In a case handled by the Firm, the Ninth Circuit rendered a favorable decision that will allow securitized trusts to litigate in Federal Court on diversity grounds. The Court has confirmed that an investment trust may remove a state court lawsuit to federal court based on diversity jurisdiction when its trustee resides in a different state from the opposing parties to the suit.
Although the Ninth Circuit has recognized for decades that a trust’s citizenship is that of its trustee, the future of this precedent was called into question three years ago, when the U.S. Supreme Court considered the case, Americold Realty Trust v. Conagra Foods, Inc., 136 S. Ct. 1012 (2016). In Americold, the Court was asked to determine whether diversity jurisdiction existed in a case involving an unincorporated real estate investment trust governed by Maryland law, which had brought suit in its own name, as it was authorized to do pursuant to Maryland statute.
The Americold Court concluded that the Maryland trust’s citizenship for diversity jurisdiction purposes was that of the trust’s members rather than its trustees, likening the trust in the case to a limited partnership or joint-stock company, artificial entities whose citizenship is determined by its members or shareholders.
The Ninth Circuit disagreed, on two separate grounds. First, the Court distinguished Americold from Demarest on the grounds that the trust in Americold had brought suit in its own name, as it was allowed to under Maryland law. In contrast, the borrower in Demarest had brought suit against HSBC Bank itself – the trustee, rather than the trust.
The Demarest Court noted that Americold itself supported the ruling that “when a trustee files a lawsuit or is sued in her own name, her citizenship is all that matters for diversity purposes.” Americold, 136 S. Ct. at 1016. Second, the Court distinguished the mortgage-backed investment trust in Demarest, relying on the PSA and New York authorities (since New York law governed the trust pursuant to the PSA) to find that the trustee in such trusts is the real party in interest – and therefore the party whose citizenship controls for diversity jurisdiction purposes – because the trustee “possesses certain customary powers to hold, manage, and dispose of assets for the benefit of others.”
See the decision in the link below.