The Probate Exception to Federal Jurisdiction

Edita Applebaum v. William P. Fabian, et al., Civ. No. 18-11023-KM-JSA, 2021 WL 5833454 (D.N.J. December 9, 2021)

This case highlights the so-called “probate exception” to federal jurisdiction, in addition to more frequent bars to recovery that practitioners are likely to face in federal and state courts.

Decedent Todd Harris Applebaum passed away testate in November 2012.  At death, his largest assets consisted of the stock in his solely-owned corporation, Todd Harris Company (“THC”); a condominium; a 51% stake in Toben Investments, Inc. (“Toben”),  with a single asset of a commercial building; and a 401(k) plan containing approximately $100,000 that did not list his wife, plaintiff Edita Applebaum (“Edita”), as a beneficiary.

Decedent’s will bequeathed 60% of his stock in THC to a trust for the benefit of Edita and the couple’s three children.  The balance of his estate passed to Edita outright.  The will appointed decedent’s son, Benjamin Applebaum (“Applebaum”), and decedent’s close friends and business associates, William Fabian (“Fabian”) and Frank Rajs (“Rajs”), as trustees of the trust.  Fabian was also named as executor of decedent’s estate.  Notably, as executor, the will vested Fabian with the power to “sell, convey, mortgage, lease, invest, reinvest, exchange, manage, control, retain or otherwise deal with any and all property, real or personal, comprising [decedent’s] estate, … and to make distribution under [the] Will wholly or partly in kind or money.”  Id. at *1.

Fabian was appointed executor in December 2012.  Following his appointment, THC’s shareholders held a meeting and elected Fabian and Rajs as directors.  At that time, Rajs was also appointed as THC’s president and CEO.  Edita attended the meeting.

Between December 2012 and June 2013, on three separate occasions, THC drew down on a line of credit with Sun Bank that decedent had personally guaranteed.  In June 2013, Sun Bank became aware of decedent’s death and declared a default under the loan agreement.  The bank alleged decedent’s signature had been forged on the drawdown paperwork submitted in the months after his death and filed an action against decedent’s estate, THC, Rajs, and THC’s controller.

In response to the lawsuit, THC and Toben’s board of directors held a special meeting.  Counsel for THC and decedent’s estate advised the board that Sun Bank would likely prevail in the lawsuit but had offered to settle the matter for roughly $350,000.  After exploring different options, THC’s board agreed to cause the company to borrow $350,000 from Fabian and to execute a promissory note.  Edita and Applebaum guaranteed the loan.  At the special meeting, Fabian disclosed he had made other loans to THC, but they had been kept off the company’s books, which likely allowed THC to obtain the line of credit.

To cover taxes and estate administration expenses, Fabian caused Toben to sell its commercial building for $800,000.00 in October 2013.  He used a portion of the sale proceeds to pay himself back for the monies he had loaned to THC and to advance funds to THC for its business operations.

Edita accused Fabian of selling the Toben building for less than its fair market value.  She had also begun to question how THC was being managed during a brief stint of employment with the company, which began in June 2013.  THC fired her in December 2013, and, not long thereafter, Fabian elected to distribute her 40% share in THC in cash.

On March 31, 2014, Edita filed an 11-count complaint in New Jersey Superior Court.  She claimed Fabian, Rajs, and others had defrauded THC and breached their fiduciary duties to the company.  She also brought claims against Fabian, Rajs, and others in her individual capacity for intentional interference with inheritance and intentional infliction of emotional distress.  Additionally, she asserted a claim for breach of fiduciary duties against Fabian for selling the Toben property.  By way of an order to show cause, she sought emergent relief to remove Fabian as executor, to remove Fabian and Rajs as officers of THC and Toben and trustees of the trust and to replace them with herself, and to compel Fabian to distribute her 40% share of THC and 51% share of Toben in kind.

The trial court found Edita failed to show a likelihood of success on the merits and denied her request for emergent relief.  Over the next few years, the trial court also denied her continual requests to remove Fabian as Executor.

On April 30, 2019, the trial court approved Fabian’s final estate accounting over Edita’s exceptions.  Moreover, the court found no evidence of fraud by Fabian, dismissed all claims against him and the other defendants, approved the distribution of her 40% share in THC in cash instead of in kind, and closed the estate.  Edita subsequently appealed.

In April 2021, the Appellate Division affirmed the trial court’s rulings but remanded the matter for a limited evidentiary hearing on exceptions to Fabian’s accounting that were unrelated to the sale of the Toben property and distribution of cash in lieu of the THC shares.  The Appellate Division held that the trial court had properly concluded there was no evidence to substantiate Edita’s fraud claim.  It also upheld the trial court’s approval of the distribution of cash to Edita instead of the THC shares, explaining that the “will’s clear grant of discretion to the executor” prevailed over New Jersey law’s preference for in-kind distributions.  Id. at *4.

While her state court action was still pending, in June 2018, Edita filed a 12-count complaint against many of the same defendants in the United States District Court for the District of New Jersey.  After Edita amended her Complaint twice, the defendants moved to dismiss the Second Amended Complaint (the “2nd AC”) in its entirety.

The 2nd AC alleged the following:  (1) federal RICO violations, (2) common law fraud, (3) defamation, (4) New Jersey CEPA violations, (5) conversion, (6) ERISA violations, (7) intentional infliction of emotional distress, (8) tortious interference with prospective economic advantage, (9) negligence, (10) John Doe counts, (11) New Jersey RICO violations, and (12) civil conspiracy.  The district court dismissed all 12 claims, finding that they were time-barred, failed to state a claim, or were otherwise barred by the litigation privilege or the probate exception.  As to the federal and New Jersey RICO claims, the district court found that six of the seven predicate acts fell outside the four-year statute of limitations.  The remaining predicate act, based upon the defendants’ alleged litigation fraud and perjury in filings in the state court action, was not an eligible predicate racketeering act under the RICO statute and failed on the merits.  Moreover, the First Amendment and the Noer-Pennington doctrine, which immunizes a party who petitions the government for redress from liability arising out of that petition, protected the defendants’ submissions in the state court action.

With respect to Edita’s fraud claim, the district court held that she had failed to identify a specific misrepresentation that she had relied on to her detriment.  Thus, she failed to state a claim for common law fraud under New Jersey law.

Edita’s defamation and CEPA claims likewise failed.  The defamation claim, which arose out of the statements the defendants made in affidavits filed with the probate court, was barred, in part, by the applicable one-year statute of limitations.  The underlying statements were also protected by the litigation privilege, which immunizes a litigant from liability for statements made in the course of a judicial proceeding.  Edita’s CEPA claim based upon her alleged wrongful termination from THC was similarly time-barred.  Moreover, her efforts to allege a “continuing violation” based upon the defendants’ actions in the probate action were barred by the litigation privilege and the Noer-Pennington doctrine.

Edita’s conversion and ERISA claims failed to allege that she was a beneficiary of the 401(k) account.  In addition, she could not allege that payment of the 401(k) to the decedent’s estate injured her.  Thus, the district court found that she failed to state a conversion claim and lacked standing to bring an ERISA claim.

The district court further held that Edita’s intentional infliction of emotional distress and civil conspiracy claims were barred, in part, by the probate exception.  The district court noted 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….”  Id. at *5.  Thus, to the extent either claim sought to overturn the probate court’s decision to allow Fabian to distribute cash in lieu of the THC shares, both claims failed.  Moreover, Edita failed to allege conduct that approached the level of outrageous required to state an emotional distress claim,  and the remaining allegations comprising her civil conspiracy claim were not actionable.

Edita’s claims for tortious interference and negligence also warranted dismissal.  Edita was unable to plausibly allege that she had a protectable interest in the funds from the decedent’s 401(k), certain compensation that had been paid to Fabian, or the Toben property.    Therefore, she did not allege a cognizable claim for tortious interference.  Furthermore, the district court observed that her negligence claim was based upon Fabian’s alleged breach of fiduciary duties that he owed her as executor of decedent’s estate.  The trial court and the Appellate Division had already considered that theory of liability and rejected it on the merits.  Those decisions were final and had “claim- and issue-preclusive effect.”  Id. at *14.  Consequently, the district court dismissed both claims.

Finally, the district court denied Edita’s cross-motion to amend her Complaint a third time, finding that any further amendment would be futile.