In diversity jurisdiction cases, is a trust a citizen of every state where its beneficiaries reside?
In 1992, ConAgra Foods, Inc. (“ConAgra”) sued Americold Logistics, LLC and its parent company, Americold Realty Trust (collectively, “Americold”), in Kansas state court to recover damages for goods destroyed by fire in an Americold storage facility. Americold removed the action to federal court on the basis of diversity jurisdiction, and received summary judgment. ConAgra appealed. Although the parties did not raise the question, the U.S. Court of Appeals for the Tenth Circuit determined Americold Realty Trust—a real estate investment trust (“REIT”) with potential beneficiaries in many states—had not shown it was completely diverse from ConAgra. Accordingly, the court did not have jurisdiction to hear the case.The Supreme Court will decide how to determine the citizenship of a trust for purposes of diversity jurisdiction. Americold maintains that the citizenship of a trust should be based on the citizenship of its trustees, not its beneficiaries. ,ConAgra contends that a court should consider a trust to be a citizen of every state in which any of the trust’s members, shareholders, or beneficiaries is a citizen. The Court’s resolution of this case will impact the jurisdictional status of REITs and how courts determine the citizenship of trusts.
Questions as Framed for the Court by the Parties
Is the citizenship of a trust for purposes of federal diversity jurisdiction based on the citizenship of the controlling trustees, the trust beneficiaries, or some combination of both?
In December 1991, a fire in an underground storage facility destroyed food and other products that ConAgra Foods, Inc. (“ConAgra”) was storing there. ConAgra leased the facility from Americold Logistics, LLC. Americold Realty Trust (the “Americold trust”), a real estate investment trust (“REIT”), was Americold’s parent company.
In 1992, ConAgra filed suit against Americold Logistics and the Americold trust (collectively, “Americold”) in Kansas state court to recover damages for the destroyed goods. . Americold removed the case to federal court, the U.S. District Court for the District of Kansas, on the basis of diversity jurisdiction. In district court, both parties moved for summary judgment, and the district court granted Americold’s motion. ConAgra appealed the ruling to the U.S. Court of Appeals for the Tenth Circuit.
The Court of Appeals noted that neither the parties nor the district court addressed the jurisdictional issue of whether removal from state to federal court was proper. Nevertheless, the Court of Appeals raised the issue sua sponte. The court posed two questions to the parties: (1) how should the citizenship of the Americold trust be determined, and (2) did complete diversity exist to make removal proper?
The Tenth Circuit ordered the parties to file supplemental briefing on the two questions. Subsequently, the court concluded that a trust is a citizen of every state in which its members are citizens. The court decided that it did not need to reach the issue of who qualifies as a member of a trust; rather, it held that at a minimum, the beneficiaries of a trust are members of the trust.
Accordingly, the court found the Americold trust did not demonstrate that it was completely diverse from ConAgra. The Americold trust did not disclose to the court the citizenship of its beneficiaries, so the court reasoned that the trust’s members could be citizens of Delaware, Illinois, or Nebraska—states where ConAgra was a citizen.
Because complete diversity did not exist, the Tenth Circuit held that it could not hear the case on the basis of diversity jurisdiction. The court remanded the case to the district court with instructions to vacate its summary judgment ruling and remand the case back to Kansas state court. After the Court of Appeals denied Americold’s motion for rehearing en banc, Americold filed a petition for writ of certiorari on May 15, 2015. The Supreme Court granted cert on October 1, 2015.
To hear a case, federal courts must have jurisdiction. Diversity is one basis for jurisdiction. To find diversity, courts must conclude that no plaintiff has the same state citizenship as a defendant. In this case, the Supreme Court will decide whether, for diversity purposes, a trust is a citizen of every state where its beneficiaries reside.
Americold argues that common law grants trustees exclusive power to sue on behalf of a trust, and contends that the Court has recognized the trustee as the “real” party in litigation involving a trust. Accordingly, Americold asserts that the Court looks to the citizenship of the trustee, and not beneficiaries, in making diversity determinations. But ConAgra argues that the Americold trust is an unincorporated entity under Maryland law. ConAgra maintains that the Court, in deciding the citizenship of unincorporated entities, looks to the citizenship of the entities’ members.
ARE REITS LIKE COMMON LAW TRUSTS, OR UNINCORPORATED ENTITIES?
Since Navarro Savings Assn. v. Lee, 446 U.S. 458 (1980), Americold argues, the Court has examined the trustee’s citizenship, and not the citizenship of the trust’s beneficiaries, to determine if diversity exists. Americold explains that common law vests a trust’s legal title in the trustee. The trustee has the sole authority to sue on the trust’s behalf, Americold continues, and generally has the power “to hold, manage, and dispose of trust assets for the benefit of others.” Recognizing the trustee’s power, Americold asserts that the Court has declared the trustee as the “real” party in suits against a trust.
Americold contends that the Tenth Circuit mistakenly relied on Carden v. Arkoma Assocs., 494 U.S. 185 (1990), which held that the citizenship of unincorporated entities, such as partnerships, depends on its members. Americold argues that trusts are legally different than unincorporated entities. Americold explains that trusts have two tiers of members; trustees have authority over the trust, while beneficiaries have limited rights to benefit from the trust. But common law partnerships have one tier of members, partners, who share the same legal status. Even if the Court applies Carden’s reasoning, Americold argues that the relevant members of a trust are the trustees, not the beneficiaries, because the trustees are personally liable for the trust’s obligations, in the same way a partner is liable for a partnership’s obligations.
ConAgra contends that having “trust” in its name does not make the Americold trust legally identical to common law trusts. Furthermore, ConAgra argues that merely because both a trust’s beneficiaries and the Americold trust’s shareholders cannot litigate on behalf of the trusts does not mean that they are the same. Americold explains that there are many corporate entities, such as limited partnerships, in which members are not liable for a manager’s conduct. But these entities, Americold asserts, are not considered trusts.
ConAgra maintains that Americold is a REIT under Maryland law, and that Maryland law states REITs are unincorporated entities. ConAgra asserts that the Americold trust’s beneficiaries are indistinguishable from members of unincorporated entities, because both beneficiaries and members “invest capital,” have transferrable interests, and are not personally liable for managers’ liabilities. Accordingly, ConAgra argues that the Court should apply the Carden line of cases that dealt with unincorporated entities. ConAgra concludes that the Court has created a dichotomy regarding diversity citizenship: Either an entity is a corporation or an unincorporated entity, and a trust, by definition, can only be classified as an unincorporated entity.
EVOLVING LAW AND PRACTICAL CONSIDERATIONS
Americold suggests that evolutions in trust law, such as the ability of trusts in some states to litigate in their own name, does not justify a deviation from the Court’s traditional view: Trustees are still the parties actively involved in litigation. Americold asserts that looking to the citizenship of the beneficiaries of a trust when a trust is sued in its own name would lead to “gamesmanship” by parties seeking favorable forums. And Americold maintains that looking to the citizenship of a trust’s beneficiaries would be too complex, because beneficiaries are frequently numerous and dispersed.
ConAgra counters that looking to all of the beneficiaries will not encourage forum shopping, because state law usually limits whom plaintiffs can sue for relief. ConAgra also contends that the Court has affirmed plaintiffs’ ability to craft complaints to create or destroy diversity.
The Supreme Court’s resolution of this case may affect the ability of REITs to bring suits in federal court, and the use of judicial resources in determining the citizenship of trusts. Americold contends that the citizenship of a trust should be based on the citizenship of its trustees, not its beneficiaries. But ConAgra argues that for diversity jurisdiction, courts should consider a trust to be a citizen of every state in which any of the trust’s members, shareholders, or beneficiaries is a citizen.
REAL ESTATE INVESTMENT TRUSTS’ ACCESS TO FEDERAL COURT
REITs have become successful real estate operations, and the National Association of Real Estate Investment Trusts (“NAREIT”) asserts that like any successful enterprise, REITs can “be magnets for meritless litigation asserting state-law claims.” But NAREIT fears that the Tenth Circuit’s decision will prevent REITs from filing suit in, or removing suits to, federal court, and thus deny them the protection federal courts provide from the “danger of local prejudice as large, out-of-state corporate litigants.” NAREIT explains that many REITs are publicly traded (although Americold is not), and can have shareholders in every state in the country. . Publicly traded REITs’ beneficiaries include their shareholders, NAREIT asserts. If the citizenship of REITs depends on the citizenship of their beneficiaries, then NAREIT concludes that REITs will rarely satisfy complete diversity.
But ConAgra explains that if REITs are precluded from removing actions to federal court, the preclusion is the result that the Court’s jurisprudence requires. ConAgra notes that the Court has upheld plaintiffs’ ability to “craft” complaints to destroy diversity jurisdiction. ConAgra explains that plaintiffs can preclude diversity by specifying the amount in controversy or the parties to the action.
CONSERVATION OF JUDICIAL RESOURCES
Winston Wen-Young Wong, who sued to recover $2 billion of his father’s assets that were transferred to a U.S. trust, argues that determining the citizenship of trusts based on the citizenship of their beneficiaries will waste judicial time and resources. Wong asserts that it can be difficult to determine the citizenship of a trust, because “the beneficiaries of a traditional trust often are not actual persons or entities.” For example, Wong explains a trust may be created for “charitable purposes,” but a purpose does not have citizenship. Wong concludes that broad purpose declarations raise the question of “which past, present or theoretical future” beneficiaries control the trust’s citizenship.
However, ConAgra maintains that the Tenth Circuit’s decision is simple to follow and implement. ConAgra notes that REITs seeking to invoke diversity jurisdiction only need to plead the basis for it, by, for example, revealing the citizenship of its members or shareholders. Additionally, ConAgra contends that Wong’s discussion mischaracterizes Americold as a “traditional trust,” and is thus inapplicable to the case because Americold is a Maryland-law REIT.
The Court will decide how to determine the citizenship of a REIT. Americold maintains that the citizenship of a trust should be based on the citizenship of the trustees, not the beneficiaries. However, ConAgra argues that a trust is a citizen in each state where its beneficiaries reside. The decision in this case will impact the citizenship of REITs and how courts determine a trust’s citizenship.
- Joe Harris, Storage-Facility Fire Case Headed to Supremes, Courthouse News Service, (Oct. 2, 2015).