In all cases where a federal court is exercising jurisdiction solely because of the diversity of citizenship of the parties, the outcome of the litigation in the federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a state court
The suit, instituted as a class action on behalf of respondent nonaccepting noteholders and brought in a federal court solely because of diversity of citizenship, is based on an alleged breach of trust by petitioner trustee in that it failed to protect the interests of the noteholders in assenting to the exchange offer and failed to disclose its self-interest when sponsoring the offer. Petitioner moved for summary judgment, which was granted. On appeal, the judgment that a federal diversity court was not bound by a state statute of limitations was reversed. The court concluded that the federal diversity courts were required to apply state law to determine the outcome of litigation, regardless of whether the remedy was in law or in equity. Respondent noteholder's suit against petitioner trustee arising from an alleged breach of trust was remanded for further proceedings.
Is the federal court bound by local state law?
The court noted that under the Erie Doctrine, in all cases where a federal court had jurisdiction solely because of diversity of citizenship, the outcome of the litigation in the federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a state court. The doctrine required the federal diversity court to follow state law, and if the statute of limitations under state law barred recovery in a state court, the federal court could not afford recovery. The court reiterated that the source of substantive rights enforced by a federal diversity court was state law, and that this law determined the outcome regardless of the forum or whether the remedy was in law or in equity.