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By Patrick Gregory
Jan. 19 — The U.S. Supreme Court seemed to want a bright line rule concerning the citizenship of trusts for purposes of diversity jurisdiction at oral argument Jan. 19.
The outcome of this case could determine whether publicly traded real estate investment trusts, or “REITs”—owned by “millions of shareholders”—have access to federal courts through diversity jurisdiction, according to an amicus brief filed by the National Association of Real Estate Investment Trusts.
Justices Ruth Bader Ginsburg and Elena Kagan suggested the court had already established a bright line between corporations—whose citizenship isn't determined by its members—and all other entities such as trusts or partnerships.
But such a line wouldn't clarify diversity questions, the attorney for petitioners Americold Realty Trust (a Maryland REIT) and Americold Logistics LLC argued.
Because REITs can have millions of shareholders, determining citizenship based on them could be impossible, he said.
A different bright-line rule should therefore apply: a trust's citizenship should be determined only by its trustees, the Americold attorney said.
The U.S. Court of Appeals for the Tenth Circuit rejected that argument, ruling that a trust's citizenship for purposes of diversity jurisdiction is determined by its beneficiaries, in ConAgra Foods, Inc. v. Americold Logistics, LLC, 776 F.3d 1175 (10th Cir. 2015).
Publicly traded REITs (which don't include the Americold entities) have shareholder-beneficiaries “in all U.S. states, or nearly all,” NAREIT's brief said.
“Adopting the Tenth Circuit's reasoning would treat those REITs as citizens of every one of those states,” meaning they couldn't benefit from diversity jurisdiction, NAREIT said.
REITs are subject to potential lawsuits “anywhere they may own property, making the protections of diversity jurisdiction particularly important to them,” NAREIT said.
ConAgra Foods Inc. and Swift-Eckrich Inc. unsuccessfully sued the Americold entities for breach of a settlement agreement related to a 1991 building fire, in ConAgra Foods, Inc. v. Americold Logistics, LLC, 2013 BL 273529, D. Kan., No. 13-2064-JWL, unpublished, 10/4/13.
The federal district court granted summary judgment to the Americold companies, but the Tenth Circuit found that they shouldn't have been allowed to remove the case to federal court based on diversity jurisdiction.
The Americold companies lacked diversity from the plaintiffs because Americold Realty Trust's beneficiaries weren't diverse from the plaintiffs, the Tenth Circuit said.
Diversity jurisdiction “depends on the citizenship of all the members” of an entity, the appeals court said, quoting Carden v. Arkoma Assocs., 494 U.S. 185 (1990).
Such members include the beneficiaries of a trust, the court held, joining the Third and Eleventh circuits.
The court acknowledged that the Second, Fifth, Seventh and Ninth circuits came to a contrary conclusion based on Navarro Savings Ass'n v. Lee, 446 U.S. 458 (1980).
But Navarro stood only for the “limited proposition that if a trustee is a proper party to bring a suit on behalf of a trust, it is the trustee's citizenship that is relevant,” the Tenth Circuit said.
Carden made clear that when “the trust itself is a party to litigation,” the citizenship of a trust's members—including its beneficiaries—determines the trust's citizenship, the appeals court said.
The court should apply a “bright-line rule” that in suits involving a trust, “the trustee should be the party of interest” rather than the beneficiaries, Michael D. Pospisil of Edgar Law Firm LLC, Kansas City, Mo., said in arguing for the Americold entities.
That rule would be consistent with “over 200 years” of high court jurisprudence involving common law trusts, Pospisil argued.
But Justice Antonin Scalia questioned whether the Maryland REIT here was comparable to a common law trust.
Scalia asked Pospisil to confirm that while trustees of common law trusts could sue, the trustees here can't.
Pospisil confirmed that understanding.
But that difference shouldn't “change the analysis,” Pospisil said.
“There still has to be somebody we look to, some real people that we look to to determine whose citizenship controls,” he said.
Navarro is “pretty clear” that when a trustee “has absolute control” of a trust as with the REIT here, it's the trustee's citizenship that determines diversity, he said.
Justice Samuel A. Alito Jr. asked why the REIT here should be treated like a traditional trust instead of “another unincorporated artificial entity” such as a limited liability company.
Pospisil responded that the trust here has attributes that trusts “have historically had.”
Historically, trusts have had “a separation between legal ownership” and beneficial ownership, Pospisil said.
That same separation exists here, Pospisil said.
No law “in the country that we have found has ever held that the legal ownership goes in the name of a trust beneficiary” such as a REIT's shareholders, Pospisil said.
“The ownership is always in the name of the trust or the trustees,” he said. It's therefore their citizenship that should control, Pospisil argued.
The court should adopt and reaffirm “its bright-line ruling announced in Carden that artificial entity associations sued or suing in their own names must measure their diversity citizenship by all of their members,” John M. Duggan of Duggan Shadwick Doerr & Kurlbaum LLC, Overland Park, Kan., arguing for ConAgra, said.
That membership would “include those persons who own a beneficial interest in the entity,” such as a REIT's shareholders, Duggan argued.
Ginsburg seemed to agree, suggesting that Carden drew a bright-line rule “between corporations on one side”—whose citizenship isn't determined by that of its members—and “all other associations.”
Similarly, Kagan said she “thought that one of the virtues of Carden was that it just set up a very categorical, bright-line rule.”
Under that rule, everything “that's an artificial legal entity that's not a corporation ought to be treated in the same way,” Kagan said.
There's a benefit to “just doing that in that bright-line, categorical way, so that we don't have to look at the thousands of different variations among legal entities and decide which fits in which box,” Kagan said.
Justice Sonia Sotomayor also suggested that a bright line exists already.
She told Pospisil that he was “asking us to come and place trustee law above our general rule, that you're either a corporation,” which has simplified citizenship, “or you're not.”
Pospisil argued that Carden doesn't control here because that decision didn't involve trustees, trust assets or beneficiaries.
Further, even if the citizenship of some entities other than corporations—such as partnerships—is determined by members, “there are no members in a trust,” Pospisil argued.
Chief Justice John G. Roberts Jr. asked Duggan if he would consider a shareholder beneficiary to be “a member of a trust.”
“I don't know if I'd call beneficiaries members of a trust,” Roberts said.
Duggan responded that the shareholders here “only have an interest in the personal property of a certificate of ownership” rather than an equitable interest in the trust.
That is “very much like” the interest held by “the limited partners in Carden” who were considered members of a partnership, Duggan asserted.
The limited partners in Carden and the beneficiaries here “are virtually identical” because they both “invest money in an artificial entity and receive a certificate of ownership, and they periodically vote on important matters that affect the entity,” Duggan said.
Pospisil argued that basing a trust's citizenship on that of its beneficiaries would be difficult if not impossible due to the possible number of shareholders.
Scalia asked Pospisil if he was aware of any Maryland REITs that had “more than a thousand” shareholder beneficiaries.
Pospisil pointed to NAREIT's brief and its assertion “that there are some publicly traded REITs that have tens of millions of” them.
Further, “a lot of these shares of REITs are also traded on a daily basis,” Pospisil argued.
A shareholder could be a beneficiary at “10 o'clock this morning” but sell that interest at 10:15, Pospisil said.
“How are you ever going to identify who the beneficiaries are at any given time?” Pospisil asked.
But Duggan argued that accepting Americold's position would be contrary to Carden and would therefore “open the floodgates of uncertainty” in lower courts concerning limited liability companies.
“Limited liability companies can call their boards of managers ‘boards of trustees,' ” Duggan said.
Such managers can sometimes “hold property in trust for the entity just like the trustees in this case can,” Duggan said.
Therefore, adopting Americold's position will cause some managers facing a diversity question to analogize themselves to the trustees here, in contrast to “the limited partners in Carden,” Duggan said.
“And it's going to create uncertainty” in the courts concerning the diversity of those managers, Duggan said.
To contact the reporter on this story: Patrick L. Gregory in Washington at email@example.com
To contact the editor responsible for this story: Jessie Kokrda Kamens at firstname.lastname@example.org
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