Guaranty Trust Co. v. York

Guaranty Trust Co. v. York United States Supreme Court 326 U.S. 99 (1945) Facts: - In April 1930 Van Sweringen Corporation issued notes in the amount of $30,000,000 (thirty million) - Guaranty Trust Co. was named trustee with the power and obligations to enforce the rights of the note holders in the assets of the Corporation and of the Van Swearingen brothers - In October 1930 Guaranty Trust Co. with other banks made advances to companies affiliated with the Corporation - The following year it became apparent that the Corporation could not meet its obligations, Guaranty created a plan for the purchase of the outstanding notes on the basis of cash for o 50% of the face value of the notes o AND 20 shares of Van Swearingen Corporation’s stock for each $1,000 note - The exchange offer was open until December 15, 1931 - York received $6,000 of the notes as a gift in 1934; her donor did not accept the offer of exchange - In April 1940 three accepting noteholders filed suit against Guaranty charging fraud and misrepresentation - York’s application to intervene in that suit was denied and summary judgment in favor of Guaranty was affirmed (Hackner v. Morgan) - After her dismissal, York began the present proceedings in January 1942 - The suit was a class action on behalf of the non-accepting noteholders brought in a federal court due to diversity of citizenship alleging breach of trust by Guaranty that it failed to protect the interests of noteholders AND failed to disclose its own self interest - Summary judgment was granted based on the Hackner case - The Circuit Court of Appeals held that federal district court is not required to apply State statute of limitations that would govern like suits in the courts of a State where the federal court is sitting even through the exclusive basis of federal jurisdiction is diversity of citizenship [NOTES START] - 6 months before this black Tuesday happened and the stock market crashed Swearingen Bros. lent money to the corp. and were controlling the trustee Disparity here was that the statute of limitations was up NY was one of the first to codify torts Matters of state law—statute of limitations Both tort and SOL both state law Unable under state - - - - - - Doctrine of Laches—gets a brief mention in the case—equitable; defendant did something to give P sense of self security; special circumstances involving SOL tolls the statute NY statutes but equity wasn’t limited by statutes and NY did not have Laches Federal court did use Laches doctrine o P has a chance in federal court because of Laches Can’t use Laches because it would change the outcome of the case o Outcome determinative test o If the difference between federal and state rules could make a real difference; then you have to follow state law as much as possible States like NY codified central doctrines but in the body of Equitable law there were other doctrines that went with it o If using a substantive doctrine, then we have to take the rest of equity with it Court brings in quasi procedural rule in of the state substantive law and accompanying doctrines—follow state law if the federal law is outcome determinative Outcome determinative test—tends to say follow the state law where there is a difference in outcome between the two (preference given to state law) o Gives more deference to the states Equitable doctrines can still be used where they are not outcome determinative A federal court sitting in diversity has to follow the law of the state o In this case Laches wasn’t a part of the law This is NOT an RDA case NY did not have a Laches doctrine SO it cannot be applied in this case How does this case go beyond Erie? o Do federal courts abandon their theories? o Areas we don’t want the law to overlap o What matters is the difference in doctrines is determinative o Not interpreting the rules and decision act and not all about substance o Must have absolute vertical uniformity (follow the state court whenever you are in diversity) FRCP was just promogulated Purpose of diversity was to give non-biased forum o Shouldn’t change the outcome of the case; just make it fairer The determinative test comes from policy Ragan Case—automobile accident 3 yr. statute of limitation o P files suit a day before the statute is up o FRCP 3 action is commenced when you file in federal court but the state rule said this is a state automobile accident and the state SOL runs for 3 years and is only ended when you served D Fed law okay SOL State law not okay under SOL o Shows how the consequences can be [NOTES END] Issue: - Does the Erie doctrine require federal courts exercising diversity jurisdiction to apply state statutes of limitation to equitable actions? Holding: - Federal courts exercising diversity jurisdiction must apply those state laws that determine the outcome of a case. - Federal courts developed their equity rules originating from the English Court of Chancery to the founding o Developed the rule that statutes of limitation should not be rigidly applied in equity cases - Erie Doctrine = in diversity jurisdiction cases governed by state law federal courts had to apply the state substantive law - Federal courts hearing diversity cases were just like state courts whether they were hearing cases at law or in equity o Federal courts must apply state substantive law = law that determines the outcome of a case now known as The Outcome Determinative Test - Erie v. Tompkins overrules Swift v. Tyson o Law was said to be “brooding omnipresence” of reasons and decisions were merely evidence and not themselves the controlling formulations o Federal courts deemed themselves free to ascertain reason and law required independent of declared state law Case only got into federal court because diversity of citizenship - Federal courts gave more respect to “substantive rights” statutes than caselaw? o Rights at law were declared by state courts as disregarded by Swift v. Tyson o Rights in equity (legislation) were respected by federal courts - The enactment gave federal courts no power that they would not have under the first Judiciary Act when they were given cognizance - System of equity has derived from its doctrines, powers, and modes of giving relief - Giving federal courts “cognizance” congress never gave the power to deny substantive rights created by State law or to create substantive rights denied by state law o Does not mean that every equitable remedy available in state court must be available in a diversity suit in federal court o Congressional curtailment of equity powers must be respected (right to jury trial cannot be evaded) - State law cannot define remedies a federal court must give but a federal court may afford an equitable remedy for a substantive right recognized by a State even though a state court cannot give it o Forms and modes of enforcing rights vary because the judicial systems are not identical - - - A federal court sitting in diversity is only another court of the State, it cannot afford recovery unavailable by the State nor can it substantially affect the enforcement of the right as given by the state o Proper distribution of judicial power between State and federal courts In cases where a federal court has jurisdiction solely based on diversity of citizenship, the outcome of the litigation in federal court should be substantially the same as if it was tried in state court o Diversity cases must follow the law of the State at to Burden of proof (Cities Service Oil Co. v. Dunlap) Conflict of laws (Klaxon Co. v. Stentor Co.) Contributory negligence (Palmer v. Hoffman) o Avoiding the disregard of state law in diversity cases in federal court To make an exception to Erie is to reject the considerations of policy Diversity is for non-bias to non-resident litigants A double system operation is hostile to the reign of law The source of substantive rights enforced by a federal court under diversity jurisdiction is the law of the states o Whether by the legislature of the highest court, such law should govern litigation founded on that law in either state or federal court and whether the remedies are sought at law or held in equity Notes: - Procedure: manner one can recover - Substance: actual law Efforts to Apply York: - Cohen v. Beneficial Industrial Loan Corp.—Proper application of York by applying the NJ state statute - Ragan v. Merchants Transfer & Warehouse Co., Inc.,--Kansas law of the 2 year statute of limitations period; FRCP was upheld - Bernhardt v. Polygraph Co.—arbitration provision under VT law; SCOTUS said VT law had to be used ERIE ANS CONFLICT OF LAWS - State courts do not always apply laws of their own state - A federal court sitting in diversity knows in most cases it must apply substandard of state law rather than general common law - Federal court will be required to determine which state law applies - Klaxon v. Stentor o Erie extends to conflict of law—the conflict of law rule to be applied by the federal court in a particular state must conform to those prevailing in that state's courts