Plaintiff sued Defendant for an alleged breach of trust after the statute of limitations had passed, bringing the lawsuit in federal court through diversity jurisdiction.
A federal court ruling over a case under diversity jurisdiction must use applicable state law if the outcome of the federal court’s application of law would significantly affect the results of the litigation in comparison to if state law had been applied.
Trust Co. (Defendant), as a trustee, cooperated in a plan for the purchase of notes at half face value. York (Plaintiff) sued Defendant for alleged breach of trust because Defendant failed to protect the interests of or properly inform the noteholders, as required of a trustee. Plaintiff brought the lawsuit in a federal court of equity through diversity jurisdiction after the state statute of limitations had passed.
Under diversity jurisdiction, does a federal court of equity have authority over a lawsuit when the applicable state’s statute of limitations would otherwise block the case?
No, as determined by Erie Railroad Co. v. Tompkins, state law applies and the case is blocked by the statute of limitations. The lower court’s decision is reversed and remanded.
Justice Rutledge disagreed with the Court’s distinction between substantive and procedural law, arguing that the two cannot and should not so easily be separated. He argued that the statute of limitations in this case should be defined as a substantive law.
Under the Erie Railroad Co. v. Tompkins, federal courts must enforce state substantive rights but do not have to follow state remedial schemes. To enforce this rule, the Court distinguished between substantive law as law affecting the results of the litigation and procedural law as law governing the manner and means of relief. Here, the enforcement of the statute of limitations would affect the results of the litigation.