2008 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-20-2008

Three Keys Ltd v. SR Util Holding Co

Precedential or Non-Precedential: Precedential

Docket No. 07-1005

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Recommended Citation

"Three Keys Ltd v. SR Util Holding Co" (2008). 2008 Decisions. Paper 581.

http://digitalcommons.law.villanova.edu/thirdcircuit_2008/581
 Honorable Thomas N. O’Neill, Jr., United States District *

Judge for the Eastern District of Pennsylvania, sitting by

designation.

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

___________

No. 07-1005

___________

THREE KEYS LTD., 

a Maryland Corporation,

 Appellant

 v.

SR UTILITY HOLDING COMPANY, a New Jersey

Corporation; THE ESTATE OF SAMUEL RAPPAPORT,

Deceased, as the majority shareholder of SR Utility Holding

Company; WIL WES RAPPAPORT, individually and as

Administrator d.b.n.c.t.a. of the Estate of Samuel Rappaport,

Deceased; TRACY RAPPAPORT SCOTT, individually and as

Administrator d.b.n.c.t.a. of the Estate of Samuel Rappaport,

Deceased; MELLON BANK N.A., as Administrator d.b.n.c.t.a.

of the Estate of Samuel Rappaport, Deceased; RITA

RAPPAPORT, an individual; CARL CORDEK, an individual,

___________

On Appeal from an Order of the United States District Court 

for the District of New Jersey

(No. 06-cv-664)

District Judge: Honorable Jerome B. Simandle

___________

Argued January 7, 2008

Before: FUENTES, JORDAN, Circuit Judges, and 

O’NEILL, JR, District Judge. *
2

(Opinion Filed: August 20, 2008)

John A. Guernsey (argued)

Kevin D. Kent

Mark E. Seiberling

Conrad, O’Brien, Gellman & Rohn

1515 Market Street 16th Floor

Philadelphia, PA 19102

Thomas A. Leonard

Louis B. Kupperman

Obermayer, Rebmann, Maxwell & Hippel

1617 John F. Kennedy Boulevard

One Penn Center, 19th Floor

Philadelphia, PA 19103

Counsel for Appellants

Ronald J. Shaffer (argued)

Fox Rothschild

2000 Market Street

10th Floor

Philadelphia, PA 19103

Eric M. Wood

Horn, Goldberg, Gorny, Plackter, Weiss & Perskie

1300 Atlantic Avenue

Suite 500 Citicenter Building

Atlantic City, NJ 08401

Allison L. Kashon

Fox Rothschild

1301 Atlantic Avenue

Suite 400, Midtown Building

Atlantic City, NJ 08401

Counsel for Appellees
The Estate also included commercial properties not at issue 1

in this appeal, such as parking garages and shopping centers. 

3

OPINION OF THE COURT

FUENTES, Circuit Judge:

Samuel Rappaport died in 1994 leaving an estate valued at

over $58 million to his wife and two children. In 2002, the

Pennsylvania Orphan’s Court removed the estate executors,

Richard Basciano and Lois Palmer, after finding that they engaged

in multiple acts of mismanagement, conversion of estate assets, and

self-dealing. The present action was initiated in the United States

District Court for the District of New Jersey by Three Keys LTD,

a company created by Basciano, to gain access to estate property

transferred in one of his self-dealing transactions. The District

Court exercised diversity jurisdiction and dismissed the complaint

on the ground of issue preclusion. Because the District Court

lacked the power to entertain this matter in the first instance, under

the probate exception to federal courts’ diversity jurisdiction, we

will remand the case with instructions to dismiss for lack of

jurisdiction. 

I.

A.

At the time of his death, Samuel Rappaport owned 100% of

the shares in SR Utility Holding Company (“SR Utility”), whose

principal asset was the Atlantic City Sewer Company. SR Utility

was part of Samuel’s estate (the “Estate”), to be administered for

his wife, Rita, and two children, Wil Rappaport and Tracy

Rappaport Scot (collectively, the “Beneficiaries”). However, two 1

and a half years after Samuel’s death, on March 31, 1997, Basciano

negotiated the sale of 24% of the Estate’s interest in SR Utility to

Three Keys LTD (“Three Keys”), an entity created by Basciano for
The transaction also included the sale of SR Utility stock to 2

Wil Rappaport (12%), Tracy Rappaport Scot (12%), and Carl

Cordek, the Chairman of the Board of Directors of SR Utility (1%).

After the SR Utility Stock Transfer, the Estate was left with 51%

of SR Utility’s shares.

4

his children’s benefit (the “SR Utility Stock Transfer”). Basciano 2

and Palmer, Basciano’s personal assistant and paramour, who he

appointed to be the second executor required under Samuel’s will,

signed the purchase agreement (the “Purchase Agreement”) on

behalf of the Estate. However, contrary to Pennsylvania law for

transactions between an estate and an estate’s “personal

representative,” Basciano and Palmer failed to obtain court

approval before negotiating the agreement. 20 Pa. Cons. Stat. §

3356 (“[T]he personal representative, in his individual capacity,

may . . . purchase . . . property belonging to the estate, subject,

however, to the approval of the court . . . .”).

On February 23, 2001, suspicious about the Estate’s

transactions with Basciano’s companies, the Beneficiaries

petitioned the probate court—the Court of Common Pleas of Bucks

County, Pennsylvania, Orphans’ Court Division (the “Orphans’

Court”)—to compel Basciano and Palmer to file an accounting. In

response, the Executors filed a final accounting on April 25, 2001,

setting forth all of the Estate’s transactions. The Beneficiaries filed

objections to the final accounting, alleging numerous instances of

self-dealing, including the SR Utility Stock Transfer.

Simultaneously, the Beneficiaries brought an action in the

Orphan’s Court to remove Basciano and Palmer as executors of the

Estate under the Pennsylvania Probate, Estates and Fiduciary Code,

which provides for the removal of an executor if he or she “is

wasting or mismanaging the estate, . . . has failed to perform any

duty imposed by law,” or when “the interests of the estate are likely

to be jeopardized by his [or her] continuance in office.” 20 Pa.

Cons. Stat. § 3182. 

While the action to remove Basciano and Palmer as

executors was pending, Basciano personally received a payment of

$220,000 that was due to the Estate for the sale of an Estate-owned
While the Orphans’ Court ruled on the Beneficiaries’ 3

motion to remove Basciano and Palmer as executors, it did not rule

on their objections to the final accounting. Those objections are

still pending in the Orphans’ Court.

5

shopping center, again without obtaining approval from the

Orphans’ Court. The Beneficiaries responded by filing an

additional petition with the Orphans’ Court seeking the executors’

immediate removal. 

On August 23, 2002, the Orphans’ Court removed Basciano

and Palmer as executors. In its opinion, the Orphans’ Court made 3

100 “Findings of Fact,” including:

61. On March 31, 1997, Richard Basciano, as

buyer, purchased for his children 24% of the

outstanding shares of SR Utility Holding

Company, a company owned by Samuel

Rappaport before his death and which is now

owned by the Estate. 

***

71. Richard Basciano did not seek or obtain court

approval to acquire on behalf of his children

a 24% interest in SR Utility from the Estate.

(App. 96-97.) The Orphans’ Court also made seven “Conclusions

of Law,” including:

2. The Will of Samuel Rappaport did not

authorize the Executors to engage in selfdealing without obtaining Court approval

pursuant to 20 Pa.C.S.A. § 3356.

3. Richard Basciano breached his fiduciary duty

to the Estate when he engaged in multiple

self-dealing transactions with assets of the

estate without obtaining prior court approval.
Letters of administration are formal documents appointing 4

administrator(s) of an estate, issued when a will fails to name an

executor or if the executor appointed is disqualified or removed by

court order. See 20 Pa. Cons. Stat. § 3155; Black’s Law Dictionary

925 (8th ed. 2004). 

The Pennsylvania Supreme Court has “the power generally 5

to minister justice . . . as fully and amply, to all intents and

purposes, as the justices of the Court of King’s Bench, Common

Pleas and Exchequer, at Westminster, or any of them, could or

might do on May 22, 1722.” 42 Pa. Cons. Stat. § 502. The King’s

Bench power has been interpreted in Pennsylvania as “the power

of general superintendency over inferior tribunals,” Carpentertown

Coal & Coke Co. v. Laird, 61 A.2d 426, 428 (Pa. 1948), and

permits the exercise of jurisdiction even if “there is no final order

6

***

5. Richard Basciano and Lois Palmer have

wasted and mismanaged the assets of the

Estate.

6. The interests of the Estate are likely to be

jeopardized by the continuance in office of

Richard Basciano and Lois Palmer as

Executors . . . .

(App. 102-103.)

Thereafter, on October 4, 2002, the Orphans’ Court ordered

that letters of administration be issued to Wil, Tracy, and Mellon

Bank to settle the remainder of the Estate.4

The Orphans’ Court refused to certify its order removing

Basciano and Palmer as “final and appealable.” Under

Pennsylvania law, absent a trial court’s determination of finality,

an order removing a fiduciary is not an appealable order. In Re

Estate of Sorber, 803 A.2d 767, 769 (Pa. Super. 2002). Because

Basciano could not challenge his removal through an ordinary

appeal, he petitioned the Pennsylvania Supreme Court to grant

extraordinary relief pursuant to its “King’s Bench” power. The 5
as to which [the Pennsylvania Supreme Court] can exercise

appellate jurisdiction.” In re Avellino, 690 A.2d 1138, 1140-41

(Pa. 1997). 

7

Supreme Court granted the petition, and asked Pennsylvania’s

intermediate appellate court, the Superior Court, to determine

whether Basciano’s removal as executor was proper. 

On December 23, 2003, the Superior Court applied the same

standard of review as it would for a regular appeal of an order

removing an executor, and found that the Orphans’ Court did not

err by removing Basciano. In so doing, it concluded that the

Orphans’ Court’s findings of fact were supported by substantial

evidence, including that “Basciano, without court approval,

purchased 24% of the shares of an estate-owned holding company

for his children.” (App. 125.) These findings of fact “relat[ed] to

waste of estate assets, self-dealing and mismanagement, which, .

. . must be seen as harmful to the estate.” (App. 124-25.) The

Superior Court’s decision was then appealed to the Pennsylvania

Supreme Court, which summarily affirmed on April 11, 2005. 

B.

In 2002, under the threat of litigation, Basciano’s company,

Three Keys, agreed to place all of its SR Utility dividends into an

escrow account. On February 10, 2006, in an effort to gain access

to the dividends, which had reached approximately $900,000,

Three Keys initiated the present action by filing a complaint in

District Court against SR Utility, the Estate, the Beneficiaries,

Mellon Bank, and Carl Cordek (collectively, the “Defendants”).

Three Keys’ complaint enumerates five counts, each of which is

premised on Three Keys’ alleged ownership interest in SR Utility.

The complaint contends that the Defendants “den[ied] Three Keys

of its fair and equitable interest in [SR Utility], along with access

to approximately $900,000 of its SR Utility dividends currently

being unjustly held in an escrow account at the demand of the

Defendants.” (App. 31.) The primary relief sought is the release

of the SR Utility dividends to Three Keys.
8

Count One is labeled “Minority Shareholder Oppression,”

and asserts that the Defendants, who collectively own 76% of SR

Utility’s shares, are preventing Three Keys, the minority

shareholder, from accessing its dividends. (App. 39-43.) As relief,

Three Keys requests a declaration that the Purchase Agreement was

valid; the release of the SR Utility dividends held in escrow; and an

order enjoining the Defendants from escrowing future dividends,

requiring that future dividends be paid to Three Keys, appointing

a receiver for SR Utility, and awarding Three Keys compensatory

and punitive damages. 

Count Two is labeled “Declaratory Judgment,” and seeks

resolution of the dispute between Three Keys and the Defendants

“as to their legal relations with respect to the . . . Purchase

Agreement.” (App. 43-44.) As relief, Three Keys requests a

declaration that the Purchase Agreement is valid, that the

Defendants have no right to the 24% interest in SR Utility

transferred to Three Keys, and that the Defendants’ potential

claims against Three Keys are time-barred. It also seeks the

release of the dividends from the escrow account. 

Count Three is for “Breach of Fiduciary Duty,” and alleges

that the Defendants, in their capacity as majority shareholders and

thus fiduciaries, have unfairly prevented Three Keys from

accessing its interest in SR Utility. (App. 45.) For relief, Three

Keys seeks the release of the $900,000 in SR Utility dividends, an

order enjoining the Defendants from continuing to insist on

escrowing the dividends, the payment of future dividends directly

to Three Keys, and compensatory and punitive damages. 

Count Four alleges “Breach of [the] Covenant of Good Faith

and Fair Dealing.” (App. 48.) In particular, this Count alleges that

the Defendants, who were parties to the Purchase Agreement,

breached the implied covenant of good faith and fair dealing,

resulting in financial losses. As relief for this loss, Three Keys

requests the release of the SR Utility dividends currently in escrow,

the payment of future dividends directly to Three Keys, and

compensatory and punitive damages. 

Finally, Count Five is for “Civil Conspiracy,” and alleges
While Three Keys was not a party to the proceedings to remove 6

Basciano and Palmer, the District Court reasoned that issue preclusion

barred the action because Three Keys “is clearly in privity with

Basciano,” considering that Three Keys is an entity associated with

Basciano’s children and appears to have been created, funded, managed,

and controlled by Basciano. Three Keys, Ltd. v. SR Utitlity Holding

Co., 464 F. Supp. 2d 388, 397 (D.N.J. 2006).

9

that the Defendants conspired to force Three Keys into escrowing

its SR Utility dividends and as a result “Three Keys suffered

substantial financial hardship, including the inability to access

approximately $900,000 of its rightfully earned and accrued SR

Utility dividends.” (App. 50-51.) As relief for Count Five, Three

Keys seeks compensatory and punitive damages. 

In response to Three Keys’ complaint, the Defendants filed

a motion in the District Court to dismiss the complaint, asserting

three alternate theories: the probate exception to federal

jurisdiction, the Rooker-Feldman doctrine, and issue preclusion

based on the removal proceedings.

On December 8, 2006, the District Court concluded that it

had jurisdiction to rule on the complaint under 28 U.S.C. § 1332,

but nevertheless dismissed the action based on issue

preclusion—that is, the District Court concluded that Three Keys

could not relitigate the validity of the SR Utility Stock Transfer, an

issue that had been resolved in the removal proceedings. Three 6

Keys filed a timely notice of appeal. We have appellate

jurisdiction pursuant to 28 U.S.C. § 1291.

II. 

In any appeal, “the first and fundamental question is that of

jurisdiction.” Storino v. Borough of Point Pleasant Beach, 322

F.3d 293, 296 (3d Cir. 2003) (citation omitted). We must assess

our jurisdiction regardless of whether a district court correctly

disposed of a case on the merits, and regardless of whether the
As a jurisdictional limitation, the failure of either party to 7

brief the probate exception on appeal does not waive the issue. See

Bracken v. Matgouranis, 296 F.3d 160, 162 (3d Cir. 2002) ( “[T]his

Court has a continuing obligation to sua sponte raise the issue of

subject matter jurisdiction if it is in question.”); Morel v. INS, 144

F.3d 248, 251 n.3 (3d Cir. 1998) (“[A federal] court, including an

appellate court, will raise lack of subject-matter jurisdiction on its

own motion.”) (quoting Insurance Corp. of Ireland, Ltd. v.

Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982)).

10

issue was raised by the parties on appeal. See id. Therefore, our 7

analysis begins by determining whether the “probate exception” to

diversity jurisdiction prevents consideration of any or all of the

complaint.

The probate exception is a jurisdictional limitation on the

federal courts originating from the original grant of jurisdiction in

the Judiciary Act of 1789. As the Supreme Court observed in

Markham v. Allen, the “jurisdiction conferred by the Judiciary Act

of 1789, which is that of the English Court of Chancery in 1789,

did not extend to probate matters.” 326 U.S. 490, 494 (1946)

(citation omitted). While the general idea that federal courts lack

jurisdiction to adjudicate “probate matters” has been invoked

frequently by federal courts, the precise contours of the limitation

have proven difficult to draw. In Markham, the Supreme Court

held that 

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.

Id. (emphasis added). Unfortunately, this explication did little to

guide federal courts as to when a potential final judgment’s
11

“interfere[nce] with the state court’s possession” of property would

render the federal court without jurisdiction. Id.

We wrestled with the scope of matters “interfering” with the

probate in Golden ex rel. Golden v. Golden, 382 F.3d 348 (3d Cir.

2004). In Golden, the testator divided her assets into equal shares

for three beneficiaries in her will. When the testator became ill,

she executed an addendum that drastically reduced the amount of

the legacy to two of her beneficiaries, increasing the share of the

third beneficiary, who was also the estate executor and a witness to

the addendum. Following the testator’s death, those two

beneficiaries sued the third, alleging common law torts, including

fraud and slander, and “several grounds for relief that relate[d] to

probate law, including undue influence and breach of fiduciary

duty as the executor of a will.” Id. at 352. After acknowledging

the confusion arising out of the exact scope of the probate

exception, we stated that if the resolution of an action, including an

in personam action, would “undercut the past probate of a will or

result in the federal court ‘assum[ing] general jurisdiction of the

probate or control of the property in the custody of the state

court,’” we would dismiss for lack of jurisdiction. Id. at 358-59

(quoting Markham, 326 U.S. at 494). We further held that,

consistent with our precedent, “[w]e take a fairly broad view of the

types of actions that interfere with the probate proceedings.” Id. at

360. Applying these principles, we concluded that claims for

undue influence, forgery, and breach of fiduciary duty as an

executor would interfere with probate proceedings and were

therefore subject to the probate exception. Id.

Subsequently, in 2006, the Supreme Court decided Marshall

v. Marshall, which, similarly to Golden, dealt with a claim that the

ultimate beneficiary of an estate fraudulently prevented the transfer

of an intended gift to the plaintiff. 547 U.S. 293, 304 (2006). The

Supreme Court held that the single claim at issue, for tortious

interference with the plaintiff’s expected gift, sought an in

personam judgment against the defendant, not the probate or

annulment of a will, nor any res in the custody of the probate court.

Id. at 312. As such, it was not barred by the probate exception.

Marshall criticized Golden as one of many circuit court
12

decisions interpreting Markham “to block federal jurisdiction over

a range of matters well beyond probate of a will or administration

of a decedent’s estate.” Id. at 311. The Supreme Court then

clarified what constitutes interference “with the state court’s

possession,” as follows:

[W]e comprehend the “interference” language in

Markham as essentially a reiteration of the general

principle that, when one court is exercising in rem

jurisdiction over a res, a second court will not

assume in rem jurisdiction over the same res. Thus,

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. But it does not bar federal courts from

adjudicating matters outside those confines and

otherwise within federal jurisdiction.

Id. at 311-312 (citations omitted). It is clear after Marshall that

unless a federal court is endeavoring to (1) probate or annul a will,

(2) administer a decedent’s estate, or (3) assume in rem jurisdiction

over property that is in the custody of the probate court, the probate

exception does not apply. Insofar as Golden interpreted the probate

exception as a jurisdictional bar to claims “interfering” with the

probate, but not seeking to probate a will, administer an estate, or

assume in rem jurisdiction over property in the custody of the

probate court, that interpretation was overbroad and has been

superseded by Marshall.

III.

Each count in Three Keys’ complaint is based on the

supposition that Three Keys has an ownership interest in SR

Utility. Hence, we must consider the third prohibition of the

probate exception—that a federal court cannot assume in rem

jurisdiction over estate property in the custody of the probate court.

If the relevant shares of SR Utility are Estate property in the

custody of the Orphans’ Court, and if Three Keys’ claims would
Section 711(17) states that “the jurisdiction of the court of 8

common pleas over the following shall be exercised through its

orphans’ court division: . . . Title to personal property. The

adjudication of the title to personal property . . . alleged by the

personal representative to have been in the possession of the

decedent at the time of his death.” 20 Pa. Cons. Stat. § 711(17). 

13

require a federal court to assume in rem jurisdiction over those

shares, then it follows that the probate exception precludes the

exercise of diversity jurisdiction.

The District Court ruled out the probate exception because

the “record presented to the Court does not prove that the escrow

account, the SR Utility shares transferred to Three Keys, and the

dividends, are ‘property that is in the custody of a state probate

court.’” Three Keys, Ltd. v. SR Utility Holding Co., 464 F. Supp.

2d 388, 393 (D.N.J. 2006) (citing Marshall, 547 U.S. at 312). The

District Court emphasized that the Orphans’ Court did not exercise

jurisdiction over the SR Utility shares during Basciano and

Palmer’s removal proceedings. Id. However, in addition to the

removal proceedings, the Orphans’ Court has been and remains in

the process of probating the Estate. Under Section 711 of the

Pennsylvania Probate, Estates and Fiduciaries Code, the Orphans’

Court has exclusive jurisdiction over the distribution of a

decedent’s estate, which includes the decedent’s personal property

at the time of his or her death. 20 Pa. Cons. Stat. § 711(17).8

Because all of the SR Utility shares were in Samuel’s possession

at the time of his death, they were initially part of the Estate and

became property under the exclusive jurisdiction of the Orphans’

Court. 

Nevertheless, Basciano purported to sell 24% of the SR

Utility shares to Three Keys, without acquiring Orphans’ Court

approval. We must determine whether this interested transaction

somehow removed the shares from the exclusive jurisdiction of the

Orphans’ Court. We conclude that it did not. 

We have held that “the estate maintain[s] a proprietary

interest in any distributions prior to the Orphans’ Court’s
14

approval.” Estate of Meriano v. C.I.R., 142 F.3d 651, 661 (3d Cir.

1998). To our knowledge, the Orphans’ Court has yet to rule on

the Beneficiaries’ objections to Basciano and Palmer’s accounting,

which included the SR Utility Stock Transfer. Until the Orphans’

Court determines the validity of the SR Utility Stock Transfer to

Three Keys, the Estate maintains its interest in the SR Utility

shares, which remain property under the jurisdiction of the

Orphans’ Court. 

The Orphans’ court maintains jurisdiction over the SR

Utility shares involved in the SR Utility Stock Transfer because

Basciano, as the executor, was an officer of the probate court, who

administered the Estate subject to that court’s control. See Byers

v. McAuley, 149 U.S. 608, 615 (1893) (“An administrator

appointed by a state court is an officer of that court. His possession

of the decedent’s property is a possession taken in obedience to the

orders of that court. It is the possession of the court, and it is a

possession which cannot be disturbed by any other court.”); In re

Rentschler’s Estate, 139 A.2d 910, 918 (Pa. 1958) (removing an

executor because he lost the confidence of the court); In re Estate

of Alexander, 758 A.2d 182, 187 (Pa. Super. 2000) (stating that an

executor is an officer of the court). One mechanism by which the

probate court controls an executor is by requiring him or her to

request and receive probate court approval prior to engaging in

interested transactions, which Basciano failed to do with respect to

the SR Utility Stock Transfer. 

Moreover, we note that the Orphans’ Court has extensive

power to remedy improper transfers of estate property. As the

Pennsylvania Supreme Court has stated, “the [O]rphans’ [C]ourt

has jurisdiction finally to decide the question of ownership and

compel a surrender to a decedent’s estate of assets improperly held

by one whose title is colorable only.” In re Williams’ Estate, 84 A.

848, 852 (Pa. 1912); see also Estate of Meriano, 142 F.3d at 661

(same); Mauser v. Mauser, 192 A. 137, 138 (Pa. 1937) (“[P]roperty

admittedly belonging to the estate . . . which, it is charged, was

wrongfully converted . . . after [the testator’s] death . . . is within

the jurisdiction of the orphans’ court, regardless of who may now

hold it.”); cf. In re Hinds’ Estate, 38 A. 599 (Pa. 1897) (affirming

an order of the Orphans’ Court requiring a pledgee of a ward’s
These terms originally correlated to the types of actions and 9

judgments available in courts acting at law and equity, respectively.

See Walter W. Cook, The Powers of Courts of Equity, 15 COLUM.

L. REV. 37, 38 (1915). Of course, in our federal system, actions at

law and suits in equity have been merged into “one form of

action—the civil action.” Fed. Rule Civ. Proc. 2. Meanwhile,

many of the functional distinctions between in rem and in

personam, as bases of jurisdiction, have been abolished, in favor of

less formulaic and more effective methods of ensuring that an

exercise of jurisdiction is fair. See Shaffer v. Heitner, 433 U.S.

186 (1977) (holding that the statutory presence of stock certificates

was an insufficient basis for attachment jurisdiction without

additional minimum contacts between the jurisdiction and the

litigation); Restatement (Second) of Judgments § 5. These changes

accompanied the realization that both forms of jurisdiction “have

the purpose and effect of determining interests of persons.”

Restatement (Second) of Judgments, § 6 cmt. a. Nevertheless,

many substantive differences still exist between in personam and

in rem jurisdiction, and the distinction is still invoked in the case

law discussing the probate exception, most recently in Marshall. 

15

property to return the property to the ward, when the guardian

pledged the property for a loan to invest in a security in which he

had a personal interest, without receiving Orphans’ Court

approval). We therefore conclude that the SR Utility shares remain

under the jurisdiction of the Orphans’ Court. 

Because the SR Utility shares in question are still property

under the jurisdiction of the Orphans’ Court, it follows that we

cannot assume in rem jurisdiction over that same property. See

Marshall, 547 U.S. at 311-312. We recognize that the distinction

between in rem and in personam is often as elusive as the boundary

lines of the probate exception. But at a minimum, following 9

Marshall, an action “to dispose of property that is in the custody of

a state probate court” involves the assumption of in rem

jurisdiction over that property. Marshall, 547 U.S. at 312. 

Count Two of Three Keys’ complaint, labeled “Declaratory

Judgment,” is most clearly in violation of this principle. It seeks a
We note that while claims that seek to invoke a federal 10

court’s in personam jurisdiction generally do not violate the

probate exception, that does not permit a court to grant as relief the

possession of specific property that is within the jurisdiction of a

probate court. In Wisecarver v. Moore, 489 F.3d 747, 751 (6th Cir.

2007), the Sixth Circuit held that even though the claims before it

were in personam, the probate exception barred the court from

granting as relief an order divesting the primary beneficiaries of an

estate of all property retained by them. However, the Sixth Circuit

remanded the case to consider other forms of relief requested, such

as a monetary judgment. Id. Similarly, in Lefkowitz v. Bank of

New York, 528 F.3d 102, 107 (2d Cir. 2007), the Second Circuit

barred claims that sought as relief disgorgement of funds remaining

under the control of the probate court. In this case, Three Keys

seeks the disgorgement of property in the jurisdiction of the

Orphans’ Court. Like the Sixth Circuit in Wisecarver and the

Second Circuit in Lefkowitz, we conclude that such relief is barred

16

federal court determination of Three Keys’ ownership interest in

SR Utility, which would dispose of Estate property under the

jurisdiction of the Orphans’ Court. However, Counts One

(Minority Shareholder Oppression), Three (Breach of Fiduciary

Duty), Four (Breach of the Covenant of Good Faith and Fair

Dealing), and Five (Civil Conspiracy) request, on their face, the

exercise of in personam jurisdiction. Counts One and Three allege

that the Defendants, as majority shareholders and fiduciaries, are

personally liable because they are preventing Three Keys from

accessing its interest in SR Utility; Count Four asserts that the

Defendants are personally liable because they breached the implied

covenant of good faith and fair dealing implicit in the Purchase

Agreement when they prevented Three Keys from enjoying its

interest in SR Utility; and Count Five alleges that the Defendants

are personally liable for conspiring to deprive Three Keys of its

interest in SR Utility. 

On the surface, these claims seek to impose liability against

the Defendants as legal persons, which would call for in personam

jurisdiction. However, not only does Three Keys seek as relief the

distribution of probate property, Three Keys also seeks a 10
by the probate exception. 

17

determination that itsinterest in the SR Utility shares and dividends

is superior to the interest of the Estate. Each of these claims,

whether characterized as an in personam action or not, requires the

District Court to “endeavor[] to dispose of property that is in the

custody of a state probate court,” which is prohibited by the probate

exception. Marshall, 547 U.S. at 312; see also Byers, 149 U.S. at

618 (holding that federal courts do not have the power to “take

possession of property in the hands of an administrator appointed

by the state court, and thus dispossess that court of its custody”). 

In an effort to clarify prior case law, we note the distinction

between an in personam action seeking a judgment that a party has

the right to a distributive share of an estate, but stopping short of

determining a party’s interest in specific estate property, and an in

rem action such as Three Keys’, which seeks a determination of a

party’s interest in specific property in the custody of the probate

court. The distinction mirrors the traditional understanding of a

judgment in personam, which is “of such character that by means

of it the plaintiff can, as a means of attaining the principal object

of the action, subject the general assets of defendant, as

distinguished from some specific property interest, to the payment

of his claim.” Cook, 15 COLUM. L. REV. at 120. Hence, in

Markham, which arose during World War II, the Supreme Court

held that a federal court possessed jurisdiction to declare that the

Alien Property Custodian, acting under § 5(b)(1)(B) of the Trading

with the Enemy Act, and not the decedent’s American heirs-at-law,

acquired the interests of German legatees in the estate of a

decedent. 326 U.S. at 492-93, 495. The federal court in Markham

was not asked to declare interests in specific estate assets, but

rather to “decree petitioner’s right in the property to be distributed

after [the estate’s] administration.” Id. at 495. 

Similarly, in Marshall v. Lauriault, 372 F.3d 175, 180-82

(3d Cir. 2004), we held that the probate exception did not apply to

a dispute between beneficiaries to a trust and adult adoptees of one

of the beneficiaries over their right to trust income. In Lauriault,

as in Markham, after the federal court decreed rights to the estates,
18

“[t]he marshaling of that claim with others, its priority, if any, in

distribution, and all similar questions, [were left] for the probate

court upon presentation to it of the judgment or decree of the

federal court.” Pufahl v. Parks’ Estate, 299 U.S. 217, 226 (1936).

 

Contrary to Markham and Lauriault, a principal and

necessary object of Three Keys’ complaint is the establishment of

its property interest in SR Utility. Because that object calls for the

exercise of in rem jurisdiction over property in the custody of the

Orphans’ Court, the probate exception applies, and we are without

jurisdiction to proceed.

IV.

For the foregoing reasons, the order of the District Court is

vacated, and the case is remanded with instructions to dismiss for

lack of jurisdiction.