Post by Sean on Mar 16, 2016 4:51:32 GMT 4
On March 7, 2016, the Supreme Court of the United States held
that the citizenship of a Maryland real estate investment trust
("REIT"), for diversity jurisdiction purposes, is based
on the citizenship of all its members, including its shareholders.
In Americold Realty Trust v. ConAgra Foods, Inc.,
No. 14-1382, 2016 WL 854159 (U.S. Mar. 7, 2016), the Court affirmed
a Tenth Circuit Court of Appeals decision, which ruled that, in
determining federal court diversity jurisdiction, the citizenship
of a REIT hinges upon the citizenship of each trust beneficiary.
The issue in this case was a simple one: How does one decide the
state or states in which an unincorporated REIT is a citizen for
purposes of diversity jurisdiction? This issue had split courts
across the country. The Supreme Court's resolution of this
matter may affect how courts determine the citizenship of REITs and
may make it challenging to rely upon federal diversity jurisdiction
in lawsuits involving REITs. Accordingly, prudent consideration
should be given to entity formation matters, as well as contractual
agreements involving unincorporated entities that may consent or
seek to sue or be sued in U.S. courts.
Background of the Case
In December 1991, a fire in an underground storage facility
destroyed food owned by ConAgra Foods, Inc.1 ConAgra
leased the facility from Americold Logistics, LLC. Americold Realty
Trust, a REIT, was Americold Logistics, LLC's parent
company.2 In 1992, ConAgra filed suit against Americold
Logistics, LLC and Americold Realty Trust in Kansas state
court.3 Americold Logistics, LLC and Americold Realty
Trust removed the case from a state court in Kansas to the United
States District Court for the District of Kansas, asserting the
parties were diverse.4 No party challenged the removal,
and the district court issued a ruling on the merits of that
litigation without addressing any issue relating to diversity
jurisdiction. Similarly, neither party raised any jurisdictional
challenges on appeal to the Tenth Circuit Court of Appeals.
The Tenth Circuit Court of Appeals, however, sua sponte,
questioned whether there was full diversity of citizenship among
the parties.5 Specifically, the judges challenged
whether the citizenship of Americold Realty Trust, as a REIT,
should be determined by reference to its trustees' citizenship,
or instead by reference to some broader set of factors.6
The Tenth Circuit held that the jurisdictional inquiry extends, at
a minimum, to the citizenship of a trust's beneficiaries in
addition to its trustees' citizenship.7 The Tenth
Circuit, in deciding as such, wiped out diversity of citizenship
among the parties in that case. As there was no record of the
citizenship of the shareholders of Americold Realty Trust, the
Tenth Circuit held that the district court lacked subject-matter
jurisdiction.8 After the Tenth Circuit denied
Americold's motion for rehearing, Americold filed a petition
for writ of certiorari and the Supreme Court granted cert.
Summary of Decision
The Supreme Court held that the citizenship of a Maryland REIT
is based on the citizenship of all its members, including its
shareholders, for purposes of diversity jurisdiction. The Court
treated the case as being directly governed by existing doctrinal
rules. It cited the longstanding rule treating corporations as
citizens only in the states of their incorporation and their
principal places of business. At the same time, it emphasized that
"Congress never expanded this grant of citizenship to include
artificial entities other than corporations, such as joint-stock
companies or limited partnerships."9 The Court then
specifically noted the "oft-repeated rule" that all
"artificial entities other than corporations" are
citizens wherever they have "members."10
Concluding that the "members" of a REIT are all those
who own a beneficial interest in the REIT, the Court treated
Americold Realty Trust as a resident of all of the states in which
its owners reside. The Court looked to Maryland Law, where
Americold was established, to shed some light on the question of
who exactly were Americold's "members." Under
Maryland law, the Court noted, "shareholders have
'ownership interests' and votes in the trust by virtue of
their 'shares of beneficial interest.'"11
The Court stated:
"As Americold is not a corporation, it possesses its
members' citizenship. ... In Maryland, a ... [REIT] ... is an
'unincorporated business trust or association' in which
property is held and managed 'for the benefit and profit of any
person who may become a shareholder.' ... As with joint-stock
companies or partnerships, shareholders have 'ownership
interests' and votes in the trust by virtue of their
'shares of beneficial interest.' ... These shareholders
appear to be in the same position as the shareholders of a
joint-stock company or the partners of a limited
partnership—both of whom we viewed as members of their
relevant entities. ... We therefore conclude that for purposes of
diversity jurisdiction, Americold's members include its
shareholders."12
The Court reiterated its categorical rule that unincorporated
associations, such as limited partnerships, joint stock companies
and labor unions, are citizens of all the states in which any of
their members is a citizen for purposes of diversity
jurisdiction.13The Court applied these rules to a Maryland REIT,
which is also an unincorporated association under Maryland Law, and
held that an unincorporated REIT is a citizen of each state in
which each of its shareholders is a citizen.
The Court specifically rejected arguments that the residency of
an unincorporated REIT should be determined by other methods. The
Court mentioned Americold's reliance on case law recognizing
individual trustees as citizens of the states in which they reside,
but found such case law irrelevant to the current case—in
which the trust itself is a party, rather than its trustees.
Americold attempted to use such case law to argue that anything
called a "trust" possesses the citizenship of its
trustees alone.14 In clarifying the citizenship of a
REIT and in declining to apply the same rule to a REIT, sued in its
organizational name, that would apply to a human trustee, sued in
her personal name, the Court stated:
"Many States . . . have applied the 'trust' label
to a variety of unincorporated entities that have little in common
with this traditional template. Maryland, for example, treats a ...
[REIT] ... as a 'separate legal entity' that itself can sue
or be sued. ... So long as such an entity is unincorporated, we
apply our 'oft-repeated rule' that it possesses the
citizenship of all its members. ... But neither this rule nor
Navarro limits an entity's membership to its trustees just
because the entity happens to call itself a
trust."15
Lastly, noting the amicus brief submitted by NAREIT (the
National Association of Real Estate Investment Trusts), contending
that REITs resemble corporations in every practical way and should
be treated as such for purposes of diversity jurisdiction, the
Court rejected that argument. The Court reiterated the rule set
forth in Carden: that it saw "no reason to tear ... down"
the "'doctrinal wall' between corporate and
unincorporated entities."16
Potential Implications
This case is of significance not only to litigators but also to
anyone drafting agreements in which a REIT might consent or expect
to sue or be sued in federal court in the United
States.17 This especially may be the case with the rise
of large publicly-traded REITs that are likely to have owners in
most if not all of the states. Because federal diversity
jurisdiction is available only if the states in which plaintiffs
reside do not overlap with the states in which defendants reside, a
rule that looks to the owners of those REITs may effectively bar
the REITs from achieving diversity jurisdiction to sue or be sued
in federal courts.18 Thus, REITs with broad shareholder
bases seeking federal diversity jurisdiction should consider
asserting legal proceedings on behalf of their members or
shareholders. This issue is significant not only for litigators but
also for anyone drafting entity formation documents or commercial
agreements in which an unincorporated entity might consent or
expect to sue or be sued in federal court in the United States.
FootNotes
<small>1 ConAgra Foods, Inc. v. Americold Logistics, LLC, No.
13-2064-JWL, 2013 WL 5530274, at *2 (D. Kan. Oct. 4,
2013).</small>
<small>2 Id.</small>
<small>3 Id.</small>
<small>4 ConAgra Foods, Inc. v. Americold Logistics, LLC, 776
F.3d 1175 (10th Cir.), as amended (Jan. 27, 2015), cert. granted,
136 S. Ct. 27, 192 L. Ed. 2d 997 (2015) and aff'd sub nom.
Americold Realty Trust v. ConAgra Foods, Inc., No. 14-1382, 2016 WL
854159 (U.S. Mar. 7, 2016).</small>
<small>5 Id.</small>
<small>6 Id.</small>
<small>7 Id.</small>
<small>8 Id.</small>
<small>9 Americold Realty Trust v. ConAgra Foods, Inc., No.
14-1382, 2016 WL 854159, at *3 (U.S. Mar. 7, 2016).</small>
<small>10 Id.(Citing Carden v. Arkoma Associates, 494 U.S. 185,
195, 110 S. Ct. 1015, 1021, 108 L. Ed. 2d 157 (1990)).</small>
<small>11 Id. at *4.</small>
<small>12 Id.</small>
<small>13 Id. at *3-*4.</small>
<small>14 Id.</small>
<small>15 Americold, 2016 WL 854159, at *5.</small>
<small>16 Id. at *6 (Citing Carden, 494 U.S. at
190).</small>
<small>17 It should be noted that the holding of Americold does
not apply to a REIT formed as a corporation which would be
considered a citizen of its state of incorporation and the state of
its principal place of business. See 28 U.S.C. §
1332(c)(1).</small>
<small>18 It should be noted that the same result would occur
for property-owning single-member LLCs owned by a REIT directly or
through operating partnerships. When an LLC participates in
litigation, it adopts the citizenship of its members (e.g., the
REIT or the operating partnership) which in turn adopts the
citizenship of the REIT as its partner. Under Americold, the REIT
has the citizenship of each of its shareholders, for diversity
jurisdiction purposes, and so would the LLC or operating
partnership.</small>