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Barbiero v. Kaufman

United States District Court, Third Circuit

July 30, 2013



McLaughlin, J.

This action centers on a dispute over a particular Philadelphia office building held in trust for several hundred beneficiaries. One of those beneficiaries, Anthony Barbiero, filed a petition in the Orphans’ Court Division of the Philadelphia County Court of Common Pleas, seeking removal of the current trustee, Gerald S. Kaufman Corporation (“Kaufman Corp.”), and its assignee, Gerald S. Kaufman, and their replacement by a successor trustee ad litem. Kaufman and Kaufman Corp. thereafter removed Barbiero’s suit to this Court. Barbiero has filed a motion to remand under 28 U.S.C. § 1447(c), arguing that this Court lacks subject matter jurisdiction to adjudicate the controversy. The respondents have filed a motion to dismiss.

Prior to the initiation of Barbiero’s suit, Kaufman and Kaufman Corp. filed a lawsuit in Illinois state court to reform the operative trust agreement, which remains pending. In their suit, Kaufman and his company named Barbiero as one of the defendants representing the entire class of trust beneficiaries.

This Court held oral argument on the parties’ motions to remand and to dismiss on July 11, 2013. The Court will now deny Barbiero’s motion to remand. In view of the first-filed and continuing Illinois court proceeding, it will, however, dismiss this case for lack of subject matter jurisdiction pursuant to the Princess Lida doctrine.

I. Background

The facts herein discussed are those necessary to determine whether this Court has subject matter jurisdiction, which is predicated on the parties’ citizenship and the nature of the claims at issue, and to describe the relevant procedural background. Facts are drawn from the assertions in Barbiero’s petition filed in the Court of Common Pleas, the exhibits attached thereto, matters of public record, and other filings by the parties. The only pleading allegations accepted as true for purposes of this motion are those in the petition concerning the structure of the trust at the heart of this litigation and the parties’ relationships to that trust and its corpus, about which all parties appear to agree.

A. Structure of the Trust

This lawsuit involves the Terminal Commerce Building located at 401 N. Broad Street in Philadelphia (“Property”), which is presently held in trust for over 600 tenant-in-common beneficiaries. The trust was created pursuant to a trust agreement executed in 1959. Under the 1959 trust agreement, five individuals, referred to as “Nominees, ” purchased and agreed to hold title to and manage the Property as trustees. Pet. ¶¶ 6, 10-12; PX A (9/1/59 Trust Agmt.) ¶ 1.[1]

The trust agreement provides that, aside from a 99-year leasehold estate granted to the Terminal Commerce Building of Philadelphia, Inc., “[t]he Nominees shall not sell or agree to sell, mortgage, encumber or transfer the real property . . ., except upon the written direction of all of the Tenants-In-Common.” Pet. ¶ 12; PX A ¶ 4.

On May 2, 1983, the Nominees entered into a new nominee agreement with respondent Gerald S. Kaufman, the son of one of the original Nominees. Through that agreement, the original Nominees conveyed to Kaufman all of their powers and authority under the trust agreement. Kaufman became the sole Nominee–i.e., trustee–holding title to and managing the Property on behalf of the tenants in common. In 1999, Kaufman deeded title to the Property to his corporation, respondent Kaufman Corp. Since that time, Kaufman Corp. has been the Nominee for the tenants in common, and Kaufman has been the company’s assignee. Pet. ¶¶ 18, 20-21.

B. Illinois Reformation Action

On August 9, 2012, Kaufman and Kaufman Corp. filed a suit in Illinois state court against three of the tenants in common: Nanette Appel-Bloom, Alan S. Jacobs, and Anthony Barbiero, the petitioner in this suit (“Illinois Action”). The Illinois Action was filed as a defendant class action lawsuit, in which the three defendants were named as representatives of all of the tenants in common. PX B (Compl., Kaufman v. Appel-Bloom, No. 12-CH-30537 (Ill. Cir. Ct., Cook Cnty.)).

In their lawsuit, Kaufman and his corporation seek reformation of the trust agreement. They argue that the provision requiring unanimous consent among the tenants in common before the Property may be mortgaged or sold has become unworkable given the sheer number of beneficiaries. They claim that the more than 600 beneficiaries are spread among numerous states and several foreign countries, and that at least 45 of them cannot be located. Moreover, according to the Illinois Action complaint, 511 tenants in common holding approximately 90% of the beneficial interests in the Property have already approved granting the Nominee power to mortgage or sell the Property without unanimous consent. Kaufman alleges that only four beneficiaries, including Barbiero, have expressed any opposition to reforming the trust agreement in this manner. Id. ¶¶ 2-3, 22-27.

Kaufman requests that the Illinois court exercise its reformatory authority to strike the unanimous consent provision from the trust agreement and replace it with a provision that reads as follows: “The Trustees (referred to above as Nominees), . . . may borrow money, sell, mortgage, encumber, assign rents of, and grant liens upon, the property that is the subject of this Agreement, in the exercise of reasonable prudence and judgment.” Kaufman further requests an order permitting Kaufman Corp. and him to deviate from the 1959 trust agreement and engage in any of those enumerated activities without written direction or approval of any of the tenants in common. Id., Prayer (d)-(e) (quotation marks omitted).

Kaufman contends that the proposed reformation would permit Kaufman Corp. to obtain a new loan and mortgage on the Property. Id. ¶ 29.

On May 30, 2013, upon Barbiero’s motion, the Illinois court dismissed him as a defendant for lack of personal jurisdiction. The court determined that Barbiero has an interest in a trust administered in the state of Illinois, which satisfies the requirement for assertion of jurisdiction under Illinois’ long-arm statute. Nevertheless, the Illinois court found that actually exercising jurisdiction over Barbiero would offend due process because he lacked minimum contacts with the state.[2]Kaufman v. Appel-Bloom, No. 12-CH-30537 (Ill. Cir. Ct., Cook Cnty. May 30, 2013). The Illinois Action otherwise remains pending.

C. Barbiero Action

The suit presently before this Court was instituted by Barbiero in the Philadelphia County Court of Common Pleas on November 14, 2012. Barbiero and his wife jointly hold a 0.0549% ownership interest in the Property as tenants in common. Relying on Pennsylvania law, Barbiero seeks to remove Kaufman Corp. as trustee and Kaufman as its assignee, and asks that a successor trustee ad litem be installed in their place. Pet. ¶¶ 5, 66-87.

Barbiero alleges that Kaufman and Kaufman Corp. have breached their duties to (a) administer the trust in good faith in accordance with the trust’s provisions and purposes and in the interests of the beneficiaries; (b) be free from conflicts of interest; (c) act impartially in investing, managing, and distributing trust property; (d) administer the trust as would a prudent person; and (e) take reasonable steps to take control of and protect the trust property. In support of his contentions, Barbiero asserts that Kaufman violated the terms of the trust agreement when he transferred title to the Property to Kaufman Corp. without the unanimous consent of all tenant-in-common beneficiaries and that Kaufman and Kaufman Corp. violated the same provision of the agreement by issuing a mortgage on the Property to Aries Capital Incorporated (“Aries”), again without the beneficiaries’ unanimous consent. Barbiero also claims that Kaufman has a financial interest in the company that ultimately succeeded Aries as mortgagee on the aforementioned mortgage, which creates a conflict of interest given his duties and obligations as a trust fiduciary. Furthermore, Barbiero contends that Kaufman continues to mismanage the trust, risking foreclosure on the Property. Id. ¶¶ 46, 59, 70-75, 77-78.

On November 16, 2012, the Orphans’ Court issued an order to show cause why Kaufman Corp. and Kaufman should not be removed as trustees and why a successor trustee ad litem should not be appointed to administer the affairs of the Property. 12/13/12 Mattioli Decl., Ex. A (Decree, In Re: Tenants in Common of 401 N. Broad St., No. 123520 (Pa. Ct. Com. Pl., Phila. Cnty. Nov. 16, 2012)) (Docket No. 3). Rather than submit a response, the respondents removed the case to federal court on December 7, 2012. They contend that federal jurisdiction is supplied by diversity among the three named parties or the Class Action Fairness Act ...

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