federal courts, the precise contours of the limitation
have proven difficult to draw. In Markham, the Supreme Court
held that

while a federal court may not exercise its jurisdiction
to disturb or affect the possession of property in the
custody of a state court, . . . it may exercise its
jurisdiction to adjudicate rights in such property
where the final judgment does not undertake to
interfere with the state court’s possession save to the
extent that the state court is bound by the judgment
to recognize the right adjudicated by the federal
court.

Id. (emphasis added). Unfortunately, this explication did little to
guide federal courts as to when a potential final judgment’s

7
As a jurisdictional limitation, the failure of either party to
brief the probate exception on appeal does not waive the issue. See
Bracken v. Matgouranis, 296 F.3d 160, 162 (3d Cir. 2002) ( “[T]his
Court has a continuing obligation to sua sponte raise the issue of
subject matter jurisdiction if it is in question.”); Morel v. INS, 144
F.3d 248, 251 n.3 (3d Cir. 1998) (“[A federal] court, including an
appellate court, will raise lack of subject-matter jurisdiction on its
own motion.”) (quoting Insurance Corp. of Ireland, Ltd. v.
Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982)).

10
“interfere[nce] with the state court’s possession” of property would
render the federal court without jurisdiction. Id.

We wrestled with the scope of matters “interfering” with the
probate in Golden ex rel. Golden v. Golden, 382 F.3d 348 (3d Cir.
2004). In Golden, the testator divided her assets into equal shares
for three beneficiaries in her will. When the testator became ill,
she executed an addendum that drastically reduced the amount of
the legacy to two of her beneficiaries, increasing the share of the
third beneficiary, who was also the estate executor and a witness to
the addendum. Following the testator’s death, those two
beneficiaries sued the third, alleging common law torts, including
fraud and slander, and “several grounds for relief that relate[d] to
probate law, including undue influence and breach of fiduciary
duty as the executor of a will.” Id. at 352. After acknowledging
the confusion arising out of the exact scope of the probate
exception, we stated that if the resolution of an action, including an
in personam action, would “undercut the past probate of a will or
result in the federal court ‘assum[ing] general jurisdiction of the
probate or control of the property in the custody of the state
court,’” we would dismiss for lack of jurisdiction. Id. at 358-59
(quoting Markham, 326 U.S. at 494). We further held that,
consistent with our precedent, “[w]e take a fairly broad view of the
types of actions that interfere with the probate proceedings.” Id. at
360. Applying these principles, we concluded that claims for
undue influence, forgery, and breach of fiduciary duty as an
executor would interfere with probate proceedings and were
therefore subject to the probate exception. Id.

Subsequently, in 2006, the Supreme Court decided Marshall
v. Marshall, which, similarly to Golden, dealt with a claim that the
ultimate beneficiary of an estate fraudulently prevented the transfer
of an intended gift to the plaintiff. 547 U.S. 293, 304 (2006). The
Supreme Court held that the single claim at issue, for tortious
interference with the plaintiff’s expected gift, sought an in
personam judgment against the defendant, not the probate or
annulment of a will, nor any res in the custody of the probate court.
Id. at 312. As such, it was not barred by the probate exception.

Marshall criticized Golden as one of many circuit court

11
decisions interpreting Markham “to block federal jurisdiction over
a range of matters well beyond probate of a will or administration
of a decedent’s estate.” Id. at 311. The Supreme Court then
clarified what constitutes interference “with the state court’s
possession,” as follows:

[W]e comprehend the “interference” language in
Markham as essentially a reiteration of the general
principle that, when one court is exercising in rem
jurisdiction over a res, a second court will not
assume in rem jurisdiction over the same res. Thus,
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. But it does not bar federal courts from
adjudicating matters outside those confines and
otherwise within federal jurisdiction.

Id. at 311-312 (citations omitted). It is clear after Marshall that
unless a federal court is endeavoring to (1) probate or annul a will,
(2) administer a decedent’s estate, or (3) assume in rem jurisdiction
over property that is in the custody of the probate court, the probate
exception does not apply. Insofar as Golden interpreted the probate
exception as a jurisdictional bar to claims “interfering” with the
probate, but not seeking to probate a will, administer an estate, or
assume in rem jurisdiction over property in the custody of the
probate court, that interpretation was overbroad and has been
superseded by Marshall.

III.

Each count in Three Keys’ complaint is based on the
supposition that Three Keys has an ownership interest in SR
Utility. Hence, we must consider the third prohibition of the
probate exception—that a federal court cannot assume in rem
jurisdiction over estate property in the custody of the probate court.
If the relevant shares of SR Utility are Estate property in the
custody of the Orphans’ Court, and if Three Keys’ claims would

12
require a federal court to assume in rem jurisdiction over those
shares, then it follows that the probate exception precludes the
exercise of diversity jurisdiction.

The District Court ruled out the probate exception because
the “record presented to the Court does not prove that the escrow
account, the SR Utility shares transferred to Three Keys, and the
dividends, are ‘property that is in the custody of a state probate
court.’” Three Keys, Ltd. v. SR Utility Holding Co., 464 F. Supp.
2d 388, 393 (D.N.J. 2006) (citing Marshall, 547 U.S. at 312). The
District Court emphasized that the Orphans’ Court did not exercise
jurisdiction over the SR Utility shares during Basciano and
Palmer’s removal proceedings. Id. However, in addition to the
removal proceedings, the Orphans’ Court has been and remains in
the process of probating the Estate. Under Section 711 of the
Pennsylvania Probate, Estates and Fiduciaries Code, the Orphans’
Court has exclusive jurisdiction over the distribution of a
decedent’s estate, which includes the decedent’s personal property
at the time of his or her death. 20 Pa. Cons. Stat. § 711(17).8
Because all of the SR Utility shares were in Samuel’s possession
at the time of his death, they were initially part of the Estate and
became property under the exclusive jurisdiction of the Orphans’
Court.

Nevertheless, Basciano purported to sell 24% of the SR
Utility shares to Three Keys, without acquiring Orphans’ Court
approval. We must determine whether this interested transaction
somehow removed the shares from the exclusive jurisdiction of the
Orphans’ Court. We conclude that it did not.

We have held that “the estate maintain[s] a proprietary
interest in any distributions prior to the Orphans’ Court’s

8
Section 711(17) states that “the jurisdiction of the court of
common pleas over the following shall be exercised through its
orphans’ court division: . . . Title to personal property. The
adjudication of the title to personal property . . . alleged by the
personal representative to have been in the possession of the
decedent at the time of his death.” 20 Pa. Cons. Stat. § 711(17).

13
approval.” Estate of Meriano v. C.I.R., 142 F.3d 651, 661 (3d Cir.
1998). To our knowledge, the Orphans’ Court has yet to rule on
the Beneficiaries’ objections to Basciano and Palmer’s accounting,
which included the SR Utility Stock Transfer. Until the Orphans’
Court determines the validity of the SR Utility Stock Transfer to
Three Keys, the Estate maintains its interest in the SR Utility
shares, which remain property under the jurisdiction of the
Orphans’ Court.

The Orphans’ court maintains jurisdiction over the SR
Utility shares involved in the SR Utility Stock Transfer because
Basciano, as the executor, was an officer of the probate court, who
administered the Estate subject to that court’s control. See Byers
v. McAuley, 149 U.S. 608, 615 (1893) (“An administrator
appointed by a state court is an officer of that court. His possession
of the decedent’s property is a possession taken in obedience to the
orders of that court. It is the possession of the court, and it is a
possession which cannot be disturbed by any other court.”); In re
Rentschler’s Estate, 139 A.2d 910, 918 (Pa. 1958) (removing an
executor because he lost the confidence of the court); In re Estate
of Alexander, 758 A.2d 182, 187 (Pa. Super. 2000) (stating that an
executor is an officer of the court). One mechanism by which the
probate court controls an executor is by requiring him or her to
request and receive probate court approval prior to engaging in
interested transactions, which Basciano failed to do with respect to
the SR Utility Stock Transfer.

Moreover, we note that the Orphans’ Court has extensive
power to remedy improper transfers of estate property. As the
Pennsylvania Supreme Court has stated, “the [O]rphans’ [C]ourt
has jurisdiction finally to decide the question of ownership and
compel a surrender to a decedent’s estate of assets improperly held
by one whose title is colorable only.” In re Williams’ Estate, 84 A.
848, 852 (Pa. 1912); see also Estate of Meriano, 142 F.3d at 661
(same); Mauser v. Mauser, 192 A. 137, 138 (Pa. 1937) (“[P]roperty
admittedly belonging to the estate . . . which, it is charged, was
wrongfully converted . . . after [the testator’s] death . . . is within
the jurisdiction of the orphans’ court, regardless of who may now
hold it.”); cf. In re Hinds’ Estate, 38 A. 599 (Pa. 1897) (affirming
an order of the Orphans’ Court requiring a pledgee of a ward’s

14
property to return the property to the ward, when the guardian
pledged the property for a loan to invest in a security in which he
had a personal interest, without receiving Orphans’ Court
approval). We therefore conclude that the SR Utility shares remain
under the jurisdiction of the Orphans’ Court.

Because the SR Utility shares in question are still property
under the jurisdiction of the Orphans’ Court, it follows that we
cannot assume in rem jurisdiction over that same property. See
Marshall, 547 U.S. at 311-312. We recognize that the distinction
between in rem and in personam is often as elusive as the boundary
lines of the probate exception.9 But at a minimum, following
Marshall, an action “to dispose of property that is in the custody of
a state probate court” involves the assumption of in rem
jurisdiction over that property. Marshall, 547 U.S. at 312.

Count Two of Three Keys’ complaint, labeled “Declaratory
Judgment,” is most clearly in violation of this principle. It seeks a

9
These terms originally correlated to the types of actions and
judgments available in courts acting at law and equity, respectively.
See Walter W. Cook, The Powers of Courts of Equity, 15 C OLUM.
L. R EV. 37, 38 (1915). Of course, in our federal system, actions at
law and suits in equity have been merged into “one form of
action—the civil action.” Fed. Rule Civ. Proc. 2. Meanwhile,
many of the functional distinctions between in rem and in
personam, as bases of jurisdiction, have been abolished, in favor of
less formulaic and more effective methods of ensuring that an
exercise of jurisdiction is fair. See Shaffer v. Heitner, 433 U.S.
186 (1977) (holding that the statutory presence of stock certificates
was an insufficient basis for attachment jurisdiction without
additional minimum contacts between the jurisdiction and the
litigation); Restatement (Second) of Judgments § 5. These changes
accompanied the realization that both forms of jurisdiction “have
the purpose and effect of determining interests of persons.”
Restatement (Second) of Judgments, § 6 cmt. a. Nevertheless,
many substantive differences still exist between in personam and
in rem jurisdiction, and the distinction is still invoked in the case
law discussing the probate exception, most recently in Marshall.

15
federal court determination of Three Keys’ ownership interest in
SR Utility, which would dispose of Estate property under the
jurisdiction of the Orphans’ Court. However, Counts One
(Minority Shareholder Oppression), Three (Breach of Fiduciary
Duty), Four (Breach of the Covenant of Good Faith and Fair
Dealing), and Five (Civil Conspiracy) request, on their face, the
exercise of in personam jurisdiction. Counts One and Three allege
that the Defendants, as majority shareholders and fiduciaries, are
personally liable because they are preventing Three Keys from
accessing its interest in SR Utility; Count Four asserts that the
Defendants are personally liable because they breached the implied
covenant of good faith and fair dealing implicit in the Purchase
Agreement when they prevented Three Keys from enjoying its
interest in SR Utility; and Count Five alleges that the Defendants
are personally liable for conspiring to deprive Three Keys of its
interest in SR Utility.

On the surface, these claims seek to impose liability against
the Defendants as legal persons, which would call for in personam
jurisdiction. However, not only does Three Keys seek as relief the
distribution of probate property,10 Three Keys also seeks a

10
We note that while claims that seek to invoke a federal
court’s in personam jurisdiction generally do not violate the
probate exception, that does not permit a court to grant as relief the
possession of specific property that is within the jurisdiction of a
probate court. In Wisecarver v. Moore, 489 F.3d 747, 751 (6th Cir.
2007), the Sixth Circuit held that even though the claims before it
were in personam, the probate exception barred the court from
granting as relief an order divesting the primary beneficiaries of an
estate of all property retained by them. However, the Sixth Circuit
remanded the case to consider other forms of relief requested, such
as a monetary judgment. Id. Similarly, in Lefkowitz v. Bank of
New York, 528 F.3d 102, 107 (2d Cir. 2007), the Second Circuit
barred claims that sought as relief disgorgement of funds remaining
under the control of the probate court. In this case, Three Keys
seeks the disgorgement of property in the jurisdiction of the
Orphans’ Court. Like the Sixth Circuit in Wisecarver and the
Second Circuit in Lefkowitz, we conclude that such relief is barred

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determination that its interest in the SR Utility shares and dividends
is superior to the interest of the Estate. Each of these claims,
whether characterized as an in personam action or not, requires the
District Court to “endeavor[] to dispose of property that is in the
custody of a state probate court,” which is prohibited by the probate
exception. Marshall, 547 U.S. at 312; see also Byers, 149 U.S. at
618 (holding that federal courts do not have the power to “take
possession of property in the hands of an administrator appointed
by the state court, and thus dispossess that court of its custody”).

In an effort to clarify prior case law, we note the distinction
between an in personam action seeking a judgment that a party has
the right to a distributive share of an estate, but stopping short of
determining a party’s interest in specific estate property, and an in
rem action such as Three Keys’, which seeks a determination of a
party’s interest in specific property in the custody of the probate
court. The distinction mirrors the traditional understanding of a
judgment in personam, which is “of such character that by means
of it the plaintiff can, as a means of attaining the principal object
of the action, subject the general assets of defendant, as
distinguished from some specific property interest, to the payment
of his claim.” Cook, 15 C OLUM. L. R EV. at 120. Hence, in
Markham, which arose during World War II, the Supreme Court
held that a federal court possessed jurisdiction to declare that the
Alien Property Custodian, acting under § 5(b)(1)(B) of the Trading
with the Enemy Act, and not the decedent’s American heirs-at-law,
acquired the interests of German legatees in the estate of a
decedent. 326 U.S. at 492-93, 495. The federal court in Markham
was not asked to declare interests in specific estate assets, but
rather to “decree petitioner’s right in the property to be distributed
after [the estate’s] administration.” Id. at 495.

Similarly, in Marshall v. Lauriault, 372 F.3d 175, 180-82
(3d Cir. 2004), we held that the probate exception did not apply to
a dispute between beneficiaries to a trust and adult adoptees of one
of the beneficiaries over their right to trust income. In Lauriault,
as in Markham, after the federal court decreed rights to the estates,

by the probate exception.

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“[t]he marshaling of that claim with others, its priority, if any, in
distribution, and all similar questions, [were left] for the probate
court upon presentation to it of the judgment or decree of the
federal court.” Pufahl v. Parks’ Estate, 299 U.S. 217, 226 (1936).

Contrary to Markham and Lauriault, a principal and
necessary object of Three Keys’ complaint is the establishment of
its property interest in SR Utility. Because that object calls for the
exercise of in rem jurisdiction over property in the custody of the
Orphans’ Court, the probate exception applies, and we are without
jurisdiction to proceed.

IV.

For the foregoing reasons, the order of the District Court is
vacated, and the case is remanded with instructions to dismiss for
lack of jurisdiction.

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