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Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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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.

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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 insurance 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. (Stevenson 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

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litigation, the court also rejected Stevenson's claim for attorneys' 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 adjudication. 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. However, she sought these fees not as litigation costs, but as

damages for costs incurred to correct negligence. See Appellant'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 National 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

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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 judgment 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 jurisdiction 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 jurisdiction, or leave the question whether to dismiss to the discretion 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 supplemental jurisdiction over all other claims that are so

related to claims in the action within such original jurisdiction that they form part of the same case or controversy 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 jurisdiction,

(3) the district court has dismissed all claims over which

it has original jurisdiction, or

(4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.

Id.

In the typical exercise of supplemental jurisdiction, a district 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). Indeed, the statute plainly provides for the exercise of discretion whenever "the district court has dismissed all claims over

which it has original jurisdiction" irrespective of whether

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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 discretion to entertain the remaining claim if it so chooses. In

deciding whether to exercise its discretion to try the remaining cause of action, the Supreme Court has directed district

courts to consider factors such as "judicial economy, convenience, 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.

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