Monday, July 18, 2016

Early Applications of the Americold Decision on Diversity Jurisdiction

Early Applications of the Americold Decision on Diversity Jurisdiction

      There have already been two published decisions by federal courts applying the Supreme Court’s ruling of earlier this year in Americold Realty Trust v. ConAgra Foods, Inc., 136 S. Ct. 1012 (2016). Therein, the Supreme Court made clear that, where a trust has the capacity to sue and be sued in its own name, the rule of Carden v. Arkoma, and not the rule of Navarro Savings Association, will be applied to determine the citizenship, for purposes of diversity jurisdiction, of a trust. HERE IS A LINK to my earlier review of the Americold decision. It is also discussed in an article from the Journal of Passthrough Entities; HERE IS A LINK to that article.  Specifically, in RTP LLC v. ORIX Real Estate Capital, Inc., Nos. 14-3671 & 15-1153, 2016 WL 3568090 (7th Cir. July 1, 2016), Americold was held to apply to certain pension fund members of the plaintiff to the effect that they would be treated as members whose citizenship must be determined. In the second case, Wells Fargo Bank, N.A. v. Transcontinental Realty Investors, Inc., No. 3:14-cv-3565-BN, 2016 WL 357-0648 (N.D. Texas July 1, 2016), Americold was applied with respect to a securitization trust that was deemed the real party in interest.

       In RTP LLC v. ORIX Real Estate Capital, ORIX had made a loan of some $41,000,000  to RTP for the purchase of buying a commercial building in North Carolina. While that loan was itself nonrecourse, RTP LLC and an entity now named RSCD Opportunity Fund I, LLC but previously named Inheritance Capital Group, LLC, executed conditional guarantees with respect thereto. Ultimately the loan went into default, at which time ORIX accelerated the obligation and demanded that RTP and inheritance satisfy their respective guarantees. While it appears they asserted the guarantees were invalid or in some other basis ineffective (the opinion does not address this point beyond a statement that they sought “a declaration that they do not owe ORIX anything beyond what can be paid out of the building’s assets.”), the trial court would hold them liable to the tune of $30,000,000. This action before the District Court had been brought on the basis of diversity jurisdiction.
      It was on the basis of diversity jurisdiction that the action would be largely set aside. RSCD Opportunity Fund I, LLC, identified in the opinion under former name Inheritance Capital Group, LLC, has the citizenship of its members. That LLC had as its members two retirement plans, namely the General Retirement System of the City of Detroit and the Police and Fire Retirement System of the City of Detroit; each is organized as a trust with the capacity to sue and be sued in its own name. In reliance upon, inter alia, Navarro Savings  v. Lee, ORIX claimed that diversity jurisdiction should be assessed by looking only to the citizenship of the trustees of each of those trusts, ignoring, for purposes of citizenship, the citizenship of the beneficiaries of those trusts.

      In reviewing the matter, the Seventh Circuit would first hold that two decisions, May Department Stores Co. v. Federal Insurance Co., 305 F.3d 597 (7th Cir. 2002) and Hicklin Engineering, L.C. v. Bartel, 439 F.3d 346 (7th Cir., 2006) “did not survive Americold.” From there, it was observed that “the trusts themselves, not the trustees, are the members of the two LLCs. Detroit’s two pension funds contract (and litigate) in their own names. These trusts therefore have the citizenships of their own members.” The court would also note that the members of a trust of this nature include not only current participants who are paying into the trust fund, but also current beneficiaries thereof. Ultimately, in order to demonstrate diversity jurisdiction, ORIX, the party who sought removal in the first place, is going to need to investigate the domicile of each of the trusts that are in turn members of one of the guarantor parties. Specifically:
ORIX may think it pointless to conduct a detailed inquiry into the domiciles of the 59 persons who resided in these two states in 2013, especially because it would become necessary to consider the possibility that beneficiaries who then resided elsewhere (say, Oklahoma or Maryland) were domiciliaries of Texas or Delaware at the time. But ORIX may choose its own litigation strategy.
      Ultimately, the judgment of the District Court was vacated, the case was remanded for further proceedings. It was specified that if ORIX does not seek to determine the domicile of those trust beneficiaries as of 2013, “then the District Court must remand this litigation to state court.”

      The second of these decisions, Wells Fargo Bank, N.A. v. Transcontinental Realty Investors, Inc., involved the treatment of a securitization trust. Wells Fargo filed this action initially in federal court on the basis of diversity jurisdiction. In doing so, Wells Fargo identified only its own citizenship, namely South Dakota, as the basis for diversity; Transcontinental is a Nevada corporation with its principal place of business in Texas. Transcontinental sought dismissal of the action on the basis that diversity did not exist. As summarized by the court:
Wells Fargo is the trustee of the Trust, and an unincorporated entity, and the Defendant argues that Wells Fargo cannot rely solely on its own citizenship for diversity jurisdiction. Instead, Defendant alleges, Wells Fargo must establish the diverse citizenship of all of the Trust’s members to establish diversity jurisdiction.
      As any award of relief would be to the benefit of the trust, and not Wells Fargo alone, it was found that “a careful review of the complaint makes clear that Wells Fargo is only a nominal or formal party suing on behalf of the trust, which is the real and substantial party to the controversy with Defendant.”
      Without parsing the particular characteristics of the trust at issue, the court would hold, inter alia, that it is not a traditional, donative trust, but rather a trust for which the citizenship of all of the beneficiaries would be attributed for determining citizenship.
Here, unlike a human trustee suing in her own name on her own behalf as in Navarro, the Trust is the plaintiff and real party in interest, and, as an unincorporated entity, the Trust is a citizen of the states in which its members are located. Because Wells Fargo has not established the citizenship of each of the Trust’s members, Wells Fargo has failed to properly invoke federal diversity jurisdiction.

On that basis, Transcontinental’s motion to dismiss was granted and the action was dismissed for lack of subject matter jurisdiction.

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