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Rice v. Rice Foundation

decided: December 4, 1979.

DANIEL F. RICE, JR. AND MARY L. RICE, PLAINTIFFS-APPELLEES,
v.
THE RICE FOUNDATION, AN ILLINOIS CORPORATION, ET AL., DEFENDANTS-APPELLANTS ; DANIEL F. RICE, JR., PLAINTIFF-APPELLEE, V. THE RICE FOUNDATION, AN ILLINOIS CORPORATION, ET AL., DEFENDANTS-APPELLANTS.



Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 77 C 4052 and 77 C 4043 -- John F. Grady, Judge.

Before Sprecher, Circuit Judge, Van Dusen,*fn* Senior Circuit Judge, and Bauer, Circuit Judge.

Author: Sprecher

This is an appeal from an order of the district court denying the motion of certain attorneys to appear as counsel for the defendant Rice Foundation and granting the motion of the plaintiffs and various defendants to disqualify these attorneys as counsel for the Foundation. We will not address the propriety of this order at this time because there is a serious question as to the subject matter jurisdiction of the federal court in these cases. In addition, a decision of the Illinois Appellate Court handed down immediately prior to oral argument in this appeal*fn1 substantially alters the factual context in which the district court's order was entered. Accordingly, we vacate the district court's order and remand these cases for consideration of the jurisdictional issue; if subject matter jurisdiction exists and is exercised, the order must be reconsidered in light of the recent Illinois Appellate Court decision.

I

Our disposition of this appeal obviates the need for a detailed recital of the complicated factual background of the disqualification order. A brief description of the nature and course of the proceedings below and of the related state court proceedings will be sufficient for purposes of our ruling.

These diversity actions involve a dispute as to the proper distribution of the estates of two decedents, Daniel Rice, Sr., and his wife, Ada Rice. The plaintiff, Daniel Rice, Jr., is the adopted son and sole heir of the decedents; the defendant, Rice Foundation, is an Illinois non-profit corporation, founded by the Rices, which is the principal beneficiary of the wills of Daniel, Sr., and Ada. The gist of the plaintiff's claim is that he was deprived of his rightful share of the estates of his parents by acts on the part of various defendants amounting to the exertion of undue influence upon both decedents and fraud in concealing his rights from him. He seeks damages, a declaration that Ada's will is invalid, and any other legal and equitable relief the court deems appropriate.

A number of suits are pending in the Illinois state courts regarding the disposition of the Rice estates, including the probate proceedings for both estates. During the course of one of these suits, it was brought to the attention of the state court that there was a dispute as to which of two competing groups of directors was entitled to control the Rice Foundation. This dispute underlies much of the conflict which has arisen during the federal proceedings. The competing groups of directors are the Nolan directors, represented by Reuben & Proctor, and the Medical Institutions directors, represented by Sonnenschein, Carlin, Nath & Rosenthal. Each group bases its claim to control on a different set of purported by-laws of the Foundation. The state court ruled that the by-laws offered by the Medical Institutions group (the 1974 by-laws) were the legitimate by-laws of the Foundation. This ruling had the effect of removing the incumbent Nolan group from control and placing the Foundation under the direction of the Medical Institutions. Subsequently, the Illinois Appellate Court stayed the lower court's ruling and then, on the day before oral argument in this court, reversed the ruling as to control of the Foundation.

The federal suits on appeal here were pending while this control struggle was proceeding in the state courts; the status of the state court dispute determined, to a large extent, which attorneys attempted to represent the Rice Foundation.*fn2 After the initial state court decision vesting control of the Foundation in the Medical Institutions group, that group's counsel, the Sonnenschein firm, was permitted to appear as the Foundation's counsel in the court below. When the Illinois Appellate Court stay was issued, Reuben & Proctor, on behalf of the Nolan group, moved for leave to appear as the Foundation's counsel on the ground that the stay had the effect of returning control to the Nolan group. This motion was opposed both by the Medical Institutions group and the plaintiffs on the grounds that the stay did not return control to the Nolan group and that representation of the Foundation by counsel for the Nolan group would give rise to substantial conflicts of interest.*fn3 The district court ruled that because of the potentially differing interests of Nolan and the Foundation in the litigation before it, Reuben & Proctor, having represented the Nolan group in the state court control dispute, must be disqualified from representing the Foundation in the federal litigation.*fn4 The court decided that, in view of the control dispute, the only reasonable course would be to appoint independent counsel for the Foundation. The order appealed from directed the competing groups to seek agreement on such independent counsel; if no agreement could be reached, the district court suggested that it would undertake to appoint counsel for the Foundation. An immediate appeal was taken from this order.

II

A

The initial inquiry in any suit filed in federal court must be whether the federal court possesses subject matter jurisdiction. None of the parties to this appeal raise the jurisdictional issue and the record reveals that the court below did not explicitly consider it. Because subject matter jurisdiction determines whether a court has power to act in a given case, a federal court, including a court of appeals, must raise the issue on its own motion where the parties fail to bring it to the court's attention. See City of Kenosha v. Bruno, 412 U.S. 507, 511-12, 93 S. Ct. 2222, 37 L. Ed. 2d 109 (1973); Basso v. Utah Power and Light Co., 495 F.2d 906, 909-10 (10th Cir. 1974); Fed.R.Civ.Pro. 12(h)(3).

The cases on appeal here were filed in the Northern District of Illinois with jurisdiction based upon diversity of citizenship under 28 U.S.C. § 1332(a).*fn5 It is undisputed that the plaintiffs are citizens of California, that none of the defendants are citizens of California, and that the amount in controversy exceeds $10,000. The complaints, therefore, allege the facts necessary to establish federal diversity jurisdiction. There are, however, well-established exceptions to the diversity jurisdiction of the federal courts which may require dismissal of a suit for lack of jurisdiction even where the requisite citizenship and amount in controversy have been established. Lamberg v. Callahan, 455 F.2d 1213, 1216 (2d Cir. 1972); Buechold v. Ortiz, 401 F.2d 371, 372-73 (9th Cir. 1968); C. Wright, Handbook of the Law of Federal Courts § 25, at pp. 97-99 (3d ed. 1976). Of particular importance in this appeal is the judicially created exception which places matters of probate and estate administration outside the power of the federal courts. Markham v. Allen, 326 U.S. 490, 494, 66 S. Ct. 296, 90 L. Ed. 256 (1946); 1A Moore's Federal Practice P 0.201, at p. 2023 (2d ed. 1979); P. Bator, P. Mishkin, D. Shapiro, H. Wechsler, The Federal Courts and the Federal System 1186-88 (2d ed. 1973).

The probate exception is historical in origin, having its roots in the fact that matters of probate and administration were, in 1789, within the exclusive jurisdiction of the English ecclesiastical courts and outside the reach of the High Court of Chancery and the common law courts. The Supreme Court has held that Congress, in drafting the jurisdictional section of the Judiciary Act of 1789, intended that this limitation be imposed upon the federal courts, and that probate matters be within the exclusive jurisdiction of the state courts.*fn6 Markham v. Allen, 326 U.S. 490, 494, 66 S. Ct. 296, 90 L. Ed. 256 (1946); Starr v. Rupp, 421 F.2d 999, 1004 (6th Cir. 1970). The exception has survived to the present and has been recognized in all of the courts of appeals in which the issue was presented, including this court. See Republic of Iraq v. First National Bank of Chicago, 350 F.2d 645, 648 (7th Cir. 1965), Cert. denied, 382 U.S. 982, 86 S. Ct. 556, 15 L. Ed. 2d 471 (1966).*fn7

Despite its long history and undisputed viability, the probate exception is not easily applied to particular cases. It is clear that "pure" probate matters are outside federal jurisdiction. Waterman v. The Canal-Louisiana Bank & Trust Co., 215 U.S. 33, 44, 30 S. Ct. 10, 54 L. Ed. 80 (1909); Mitchell v. Nixon, 200 F.2d 50, 51 (5th Cir. 1952). It is equally clear, however, that "(t)he exception from the diversity jurisdiction as to probate matters is far from absolute." C. Wright, Supra, at 98 (citations omitted). In fact, the federal courts construe the meaning of "probate" quite narrowly to limit the scope of the exception. Phillips, Nizer, Benjamin, Krim & Ballon v. Rosenstiel, 490 F.2d 509, 514 (2d Cir. 1973); Akin v. Louisiana National Bank of Baton Rouge, 322 ...


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