Thales Alenia Space France v. Thermo Funding Company, LLC
Filing
43
OPINION AND ORDER re: 33 MOTION to Dismiss Plaintiff's First Amended Complaint for Lack of Subject-Matter Jurisdiction filed by Thermo Funding Company, LLC. For all of the reasons set forth above, Thermo's motion to dismiss under Rule 12(b)(1) is denied. The Clerk of the Court is directed to close this motion (Docket No. 33). A conference is scheduled for December 2, 2013 at 4:30 pm. (Signed by Judge Shira A. Scheindlin on 11/12/2013) (cd)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
THALES ALENIA SPACE FRANCE,
Plaintiff,
OPINION AND ORDER
-against
13 Civ. 712 (SAS)
THERMO FUNDING COMPANY, LLC,
Defendant.
--------------------------------- X
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
In this action for an alleged breach of contract, defendant Thermo
Funding Company, LLC ("Thermo") challenges this Court's subject-matter
jurisdiction under Federal Rule of Civil Procedure 12(b)(1). Plaintiff Thales
Alenia Space France C'Thales"), a French company, claims diversity of citizenship
because the action is between a citizen of a State (Thermo) and a citizen of a
foreign state (Thales). Thermo claims that it too is a citizen of a foreign state, and
thus diversity of citizenship is lacking.
As a limited liability company, Thermo takes the citizenship of its
members. The sole membership interest in Thermo is held by a trust. While the
1
sole trustee is a citizen of Colorado, one of the trust's beneficiaries is domiciled in
l
Australia. The question is whether Thermo's citizenship is determined by the
citizenship of the trust's beneficiaries, or solely by that of its trustees.
Because the trust here is a traditional, testamentary trust
business or statutory trust2 -
not a
only the trustees' citizenships are considered for
diversity purposes. As such, complete diversity of citizenship exists and this Court
has subject-matter jurisdiction over this action.
II.
FACTUAL BACKGROUND
Thales is a French aerospace company involved in the manufacture of
satellites/ while Thermo is a private equity firm organized as a Colorado limited
liability company (LLC).4 This case arises from a series of contracts stemming
While both parties agree on her citizenship, Thales argues that the
grantor's sister is not in fact a trust beneficiary. This argument, while ultimately
irrelevant to this decision, is unfounded. A beneficiary is merely any person to
whom "the trust document directs the trustee to distribute income and principal."
Amy Morris Hess et ai., Bogert's Trusts and Trustees ("Bogert's Trusts") § 1
(2013). See also Colo. Rev. Stat. § 15-10-201(5) (2013) (,,'Beneficiary', as it
relates to a trust beneficiary, includes a person who has any present or future
interest, vested or contingent ....").
2
"Business" or "statutory" trusts are more akin to unincorporated
associations than traditional trusts. See infra Part IV.C.
3
See First Amended Complaint ("FAC") ~ 3; Memorandum of Law in
Support of Defendant's Motion to Dismiss Plaintiff's First Amended Complaint
("Def. Mem.") at 1.
4
See FAC
~
4; Def. Mem. at 1-2.
2
from Thermo's controlling ownership interest in Globalstar, Inc., a provider of
satellite voice and data services that contracted with Thales to purchase a fleet of
satellites. 5 The amount in controversy exceeds $75,000. 6 For a full description of
the contractual relations between the parties which gave rise to this action, see this
COUl1's Opinion and Order dated June 25,2013. 7
A.
Thermo and the James Monroe Revocable Trust
The sole membership interest in Thermo is held in the James Monroe
Revocable Trust ("the Trust,,).8 The Trust was created in 1997 and is currently
governed by a "First Restatement of Declaration and Agreement of Trust" dated
5
See FAC ~~ 4,8.
6
See id. at 7 (claiming that "Thermo breached the Settlement
Agreement by failing to pay Thales $12,500,000" and demanding damages in the
same amount).
7
See Thales Alenia Space France v. Thermo Funding Co., No. 13 Civ.
712,2013 WL 3199628, at *1-2 (S.D.N.Y. June 25, 2013).
8
See 7117113 Transcript of Deposition of James Monroe, III ("Thermo
Excerpts of Monroe Dep."), Ex. B to Declaration of Gerald S. Greenberg, Counsel
for Thermo, in Support of Defendant's Motion to Dismiss Plaintiff's First
Amended Complaint ("Greenberg Dec!."), at 86 ("Q. SO the sole member of
Thermo Funding Company, LLC, is this trust? A. That's my understanding,
yes."); Def Mem. at 2; Plaintiff's Memorandum of Law in Opposition to Motion
to Dismiss Plaintiff's First Amended Complaint for Lack of Subject Matter
Jurisdiction ("Opp. Mem.") at 9.
3
9
August 10 of that year. The grantor of the trust is also its current sole trustee,
James Monroe, III.lo
The Trust is an inter vivos trust established under Colorado law'l
it
is not a business or statutory trust registered as a business entity.12 The grantor
Monroe -
reserves the right to "amend, modi fy or revoke" the Trust at any time. J3
He is also entitled to all income derived from trust assets, as well as any part of the
principal of the Trust, subject to his discretion. 14 In short, Monroe has absolute
9
See 9/10/97 First Restatement of Declaration and Agreement of Trust
("Trust Agreement"), Ex. A to Greenberg Decl., at 1.
10
See id. at 1-2,42; Thermo Excerpts of Monroe Dep. at 86 ("Q. Who
is the grantor of the James Monroe Revocable Trust? A. I am, James Monroe, III.
Q. Who is the trustee? A. James Monroe, III, as trustee."); Def. Mem. at 2-3;
Opp. Mem. at 5.
J1
See Trust Agreement at 2,37. More specifically, the validity of the
trust is "governed by the laws of the state in which the Grantor is domiciled," id. at
37, in this case, Colorado.
12
See 7117113 Transcript of Deposition of James Monroe, III ("Thales
Excerpts of Monroe Dep."), Ex. B to Declaration of Elliot Polebaum, Counsel
for Thales, in Support of Plaintiff's Memorandum of Law in Opposition to Motion
to Dismiss ("Polebaum Decl."), at 87 ("[I]t' s an estate planning succession trust.").
See also 7/26/13 Transcript of Telephone Conference, Ex. F to Polebaum Decl., at
3 ("MR. GREENBERG: ... [1]t is not a Massachusetts business trust, anything
like that."). For more on the nature of the James Monroe Revocable Trust, see
infra Part V.A.
13
Trust Agreement at 3.
14
See id. at 4.
4
discretion during his lifetime as to the existence of the Trust and the disposition of
trust assets.
Upon Monroe's death, the income from the Trust shifts to his wife,
and the trustee is empowered to distribute amounts from the principal to her at its
discretion.
15
Upon the death of Monroe's wife, or upon Monroe's death ifhe
survives her, the trust distributes set amounts to several named beneficiaries. 16
After this, the residual goes to either a limited partnership or an additional trust
established for the benefit of Monroe's children. 17
B.
Citizenships of the Trustee and Beneficiaries
Both parties agree that Monroe is a citizen of Colorado. ls Thus, if
Monroe's citizenship is all that can be ascribed to Thermo, diversity of citizenship
is not in dispute. However, one of the named beneficiaries in the Trust Agreement
15
See id. at 7.
16
See id. at 7-9.
17
See id. at 10; Thermo Excerpts of Monroe Dep. at 140-141
(describing Thermo Investments Limited Partnership and the "Irrevocable Trust").
18
See Def. Mem. at 4 ("The Trust's current Trustee, Mr. Monroe, is a
citizen of the United States of America and is domiciled in the State of
Colorado."); Opp. Mem. at 2 ("Mr. Monroe['s] ... Colorado citizenship means
that complete diversity exists between the parties."). "An individual's citizenship,
within the meaning of the diversity statute, is determined by his domicile."
Palazzo ex reI. Delmage v. Corio, 232 F.3d 38, 42 (2d Cir. 2000).
5
is Vicky Monroe Harris, Monroe's sister. 19 Harris is a citizen of the United States,
the United Kingdom, and Australia, and is domiciled in Australia?O If Thermo's
citizenship is determined by that of Harris, then this Court lacks subject-matter
jurisdiction. 21 Thus, the sole question is whether Thermo's citizenship is
determined by reference to the Trust's beneficiaries, or solely by the citizenship of
its trustee.
III.
LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(1) requires the dismissal of a
claim when a federal court lacks subject matter jurisdiction. The proponent of
jurisdiction (typically the plaintiff) bears the burden of establishing subject matter
jurisdiction by a preponderance of the evidence. 22
In considering a motion to dismiss for lack of subject matter
jurisdiction, '''the court must take all facts alleged in the complaint as true and
19
See Trust Agreement at 8.
20
See Def. Mem. at 4; 7116113 Transcript of Deposition of Victoria
Harris ("Harris Dep."), Ex. C to Greenberg Dec!., at 13, 34, 40-41.
21
See infra Part IV.A.
22
See Luckett v. Bure, 290 F.3d 493, 496-97 (2d Cir. 2002). See also
Goonewardena v. New York, 475 F. Supp. 2d 310,321 (S.D.N.Y. 2007) ("[T]he
burden of demonstrating that the court has subject matter jurisdiction over the case
falls on the plaintiff as it is the plaintiff who seeks to invoke the court's
jurisdiction.").
6
draw all reasonable inferences in favor of plaintiff. ",23 However, '''jurisdiction
must be shown affirmatively, and that showing is not made by drawing from the
pleadings inferences favorable to the party asserting it. ,,,24 In fact, "where
jurisdictional facts are placed in dispute, the court has the power and obligation to
decide issues of fact by reference to evidence outside the pleadings, such as
affidavits.,,25 "In deciding the motion, the court 'may consider affidavits and other
materials beyond the pleadings to resolve the jurisdictional issue, but [it] may not
rely on conclusory or hearsay statements contained in the affidavits. ",26
IV.
APPLICABLE LAW
A.
Diversity Jurisdiction and Alienage
District courts can exercise subject-matter jurisdiction over actions
containing only state law claims where the amount in controversy exceeds $75,000
23
Natural Res. De! Council v. Johnson, 461 F.3d 164, 171 (2d Cir.
2006) (quoting Sweet v. Sheahan, 235 F.3d 80, 83 (2d Cir. 2000)).
24
APWU v. Potter, 343 F.3d 619, 623 (2d Cir. 2003) (quoting Shipping
Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998)). Accord London v.
Polishbook, 189 F.3d 196,199 (2d Cir. 1999) ("[I]t is the affirmative burden of the
party invoking [subject-matter] jurisdiction ... to proffer the necessary factual
predicate - not simply an allegation in a complaint - to support jurisdiction."
(citations omitted)).
25
LeBlanc v. Cleveland, 198 F.3d 353, 356 (2d Cir. 1999).
26
Mosdos Chofetz Chaim, Inc. v. Village of Wesley Hills, 701 F. Supp.
2d 568,580 (S.D.N.Y. 2010) (alteration in original) (quoting J.s. v. Attica Cent.
Sch., 386 F.3d 107,110 (2d Cir. 2004)).
7
and the opposing parties are "citizens of a State and citizens or subjects of a
foreign state.,,27 This is commonly known as "alienage diversity.,,28
Federal jurisdiction may not be asserted on the basis of diversity
unless "the citizenship of each plaintiff is diverse from the citizenship of each
defendant.,,29 For alienage diversity, this means that "[t]he presence of aliens on
two sides of a case destroys diversity jurisdiction.,,30 Additionally, United States
citizens domiciled abroad are treated as neither citizens of a foreign state nor
citizens of a particular U.S. state, and will therefore destroy diversity jurisdiction in
any case to which they are a party. 31
B.
27
Carden and Diversity for Unincorporated Associations
28 U.S.C. § 1332(a)(2) (2006).
28
See, e.g., lPMorgan Chase Bank v. Traffic Stream (BVI)
Infrastructure Ltd., 536 U.S. 88,90-91 (2002); Aristocrat Leisure Ltd. v. Deutsche
Bank Trust Co. Americas, 727 F. Supp. 2d 256,285 (S.D.N.Y. 2010).
29
Caterpillar Inc. v. Lewis, 519 U.S. 61, 68 (1996).
30
Island Global Yachting, Ltd. v. Poole Capital, S.A., 438 F. Supp. 2d
310, 310 (S.D.N.Y. 2006).
31
"United States citizens 'domiciled abroad are neither citizens of any
state of the United States nor citizens or subjects ofa foreign state,' so that '§
1332(a) does not provide that the courts have jurisdiction over a suit to which such
persons are parties. m Herrick Co. v. SCS Commc 'ns, Inc., 251 F .3d 315, 322 (2d
Cir. 2001) (quoting Cresswell v. Sullivan & Cromwell, 922 F.2d 60,68 (2d Cir.
1990), abrogated on other grounds as recognized by Kalt v. Hunter (In re Hunter),
66 F.3d 1002,1005-06 (9th Cir. 1995». This also applies for dual citizens,
because in such a case, the person's "American citizenship will determine
diversity." Action S.A. v. Marc Rich & Co., 951 F.2d 504, 507 (2d Cir. 1991).
8
While a corporation takes the citizenship of both the state in which it
is incorporated and the state where "it has its principal place of business,,,32 the
same is not true for other business entities. In Carden v. Arkoma Associates,33 the
Supreme Court reaffirmed the longstanding rule that the citizenship of an
unincorporated entity
in that case a limited partnership -
derives from the
citizenships of "all of the entity's members.,,34 This holding applies to limited
liability companies (LLCs) as wel1. 35
The reasoning in Carden applies to a broad range of unincorporated
associations and business entities. 36 For example, some federal courts have held
that business trusts take the citizenship of their beneficiaries (in some cases
32
33
34
28 U.S.C. § 1332( c)(1).
494 U.S. 185 (1990).
Id. at 195.
35
See, e.g., Bayerische Landesbank, N. Y. Branch v. Aladdin Capital
Mgmt. LLC, 692 F.3d 42, 49 (2d Cir. 2012); Handelsman v. Bedford Assocs. Ltd.
P 'ship, 213 F.3d 48, 51 2 (2d Cir. 2000).
36
See, e.g., Herrick, 251 F.3d at 322 (holding that a law firm, organized
as a partnership, takes the citizenship of each of its partners); Jaser v. New York
Prop. Ins. Underwriting Ass 'n, 815 F.2d 240, 242 (2d Cir. 1987) ("The citizenship
of an unincorporated association for diversity purposes has been determined for
nearly 100 years by the citizenship of each and every member of that
association.").
9
referred to as "shareholders,,).37 However, a traditional trust
of contract between the grantor and the trustee( s)
essentially a nexus
di ffers from a business or
statutory trust in several important ways.
C.
Distinguishing Traditional and Business Trusts
1.
The Structure of Traditional Trusts
A trust is best defined as a contract or fiduciary relationship between a
holder of property (called the grantor, settlor, or trustor) and one or more trustees. 38
The settlor transfers legal title to the trust property (also known as the res) to the
trustees,39 who then carry out the manifested "intention[s] of the settlor,,40 and
37
See, e.g., Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 292
F.3d 1334, 1337 (lIth Cir. 2002) (holding that Massachusetts business trusts take
the citizenship of each of their beneficiaries/shareholders), abrogated on other
grounds by Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71
(2006). There is still debate in the federal courts over whether such business trusts
act as unincorporated associations or whether all trusts should take the citizenship
of their trustees. Compare Riley, 292 F.3d at 1338-39 (classifYing business trusts
as unincorporated associations), with Johnson v. Columbia Props. Anchorage, LP,
437 F.3d 894, 899 (9th Cir. 2006) ("A trust has the citizenship of its trustee or
trustees. ").
38
"A trust ... is a fiduciary relationship with respect to property, arising
from a manifestation of intention to create that relationship and subjecting the
person who holds title to the property to duties to deal with it for the benefit of ...
one or more persons, at least one of whom is not the sole trustee." Restatement
(Third) o/Trusts § 2 (2003). See also Black's Law Dictionary 1647 (9th ed. 2009)
(defining a trust as "a property interest held by one person (the trustee) at the
request of another (the settlor) for the benefit of a third party (the beneficiary)").
39
See, e.g., Starr Int'l Co. v. AIG, 648 F. Supp. 2d 546, 559 (S.D.N.Y.
2009) (holding that under New York law, a valid trust requires 44'the delivery of the
10
maintain, use, or distribute the property to benefit the beneficiaries of the truSt,41
This form, commonly used for gift or estate-planning purposes, is what I will call a
traditional trust.
A traditional trust may be created in several ways -
three of which
follow:
(a) a transfer by the will of a property owner to another
person as trustee for one or more persons; or
(b) a transfer inter vivos by a property owner to another
person as trustee for one or more persons; or
(c) a declaration by an owner of property that he or she
holds that property as trustee for one or more persons ....42
The first of these is known as a "testamentary trust" while the latter two are known
as "inter vivos trust[s].,,43
2.
Business and Statutory Trusts
res by the settlor to the trustee with the intent of vesting legal title in the trustee '"
(quoting Agudas Chasidei Chabad of United States v. Gourary, 833 F .2d 431, 434
(2d Cir. 1987))).
40
Restatement (Third) of Trusts § 4.
41
In this capacity, the trustee "has, except as limited by statute or the
terms of the trust, ... all of the powers over trust property that a legally competent,
unmarried individual has with respect to individually owned property,"
Restatement (Third) of Trusts § 85, and can "hold, manage, and dispose of [trust]
assets for the benefit of [the beneficiaries]." Navarro Sav. Ass 'n v. Lee, 446 U.S.
458, 464 (1980).
42
Restatement (Third) of Trusts § 10.
43
See Black's Law Dictionary 1651, 1654.
11
While the term "trust" typically refers to the traditional gift and estate
planning trusts described above, the term has also been used to describe another
legal form: the business or statutory trust.
"[I]n general the term 'business trust' has been used 'to denote
an unincorporated organization created for profit under a
written instrument or declaration of trust, the management to be
conducted by compensated trustees for the benefit of persons
whose legal interests are represented by transferable certificates
of participation, or shares. ",44
Business trusts are more akin to business entities
LLCs, or even corporations -
such as limited partnerships,
than to the traditional trusts described above. 4s In
44
Myron Kove et aI., Bogert's Trusts § 24 7 (quoting Comment,
Massachusetts Trusts, 37 Yale LJ. 1103, 1105 (1928)).
4S
See, e.g., Carey v. US Indus., Inc., 414 F. Supp. 794, 795 (N.D. Ill.
1976) ("The object of an ordinary trust is to hold and conserve a particular res,
while a business trust is simply a convenient medium for conducting business and
sharing profits. In fact, the business trust closely resembles a corporation in its
centralized control, limited liability, profit motivation, and free transfer of the
beneficial interest." (citations omitted)). See also Riley, 292 F.3d at 1338
("Carden made clear that the incorporated/unincorporated distinction applies
specifically to Massachusetts business trusts, requiring their citizenship to be
determined on the basis of the citizenship of their shareholders."); Bogert's Trusts
§ 247 ("For many years the trust had been used in Massachusetts as a form of
business organization, a substitute for incorporation ...."); 13 American
Jurisprudence 2d Business Trusts § 1 (2013) ("One of the distinctive devices by
means of which individuals may combine their resources to operate a business for
profit is the so-called business trust or 'Massachusetts trust,' which may be
comprehensively defined as an unincorporated business organization ....").
12
fact, Colorado law excludes business trusts from the definition of trusts within that
state's probate code. 46
A leading treatise on trusts notes the key distinction between the two
forms as follows:
The most significant characteristic of the business trust, and the
most important distinction between such trusts and ordinary
trusts established by will or inter vivo, lies in the fact that the
business trust is organized not as a means of effecting a gift or
transfer but as a device for profit making through the
combination of capital contributed by a number of investors. 47
Other distinctions between the two types of trusts include whether the trust was
"established to run a business enterprise,,,48 as well as the power of "the
beneficiaries to elect and remove trustees,,,49 and "to control the trustees in the
46
See Colo. Rev. Stat. § 15-10-201(56)(b)(J) ('''Trust' also excludes ...
business trusts, as defined in subsection (6.5) of this section ....").
47
Bogert's Trusts § 247. In accordance with this view, the Second
Circuit noted that "many courts have found the presence or absence of a profit
motive influential in their determination of whether the trust at issue was a
business trust. As most corporations are established to generate a profit, we too
find this factor relevant to our determination of whether the Trust is a business
trust." In re Secured Equip. Trust of E. Airlines, Inc., 38 F.3d 86, 90 (2d Cir.
1994). However, the court also noted that even if "not specifically established to
generate a profit," other factors could still lead to a trust being classified as a
business trust. Id.
48
Secured Equip. Trust, 38 F.3d at 90.
Bogert's Trusts § 247. See also Navarro, 446 U.S. at 472 (Blackmun,
1., dissenting) ("It appears to me that the powers lodged in the beneficial
shareholders of Fidelity - the powers to elect and remove trustees, to vote on
49
13
conduct of the business.,,5o Some states also require business trusts to file certain
registration documents that differentiate them from traditional trustS. 51
Colorado law, though not dispositive on this Court's classification of
Monroe's trust for diversity purposes, is also revealing here:
"Business trust" includes, but is not limited to, Massachusetts
business trusts created for business or investment purposes;
Delaware statutory trusts; Illinois land trusts; mutual fund
trusts; common trust funds; voting trusts; liquidation trusts; real
estate investment trusts; environmental remediation trusts;
trusts for the primary purpose of paying debts, dividends,
interest, salaries, wages, compensation, annuities, profits,
pensions, or employee benefits of any kind; and other trusts
with purposes that are the same or similar to any of the trusts
enumerated in this subsection (6.5), regardless of whether such
other trusts are created under statutory or common law, and
major trust investments, to amend the terms of the trust, and to terminate it
clearly dictate that it falls on the partnership side of the line."). However, in
Navarro, the majority did not contest that these factors indicate a trust is a business
trust (the trust there was, in fact, a Massachusetts business trust), but rather held
that where a trustee "possesses certain customary powers to hold, manage, and
dispose of assets for the benefit of others," she is a real party to a controversy and
may sue in her own name. Id. at 464-65 (majority opinion).
50
Bogert's Trusts § 247. See also Navarro, 446 U.S. at 472 (Blackmun,
l, dissenting).
51
See Olympic Coast Inv., Inc. v. Seipel, 208 Fed. App'x 569, 570 (9th
Cir. 2006) (noting lack of filing with the Washington Secretary of State as
evidence that a business trust did not exist). See also, e.g., Mass. Gen. Laws ch.
182, § 2 (2013) ("The trustees of an association or trust shall file a copy of the
written instrument or declaration of trust creating it with the secretary and with the
clerk of every city or town where such association or trust has a usual place of
business.").
14
regardless of whether the beneficial interests in such other trusts
are evidenced by certificates. 52
D.
Current Case Law on the Citizenship of Trusts
The Second Circuit has not yet decided how to determine the
citizenship of a trust, and the other Courts of Appeals are divided. 53 As the
Third Circuit noted in Emerald Investors Trust v. Gaunt Parssipany
Partners, there were two predominant approaches in the case law before that
case was decided: (1) looking solely to the citizenships of the trustees and
(2) looking solely to the citizenships of the beneficiaries. 54 Courts have
taken these approaches by interpreting Carden and an earlier Supreme Court
decision, Navarro Savings Association v. Lee. 55 Carden, as discussed
earlier, held that unincorporated business entities take the citizenships of
each of their members. 56 In Navarro, the Court held that when a trust has
"active trustees whose control over the assets held in their names is real and
52
Colo. Rev. Stat. § 15-10-201(6.5).
53
See Emerald Investors Trust v. Gaunt Parsippany Partners, 492 F.3d
192, 201-05 (3d Cir. 2007) (describing the various answers to this question
adopted by the Courts of Appeals); Mills 2011 LLC v. Synovus Bank, 921 F. Supp.
2d 219,226 (S.D.N.Y. 2013) (noting that "the Second Circuit has not spoken on
[this] question").
54
See 492 F.3d at 201-02.
55
446 U.S. 458 (1980).
56
See 494 U.S. at 195.
15
substantial," those trustees "are real parties to the controversy" and may "sue
in their own right, without regard to the citizenship of the trust
beneficiaries.,,57
The holding in Navarro is in line with the Supreme Court's
treatment of trusts prior to the advent and popularization of the business
trust. For example, in Bullard v. City a/Cisco, the Court held that when an
agreement vested trustees with full legal title to the trust property, the
trustees were entitled to bring suit in federal court "by reason of their
citizenship[s]" alone.
58
"The beneficiaries were not necessary parties and
their citizenship was immaterial.,,59
The Second Circuit has noted in dicta that Navarro "deemed
the citizenship of the trustees to be determinative.,,60 Similarly, the Seventh
57
58
59
446 U.S at 465.
290 U.S. 179, 190 (1933).
Id.
E.R. Squibb & Sons, Inc. v. Accident & Cas. Ins. Co., 160 F.3d 925,
931 (2d Cir. 1998) (citing Navarro, 446 U.S. at 465-66). While this opinion did
not distinguish between traditional and business trusts, it is likely that this
statement was directed toward traditional trusts - the form most commonly
thought of when using the word "trust."
60
16
and Ninth Circuits have cited Navarro as standing for the proposition that
"[t]he citizenship ofa trust is that of the trustee.,,6J
By contrast, in Riley v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., the Eleventh Circuit held that a Massachusetts business trust is
"deemed, for diversity purposes, a citizen of each state in which it has at
least one shareholder.,,62 However, the holding of Riley was limited to
business trusts and similar entities. 63
In Emerald Investors, the Third Circuit decided on a third path:
using the citizenships of both the trustees and the beneficiaries. 64 But the
Emerald Investors court declined to consider the characteristics of the trust
at issue, noting that its "research ... has not led [it] to conclude that the type
of trust calls for a difference in treatment when determining a trust's
61
Hicklin Eng'g, L.c. v. Bartell, 439 F.3d 346,348 (7th Cir. 2006).
Accord Johnson, 437 F.3d at 899 ("A trust has the citizenship of its trustee or
trustees.") .
62
292 F.3d at 1337.
63
See id. at 1338-39 (framing the discussion as specific to
Massachusetts business trusts, and also drawing comparison to entities "which
appear to be voluntary unincorporated associations" rather than traditional trusts).
64
See 492 F.3d at 203 ("The final alternative is to look to the citizenship
of both the trustee and the beneficiary in all cases in which a trust is a party. We
consider that approach to be best for several reasons.").
17
citizenship for diversity of citizenship jurisdictional purposes.,,65 While the
court believed that the trust there may have been a business trust, it
"reach[ ed] no conclusion on that point.,,66
One judge of this Court recently accepted the reasoning of
Emerald Investors in Mills 201 J LLC v. Synovus Bank and "adopt[ed] the
'dual trustee-beneficiary approach. ",67 In that case, the trust was a Delaware
statutory trust.
68
While the court did not explicitly limit its holding to
business trusts, it did make reference to the '''member[s], beneficiar[ies], or
shareholder[s]," of business trusts.
69
In another recent opinion, a different
judge of this Court held that "a court must look, at least in part, to the
citizenship of the trust's trustee or trustees.,,70 The court also noted that
"[w ]hile the citizenship of a trust may also depend on the citizenship of the
65
Id. at 198 n.10.
66
Id.
67
921 F. Supp. 2d at 226.
See Plaintiffs Memorandum of Law in Opposition to Motion to
Dismiss at 2, Mills, 921 F. Supp. 2d 219 (No. 12 Civ. 6158),2012 WL 5272374
("The Trust is a Delaware statutory business trust."). Delaware statutory trusts
meet this Court's definition of a business trust. See supra Part IV.C.2.
68
l'vfills, 921 F. Supp. 2d at 227. See also id. at 222-23 (discussing
Carden as referring to a business trust)
69
Quantlab Fin., LLC v. Tower Research Capital, LLC, 715 F. Supp. 2d
542, 547 (S.D.N.Y. 2010).
70
18
trust's beneficiary or beneficiaries," the case did "not present an occasion to
address this issue.,,71
V.
DISCUSSION
A.
The James Monroe Revocable Trust Is a Traditional Trust, Not a
Business Trust
The Monroe Revocable Trust is a traditional trust because it was
established for estate-planning purposes.72 It also fits the Restatement definition of
"a declaration by an owner of property that he or she holds that property as trustee
for one or more persons.,,73
71
72
Id. at 547 n.2.
Q. So is the general purpose of this trust to -- to benefit your
family?
A. It was -- yeah, I said it's an estate planning succession trust.
Q. SO you wanted to provide for your family after your death?
A. Correct. And under other circumstances like not quite dead,
but limping along.
Q. Did you enter into this trust for tax purposes as well?
A. No, I don't think so.
Q. SoA. It's for estate planning.
Q. SO to benefit your family where you're incapacitated or
after your passing?
A. That's the primary purpose, yes.
Thales Excerpts of Monroe Dep. at 87.
73
Restatement (Third) a/Trusts § 10.
19
Furthermore, the Trust does not fit the definition of a business trust. It
is not "'an unincorporated organization created for profit under a written
instrument or declaration of trust, the management to be conducted by
compensated trustees for the benefit of persons whose legal interests are
represented by transferable certificates of participation, or shares. ",74 It was not
"established to run a business enterprise.,,75 The beneficiaries have no power to
"elect and remove [the] trustees,,,76 nor do they have any ability to control the
conduct of the trustees. 77 Additionally, there is no requirement to register the Trust
under Colorado law. 78
For all of these reasons, the Monroe Revocable Trust is properly
categorized as a traditional trust. As such, insofar as there is any difference in the
74
Bogert's Trusts § 247 (quoting Massachusetts Trusts, supra note 44,
at 1105).
75
Secured Equip. Trust, 38 F.3d at 90. Holding ownership interests in
various businesses is not the same as running a specific business enterprise. The
holding of various assets in trust - including such ownership interests - is the
raison d'etre of traditional trusts.
76
Bogert's Trusts § 247.
77
See id.
See Colo. Rev. Stat. § 15-16-101 (3) ("Registration of a fully and
presently revocable inter vivos trust shall not be required until such time as the
grantor's power to revoke such trust has terminated ....").
78
20
treatment of traditional and business trusts for diversity purposes, the law
governing the citizenship of traditional trusts is controlling.
B.
Traditional Trusts Take the Citizenship of Their Trustees
A traditional trust is not a business entity or unincorporated
association covered by Carden, and the rules governing the citizenships of
business associations do not apply to traditional trusts. Unlike a business trust
which typically has a legal personality, conducts business in its own right, can sue
or be sued, and generally operates like an unincorporated business entity
a
traditional trust is primarily an estate-planning tool. Calling the beneficiaries of a
traditional trust its "members" extends Carden and its progeny well beyond
associations and simi lar entities.
There is ample Supreme Court precedent holding that for traditional
trusts, the trustee is the real party to the controversy.79 While these cases involve
79
See Bullard, 290 U.S. at 190 ("As the transfers ... were made to them
as trustees, were real and not simply for purposes of collection, and invested them
with the full title[,] they were entitled, by reason of their citizenship and of the
amount involved, to bring the suit in the federal court. The beneficiaries were not
necessary parties and their citizenship was immaterial."); Knapp v. Western Vt.
R.R. Co., 87 U.S. (20 Wall.) 117, 123 (1873) ("[Trustees] are the real plaintiffs in
any suit brought to enforce a claim accruing to them in the execution of their trust,
as much so as executors and administrators are, who also sue for the benefit of
others and not themselves."); Coal Co. v. Blatchford, 78 U.S. (11 Wall.) 172, 175
(1870) ("Executors and trustees suing for others' benefit form no exception to this
rule. If they are personally qualified by their citizenship to bring suit in the Federal
courts, the jurisdiction is not defeated by the fact that the parties whom they
represent may be disqualified.").
21
the capacity of a trust to sue or be sued, or whether a trust is a proper or required
party, their reasoning suggests that the trustee should determine the citizenship of a
business entity whose membership interest is held in the res of a traditional trust.
Any other holding would be inconsistent with the cases holding that, because a
traditional trust cannot sue or be sued,80 the citizenship of the trustees determines
citizenship for the purpose of establishing diversity.
Furthermore, it makes little sense to define the citizenship of a trust by
reference to the beneficiaries when those beneficiaries may not even know the trust
exists. S' Here, it appears that Vicky Harris did not know of the Trust's existence or
so
See, e.g., First Union Nat 'I Bank ex rei. Se. Timber Leasing Statutory
Trust v. Pictet Overseas Trust Corp., 351 F.3d 810, 814 (8th Cir. 2003) ("Some
states also now recognize the so-called 'business' or 'Massachusetts' trust. Unlike
traditional trusts, this form of business organization gives the trust powers to sue
and be sued in its own name." (citations omitted)). See also Fed. R. Civ. P. 17(b)
(stating that for all parties aside from individuals and corporations, the "[ c ]apacity
to sue or be sued is determined ... by the law of the state where the court is
located ...."); MASTR Adjustable Rate Mortgages Trust 2006-0A2 v. UBS Real
Estate Sec. inc., No. 12 Civ. 7322,2013 WL 4399210, at *2 (S.D.N.Y. Aug. 15,
2013) (holding that a suit listing the trust as the plaintiff in the caption could
continue only because the body of the complaint noted that the trust was acting
through the trustees).
81
See, e.g., Martin v. Funk, 75 N.Y. 134, 138 (1878) ("[W]hen a trust is
declared, whether in a third person or the donor, it is not essential that ... the
[beneficiary] should be informed of the trust."); Restatement (Third) a/Trusts § 14
("A trust can be created without notice to or acceptance by any beneficiary or
trustee."); Bogert's Trusts § 169 ("It is generally held that notice by the settlor to
the beneficiary that a trust has been created is not necessary to the completion of a
trust, subject to the power of the beneficiary to reject the trust when he is informed
of it.").
22
that she was a beneficiary of it until this litigation. 82 It would be illogical to bar
jurisdiction based on the citizenships of beneficiaries who may not even know that
the trust in question exists, when the citizenship of the trustee th[e] controversy",83
'''a real party to
would permit subject-matter jurisdiction.
Thermo cites Emerald Investors and other cases for the proposition
that the type of trust is irrelevant when determining citizenship for diversity
purposes,84 and argues that this Court should adopt the rule in Emerald Investors
and consider the citizenship of both trustees and beneficiaries. The argument that
"the Trust should be treated no differently than any other unincorporated
association,,85 has some appeal in a search for simplicity. However, the distinction
between traditional and business trusts is important. The holding of Carden did
not alter the treatment of traditional trusts exemplified in Bullard and discussed in
Navarro. Therefore, when an unincorporated business entity is a party to a case,
82
See Harris Dep., Ex. C to Polebaum Decl., at 21-22. See also Opp.
Mem. at 6 ("[Monroe] did not inform his sister of her supposed interest in the Trust
until a few weeks ago, when he attempted to obtain evidence to support this
Motion to Dismiss.").
83
Andrews v. Modell, 636 F. Supp. 2d 213, 220 (S.D.N.Y 2008)
(alteration in original) (quoting Navarro, 446 U.S. at 462).
84
85
See Def. Mem. at 14 (citing Emerald, 492 F .3d at 198 n.l 0).
Id. at 15.
23
and an ownership interest in that entity is within the res of a traditional trust, the
citizenship of the trustees controls.
Because the Monroe Revocable Trust is a traditional trust, and its sole
trustee is a citizen of Colorado, Thermo is a citizen of Colorado and complete
diversity of citizenship exists.
VI.
CONCLUSION
For all of the reasons set forth above, Thermo's motion to dismiss
under Rule 12(b)(1) is denied. The Clerk of the Court is directed to close this
motion (Docket No. 33). A conference is scheduled for December 2,2013 at
4:30 pm.
SO ORDERED:
\
~
Shira A. Scheindlin
U.S.D.l
Dated:
New York, New York
November 12,2013
24
- Appearances
For Plaintiff:
Elliot E. Polebaum, Esq.
Fried, Frank, Harris, Shriver & Jacobson LLP
801 17th Street, NW
Washington, DC 20006
(202) 639-7000
Eugene N. Hansen, Esq.
Fried, Frank, Harris, Shriver & Jacobson LLP
1001 Pennsylvania Avenue, NW
Washington, DC 20004
(202) 639-7375
For Defendant:
Gerald S. Greenberg, Esq.
Taft Stettinius & Hollister LLP
425 Walnut Street, Suite 1800
Cincinnati, OH 45202
(513) 357-2838
25
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