Diversity Jurisdiction Returns to the Supreme Court: What is the Citizenship of a Business Trust?

Diversity Jurisdiction Returns to the Supreme Court: What is the Citizenship of a Business Trust?

      There is currently pending a case before the US Supreme Court which it is considering the appropriate treatment all a trust for purposes of diversity jurisdiction.  Americold Logistics LLC v. ConAgra Foods. Oral argument in this case was held on January 19, 2016.

      The question presented in this case is relatively straightforward, namely whether in determining the citizenship of a trust for purposes of diversity jurisdiction (28 U.S.C. § 1332), the trust will be deemed to have citizenship of only the trustees, only of the beneficiaries, or other combination of the two. Presumably, the ultimate decision will address the interface of the Supreme Court’s 1980 decision rendered in Navarro Savings Association, in which suit was brought by the trustees as the trustees and, on those facts, only their citizenship was relevant, and Carden v Arkoma Associates, a 1990 decision in which it was held that the citizenship of every “member” of an unincorporated association should apply to determine its citizenship.

       Americold is arguing that the citizenship of only the trustees should be relevant in assessing a trust’s citizenship. This argument is to the effect that a broadly held trust should be able to access the federal courts through diversity jurisdiction. In contrast, ConAgra Foods is seeking the return of the suit to state court by its argument that the citizenship of all of the beneficiaries of Americold is relevant to determine its citizenship.

      Below, the district court, on the merits, ruled with respect to the dispute between Americold and ConAgra Foods. On appeal, however, that decision was dismissed, and the District Court was directed to remand the case to state court on the basis that all the beneficiaries of Americold should be assessed in determining the trust citizenship and there was no diversity jurisdiction.  See Conagra Foods, Inc. v. Americold Logistics, LLC, 776 F.3d 1175 (10^th Cir. 2015).

      While it is always dangerous to make predictions, especially about the future, a question/statement from Justice Elena Kagan may well indicate where the Court is going, namely a continued application of the bright line rule of Carden (the citizenship of all members apply in assessing the availability of diversity jurisdiction), she observing:

I thought that one of the virtues of Carden was that it set up a very categorical, bright-line rule. Everything that’s an artificial legal entity that’s not a corporation ought to be treated in the same way. Doesn’t matter what you call yourself. You can put trust in the title, or not put trust in the title. If you’re an artificial legal entity that is not a corporation, [you are] subject to the rule of Carden.

In favor of that bright line test, counsel for ConAgra argued:

In this case there’re an association.  We measure by those persons that have an ownership interest floodgates of uncertainty for the under - - for the lower courts. 

And I’ll tell you why. 

The Court has never explicitly addressed a limited liability company, and they’re common throughout the United States.  Limited liability companies can call their board of managers boards of trustees.  And in certain instances under those uniform laws, both the general partnership law and the LLC law, managers can hold property in trust for the entity just like the trustees in this case can hold property in trust for the entity.

At the end of the day, if we’re going to now say it’s the board of managers that are called trustees that we look to, everyone’s going to analogize in the circuits that haven’t decided the LLC questions: I’m much more like the board of managers in Americold and much different than the limited partners in Carden.  And it’s going to create uncertainty.

Our rule, the bright-line rule, is very clear.  When an artificial entity is sued or being – - or suing in its own name, we look to the members, which in this case constitutes those persons that own the beneficial interest in the entity, the shareholder members, just like this Court did in Chapman, Great ownership, and they periodically vote on important matters that affect the entity.

They are, in most instances, virtually identical.

So in my view - - and I think this case rests upon defining a clear rule, a clear rule that says when you have an artificial entity, we’re going to measure by those persons that I consider to be the beneficial owners.

      In addition, Chief Justice Roberts raised a question about increasing the number of disputes that would be directed to federal court through the adoption of the rule propounded by Americold.

Does it is it a pertinent consideration in terms of the impact on Federal jurisdiction? I mean, this is standard, run of the mill commercial dispute about a commercial accident. And adopting one position would limit the number of times that such disputes would be brought in Federal court. The other one will expand it. Is that I mean, does Americold really feel that it's not going to get a fair shake in the Kansas courts in this case?

This attitude is in opposition to a 2015 proposal approved by the American Bar Association’s House of Delegates to the effect that the diversity jurisdiction rule should be amended to, in effect, increase the availability of federal diversity jurisdiction for unincorporated organizations.