Ninth Circuit Court of Appeals Addresses Distinction Between Traditional and Business Trusts for Purposes of Diversity Jurisdiction

Ninth Circuit Court of Appeals Addresses Distinction Between Traditional and Business Trusts for Purposes of Diversity Jurisdiction

      In a decision rendered earlier this month by the Ninth Circuit Court of Appeals, it addressed whether a particular trust would be treated as a traditional trust or a business trust for purposes of diversity jurisdiction. In this instance, having examined the documents that brought the trust into existence, it was determined that it would be treated as a traditional trust. Demarest v. HSBC Bank USA, N.A., ___ F.3d___, No. 17-56432, 2019 WL 1510430 (9^th Cir. April 8, 2019).

      Demarest brought this action in state court challenging the foreclosure of her property. HSBC, as the trustee of the deed of trust holding as assignee the mortgage, along with other defendants, removed the action to federal court, where they were granted summary judgment. In this appeal, Demarest sought a determination that the removal of the action to federal court was deficient. She would lose that argument.

      While the law in this area has noteworthy exceptions, the generally accepted rule is that, with respect to a traditional trust, its citizenship, for purposes of determining whether or not there exists federal diversity jurisdiction (28 U.S.C. § 1332) will be that of the trustees (i.e., the citizenship of the beneficiaries as beneficiaries will not be attributed to the trust). In contrast, a “business trust,” a category that includes a variety of business organizations that, while utilizing “trust” in their respective names, do not share the elements of a traditional trust, will be assessed like any other unincorporated organization and the citizenship of all of the members (i.e., the trust’s beneficiaries) will be attributed to the trust. In this instance the plaintiff was alleging that, as HSBC had not demonstrated that none of the beneficiaries of the trust were California citizens, the removal of the action failed.

      The plaintiff’s position was based upon the US Supreme Court's decision in Americold, wherein it clarified the law with respect to traditional trust versus unincorporated business organizations; HERE IS A LINK to my review of the Americold decision. Also HERE IS A LINK to my review of two subsequent decisions applying the holding in Americold. The plaintiffs reliance on Americold was rejected on the basis that the trust here at issue for which HSBC served as the trustee was a traditional common law trust and not a business trust as contemplated by the Americold ruling. As observed by the court:

Among other things, the Agreement established the Trust, enumerated its assets, and appointed HSBC as trustee, and it described the Trust as a common-law trust governed by New York law. Id.

      In addition, the trust afforded the trustee, in that capacity, the power to institute a “suit or proceeding in its own name as Trustee.” Id. *6. Based upon these characteristics, it was determined that the trust at issue is a common-law trust subject to the rule of Navarro Savings Ass’n v. Lee, 446 U.S. 458 (1980), under which only the citizenship of the trustees, and not the citizenship of the beneficiaries, would apply in determining citizenship for purposes of diversity jurisdiction.