Securitization Trust has Citizenship of the Trustee, and not the Certificate Holders, for Purposes of Diversity Jurisdiction

Securitization Trust has Citizenship of the Trustee, and not the Certificate Holders, for Purposes of Diversity Jurisdiction

      In a recent decision out of Texas, it was necessary that the court characterize a securitization trust as either a traditional trust or a business trust in order to determine whether diversity jurisdiction existed. In this instance, based upon the characteristics of this particular trust, it was found to be a traditional trust. On that basis, it was afforded the citizenship of only its trustee. DHI Holdings, LP v. Mortgageit, Inc., Civ. Act. No. H-17-0960, 2017 WL 3116152 (S.D. Texas July 21, 2017).

      The court characterized the question as follows:

The motion to remand presents a narrow issue.  One of the defendants in the case is US Bank, as trustee of the Terwin Mortgage Trust 2006-3 Asset-Backed Certificates, Series 2006-3 (referred to in the briefs, and this opinion, as the “2006-3 Trust” or the “Trust”). The issue is whether US Bank as trustee, or instead the 2006-3 Trust itself, is the real party in interest in the suit.  If US Bank is the real party in interest, the court looks only to US Bank’s Ohio citizenship, and there is complete diversity.  If it is not, the court must look to the citizenship of all of the Trust’s member certificate holders.  Because there is no record evidence of the certificate holders’ citizenship, the presumption against jurisdiction requires remand if the trust itself is the real party in interest.

      Assessing the terms of the trust, pursuant to which the trustee had legal title to the assets and managed same (sometimes through agents), as well as the provision that U.S. Bank could sue and be sued in its capacity as trustee, it was determined that it was the real party in interest under Navarro Savings Association v. Lee, 446 U.S. 458, 460-61 (1980). The court considered and rejected arguments to the contrary such as the ability of the certificate holders to compel certain actions, including the removal of the trustee, finding they were not sufficient to remove the trust from classification as a traditional trust in contrast to a business trust. Therefore, diversity jurisdiction existed.