The Supreme Court’s most recent citizenship opinion, Americold Realty Trust v. Conagra Foods, Inc., could make removing or keeping a case in federal court based on diversity more difficult for a statutory trust with a proprietary or complex ownership structure.
With Americold, the Supreme Court clarified a circuit split regarding the citizenship of statutory trusts. In a unanimous opinion, the Court clarified that the citizenship of unincorporated, non-traditional trusts (such as a real estate investment trust) is that of all of its members. This includes the citizenship of both the trustee and the trust’s beneficiaries.
A privately held real estate investment trust often has multiple layers of corporate ownership within its beneficiary structure. Rather than a single individual shareholder being named as the beneficiary, the trust could name a limited liability company (LLC) or limited partnership (LP), whose members may be other LLCs or LPs. The complexity and scope of ownership can range from a few simple layers to a complicated flowchart of entities and individuals. “Panama Papers” aside, there are justified circumstances where the trust may not want to disclose every layer in the chain of ownership or cannot disclose certain ownership information which remains outside of its custody or control.
Because the citizenship inquiry traditionally forces examination of every layer of LLC and/or LP ownership until reaching an individual or corporation, statutory trusts could find themselves in the procedural quandary of how to remove or keep state law claims in federal court, where there is no federal question giving the court subject matter jurisdiction. The burden of establishing citizenship typically lies with the party asserting federal diversity jurisdiction. That means a plaintiff that sues in federal court trying to assert diversity jurisdiction could seek jurisdictional discovery from the trust to peel back the trust’s layers of ownership. Alternatively, if the trust is trying to remove a state court matter, the trust will carry the burden to affirmatively allege each layer of its citizenship. Under either scenario, the trust must decide how much it can and is willing to disclose in order to litigate in federal court.
Prior to Americold, parties asserting diversity jurisdiction often relied on Navarro Savings Assn. v. Lee, to argue the citizenship of anything called a “trust” was defined by the citizenship of its trustee alone. Such arguments tended to lump a statutory trust together with the “traditional trust,” which the Americold Court distinguished as “a ‘fiduciary relationship’ between multiple people” and which “could not be haled into court . . . .” Indeed, the Court noted that “[m]any states . . . have applied the ‘trust’ label to a variety of unincorporated entities that have little in common with [the] traditional [trust] template [sic].” The Court expressly limited the scope of Navarro to the separate rule that the citizenship of a traditional trust is that of its natural person trustee. “This rule coexists with our discussion above that when an artificial entity is sued in its name, it takes the citizenship of each of its members.”
Traditionally, taking such a narrow view of citizenship proved quite helpful to privately held real estate investment trusts where, in many cases, the trustee is a national association (N.A.) whose citizenship can be established from the public record. Relying on Navarro alleviated the need to examine the trust’s beneficiary, with its potential domino of disclosures as to its shareholders, often layered with other LLC or LP entities before reaching any individuals. However, relying on the citizenship of the trustee alone is now a wholly foreclosed argument. The Court in Americold made crystal clear that Navarro does not limit “an entity’s membership to its trustees just because the entity happens to call itself a trust.”
Instead, the Americold case forces the party asserting diversity jurisdiction to now also examine the citizenship of the trust’s beneficiary. “Despite what [a statutory trust] calls itself, so long as it is unincorporated, this Court will apply the ‘oft-repeated rule’ that it possesses the citizenship of all its members.”
What constitutes a “member” depends upon the statutory framework set forth in the state where the real estate investment trust was formed. In Americold, the Court looked to Maryland law to determine the “members” of Americold Realty Trust, highlighting that the state defines a real estate investment trust as the “unincorporated business trust or association” held and managed “for the benefit and profit of any person who may become a shareholder.” The Court pointed to the shareholders’ “ownership interests” and “votes in the trust by virtue of their ‘shares of beneficial interest’.” Many states, including Delaware, provide similar definitions (see, e.g., 12 Del. Code § 3801, et seq.). The Court compared these shareholders’ “ownership interests” to that of the shareholders in a joint-stock company or the partners of a limited partnership.
Thus, in addition to the citizenship of the trustee, all diversity jurisdiction roads lead back to the corporate structure of the statutory trust’s beneficiary. Where the beneficiary’s corporate structure involves an LLC or LP and is complex, proprietary or simply not fully within the custody or control of the trust entity, the trust must determine whether litigating in a federal forum is worth the time, expense and tangible effects of the disclosure of its beneficial owners and their citizenship.
Jurisdictional discovery presents just one example. Where a borrower-plaintiff seeks to bring a case against a real estate investment trust in federal court based on diversity jurisdiction, the plaintiff may request – or the court may order sua sponte – citizenship discovery to determine whether subject matter jurisdiction exists. Some real estate investment trusts may elect to push back on jurisdictional discovery requests, objecting to certain ownership information as being beyond their custody or control. Without record evidence that subject matter jurisdiction exists, the case presumably will be dismissed from federal court without prejudice. Similarly, trusts may elect to forego removal opportunities and remain in state court because they choose not to – or cannot – affirmatively allege on the record their beneficiary owners, much less the citizenship of all of their shareholders. Even if the information is readily available, conceivably, disclosure of all beneficial owners of the trust at the individual level could preclude diversity jurisdiction altogether. Put simply, assuming federal question jurisdiction is absent, burdening a real estate investment trust with demonstrating complete diversity could bar its access to federal courts.
Though the volume of cases in which this circumstance might arise may be limited, such instances can have big consequences in an unfriendly state forum where a plaintiff brings only state law claims such as wrongful foreclosure, quiet title, and fraud against a real estate investment trust. In those instances, the trust may have no alternative but to litigate in state court, leaving some to wonder whether Americold has left statutory trusts in the cold.