The Southern District of New York has confirmed that when the trustee of a non-citizen aircraft trust brings suit in its own name, the citizenship of that trustee may be used to establish diversity jurisdiction in federal court.1 The dispute arose out of an aircraft leasing arrangement involving non-U.S. citizens. Because federal law restricts the ability of non-U.S. citizens to register aircraft with the Federal Aviation Administration,2 the aircraft owner created a trust designating a citizen of Utah as owner trustee.
After creation of the trust, the trustee leased the aircraft. As a condition of the lease, the owner trustee required two non-U.S. entities to unconditionally guaranty lessee’s performance and payment. Following lessee’s default for non-payment, the trustee filed an action in federal court against the guarantors for breach of contract.
Under 28 U.S.C. § 1332(a)(2), federal district courts have original jurisdiction over civil actions in which the amount in controversy exceeds $75,000 and the dispute is “between citizens of a State and citizens or subject of a foreign state.” Where all parties are foreign entities, however, diversity is lacking and the federal court does not have jurisdiction (unless there is another basis for jurisdiction). In an attempt to destroy diversity, defendants argued that the beneficiary of the aircraft trust, a citizen of the Cayman Islands, was the real party to the controversy.
Federal Rule of Civil Procedure 17(a), which requires that “an action must be prosecuted in the name of the real party in interest,” allows the “trustee of an express trust” to sue in its own name. Thus, even defendants conceded that the trustee was a proper plaintiff. But the fact that the trustee satisfied Rule 17’s procedural requirement did not automatically establish that it was a real party to the controversy for purposes of diversity jurisdiction.
Citing U.S. Supreme Court precedent,3 the district court found that in a suit involving a trustee suing or being sued in its own name the citizenship of the trustee may be used for purposes of establishing diversity jurisdiction if it is a “real and substantial” party to the controversy. A trustee is deemed a real party to the controversy if it possesses certain customary powers to hold, manage, and dispose of assets for the benefit of others. In contrast, a court may not rest diversity jurisdiction on the citizenship of a “naked” or “sham” trustee who acts as a mere conduit for a remedy flowing to others.
In denying defendants’ motion, the Court found that the trustee was a real and substantial party because it had the legal capacity to hold and dispose of the aircraft. Pursuant to the trust agreement, the trustee had the power to enter into an assignment, sale, transfer, or other conveyance that would bind the beneficiary. The trustee also had the power to manage the aircraft, including to receive all payments and to pursue remedies in the event of a default.
The court reached the correct result in response to defendants’ overreaching attempt to divest the federal court of its jurisdiction. Defendants unconvincingly conflated the trustee’s lack of “operational control” of the aircraft with the rights afforded to the trustee under the trust agreement to manage the asset. Indeed, the trust agreement left no doubt as to the trustee’s power to exercise remedies against the lessee and guarantors.4 So too, relying on the citizenship of the trust beneficiary would be counterintuitive to a regulatory scheme whereby foreign trust beneficiaries may not have more than 25 percent of the aggregate power to influence or limit the exercise of the trustee’s authority.5