Friday, July 26, 2013

Citizenship of an LLC in Which a Trust is a Member

Citizenship of an LLC in Which a Trust is a Member
       A recent decision from the U.S. District Court for the Western District of Virginia has addressed in the seldom addressed question of how to determine the citizenship of an LLC of which one of the members is a trust.  Poulos v. Geomet Operating Co., 2013 WL 2456044 (W.D. Va. June 6, 2013).
      This case involved a dispute over the ownership of certain coal bed methane interests.  This suit appears to have been originally filed in federal court against defendants including LBR Holdings, LLC.  The plaintiffs then filed a motion to dismiss without prejudice on the basis that subject matter jurisdiction was lacking on the basis the LLC had the citizenship of North Carolina, sharing that citizenship with one of the plaintiffs.  The North Carolina citizenship was ascribed to the LLC on the basis that one of the members of the LLC was a trust, of which one of the beneficiaries was a citizen of North Carolina.  LBR, seeking to keep the case in federal court, argued that it should only be the citizenship of the trustee, rather than the citizenship of the beneficiaries, that should control as to the citizenship of the trust as ascribed to the LLC.  On the basis that the trustee was a citizen of Kentucky, diversity would have been preserved.
     Distinguishing Navarro Savings Association, the Court applied the Carden test to look to all of the “members” of the trust.  Relying on a number of cases including Emerald Investors, the court found that the citizenship of each beneficiary would be attributed to the LLC.  In doing so, the LLC took on the citizenship of the North Carolina beneficial owner, and on that basis, diversity of citizenship was lacking.
     Based upon the information available in the decision, it would appear that the trust at issue was a common law donative trust.  The outcome might have been different had it been a modern form of business/statutory trust.  As to that point, see Thomas E. Rutledge and Christopher E. Schaefer, The Trust as an Entity and Diversity Jurisdiction: Is Navarro Applicable to the Modern Business Trust, 48 Real Property, Trust and Estate law Journal  (Forthcoming).  The working draft of this article can be accessed through this link:  The Trust as an Entity and Diversity Jurisdiction

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