The recent Supreme Court decision in
Americold Realty Trust v. ConAgra Foods, Inc. may negatively impact the ability of real estate investment trusts (“REITs”)
to commence litigation in federal courts or to avoid suits in state courts.
In order to bring a suit in federal court there must be either federal
question jurisdiction or diversity jurisdiction. A federal court has “diversity
jurisdiction” when there is no overlap between the citizenship of
the parties. Determining diversity jurisdiction when the parties are human
beings simply requires examining where each person is a citizen. The analysis
for corporations is similar, but with a subtle nuance – corporations
are citizens of both the state where they are incorporated and the state
where they have their principal place of business.
However, determining citizenship of unincorporated entities like LLCs,
partnerships and investment trusts is more difficult because unlike corporations,
they are considered citizens of every state where any of their members
is a citizen. Therefore, prior to the decision in
Americold, there were questions regarding the citizenship of investment trusts and
little guidance from the Supreme Court.
The Americold Decision:
Americold case, ConAgra Foods (“ConAgra”) sued Americold Realty Trust
(“Americold”) to recover damages arising from a warehouse
fire in 1991. Although the case was moved to federal court, there was
a dispute as to whether the parties had the diversity of citizenship necessary
for federal jurisdiction. It was agreed that for unincorporated entities,
the trust’s “members” determined citizenship. Therefore,
a trust has citizenship wherever its members lived. However, the parties
disagreed on who was considered a member of the trust. Americold’s
position was that only its trustees were members for purposes of diversity
jurisdiction. ConAgra disagreed, arguing that Americold’s members
included its shareholders as well as its trustees.
The Supreme Court in analyzing Maryland state law, unanimously held that
the citizenship of an unincorporated entity, such as a REIT, is the citizenship
of its members, including its shareholders. Justice Sonia Sotomayor wrote:
In Maryland, a real estate investment trust 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
. . . 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 the purposes of diversity jurisdiction, Americold’s
members include its shareholders.
The Court also addressed the difference between the citizenship of a traditional
trust and a REIT. The Court recognized the long standing tradition that
a trust is not considered a distinct legal entity, but a “fiduciary
relationship” between multiple people; and thus, a lawsuit must
be brought on behalf of or against a trust in the name of the trustee.
Therefore, for purposes of a traditional trust, there is no need to determine
its membership because the citizenship of the trustee is all that matters.
However, the Court declined to recognize a REIT as a trust, despite being
labeled as such, and held that a REIT, under Maryland state law, is a
“’separate legal entity’ that itself can sue or be sued.”
Implications of Americold:
The Supreme Court’s decision in
Americold is broad enough that it presents possible challenges for unincorporated
entities such as REITs. For unincorporated entities with large number
of shareholders or those that have shareholders from a diverse number
of states, the likelihood of diversity jurisdiction is reduced. This would
make it more difficult to get cases heard in federal court and may expose
REITs to suits in unfavorable state venues – simply because a shareholder
lives in the same state as an opposing party.
Entities not formed as corporations (including public companies organized
as REITs or other unincorporated statutory trusts, and perhaps non-statutory
business trusts) seeking access to federal courts may want to reconsider
the geographical makeup of its shareholders and weigh the costs and benefits
of remaining an unincorporated entity. Despite the impact of this decision,
unincorporated entities can take steps to protect themselves by keeping
an eye on revisions in state laws that may mitigate the impact of this
decision. In addition, unincorporated entities can also avoid the uncertainty
of diversity jurisdiction altogether by utilizing arbitration clauses
for contract disputes.
If you would like more information on this matter, please contact Jenny
Park or call our main office at (949) 298-8050.
Americold Realty Trust v. Conagra Foods, Inc., No. 14-1382, 2016 WL 854159, at *4 (U.S. Mar. 7, 2016)