326 U.S. 99 (1945)
Facts & Procedural History
Plaintiffs sued a bond trustee in a federal diversity action alleging misrepresentation and breach of trust. New York substantive law governed and defendant invoked the New York statute of limitations. The Second Circuit determined that plaintiffs’ suit was not barred because it was on the “equity side” of federal court, and courts of equity are not strictly bound by statutes of limitations.
Can a federal court exercising diversity jurisdiction hear an action that would be barred in state court by the applicable statute of limitations?
Holding / Rule
(Frankfurter) No. The relevant question is whether applying the state rule of law would affect the outcome of the litigation. A federal court sitting in diversity jurisdiction must apply any state rule of law that would result in a significantly different outcome.
It is immaterial whether the state statute or rule of law is labeled as “procedural” or “substantive.” The relevant distinction is between rules of law that significantly affect the outcome of the litigation and those that only concern the manner and means by which a litigant may recover under state law. Erie was intended to ensure the proper distribution of judicial power between state and federal courts and to ensure that the outcome of diversity cases in federal court are substantially the same as they would be if tried in state court.