Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_05-cv-01114/USCOURTS-caed-1_05-cv-01114-3/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 28:1332 Diversity-(Citizenship)

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

JAMES K. WICKERSHAM,

 Plaintiff,

 v. 

HILARY W. CLARK, individually;

CHRISTOPHER W. CLARK; CHARLES K.

CLARK; HADLEY E. CLARK; and

EDWARD HUFF, Interim Trustee of

the GT Turnbow Trust,

 Defendants.

1:05-CV-1114 OWW LJO

ORDER GRANTING DEFENDANTS

HILARY W. CLARK, CHRISTOPHER

W. CLARK, CHARLES K. CLARK,

AND HADLEY E. CLARK’S MOTION

TO DISMISS FOR LACK OF

SUBJECT-MATTER JURISDICTION

OR, IN THE ALTERNATIVE, TO

DISMISS OR STAY THIS ACTION

ON ABSTENTION AND OTHER

GROUNDS 

I. INTRODUCTION

Defendants Hilary W. Clark, Christopher W. Clark, Charles K.

Clark, and Hadley E. Clark (collectively, the “Clark Defendants”)

move to dismiss or stay Plaintiff James K. Wickersham’s

(“Plaintiff”) federal complaint for declaratory relief for lack

of subject-matter jurisdiction under Rule 12(b)(1) of the Federal

Rules of Civil Procedure. Plaintiff opposes the motion.

Jurisdiction is premised on diversity under Title 28,

Section 1332, of the United States Code, as Plaintiff is a Nevada

citizen and all Defendants are California citizens. The amount

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 Plaintiff’s motion for summary judgment is also before the 1

court.

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in controversy exceeds seventy-five thousand dollars, exclusive

of interest and costs. 

II. PROCEDURAL HISTORY 

The complaint was filed on August 30, 2005. Doc. 1, Compl. 

The first amended complaint (“FAC”) was filed on August 31, 2005. 

Doc. 5, FAC. Edwin D. Huff (the “Trustee”), interim trustee of

the G. T. Turnbow Trust, answered and counterclaimed on October

10, 2005. Doc. 12, Huff Ans. The response to the Trustee’s

answer and counterclaim was filed on October 28, 2005. Doc. 13,

Resp. to Huff Ans. The Clark Defendants answered and

counterclaimed on October 21, 2005. Doc. 14, Clark Ans. 

Plaintiff moved for summary judgment on October 31, 2005. Doc.

15, Mot. for Summ. J. The Clark Defendants responded on November

18, 2005. Doc. 22, Clark Resp. in Opp. to Mot. for Summ. J.

Plaintiff’s answer to the Clark Defendants’ counterclaim was

filed on November 18, 2005. Doc. 23, Ans. to Countercl. 

The Clark Defendants moved to dismiss the FAC on January 31,

2006. Doc. 40, Mot. to Dismiss. The Clark Defendants’ motion in

opposition to summary judgment was filed on January 31, 2006. 

Doc. 43, Mot. in Opp. to Summ. J. Plaintiff’s response in

1

opposition to the Clark Defendants’ motion to dismiss the FAC was

filed on February 13, 2006. Doc. 47, Resp. in Opp. The Clark

Defendants’ reply to Plaintiff’s response in opposition to the

motion to dismiss was filed on February 21, 2006. Doc. 58,

Reply. The motions were heard on April 17, 2006. 

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III. BACKGROUND

Dr. Grover D. Turnbow died in 1971. His will created a

testamentary trust (“the Trust”) which was established pursuant

to the decree of final distribution, filed December 11, 1975, by

the Alameda County, California, Superior Court (“the Probate

Court”). Dr. Turnbow’s surviving spouse, Ruth H. Turnbow, was

the sole income beneficiary. Upon her death, the Turnbows’ only

child, Mildred Turnbow Wickersham, became the Trust’s sole income

beneficiary.

The Trust provided that on Mrs. Wickersham’s death, the

Trust continued until the death of her last surviving child.

Mrs. Wickersham died on September 20, 2002. She was survived by

her three adult children, Grover, James, and Hilary, who are now

the income beneficiaries of the Trust. Decl. of Dean A. Morehous

in Supp. of Mot. to Dismiss [hereinafter, “Morehous Decl.”], Ex.

H, 3; Doc. 47, Resp. in Opp., 3. 

The Triangle-T Ranch (“the Ranch”) was organized in 1960 as

a California C-corporation, and operates an agricultural business

on twelve thousand acres in Madera, California. In or about

1985, the Ranch’s board of directors and the shareholders

unanimously elected Subchapter-S status under Title 26, Section

1362(a), of the United States Code. Doc. 5, FAC, ¶¶ 14-15. 

 The Trust’s primary assets include a stock, bond, and cash

portfolio valued at more than three million dollars, and fiftyseven thousand, eight hundred fifty-nine shares of the Ranch,

forty-two percent of the issued and outstanding voting Ranch

shares. Grover T. Wickersham, Plaintiff James K. Wickersham, and

Defendant Hilary Wickersham Clark each individually own sixteen

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and eight tenths percent of the Ranch shares, as well. Morehous

Decl., Ex. H, 3-4; Doc. 47, Resp. in Opp, 2-3. 

Dr. Turnbow’s will designated the Bank of America as the

Trust’s sole trustee. After Dr. Turnbow’s death, his son-in-law,

James E. Wickersham, became co-trustee with First Interstate

Bank. First Interstate resigned after a disagreement with James

E. Wickersham. William Hobbs, a friend of James E. Wickersham,

was then appointed co-trustee. When James E. Wickersham died in

October 2001, Hobbs continued to serve as sole trustee. On July

19, 2004, Mr. Hobbs petitioned the Probate Court, to approve his

resignation as trustee. Defendant Hilary Clark objected to the

successor trustee nominated by Grover Wickersham and Plaintiff

James K. Wickersham, and the Probate Court on its own motion

appointed Edwin Huff, an accountant who practices in Fresno,

California, as interim trustee (“the Trustee”), effective

September 13, 2004. Morehous Decl., Ex. H, 5; id., Ex. B, 1. 

On August 25, 2005, the Probate Court ordered the Trustee to

report on his analysis and application of the Uniform Prudent

Investor Act to the Trust’s ownership of stock in the Ranch.

Morehous Decl., Ex. B, 1. The Trustee recommended that the Ranch

be liquidated and its assets sold to achieve diversification of

Trust assets. Id., 15-16. Grover Wickersham and Plaintiff

oppose the Trustee’s recommendation. Id., Ex. H, 6. 

The Trustee opines:

[t]o the extent that diversification is achieved by an

asset sale, the best tax treatment will be obtained by

liquidating the corporation while it retains Subchapter S status. The Sub-chapter S tax benefits,

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pursuant to a plan of liquidation, would avoid

approximately twelve million dollars of double tax at

the corporate level, forty-two percent of which, of

approximately five million dollars, would be imposed on

the Trust. 

Id., Ex. B, 15. The Probate Court has taken no action on the

Trustee’s recommendation. 

Plaintiff seeks to exchange some of his Ranch shares for a

limited partnership interest in the Glenbrook Capital Limited

Partnership (“Glenbrook”). Doc. 5, FAC, ¶ 22. Because Glenbrook

will not qualify for Sub-chapter S shareholder status,

Plaintiff’s proposed transfer would destroy the Ranch’s Subchapter S status. Id., ¶ 23; Morehous Decl., Ex. B, 4; Morehous

Decl., Ex. G (James K. Wickersham Dep.), 255-56.

Defendant Hilary Clark intends to sue Plaintiff, Glenbrook,

or any person to whom Plaintiff transfers Ranch shares if such

transfer results in the de-election of the Ranch’s Sub-chapter S

status. Doc. 5, FAC, ¶ 24. Plaintiff seeks a declaratory

judgment that as a Ranch shareholder, he has the unrestricted

right to transfer shares to any party, without personal

liability, whether or not the transfer would terminate Subchapter S status. Id., ¶ 28. 

IV. LEGAL STANDARD

Rule 12(b)(1) of the Federal Rules of Civil Procedure

governs dismissal of a suit for lack of subject-matter

jurisdiction. “A federal court is presumed to lack jurisdiction

in a particular case unless the contrary affirmatively appears.” 

A-Z Int’l v. Phillips, 323 F.3d 1141, 1145 (9 Cir. 2003). th

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“When subject-matter jurisdiction is challenged under Federal

Rule of [Civil] Procedure 12(b)(1), the plaintiff has the burden

of proving jurisdiction in order to survive the motion.” Tosco

Corp. v. Communities for a Better Environment, 236 F.3d 495, 499

(9 Cir. 2001). th

A challenge to jurisdiction under Rule 12(b)(1) “can be

either facial, confining the inquiry to allegations in the

complaint, or factual, permitting the court to look beyond the

complaint.” Savage v. Glendale Union High School, 343 F.3d 1036,

1039-40 n.2 (9 Cir. 2003). In a factual Rule 12(b)(1)

th

challenge, “the district court is not restricted to the face of

the pleadings, but may review any evidence, such as affidavits

and testimony, to resolve factual disputes concerning the

existence of jurisdiction.” McCarthy v. United States, 850 F.2d

558, 560 (9 Cir. 1988); see also Safe Air for Everyone v.

th

Meyer, 373 F.3d 1035, 1039 (9 Cir. 2004) (“[i]n resolving a th

factual attack on jurisdiction, the district court may review

evidence beyond the complaint without converting the motion to

dismiss into a motion for summary judgment”). 

Once the moving party has raised factual issues by

presenting affidavits or other evidence properly brought before

the court, the party opposing the motion to dismiss must furnish

affidavits or other evidence necessary to satisfy its burden of

establishing subject-matter jurisdiction. Savage, 343 F.3d 1039-

40 n.2.

Where a defendant in its motion to dismiss under Federal

Rule of Civil Procedure 12(b)(1) asserts that the allegations in

the complaint are insufficient to establish subject matter

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jurisdiction as a matter of law (to be distinguished from a claim

that the allegations on which jurisdiction depends are not true

as a matter of fact), the allegations in plaintiff’s complaint

are accepted as true. Whisnant v. United States, 400 F.3d 1177,

1179 (9 Cir. 2005). th

V. ANALYSIS

A. Subject-Matter Jurisdiction

Plaintiff seeks relief under the Federal Declaratory

Judgment Act, 28 U.S.C. §§ 2201-2202 (2004). Because the

Declaratory Judgment Act does not by itself confer federal

subject-matter jurisdiction, Plaintiff is required to plead an

independent basis for federal jurisdiction. Nationwide Mut. Ins.

Co. v. Liberatore, 408 F.3d 1158, 1161 (9 Cir. 2005). th

Plaintiff alleges that the parties are of diverse citizenship and

that the amount in controversy exceeds seventy-five thousand

dollars. Doc. 5, FAC, ¶¶ 1-4. See 28 U.S.C. § 1332. 

1. Nature of Declaratory Relief Action

The purpose of a federal declaratory judgment is to give

litigants an early opportunity to resolve issues to avoid the

threat of impending litigation. Biodiversity Legal Foundation v.

Badgley, 309 F.3d 1166, 1172 (9 Cir. 2002); McDougald v. th

Jenson, 786 F.2d 1465, 1481 (11 Cir. 1986) (objectives of th

Declaratory Judgment Act include affording one threatened with

liability, but otherwise without a satisfactory remedy, an early

adjudication of an actual controversy); United States v. Doherty,

786 F.2d 491, 498-99 (2 Cir. 1986) (declaratory-judgment nd

procedure “creates a means by which rights and obligations may be

adjudicated in cases involving an actual controversy that has not

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reached the stage at which either party may seek a coercive

remedy”) (quoting Charles Allen Wright, The Law of Federal Courts

§ 100, at 671 (4 ed. 1983). Here, the legal issues to be th

decided are governed by state, not federal, law (alienability of

shares in a close Sub-S corporation). 

Defendants allege that Plaintiff’s declaratory-judgment

claim falls within the probate exception to federal jurisdiction,

which cedes jurisdiction to a state probate court when its

requirements are satisfied. Until May 2006, the Ninth Circuit

used a two-part test to determine applicability of the probate

exception: (1) whether the matter is purely probate in nature,

that is, whether the federal court is being asked directly to

probate a will or administer an estate; or (2) probaterelatedness, which determines whether, by exercising jurisdiction

over the matter, the federal court will (a) interfere with the

probate proceedings, (b) assume general jurisdiction of the

probate, or (c) assume control over property in custody of the

state court. If the answer to any of these questions is yes,

then the probate exception applies. In re Marshall, 392 F.3d

1118, 1133 (9 Cir. 2004) (citing Moser v. Pollin, 294 F.3d 335, th

340 (2 Cir. 2002)). The United States Supreme Court reversed

nd

the Ninth Circuit in Marshall v. Marshall, — U.S. —, 126 S.Ct.

1735 (2006). Holding that the Ninth Circuit had interpreted the

probate exception too expansively, the Court stated:

[T]he 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

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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.

Marshall, 126 S.Ct. at 1748. The declaratory relief requested

falls outside the probate exception as stated either by the

Supreme Court or by the Ninth Circuit. 

2. First Moser Inquiry: Purely Probate

Defendants argue that the first part of the Moser test is

satisfied, because “granting relief to the Plaintiff in this case

will unquestionably cause a change in [the Ranch’s] income-tax

status,” Doc. 40, Mem. in Supp., 13, and that would interfere

with the Trustee’s discretion regarding diversification of Trust

assets and also with the Probate Court’s power to review and

approve the Trustee’s actions, id., 12. 

The determination Plaintiff seeks would have neither alleged

effect. The event triggering the de-election of the Ranch’s Subchapter S status is the transfer of Ranch shares to a non-Subchapter-S qualified shareholder. The requested declaratory

judgment that Ranch shares are freely transferable would not

itself cause any change to the tax status of the Ranch shares.

Nor is the tax status of these shares inherently an incident of

probate proceedings or the probate administration of the

decedent’s estate. 14A Fletcher Cyc. Corp., § 6970.198 (Perm.

ed). The judgment sought would declare that Plaintiff has the

legal authority to transfer his shares, which are not assets of

the probate estate, to a non-qualified buyer, which would defeat

the Sub-chapter S election. Defendants have not shown that the

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corporation, Triangle-T Ranch, is before the Probate Court. 

“As the Moser court noted, since few practitioners would be

so misdirected as to seek, for example, letters testamentary or

letters of administration from a federal judge, the answer to

[the first] question is almost always ‘No.’” Marshall, 392 F.3d

at 1133. Here, Plaintiff seeks a federal court judgment that he

may transfer, without liability, his own shares (not shares in

the estate), in a corporation not subject to control of the

Probate Court, to Glenbrook with the objected-to adverse tax

effect on all the Ranch’s corporate shares, forty-two percent of

which are owned by the testamentary Trust. The Trust is under

the continuing jurisdiction of the Probate Court. Doc. 5, FAC,

¶¶ 25-28. The judgment sought is governed by state corporate

securities law and requires no decision whether the will

establishing the Trust is valid or should have been admitted to

probate; supervising the Trust’s administration; or addressing

any purely probate matter. Marshall, 392 F.3d at 1133. There is

no facial conflict with the Probate Court’s authority over the

Trust. The federal court has not been asked to assume

jurisdiction over the probate estate: to exert control over the

Trust’s Ranch shares, the only property subject to probate even

arguably “in the custody” of the Probate Court. Plaintiff’s

federal claim for relief is not “purely probate” in character. 

3. Second Moser Inquiry: Probate-Relatedness 

Defendants argue the requested relief is probate-related

because it would interfere with the probate proceedings and give

the federal court control over property in custody of the Probate

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 Defendants do not argue that the federal court is being 2

asked to assume general jurisdiction over the probate. This

factor need not be analyzed. 

11

Court : 2

[A]djudication of [P]laintiff[’s] [] complaint would

bind and limit the discretion of the Probate Court and

the Trustee regarding the appropriate diversification

strategy for the Trust. That is because this [c]ourt’s

[declaratory judgment] would allow [Plaintiff] to

determine [the Ranch’s] taxation status unilaterally

and thereby control the diversification strategy for

the Trust selected by the Probate Court’s designated

officer[.]

Doc. 40, Mem. in Supp., 7. 

a. Interfere With Probate Proceedings

The declaratory judgment would validate Plaintiff’s

transfer to Glenbrook of his Ranch shares, without subjecting him

to personal liability to all other Ranch shareholders or the

Ranch corporation for the adverse tax consequences that will

befall the corporation and other shareholders. This includes the

Trustee of the testamentary Trust in his capacity as a Ranch

shareholder. Doc. 5, FAC, ¶¶ 25-28. Such a judgment would not

“allow [Plaintiff] to determine [the Ranch’s] taxation status

unilaterally.” It will determine transferability of his shares,

a matter of state corporate and commercial law, not probate law,

as provided for by the articles of incorporation, by-laws, and

the alienability of corporate shares of close corporations under

the California Corporations and Uniform Commercial Codes. The

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judgment will not per se interfere with the probate proceedings,

because the issues of Ranch share transferability and class

corporation shareholder fiduciary duties to other shareholders

are independent of the probate proceeding and not governed by

probate law. Nor does the probate court have jurisdiction over

the corporation or non-probate non-Trust shares, even if the

proposed transfer is not in the best economic interests of the

probate estate. 

Defendants argue that if a federal court adjudicates

Plaintiff’s complaint it will “necessarily supplant the judgment

of the Probate Court regarding the Trust diversification

strategy” recommended by the Trustee. Id., 7. The Probate Court

has made no order to effect the Trustee’s recommendation. Even

if the share transfer occurs after a declaratory judgment in

federal court, the Probate Court retains full discretion to

approve the Trustee’s diversification strategy in light of the

transferability of the Ranch shares. The requested declaratory

judgment is not to change the shares’ tax status. Arguendo, even

if the requested determination directly changed the tax status of

the Trust’s Ranch shares, this will not implicate the probate

exception. See Markham, 326 U.S. at 494. 

No action to dissolve the corporation has been filed in

state court or the probate proceedings. Nor do Defendants

suggest how the Probate Court could effect a dissolution and

liquidate the corporation with only forty-two percent of the

Ranch shares owned by the Trustee subject to probate

jurisdiction. The federal judgment will not operate in rem or

undermine the Probate Court’s authority or control over Ranch

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shares owned by the Trust. 

b. Assume Control of Probate Property 

Defendants argue that by granting the requested relief “the

[c]ourt will invariably assume control” of Trust property, the

Ranch shares held by the Trust, which is under the continuing

jurisdiction of the Probate Court. Doc. 40, Mem. in Supp., 7. 

This too is incorrect. The declaratory judgment will only decide

the legal relations of Plaintiff and Defendants, as Ranch

shareholders inter se, regarding the legality of the proposed

exchange by Plaintiff of his Ranch shares, not the shares held by

the Trust. Defendants do not explain how the Probate Court why

the federal court need “control” of Ranch shares to make the

legal decisions. 

“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.” Markham

v. Allen, 326 U.S. 490, 494 (1946). The relief sought will

determine the transfer status of Plaintiff’s Ranch shares, but

will not directly operate to interfere with the Trust shares, as

they will not be transferred or removed from the Trust by the

judgment. The judgment will not defeat or impair the

jurisdiction of the state Probate Court. 

Defendants argue that to grant the requested relief would be

to exercise “control over all the [Ranch] shares,” because it

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would alter the disposition of the Trust stock. Doc. 40, Mem. in

Supp., 10. A declaratory judgment as to the transferability of

Ranch shares owned by the parties will not exercise control over

or operate directly on the Ranch shares. It will not order

transfer of Ranch shares. Defendants’ argument that the

proceedings in the federal court are in rem has already been

rejected. 

Defendants’ reliance on Starr v. Rupp, 421 F.3d 999 (6th

Cir. 1970) (a federal in rem action) to defeat subject-matter

jurisdiction under the custodia legis doctrine is misplaced. See

Peter Nicolas, Fighting the Probate Mafia: A Dissection of the

Probate Exception to Federal Court Jurisdiction, 74 S. Cal. L.

Rev. 1479, 1527 & n.307. Here, the requested relief would not

“empower” Plaintiff to sell his Ranch shares. He already does or

does not have that power under state law. Although the decree is

sought to absolve Plaintiff of personal liability for the

proposed transfer, such a decision as to Plaintiff’s personal

rights is not in rem, nor does it operate on any shareholder’s

Ranch shares. State law determines whether the contemplated

exchange of Plaintiff’s Ranch shares will subject him to

liability for damages to the other Ranch shareholders and the

corporation for loss of Sub-S tax status. 

Defendants cite Bortz v. DeGolyer, 904 F.Supp. 680 (S.D.

Ohio 1995), to support their contention that the requested

declaratory judgment would interfere with the Trustee as an

officer of the Probate Court. Doc. 40, Mem. in Supp., 12. In

Bortz, plaintiff alleged breach of fiduciary duty in federal

court against the attorney-in-fact and executor of decedent’s

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will for the executor’s alleged maladministration of the estate

in a state probate proceeding. Bortz, 904 F.Supp. at 683-84.

Citing Sixth Circuit precedent, Bortz held:

[F]ederal court proceedings on such a claim would

amount to interference into the state probate

proceeding. The determination of liability for a

breach of duty requires a determination whether the

administrator mishandled the estate. That

determination is a question for the Probate Court and

not for the federal court to decide.

Bortz, 904 F.Supp. at 684. 

Here, there is no issue of the federal court “sitting in

judgment of the propriety of a probate court officer’s actions.” 

Id. No one has claimed the Trustee has mishandled the probate

estate. The Trustee proposes to seek dissolution of the

corporation and to liquidate its assets to convert the Ranch

shares into cash or debt receivables while Sub-chapter S tax

status remains intact to minimize the adverse tax consequences.

The Trustee is only one of the shareholders who will be affected

by Plaintiff’s proposed transfer of the Ranch shares. The

federal decree sought will not order the Trustee to do or not to

do anything with the Trust’s property that is subject to probatecourt jurisdiction. 

Defendants further claim that this litigation is interfering

with the Probate Court proceedings by being used as a shield to

obstruct the probate administration. Defendants allege that

Plaintiff refused to disclose documents relevant to the Probate

Court proceedings on the grounds that they are relevant to the

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federal court case. Id., 8-9 (citing Morehous Decl., Ex. J

(1/24/06 Letter from Epstein to Morehous)). The letter cites two 

reasons the request for documents was refused: (1) that the

documents are not relevant to the Probate Court proceedings, but

rather to the federal court proceedings; and (2) that the persons

to whom the documents are addressed, Plaintiff and Grover

Wickersham, his brother, are not parties to the Probate Court

proceedings. The letter only partially shows that Plaintiff is

using the federal court proceedings as a “shield” to avoid

providing Defendants with discovery documents pertaining to the

proposed transfer of shares to Glenbrook. As income

beneficiaries of the Trust, the Wickersham brothers have an

interest in and “are before the Probate Court.” To the extent

Plaintiff’s share transfer will adversely affect the Trust’s

Ranch shares, the Probate Court is “interested” in the proposed

Ranch share transfer documents. 

Defendants claim that the federal proceedings are

interfering with Probate Court proceedings by spawning satellite

litigation in the Probate Court related to the federal case, for

the purpose of “attempting to gain a collateral advantage. . . .”

Doc. 40, Mem. in Supp., 9. In Moser, the court stated,

What is truly significant for purposes of the probate

exception’s interference prong . . . is the totality

with which the [federal] court’s judgment will

predetermine the result to be reached by the

Surrogate’s Court in respect of the [proceedings]

before it. 

Moser, 294 F.3d at 342. In Moser, a motion was pending in the

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Surrogate’s Court to vacate its previous decree admitting the

decedent’s will to probate. The petition alleged that the

decedent’s will was a forgery and that the defendants engaged in

testamentary fraud. The federal case, based on diversity

jurisdiction, alleged fraudulent concealment and constructive

fraud in connection with the probate of the will. Moser, 294

F.3d at 337, held:

Should the federal lawsuit reach final judgment first

and Moser successfully litigate all aspects of her case

therein, the District Court will have concluded that

the defendants committed fraudulent concealment and

constructive fraud. Such a conclusion would be

supported by findings of fact that accord with the core

allegations contained in the Complaint: that the

signature of the decedent on the Will is a forgery;

that at least one of the attesting witnesses did not

actually witness the Will’s execution; that the Will

was typed by one of the defendants; that all of the

defendants knew of the Will’s infirmities prior to its

admission to probate in 1994; and that nonetheless the

defendants concealed their knowledge from Moser and the

Surrogate’s Court.

By operation of collateral estoppel and res judicata,

each of these final determinations by the District

Court would be binding on the proceeding still pending

before the Surrogate’s Court.

Moser, 294 F.3d at 342. This would reduce the Surrogate Court

proceedings to a “rubber-stamping enterprise.” Moser, 294 F.3d

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 Defendants represented in oral argument that the Probate 3

Trustee will petition the Probate Court for instructions

regarding transferability of the Ranch shares to prevent harm to

the probate estate. 

18

at 343. 

In Marshall, the Ninth Circuit reviewed a similar conflict

between federal court and state probate court proceedings, ruling

that the federal court’s interference implicated the probate

exception. Marshall, 392 F.3d at 1134-1136. Before the state

court was:

the question of what [decedent] had and what he did

with it and whether that was proper or improper. . . .

Every transaction in connection with his estate plan

was before this Court.

Marshall, 392 F.3d at 1134 (quoting state court judge). The

federal court specifically determined that the trust was forged

and was procured by fraud, conflicting directly with the state

court’s judgment upholding the trust. This interfered with the

probate proceedings. Marshall, 392 F.3d at 1136.

Here, the federal relief requested by Plaintiff will decide

the transferability of the shares. That issue has not yet been

specifically raised in the Probate Court. The Probate Court has

not ordered the Trustee to do anything with the Trust shares. 

The Probate Court does not have the corporation before it and

cannot under present circumstances order the corporation

dissolved. The federal decision will not conflict with any

decision made by the Probate Court. A declaratory judgment in 3

Plaintiff’s favor would permit a transfer of his shares which

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would destroy the Ranch shares’ Sub-chapter S status. The decree

would not impair the Probate Court’s discretion over whether and

how to diversify the Trust’s assets; it would only clarify the

legal issue of transferability of the Ranch shares, one of the

Trust’s assets. There is no interference with the probate

proceedings. 

4. In Rem Proceedings:

Defendants suggest the controversy over the Ranch shares is

an in rem proceeding which is a local matter that must be decided

in a state court where the property is before the court, citing

Princess Lida of Thurn & Taxis v. Thompson, 305 U.S. 456 (1939). 

Corporate securities are intangible personal property under

California law. 15 Cal.Jur.3d § 118 (citing Jean v. Jean, 207

Cal. 115 (1929)); 2-10A Ballantine & Sterling [hereinafter, B &

S], Cal. Corp. Laws § 200A[2]; 4-22 B & S § 472[2] (“[i]ntangible

personal property includes loans, credit card receivables, and

securities”). Intangible personal property can be subject to in

rem proceedings. See Rothschild v. Erda, 258 Cal.App.2d 750, 755

(1968). Actions or proceedings in rem seek to affect the

interests of all persons in certain property; they are local in

the sense that the property or res must be within the territorial

jurisdiction of the state. 2 Witkin, Jurisdiction § 108 (4 ed.

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1996). Plaintiff’s shares need not be within California or

before the court to facilitate a judicial decision in this case,

nor is there any allegation that Plaintiff’s shares are within

the territorial jurisdiction of California. 

Defendants argue that “[r]esolution of the [P]laintiff’s

complaint will deprive the Probate Court of control” of the Ranch

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shares held by the Trust because both the Probate Court’s

proceedings regarding the Trust property and the proceedings

before the federal court are in rem. Doc. 40, Mem. in Supp., 8. 

Princess Lida, 305 U.S. at 466-67, held that where both

proceedings are in rem, the first court assuming jurisdiction

gains jurisdiction over the res. There, the federal action

related solely to administration and restoration of the corpus,

it was a proceeding in rem and had to yield to the pre-existing

state court proceedings with respect to the same res. 

Here, the Probate Court has exercised continuing

jurisdiction over the Trust corpus, which includes forty-two

percent of the Ranch shares, since December 1975. Morehous

Decl., Ex. A (12/11/75 Alameda County Superior Court Decree);

id., Ex. H, 3. Probate Court proceedings are in rem. In re

Estate of Ford, 32 Cal.4th 160, 166 (2004); Estate of Buckley,

132 Cal.App.3d 434, 443-44 (1982). 

Plaintiff’s federal claim is not in rem or quasi in rem. 

The declaration sought is to personally absolve Plaintiff of any

damages if he destroys the Ranch’s Sub-S tax status by

transferring his Ranch securities to Glenbrook, a non-Subchapter-S-qualified entity. Plaintiff’s shares are not before

the Probate Court. The relief will operate not on the property,

but rather on all shareholders, personally, in defining their

transfer rights in the Ranch shares and liability of Plaintiff

for adverse tax consequences to the remaining shareholders and

the corporation in the future after the exchange of shares. The

ownership of the shares as such is not in issue. 

Defendants have not yet obtained a decision about the Trust

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shares relating to dissolution of the Ranch corporation and

liquidation of its assets. The issue presented addresses

Plaintiff’s personal liability, if any, to Defendants or the

corporation. It neither seeks nor will it obtain control over

the Trustee’s shares. Neither the federal court nor the Probate

Court needs to have custody or control of the Ranch shares in

order to make this personal liability determination. The Probate

Court’s “control” of the testamentary Trust’s ownership of Ranch

securities will not be disturbed if the declaratory relief

Plaintiff seeks is granted. 

Defendants’ threatened suit is not to obtain possession of

the the Ranch shares, to cancel, encumber, or otherwise operate

on the Ranch shares as property, but rather to stop Plaintiff’s

transfer of some of his shares to Glenbrook or impose personal

liability on him for the resulting money damages to the

shareholders and the corporation caused by destroying the Ranch

shares’ Sub-chapter S tax status. 

The right to transfer shares in a corporation is ordinarily

a personal right of the shareholder. 12 Fletcher Cyc. Corp.,

§ 5452 (Perm. ed). Equity acts in personam, not in rem. Hart v.

Sansom, 110 U.S. 151, 154-55 (1884); Miller v. Miller, 423 F.2d

145, 147 (7 Cir. 1970); Wilhelm v. Consolidated Oil Corp., 84

th

F.2d 739, 746 (10 Cir. 1936). See United States v. Bank of New th

York & Trust Co., 296 U.S. 463, 478 (1936). In the legal sense,

the Trustee is simply another shareholder, who happens to be

subject to the Probate Court’s jurisdiction over that percent of

Ranch shares it owns, because the Trust he serves is

testamentary. The federal case will not cause Plaintiff to

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obtain control of the Trustee’s shares. 

5. Change in Character of Ranch Shares

 The Ninth Circuit has recognized in an unpublished, nonbinding, and non-precedential opinion, Merner v. Merner, 129

Fed.Appx. 342 (9 Cir. 2005), that whether a minority th

shareholder can unilaterally destroy the Sub-chapter S tax status

of all a corporation’s shares by transferring shares to an

unqualified owner, is an unsettled question of California law. 

Merner, 129 Fed.Appx. at 343. In Merner, the Ninth Circuit

predicted how the California Supreme Court would decide the

issue. Id. 

Out-of-circuit published authority, A. W. Chesterton Co.,

Inc. v. Chesterton, 128 F.3d 1 (1 Cir. 1997), precisely

st

addresses the underlying corporate law issues and holds under

Massachusetts law that a minority shareholder’s unilateral action

to transfer shares which defeated a close corporation’s Subchapter S tax status breached fiduciary duties to both the

corporation and the other shareholders. Chesterton, 128 F.3d at

6. 

Defendants argue that the requested declaratory judgment

would “irrevocably change[] the legal character of all [Ranch]

stock, not just the subset belonging to [P]laintiff.” Doc. 40,

Mem. in Supp., 8. This is inaccurate. The Ranch’s shares will

continue to have the legal character state corporate and

commercial law ascribe, and although Plaintiff’s transfer may

change the tax treatment of Ranch shares, the court’s judgment

will not. The triggering event for de-election of Sub-chapter S

status is Plaintiff’s transfer of Ranch stock to a non-SubCase 1:05-cv-01114-LJO -GSA Document 67 Filed 05/31/06 Page 22 of 30
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chapter-S-qualified shareholder, Glenbrook. Plaintiff does not

“concede that this would be the effect of a judgment in this

case,” id. (citing Morehous Decl., Ex. G (255:22-256:4; 257:6-

19)). 

The probate exception to federal subject-matter jurisdiction

does not deprive the federal court of jurisdiction over the

declaratory relief action. The federal action is not in rem, and

the federal court is not required to yield to the prior

proceedings in Probate Court. The federal court has diversity

subject-matter jurisdiction under Title 28, Section 1332, of the

United States Code. 

B. Abstention

Defendants argue even if federal jurisdiction exists the

court should dismiss or stay the declaratory relief action on

either of two grounds: (1) Colorado River abstention; or (2)

Brillhart abstention. 

1. Colorado River Abstention

Defendants urge abstention under Colorado River Water

Conservation District v. United States, 424 U.S. 800 (1976). In

Wilton v. Seven Falls Company, 515 U.S. 277 (1995), the Supreme

Court ruled that a court’s decision to deny declaratory relief is

governed, not by Colorado River’s “exceptional circumstances”

test, but by the discretionary standard of Brillhart v. Excess

Ins. Co., 316 U.S. 491 (1942). Wilton, 515 U.S. at 282-85. 

Arguendo, if Colorado River properly applied to this

declaratory-judgment action, there are no “exceptional

circumstances.” Colorado River abstention applies when there is

a contemporaneous exercise of concurrent jurisdiction by state

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and federal courts. In such cases there may be circumstances in

which traditional abstention principles do not apply, yet

considerations of wise judicial administration – conservation of

judicial resources and comprehensive disposition of litigation –

nonetheless justify a decision to stay or dismiss federal

proceedings pending resolution of concurrent state court

proceedings. Such circumstances are, however, exceedingly rare. 

Smith v. Central Ariz. Water Conservation Dist., 418 F.3d 1028,

1032-33 (9 Cir. 2005) (citations and internal quotation marks th

omitted). 

The Colorado River abstention doctrine is a narrow exception

to the virtually unflagging obligation of the federal courts to

exercise the jurisdiction given them. Colorado River, 418 F.3d

at 1032. The existence of a substantial doubt as to whether

state proceedings will resolve a federal action precludes

abstention and the granting of a Colorado River stay. Exact

parallelism between the state and federal proceedings is not

required; however, any substantial doubt is sufficient to

preclude a stay; for when a district court decides to dismiss or

stay under Colorado River, it concludes that the parallel statecourt litigation will be an adequate vehicle for the complete and

prompt resolution of the issues between the parties. If there is

any substantial doubt the state case will not resolve all issues,

it is a serious abuse of discretion to grant the stay or

dismissal at all under Colorado River. Central Ariz. Water

Conservation Dist., 418 F.3d at 1033.

Here, there is no certainty that the Probate Court

proceedings will promptly resolve the precise issue presented by

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Plaintiff. Defendants do not claim that the issue of the Ranch

shares’ transferability is before the Probate Court. What is

before the Probate Court is the Trustee’s concern about the

economic productivity of the Ranch shares to the Trust and its

income beneficiaries, including Plaintiff. They argue that

Plaintiff has “already started to litigate the merits of the

Trustee’s . . . recommendation that [the Ranch’s] Sub-chapter S

status be retained as part of the Trust’s overall diversification

strategy,” and that the Trustee has “made extensive filings in

the Probate Court for the express purpose of litigating issues

going to [the Ranch’s] tax status and the disposition of the

Trust’s [Ranch] stock.” Doc. 58, Reply, 7. Plaintiff rejoins

that the Sub-chapter S issue before the federal court has not

been raised in Probate Court proceedings. Doc. 47, Resp. in

Opp., 12-13. This conflict is resolved by reference to the

Trustee’s report to the Probate Court, in which the Trustee

recommends that Sub-S tax status should be retained by the

corporation. Morehous Decl., Ex. B, 4:4-5:13. Given the lack of

progress in the Probate Court, there is no present likelihood

that the Sub-chapter S issue will be promptly resolved in the

Probate Court. Colorado River abstention is not warranted. 

2. Brillhart Abstention

The Declaratory Judgment Act confers on federal courts

unique and substantial discretion in deciding whether to declare

the rights of litigants. The statute provides that a court “may

declare the rights and other legal relations of any interested

party seeking such declaration,” 28 U.S.C. § 2201(a) (emphasis

added). The statute’s textual commitment to discretion and the

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court’s broad authority to grant or withhold declaratory relief

distinguish the nature of a declaratory relief claim from a

federal court’s jurisdiction to hear and decide such claim. The

Declaratory Judgment Act is an enabling act which confers

discretion on the courts to grant relief rather than an absolute

right in the litigant to obtain relief. The propriety of

declaratory relief in a particular case depends upon its

suitability under the unique circumstances of the case. Wilton,

515 U.S. at 286-87. “In the declaratory judgment context, the

normal principle that federal courts should adjudicate claims

within their jurisdiction yields to considerations of

practicality and wise judicial administration.” Wilton, 515 U.S.

at 288. This jurisprudence confirms the permissive nature of the

declaratory judgment remedy, and does not alter a federal court’s

“virtually unflagging” obligation to exercise its jurisdiction.

Colorado River, 424 U.S. at 817. 

Brillhart governs declaratory-judgment abstention. Wilton,

515 U.S. at 282-85. The Brillhart abstention factors are nonexclusive; a federal district court should: (1) avoid needless

determination of state law issues; (2) discourage litigants from

filing declaratory actions as a means of forum shopping; and (3)

avoid duplicative litigation. The court must balance concerns of

judicial administration, comity, and fairness to the litigants.

The Ninth Circuit recognizes additional considerations, such as:

whether the declaratory relief action will settle all aspects of

the controversy and serve a useful purpose in clarifying the

legal relations at issue; whether the declaratory relief action

is being sought merely for the purposes of procedural fencing or

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to obtain a res judicata advantage; or whether the use of a

declaratory relief action will result in entanglement between the

federal and state court systems. The court may also consider the

convenience of the parties, and the availability and relative

convenience of other remedies. Principal Life Ins. Co. v.

Robinson, 394 F.3d 665, 672 (9 Cir. 2004). th

The Ninth Circuit in Merner recognizes that the issues

presented in this case are undecided under California law. Huth

v. Hartford Ins. Co. of the Midwest, 298 F.3d 800 (9 Cir. th

2002), holds that a district court does not abuse its discretion

in declining jurisdiction on the grounds of an open question of

state law. The first factor favors abstention as this case

presents an open question of state corporate law. 

The second factor is neutral. The fact that Plaintiff

prefers a federal forum, while Defendants prefer state court,

does not alone establish that either party is forum-shopping. 

Huth, 298 F.3d at 804. That the declaratory judgment action was

filed after the state probate action, which has been pending

since 1975, is not dispositive; id., although a reasonable

inference is that Plaintiff seeks to avoid the California probate

court by not presenting the question to the state court in a

petition to the Probate Court for instructions to the Trustee not

to oppose Plaintiff’s share transfer or a state-court

declaratory-relief action to validate the proposed transfer. 

The avoidance of duplicative litigation slightly favors

abstention. Although the issue presented here is not squarely

before the Probate Court, it will be, and closely related issues

are already being litigated there, i.e., diversification of the

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Trust assets by dissolution of the Ranch and liquidation of its

shares, which will leave the Ranch shareholders with cash and

debt securities. The corporate-shares-transfer issue presented

here is a part of the larger controversy over whether the Trust

should continue to hold Ranch shares as an investment. This

issue is actively being litigated in the Probate Court. As a

practical matter, the declaratory relief sought by Plaintiff will

affect the probate proceedings. The Probate Court has already

ordered evaluation of the productivity of Trust assets, and the

Trustee has recommended the Ranch be dissolved while Sub-S status

remains intact. Although a declaratory judgment for Plaintiff

would not destroy S-status, it would contribute to its

destruction upon Plaintiff’s transfer of Ranch shares to

Glenbrook. The federal action has potential to affect any

Probate Court order to the Trustee to determine how to maximize

the estate’s productivity. 

Comity favors abstention. The California courts should have

the opportunity to develop state corporation law; this role

should not be unnecessarily usurped by the federal courts. 

Likewise, although granting relief in the federal case will

clarify the Ranch shareholders’ personal legal relations inter

se, the ruling would be only a prediction of how the California

Supreme Court will decide the issues of the alienability of close

corporation shares in a transfer that will destroy Sub-Chapter S

tax status and whether a shareholder in a California Sub-S

corporation owes a fiduciary duty to the corporation and other

shareholders not to do so. See Arizonans for Official English v.

Arizona, 520 U.S. 43, 76 (1997) (cooperative judicial

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federalism). 

As an unpublished decision, Merner is not binding precedent,

M2 Software, Inc. v. Madacy Entertainment, 421 F.3d 1073, 1086

(9 Cir. 2005). Its analysis is brief and did not address many th

arguments that were made in the First Circuit case that found a

fiduciary duty in the transferor shareholder under analogous

circumstances. The California courts should have the opportunity

to interpret state law in a way that fully considers corporate

shares transferability and whether a fiduciary duty should be

imposed on close corporation shareholders in exercising transfer

rights in their common shares. See A. W. Chesterton Co., Inc. v.

Chesterton, 128 F.3d 1 (1 Cir. 1997); Wolf v. Superior Court,

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107 Cal.App.4th 25, 30 (2003) (citing Meinhard v. Salmon, 249

N.Y. 458, 463 (1928) (Cardozo, C.J.)). 

Sound judicial administration favors abstention. As a court

of general jurisdiction, see 14 Witkin, Wills and Probate § 348

(10 ed. 2005) (citing Cal. Prob. Code § 7050), the Probate

th

Court can decide the issue presented here as a matter of

California corporate securities and commercial law, resolving the

views expressed in Chesterton and Merner, although neither

decision is binding in this circuit. This will facilitate

consistent decision-making about the Trust administration of a

major asset, the Ranch shares, in a single judicial forum. 

Requiring Plaintiff to pursue these issues in the Probate Court

is not unfair and will achieve ultimate judicial economy. The

Brillhart factors justify abstention as a proper exercise of the

district court’s authority under the Declaratory Judgment Act not

to grant relief. See Wilton, 515 U.S. at 286-87. 

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VI. CONCLUSION

For the reasons stated above, in the interests of comity and

sound judicial administration, Defendants’ motion to stay is

GRANTED on Brillhart abstention grounds. If the issue is not

timely litigated in the state court, any party may apply to

modify or vacate the stay. The parties shall provide a joint

report on the status of the state court proceedings every six

months and when the state case is concluded. 

SO ORDERED

DATED: May 31___, 2006.

_/s/ OLIVER W. WANGER_______

OLIVER W. WANGER

United States District Judge

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