Stevenson, Ferdinan v. Severs, Charles A.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 1, 1998 Decided October 27, 1998

No. 97-7157

Ferdinan B. Stevenson,

Appellant

v.

Charles A. Severs, III, et al.,

Appellees

Appeal from the United States District Court

for the District of Columbia

(No. 95cv02327)

Robert L. Widener argued the cause for appellant. With
him on the brief was Chrys D. Lemon.

Jack Kaufmann argued the cause for appellees. With him
on the brief were Myles V. Lynk and Ralph G. Blasey, III.

Before: Wald, Williams and Tatel, Circuit Judges.

Opinion for the Court filed Per Curiam.

Per Curiam: In 1986, appellant Ferdinan B. Stevenson
retained a lawyer, appellee Charles Severs, and an insurance
agent, appellee Sam Radin of National Madison Group, Inc.,
to set up a life insurance trust to benefit her four children
upon her death. In order to avoid estate and gift tax liability
for her yearly contributions to the trust, Severs advised
Stevenson that the trust itself, instead of Stevenson's estate,
should be the owner and beneficiary of two life insurance
policies, each worth half a million dollars. Nine years later, a
different lawyer retained by Stevenson noticed that the life
insurance policies listed her estate, not the trust, as the
policies' beneficiary. After the new lawyer directed the in-
surance agent to transfer the policies to the trust and after
she paid $61,451 in gift taxes, Stevenson sued Severs, Radin,
and National Madison Group in the United States District
Court for the District of Columbia seeking recovery of those
gift taxes, $550,000 in possible future estate tax liability that
her estate would incur pursuant to 26 U.S.C. s 2035(a) if she
were to die within three years after the transfer, and $25,000
she had paid to the lawyer who discovered the problem.

The district court granted summary judgment for all three
appellees. The court found that Stevenson had not incurred
any additional gift tax liabilities since she had already used
her $10,000 per year exemption by giving yearly gifts to her
children, the trust's beneficiaries. Even if the trust had been
set up correctly, contributions to it would therefore have been
subject to gift taxes. Moreover, the interpolated terminal
reserve value of the policies at the date of the ultimate gift,
$165,260, was less than the $170,901 that Stevenson would
have had to pay had the trust been set up correctly. (Steven-
son would have been liable for gift taxes on $161,256 in
premium payments paid from 1990 to 1994 plus $9,645 for
gifts given from 1986 to 1988 above and beyond her $10,000
per year exemption.) The court also found that none of the
appellees had a duty to advise Stevenson on the potential gift
tax liabilities of the trust arrangement, and that even if they
had such a duty, they had not breached it. The district court
found that the estate tax claim was unripe. Relying on the
"American Rule" that each party pay the costs of its own

litigation, the court also rejected Stevenson's claim for attor-
neys' fees.

We affirm the district court's ruling that Stevenson has
failed to prove actual injury. We agree that no evidence
appears in the record suggesting that even if appellees had
properly established the trust, Stevenson would have paid
less in gift taxes than she eventually did. Stevenson fails to
point to anything in the record suggesting that she would
have altered her gift-giving practices had the trust been
properly established. Indeed, Stevenson's own estate tax
expert states in his affidavit: "There is absolutely no way of
knowing whether the plaintiff would have maintained the
same pattern of gift giving if she were using her annual
exclusion for the payment of insurance premiums." Affidavit
of Sanford J. Schlesinger, p 8. We also agree with the
district court that the estate tax claim was unripe for adjudi-
cation. Indeed, assuming Stevenson has survived beyond
September 29, 1998--three years after the date of transfer--
the estate tax claim is now moot.

We find, however, that the district court misinterpreted
Stevenson's claim for attorneys' fees. The district court
viewed Stevenson's claim as one for litigation costs. Howev-
er, she sought these fees not as litigation costs, but as
damages for costs incurred to correct negligence. See Appel-
lant's Amended Complaint at pp 23-25, 35, 39, 44, 48. Viewed
this way, her claim is not barred by the "American Rule."
But Stevenson can only recover the fees paid to the lawyer
who discovered the problem if appellees had, in fact, breached
a duty they owed her. Specifically, she must show that
Severs' "neglect of a reasonable duty ... resulted in and was
the proximate cause of loss to the client," M & S Building
Supplies v. Keiler, 738 F.2d 467, 472 (D.C. Cir. 1984) (internal
quotation omitted), and/or that the facts of Radin and Nation-
al Madison Group's relationship with her warrant a finding of
liability, see Aetna Casualty & Surety Co. v. Walter Ogus,
Inc., 396 F.2d 667, 669-70 (D.C. Cir. 1967); 16A John Allen

Appleman & Jean Appleman, Insurance Law and Practice
65-66 (1981) ("[W]here an agent also holds himself out as a
consultant and a counselor, he does have a duty to advise the
insured as to his insurance needs, particularly where such
needs have been brought to the agent's attention."). But
because appellees point to nothing in their summary judg-
ment motions indicating that the issues of duty to advise on
gift tax liabilities or breach of such a duty were properly
brought to the attention of the district court and Stevenson,
we reverse and remand on the issues of duty and breach.

This leaves for adjudication on remand, then, a $25,000
claim for attorneys' fees, a claim which falls below the $75,000
amount-in-controversy requirement for federal court jurisdic-
tion based on diversity of citizenship. See 28 U.S.C.A.
s 1332(a) (West Supp. 1998). We must therefore decide
whether to follow appellees' suggestion and remand with
directions to dismiss this remaining claim for want of jurisdic-
tion, or leave the question whether to dismiss to the discre-
tion of the district court, as Stevenson urges.

Resolution of this issue turns on the language of the
supplemental jurisdiction statute, 28 U.S.C. s 1367(a) (1994),
which provides:

[I]n any civil action of which the district courts have
original jurisdiction, the district courts shall have supple-
mental jurisdiction over all other claims that are so
related to claims in the action within such original juris-
diction that they form part of the same case or contro-
versy under Article III of the United States Constitution.
Courts may decline to exercise supplemental jurisdiction over
a state law claim if
(1) the claim raises a novel or complex issue of state
law,
(2) the claim substantially predominates over the claim
or claims over which the district court has original jurisdic-
tion,
(3) the district court has dismissed all claims over which
it has original jurisdiction, or
(4) in exceptional circumstances, there are other compel-
ling reasons for declining jurisdiction.

Id.

In the typical exercise of supplemental jurisdiction, a dis-
trict court finds that a state claim is "so related" to a federal
cause of action that it forms "the same case or controversy,"
United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966); in
the interest of efficient use of judicial resources, the court
therefore asserts supplemental jurisdiction over the state law
claim. As the Fourth Circuit has held, however, "the statute
is not limited to cases where the original basis for federal
jurisdiction was a federal question. It clearly provides for
the operation of supplemental jurisdiction in diversity cases."
Shanaghan v. Cahill, 58 F.3d 106, 109 (4th Cir. 1995). In-
deed, the statute plainly provides for the exercise of discre-
tion whenever "the district court has dismissed all claims over
which it has original jurisdiction" irrespective of whether
original jurisdiction arose from diversity of citizenship or
existence of a federal question. 28 U.S.C. s 1367(c)(3).

In this case, the district court had original jurisdiction over
Stevenson's claim since the amount in controversy from her
combined gift tax liability, estate tax liability, and attorneys'
fees claims exceeded $75,000. Because we have affirmed the
district court's grant of summary judgment on two of the
three claims, however, the case on remand now consists
entirely of a claim over which the district court would not
have had jurisdiction had it been the sole basis for the
original claim. Yet because the attorneys' fees claim formed
part of the same "case or controversy" as the underlying
jurisdictionally sufficient claims, the district court has discre-
tion to entertain the remaining claim if it so chooses. In
deciding whether to exercise its discretion to try the remain-
ing cause of action, the Supreme Court has directed district
courts to consider factors such as "judicial economy, conve-
nience, fairness [to the parties], and comity [between the
federal and state judiciary]." Carnegie Mellon University v.
Cohill, 484 U.S. 343, 350 n.7 (1988).

This matter is remanded for proceedings consistent with
this opinion.

So ordered.