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March 7 — The Supreme Court curtailed access to federal courts for nontraditional trusts March 7 sticking with a bright-line rule.
Resolving a deep circuit split, the court refused to treat “real estate investment trusts” like traditional trusts for diversity purposes. A REIT's citizenship is determined by that of its members, including its shareholders, Justice Sonia Sotomayor wrote for the court.
The unanimous ruling means that many REITs won't have access to federal courts because their large number of shareholders will prevent them from qualifying for diversity jurisdiction.
The court also declined to extend the “special jurisdictional rule” applied to corporations, which limits corporations' citizenship significantly.
There is a dizzying array of state quasi-corporation entities, Donald M. Falk, a partner in Mayer Brown LLP’s Supreme Court and appellate practice, Palo Alto, Calif., told Bloomberg BNA. Falk's appellate practice involves a wide range of constitutional, statutory, patent, securities, administrative, criminal and common law issues, according to Mayer Brown's website.
The Supreme Court signaled that it has no appetite for sorting them out for jurisdictional purposes, Falk said.
In refusing to extend the “corporation rule,” the court stuck close to the text of 28 U.S.C. §1332(c), Falk said.
That provision says that for purposes of diversity jurisdiction, “a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business.”
The court unanimously refused to wade into the factual morass of whether particular unincorporated entities were sufficiently like corporations to be treated the same for diversity purposes, Falk said.
The court left it up to Congress to draw those lines, he said.
As Sotomayor put it for the 8-0 court, “it is up to Congress if it wishes to incorporate other entities into 28 U.S.C. §1332(c)'s special jurisdictional rule.”
But attorneys familiar with the issue said that's unlikely to happen.
“Significant Congressional amendments to the diversity jurisdiction statute are rare,” John M. Duggan of Duggan Shadwick Doerr & Kurlbaum LLC, Overland Park, Kan., told Bloomberg BNA.
Duggan successfully argued for the respondents, Conagra Foods, Inc., which advocated for the definition of citizenship ultimately adopted by the high court in Americold Realty Trust. The petitioner's attorneys, Edgar Law Firm LLC of Kansas City, Mo., didn't return a request for comment.
The late Justice Antonin Scalia “was incredibly specific in calling upon Congress to change the ‘corporation' rule in” Carden v. Arkoma Assocs., 494 U.S. 185 (1990), which refused to extend the rule to limited partnerships, Brooklyn Law School's Robin Effron, Brooklyn, told Bloomberg BNA.
Effron, who contributes to the Civil Procedure & Federal Courts Law Professors Blog, added that in the years since Carden was decided in 1990, “Congress has made several changes to the jurisdiction and venue laws. It has not changed 1332(c).”
“Even though there are good reasons to change the rule, none of these reasons are any different today than they have been for the past 25 years,” Effron said.
Duggan added that “in 2005, Congress specifically amended 28 U.S.C. §1332 to extend the ‘corporation rule' to unincorporated associations, but only in the limited context of class actions.”
This “suggests Congress has considered the issue, and decided the corporation rule should not be extended to unincorporated associations beyond the class action lawsuit context,” he said.
The court also declined to treat REITs like traditional trusts, Falk said.
“Traditionally, a trust was not considered a distinct legal entity, but a ‘fiduciary relationship' between multiple people,” the Supreme Court said.
“Such a relationship was not a thing that could be haled into court; legal proceedings involving a trust were brought by or against the trustees in their own name,” it said. “And when a trustee files a lawsuit or is sued in her own name, her citizenship is all that matters for diversity purposes.”
While trust-like, real estate investment trusts are different from traditional trusts, Falk said.
By refusing to lump all “trusts” together, the court made clear that entities can't sidestep the corporation rule by suing the “trust” label, Effron said.
Had the court gone the other way, it would have signalled “that anything called a ‘trust' should be treated as something where only the trustees can sue or be sued, and not the beneficiaries,” she said. “In other words, it would have created a special federal rule for understanding what are the ‘members' of a trust.”
Under the ruling, many of these entities will be citizens of almost every state, Falk said.
That means their cases will be bounced from federal courts, and have to be adjudicated in state courts.
To contact the editor responsible for this story: Jessie Kokrda Kamens at email@example.com
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