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Guaranty Trust Co. v. York

Supreme Court of the United States · 1945 · Civil Procedure

Civil ProcedureErie doctrineoutcome determinative teststatute of limitationsdiversity jurisdictionstate-created rightsequitystatute of limitations

Facts

Van Sweringen Corporation issued notes under an indenture naming Guaranty Trust Co. as trustee for noteholders. After financial trouble developed, Guaranty participated in an exchange offer under which noteholders could take cash and stock; respondent later received notes whose donor had not accepted that offer. Respondent sued in federal court, solely on diversity grounds, alleging Guaranty breached its trust duties by assenting to and sponsoring the exchange offer without protecting noteholders and without disclosing its self-interest. The question presented was whether a federal court sitting in equity could entertain the suit if a state court would treat the claim as barred by the state statute of limitations.

Issue

When a federal court hears a state-created claim solely because of diversity of citizenship, may the federal court sitting in equity disregard the forum state's statute of limitations and allow recovery even though a like suit in state court would be barred? More generally, must a federal diversity court apply a state limitations rule when ignoring it would substantially alter the result of the litigation?

Rule

In diversity cases, a federal court adjudicating a state-created right must apply state law when disregarding that law would significantly affect the result of the litigation. Therefore, if a state statute of limitations would bar recovery in the state court on the same claim between the same parties, a federal court ordinarily may not afford recovery by treating the matter as merely procedural, even when the suit is brought on the equity side.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nadia Flores, a resident of Arizona, sues Lakeview Asset Custodians, a fictional trust company based in Illinois, in federal district court in Chicago. She seeks an accounting and other equitable relief on a state-law fiduciary-duty claim arising under Illinois law, but an Illinois court would dismiss the same claim as untimely under Illinois's limitations statute.

Should the federal court disregard the Illinois limitations bar because Nadia requested equitable relief rather than damages?

Explanation. The majority held that when a federal court hears a state-created claim solely because of diversity, it is, for that purpose, only another court of the state. The key inquiry is whether disregarding the state rule would significantly affect the outcome. If the state limitations rule would bar recovery in state court, a federal court ordinarily may not allow recovery merely because the suit is brought on the equity side.