Money and Dirt: A blog on legal issues impacting California real estate investment, development, and secured lending

U.S. Supreme Court: REITS Have Citizenship of their Members

Many entities that get sued with any regularity prefer being defendants in federal court, rather than state court.  The reasons for this preference are varied, but essentially boil down to a perceived slight defense tilt in federal courtrooms.

But to gain entry to federal courts, the case must either involve a question of federal law, or there must be “complete diversity” of citizenship between the plaintiffs and defendants.  If one of several plaintiffs shares the same citizenship as one of several defendants, diversity jurisdiction does not exist and the matter cannot proceed in federal court.

A recent opinion from the U.S. Supreme Court —Americold Realty Trust v. ConAgra Foods, Inc. — holds that for purposes of determining diversity jurisdiction, a REIT has the citizenship of its members (in California REITs, called “shareowners” under Corp. Code section 23000).  Under this standard, REITs may find it difficult to establish diversity jurisdiction and keep their disputes in federal court.

The underlying dispute: REIT gets sued for fire at warehouse that destroyed food products

The Supreme Court’s opinion described the case as “a typical state-law controversy, one involving a contract dispute and an underground food-storage warehouse fire.”  The companies whose food products were damaged in the fire sued a REIT called Americold Realty Trust (which owned the warehouse) in Kansas state court.

The plaintiffs were corporations organized in or with their principal place of business in Delaware, Nebraska, and Illinois.  The REIT defendant was organized under Maryland law with members from various jurisdictions (the record did not specify the members’ citizenship).

The REIT removed the case to the Federal District Court in Kansas, which accepted jurisdiction and resolved the case in the REIT’s favor.

The Tenth Circuit rules against the REIT

On appeal, the federal Tenth Circuit Court of Appeals reversed.

The Tenth Circuit’s decision held that while the corporate plaintiffs’ citizenship was appropriately determined by the place of their organization and principal place of business, the REIT was not a corporation and its citizenship must therefore be determined by looking to the citizenship of its members / shareholders.

Since the citizenship of the REIT’s members was not in the record, the Tenth Circuit held that grounds for diversity jurisdiction were not established and the Federal District Court therefore lacked jurisdiction to handle the case.

The U.S. Supreme Court affirms the decision of the Tenth Circuit, holding that REITs have the citizenship of their members

The U.S. Supreme Court granted review “to resolve confusion among the Courts of Appeals regarding the citizenship of unincorporated entities.”

The Court confirmed that a corporation can be considered a citizen of its State of incorporation or the State where it has its principal place of business.

But the citizenship rule for corporations does NOT apply to other entities, such as partnerships, LLCs, joint-stock companies, or unions.  For those non-corporate entities, under long-standing law, citizenship is based on the citizenship of the entity’s partners / members / shareholders.

As such, the REIT in this case was a citizen of the States where its members were citizens.  The Court agreed with the Tenth Circuit’s holding that since there was no evidence presented on the citizenship of the REIT’s members, diversity jurisdiction was not established.

The Court rejected two interesting, but unsuccessful, arguments.

The first argument — asserted by the REIT defendant — urged that the REIT’s citizenship must be that of its trustees, since the REIT normally acts only by and through its trustees.  The Court disagreed, drawing a distinction between a “traditional” trust (not a distinct legal entity, but a fiduciary relationship between multiple people), and the more modern use of “trust,” which is applied to a variety of unincorporated entities such as REITs.  A traditional trust usually gets involved in litigation only through its trustees, and therefore the citizenship of the trustees is key.  But the default rule for citizenship of an unincorporated entity — whether called a “trust” or something else — is that it “possesses the citizenship of all its members.”

The second argument — advanced by amicus curiae (a third party “friend of the court”) National Association of Real Estate Investment Trusts — invited the Supreme Court to apply the “corporate” rule of citizenship to non-corporate entities too, and look only to the entity’s State of organization and principal place of business.  The Court declined this invitation, reciting the “doctrinal wall” between corporate and unincorporated entities, and concluding that it was up to Congress to consider this change.

Lesson

While the Supreme Court’s opinion addresses a REIT organized under Maryland law, it is worded broadly enough to apply to unincorporated associations (including REITs) throughout the United States.  The holding also appears to clearly apply to REITs formed in California, where a REIT by definition is an “unincorporated association or trust…” (Cal. Corp. Code section 23000.)

The holding makes clear that litigation involving REITs is more likely to proceed in state court rather than federal court, especially for REITs with a sizable shareholder roster.

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