In determining whether parties are diverse for subject matter jurisdiction, how is the citizenship of a trust established? It all depends on the type of trust. Courts have held that citizenship of a business or statutory trust is derived from the citizenship of all of the entity’s members. But what about a traditional trust—a testamentary or inter vivos trust created for the benefit of its beneficiaries?
The Southern District of New York recently held that where a traditional trust was the sole membership interest in a limited liability company—the court is to consider only the citizenship of the trustee, and not the citizenship of the trust’s beneficiaries—in determining whether the parties are diverse for subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1).
In France v. Thermo Funding Company, No. 13 Civ. 712(SAS), 2013 WL 5996148, at *1 (S.D.N.Y. Nov. 12, 2013) an action for breach of contract, Plaintiff Thales Alenia Space France, a French company, claimed federal court jurisdiction on the basis of “alienage diversity.” The sole membership interest in Defendant Thermo was held in the James Monroe Revocable Trust, an inter vivos trust with a sole trustee—the testator, a resident and domiciliary of Colorado, who retained the right to amend, modify, and revoke the trust. Id. at *1. The trust provided for several named beneficiaries, including the testator’s wife.
Under alienage diversity, a district court can exercise subject-matter jurisdiction over any action that contains only state law claims where the amount in controversy exceeds $75,000 and the opposing parties are “citizens of a State and citizens or subjects of a foreign state.” Id. at *2. For alienage diversity, the presence of aliens on two sides of a case destroys diversity jurisdiction. Here, Defendant Thermo argued a lack of diversity because one of the beneficiaries of the trust was both a citizen of and domiciled in Australia, thereby breaking diversity. In its analysis, the court focused on the purpose of the trust at issue and the citizenship of the trustee, rather than the citizenship of the trust’s beneficiaries to determine the existence of diversity jurisdiction.
A determination that the trust was a business or statutory trust would have engendered a different outcome. A business trust is an unincorporated organization created for profit under a declaration of trust, and managed by trustees for persons with a legal interest in the company represented by shares. In holding that the Court was to consider only the citizenship of the trustee, the Southern District looked to a line of cases—Emerald Investors Trust v. Gaunt Parssipany Partners, Garden v. Arkoma Associates, and Navarro Savings Association v. Lee.
In an early Supreme Court decision, Navarro, the Court held that when a trust has active trustees whose assets are real and substantial and are held in their names, the trustees are the parties to the controversy. Following Navarro, in Garden v. Arkoma Associates the Supreme Court held that the citizenship of an unincorporated entity derives from the citizenship of all of the entities’ members.
By contrast, the Third Circuit in Emerald Investors used the citizenship of both the trustees and the beneficiaries. However, the court in Emerald Investors declined to determine the type of trust at issue and whether an analysis for purposes of diversity jurisdiction would call for different treatment on the basis of the type of trust.
While considering the Garden and its progeny, the Court in Thermo rejected finding that the trust at issue was a business trust. Rather, the trust held the characteristics of a traditional trust—it was created primarily as an estate planning tool. Id. at *5. In relying on Supreme Court precedent, the court ultimately held that the trustee is the real party to the controversy—therefore the trustee’s citizenship controls.
For more discussion on trust citizenship, see Bryan Cave’s Fiduciary Litigation Blog post on the Peierls cases.