There are many benefits to having a case in federal court as opposed to state court. For example, the Federal Rules of Civil Procedure create, for the most part, a streamlined process for a case throughout all stages of litigation. Moreover, in federal court there usually is one judge assigned to a case from start to finish, which allows for a more informed decision maker on the key factual and legal issues. Assuming the amount in dispute exceeds $75,000, a business organization may access the federal courts through diversity jurisdiction, which is dependent upon the organization’s ability to show that none of the plaintiffs share the same citizenship as that of any of the defendants. 28 U.S.C. § 1332. A natural person is a citizen of the state in which he or she is domiciled, and, by legislative act, a corporation is a citizen of its jurisdiction of incorporation and the jurisdiction in which it maintains its principal place of business. Within the last few years, the Supreme Court resolved the question as to which test should be utilized in determining the principal place of business, adopting the “nerve center” test. See Hertz Corp. v. Friend, 559 U.S. 77 (2010).
The situation is far more complicated for LLCs and other organizations that are not corporations. The rule for these entities is that the organization has the citizenship of each of its “members.” See Carden v. Arkoma Assoc., 494 U.S. 185 (1990) (holding that a limited partnership has the citizenship of each of its partners, whether general or limited). Compliance with this rule causes issues mostly with the access by LLCs and other unincorporated forms to federal courts on the basis of diversity jurisdiction. Several recent decisions provide guidance as to how those requirements may or may not be satisfied.
Americold Realty Trust v. ConAgra
The decision rendered by the Supreme Court in Americold Realty Trust v. ConAgra, No. 14-1382, 136 S. Ct. 1012 (Mar. 7, 2016), addressed how the Carden decision should be applied in the context of a modern business trust. In a 1980 decision, Navarro Savings Assn. v. Lee, 446 U.S. 458 (1980), the Supreme Court held that, where suit was brought on behalf of a traditional common-law business trust by and in the names of the individual trustees (a common-law trust lacks the capacity to sue or be sued in its own name), only the citizenship of those trustees is considered, not the citizenship of the trust’s beneficiaries.
In the decades since, there have been substantial changes in the law of business trusts. These organizations are now often organized pursuant to statutes that afford a business trust the capacity to sue and be sued in its own name. See, e.g., Del. Code Ann. tit. 12, § 3804(a); Ky. Rev. Stat. Ann. § 386A.3-060(1); Md. Corp. & Assns. Code Ann. § 8-301(2); Unif. Stat. Tr. Entity Act § 8-308, 6 (pt. 1) U.L.A. 675 (2015). In such a milieu, would Navarro or Carden control? The Americold decision considered and answer that question.
Americold was a real estate investment trust organized under Maryland law. ConAgra had been the plaintiff in state court. On the basis of diversity jurisdiction, the defendant removed to federal court. After it lost in trial court, ConAgra sought to set aside the verdict on the basis that diversity jurisdiction was lacking, thereby affording it another bite at the apple in state court. In support of its position, ConAgra argued that the citizenship inquiry should extend to all of its beneficial owners and not only the trustees. Not surprisingly, Americold, in reliance upon the Navarro decision, argued that its citizenship should be restricted to that of the trustees. The Tenth Circuit agreed with ConAgra and applied Carden to Americold. As the record lacked a listing of Americold’s shareholders and their citizenship, the Tenth Circuit held that there was a failure to show diversity of citizenship.
In a unanimous opinion authored by Justice Sotomayor, the Supreme Court restricted the Navarro decision to trusts that in and of themselves lack the capacity to sue and be sued. In contrast, because Americold was organized under a statute enabling it to sue and be sued in its own name, the rule of Carden was applied, and the citizenship of every beneficial owner in the trust will be attributed to it for purposes of assessing diversity jurisdiction.
Even as clarity has been added as to business trusts, there is no consensus as to whether, in the context of a common-law donative trust, citizenship is determined by reference to the trustees alone or to the beneficiaries as well.
There have already been two published decisions by federal courts applying the Supreme Court’s Americold decision. Specifically, in RTP LLC v. ORIX Real Estate Cap., Inc., Nos. 14-3671 & 15-1153, 2016 WL 3568090 (7th Cir. July 1, 2016), Americold was held to apply to certain pension-fund members of the plaintiff to the effect that they would be treated as members whose citizenship must be determined. In the second case, Wells Fargo Bank, N.A. v. Transcontinental Realty Investors, Inc., No. 3:14-cv-3565-BN, 2016 WL 357-0648 (N.D. Texas July 1, 2016), Americold was applied with respect to a securitization trust that was deemed the real party in interest.
In RTP LLC, ORIX loaned some $41,000,000 to RTP for the purchase of a commercial building in North Carolina. Although the loan was itself nonrecourse, RTP and an entity now named RSCD Opportunity Fund I, LLC, but previously named Inheritance Capital Group, LLC, executed conditional guarantees with respect thereto. Ultimately, the loan went into default, at which time ORIX accelerated the obligation and demanded that RTP and Inheritance satisfy their respective guarantees. Although it appears that they asserted the guarantees were invalid or on some other basis ineffective (the opinion does not address this point beyond a statement that they sought “a declaration that they do not owe ORIX anything beyond what can be paid out of the building’s assets”), the trial court held them liable to the tune of $30,000,000. This action before the district court had been brought on the basis of diversity jurisdiction.
It was also on this basis that the action would be largely set aside. RSCD Opportunity Fund I, LLC (formerly Inheritance Capital Group, LLC) has the citizenship of its members: two retirement plans, namely the General Retirement System of the City of Detroit and the Police and Fire Retirement System of the City of Detroit, each organized as a trust with the capacity to sue and be sued in its own name. In reliance upon, inter alia, Navarro, ORIX claimed that diversity jurisdiction should be assessed by looking only to the citizenship of the trustees of each of those trusts, ignoring for purposes of citizenship the citizenship of the beneficiaries of those trusts.
In reviewing the matter, the Seventh Circuit first held that two decisions, May Department Stores Co. v. Fed. Ins. Co., 305 F.3d 597 (7th Cir. 2002), and Hicklin Engineering, L.C. v. Bartel, 439 F.3d 346 (7th Cir. 2006), “did not survive Americold.” From there, the court observed, “the trusts themselves, not the trustees, are the members of the two LLCs. Detroit’s two pension funds contract (and litigate) in their own names. These trusts therefore have the citizenships of their own members.” The court also noted that the members of a trust of this nature include not only current participants who are paying into the trust fund, but also current beneficiaries thereof. Ultimately, in order to demonstrate diversity jurisdiction, ORIX, the party who sought removal in the first place, must investigate the domicile of each of the trusts that are in turn members of one of the guarantor parties. Specifically:
ORIX may think it pointless to conduct a detailed inquiry into the domiciles of the 59 persons who resided in these two states in 2013, especially because it would become necessary to consider the possibility that beneficiaries who then resided elsewhere (say, Oklahoma or Maryland) were domiciliaries of Texas or Delaware at the time. But ORIX may choose its own litigation strategy.
Ultimately, the judgment of the district court was vacated, and the case was remanded for further proceedings. It was specified that, if ORIX does not seek to determine the domicile of those trust beneficiaries as of 2013, “then the District Court must remand this litigation to state court.”
The second of these decisions, Wells Fargo, involved the treatment of a securitization trust. Wells Fargo initially filed this action in federal court on the basis of diversity jurisdiction. In doing so, it identified only its own citizenship, namely South Dakota, as the basis for diversity; Transcontinental is a Nevada corporation with its principal place of business in Texas. Transcontinental sought dismissal of the action on the basis that diversity did not exist. As summarized by the court:
Wells Fargo is the trustee of the Trust, and an unincorporated entity, and the Defendant argues that Wells Fargo cannot rely solely on its own citizenship for diversity jurisdiction. Instead, Defendant alleges, Wells Fargo must establish the diverse citizenship of all of the Trust’s members to establish diversity jurisdiction.
As any award of relief would be to the benefit of the trust, and not Wells Fargo alone, it was found that “a careful review of the complaint makes clear that Wells Fargo is only a nominal or formal party suing on behalf of the trust, which is the real and substantial party to the controversy with Defendant.”
Without parsing the particular characteristics of the trust at issue, the court held, inter alia, that it is not a traditional, donative trust, but rather a trust for which the citizenship of all of the beneficiaries are attributed that determines citizenship.
Here, unlike a human trustee suing in her own name on her own behalf as in Navarro, the Trust is the plaintiff and real party in interest, and, as an unincorporated entity, the Trust is a citizen of the states in which its members are located. Because Wells Fargo has not established the citizenship of each of the Trust’s members, Wells Fargo has failed to properly invoke federal diversity jurisdiction.
On that basis, Transcontinental’s motion to dismiss was granted, and the action was dismissed for lack of subject-matter jurisdiction.