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 (9th
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.
