Opinion
21-CV-3089 (GBD) (RWL)
09-15-2021
MSR TRUST, Plaintiff, v. NATIONSTAR MORTGAGE LLC d/b/a Mr. Cooper Defendant.
REPORT AND RECOMMENDATION TO HON. GEORGE B. DANIELS: MOTION TO REMAND
ROBERT W. LEHRBURGER, UNITED STATES MAGISTRATE JUDGE.
Plaintiff MSR Trust (“MSR Trust” or the “Trust”), a statutory business trust, filed a lawsuit in New York state court alleging breach of contract and seeking damages as well as declaratory relief. Defendant Nationstar Mortgage LLC, d/b/a Mr. Cooper (“Nationstar”) removed the action to federal court and asserted federal subject matter jurisdiction on the basis of diversity of the parties' citizenship. Currently before the court is MSR Trust's motion to remand the case back to state court for lack of federal subject matter jurisdiction. Both parties agree the question presented is whether MSR Trust's citizenship is determined by the citizenship of its trustee, its ultimate beneficial owner, or both. For the reasons set forth below, I find that the citizenship of MSR Trust is based on the citizenship of its only member, the ultimate beneficial owner, and recommend that MSR Trust's motion to remand be DENIED.
BACKGROUND
MSR Trust is a Delaware statutory trust that owned the right to service residential mortgage loans. (Compl. ¶¶ 5, 9.) Its trustee is U.S. Bank Trust National Association (the “Trustee”), a national bank whose main office is in Delaware and who therefore is a citizen of Delaware. (Compl. ¶ 5.) MSR Trust's sole beneficial owner is CM REO Holdings, also a Delaware statutory trust. CM REO Holdings' sole beneficial owner is Natixis Real Estate Holdings, LLC, a Delaware limited liability company with one member, Natixis North America LLC, a Delaware limited liability company, which also has one member: Natixis S.A. (“Natixis”), a French company. (Compl. ¶ 5.) There is no dispute that Natixis is MSR Trust's ultimate beneficial owner. All assets of MSR Trust are held in the name of the Trust, not the Trustee; the Trustee has no ownership interest in the Trust. (See Trust Agreement of MSR Trust (the “Trust Agreement”), Dkt. 30, § 2.07(a).)
“Compl.” refers to MSR Trust's Complaint, filed on March 5, 2021 (Dkt. 1, Ex. 1).
Neither party submitted the Trust Agreement with their motion papers. The Court separately asked MSR Trust to file the document. (See Dkt. 30.) The Court may consider documents outside the pleadings in determining whether the Court has subject matter jurisdiction. St. Paul Fire & Marine Insurance Co. v. Universal Builders Supply, 409 F.3d 73, 80 (2d Cir. 2005) (“when the question is subject matter jurisdiction, the court is permitted to rely on information beyond the face of the complaint”).
Nationstar is a Delaware limited liability company with two members: Nationstar Sub1 LLC and Nationstar Sub2 LLC. Each of those limited liability companies has a single member, Nationstar Mortgage Holdings, Inc., a business incorporated in Delaware, with its principal place of business in Texas. Under 21 U.S.C. § 1332(c)(1), Nationstar Mortgage Holdings, Inc - and Nationstar - are citizens of both Delaware and Texas. (Notice Of Removal ¶ 8.) The parties thus agree that Nationstar is a citizen of Delaware and Texas. (Mem. at 1; Opp. at 1.)
“Notice Of Removal” refers to Defendant's Notice Of Removal, filed on April 9, 2021 (Dkt. 1).
“Mem.” refers to MSR Trust's “Memorandum of Law in Support of Plaintiff MSR Trust's Motion to Remand” (Dkt. 12). “Opp.” refers to “Nationstar Mortgage LLC's Memorandum of Law in Opposition to Plaintiff's Motion to Remand” (Dkt. 19).
In 2014, MSR Trust and Nationstar entered into two agreements transferring the servicing rights of MSR Trust's residential mortgage loans to Nationstar. (Compl. ¶¶ 1014.) Natixis's U.S. subsidiary, Natixis Real Estate Holdings, LLC, executed the contracts on behalf of MSR Trust. (Compl., Ex. A.) On March 5, 2021, MSR Trust filed a lawsuit against Nationstar in the Supreme Court of the State of New York, County of New York alleging breach of the 2014 agreements and requesting a declaratory judgment against Nationstar. (Compl. ¶¶ 2-4.)
On April 9, 2021, Nationstar removed the action from state court to this Court asserting federal diversity jurisdiction under 28 U.S.C. § 1332(a)(1). (Notice Of Removal.) On May 10, 2021, MSR Trust moved to remand, arguing lack of complete diversity between the parties (Dkt. 11); Nationstar filed its response on May 24, 2021 (Dkt. 19); and MSR Trust submitted a reply on June 1, 2021. (Dkt. 23.) On June 16, 2021, the motion was referred to the undersigned for report and recommendation. (Dkt. 24.) Oral argument took place on August 12, 2021.
The issue raised in MSR Trust's motion is to determine who are the members of the Trust as the members' citizenship will be imputed to the Trust. MSR Trust argues that the Trustee is a member of the Trust, and the Trust's citizenship therefore includes that of its Trustee, thus making the Trust a citizen of Delaware, destroying diversity, and requiring remand. Nationstar asserts that MSR Trust's citizenship is determined by the citizenship of its only member and ultimate beneficial owner, Natixis, which makes MSR Trust a citizen of France and maintains complete diversity.
LEGAL STANDARDS
It is well-established that “‘federal courts are courts of limited jurisdiction' and lack the power to disregard such limits as have been imposed by the Constitution or Congress.” Durant, Nichols, Houston, Hodgson & Cortese-Costa P.C. v. Dupont, 565 F.3d 56, 62 (2d Cir. 2009) (quoting Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 374, 98 S.Ct. 2396, 2403 (1978)). Arguably the most significant jurisdictional limit placed upon federal courts is subject-matter jurisdiction, which dictates “a court's competence to adjudicate a particular category of cases.” Wachovia Bank v. Schmidt, 546 U.S. 303, 316, 126 S.Ct. 941, 950 (2006). Congress granted district courts original jurisdiction in cases where the issue at hand poses a federal question, see 28 U.S.C. § 1331, and in cases where the parties are citizens of different states and meet the requisite monetary threshold, see 28 U.S.C. § 1332.
In tandem with that limited grant of jurisdiction, “the federal removal statute allows a defendant to remove an action to the United States District Court in ‘any civil action brought in a State court of which the district courts of the United States have original jurisdiction.'” Bounds v. Pine Belt Mental Health Care Resources, 593 F.3d 209, 215 (2d Cir. 2010) (quoting 28 U.S.C. § 1441(a)). To remove a case on the basis of diversity jurisdiction, as Nationstar has done here, complete diversity must exist between opposing parties, and the amount in controversy must exceed $75,000. 28 U.S.C. § 1332(a); see Lincoln Property Co. v. Roche, 546 U.S. 81, 89, 126 S.Ct. 606, 613 (2005) (“we have read the statutory formulation ‘between ... citizens of different States' to require complete diversity between all plaintiffs and all defendants” (alteration in original)).
The party seeking removal bears the burden of establishing that removal is proper. Mehlenbacher v. Akzo Nobel Salt, Inc., 216 F.3d 291, 296 (2d Cir. 2000) (party seeking to remove lawsuit to federal court “bore the burden of establishing that the requirements for diversity jurisdiction were met”); United Food & Commercial Workers Union, Local 919, AFL-CIO v. CenterMark Properties Meriden Square, Inc., 30 F.3d 298, 301 (2d Cir. 1994) (“Where, as here, jurisdiction is asserted by a defendant in a removal petition, it follows that the defendant has the burden of establishing that removal is proper”). Because the removal right is statutory, and “[i]n light of the congressional intent to restrict federal court jurisdiction, as well as the importance of preserving the independence of state governments, ” the Court must “construe the removal statute narrowly, resolving any doubts against removability.” Lupo v. Human Affairs International, Inc., 28 F.3d 269, 274 (2d Cir. 1994) (internal quotation marks omitted); see Shamrock Oil & Gas Corporation. v. Sheets, 313 U.S. 100, 108, 61 S.Ct. 868, 872 (1941) (calling for “strict construction” of the removal statute).
DISCUSSION
The Court must determine whether complete diversity exists between MSR Trust and Nationstar such that removal is proper. As an unincorporated entity, MSR Trust possesses the citizenship of its “members.” Americold Realty Trust v. Conagra Foods, Inc., 577 U.S. 378, 381136 S.Ct. 1012, 1015 (2016). The question thus becomes: in determining the citizenship of a business trust, specifically a Delaware statutory trust, for purposes of diversity jurisdiction, does the trust's membership consist of its trustee, its beneficial owners, or both? To answer that question, both parties rely on the Supreme Court decision in Americold and certain lower court cases. The discussion, however, should begin with a trilogy of Supreme Court cases, of which Americold is the most recent.
A. Navarro, Carden, Americold, And The Citizenship Of Unincorporated Entities
Clear rules govern the citizenship of individuals and corporations. See 28 U.S.C. § 1332(a), (c). The same cannot be said for unincorporated entities, such as joint-stock companies, limited partnerships, or trusts. The Supreme Court has sought to clarify the citizenship of unincorporated entities on at least three occasions.
1. Navarro Savings Association v. Lee
In Navarro, the Court addressed “whether the trustees of a business trust may invoke the diversity jurisdiction of the federal courts on the basis of their own citizenship, rather than that of the trust's beneficial shareholders.” Navarro Savings Association v. Lee, 446 U.S. 458, 458, 100 S.Ct. 1779, 1780-81 (1980). The question arose because the trustees of a Massachusetts business trust filed a lawsuit, in their own names, alleging breach of contract against Navarro Savings Association. The trustees sued in federal court, invoking diversity jurisdiction. The citizenship of each trustee differed from that of the savings association, but the trust's shareholder beneficiaries were citizens of the same state as the savings association. Id. at 459-60, 100 S.Ct. at 1780-81. The district court dismissed the case, holding that complete diversity was missing because a business trust is a citizen of every state in which its shareholders reside. Id. at 460, 100 S.Ct. at 1781. The Fifth Circuit reversed and reasoned that the trustees, and not the shareholders, were the real parties in interest because they had full authority to manage the trust and sue on its behalf; complete diversity therefore existed among the actual parties to the controversy. Id., 100 S.Ct. at 1781. The Supreme Court affirmed.
In reaching its decision, the Supreme Court looked to the role of the trustees. Because the trustees were “active trustees whose control over the assets held in their names [was] real and substantial” and were “not naked trustees who act as mere conduits for a remedy flowing to others, ” the Supreme Court reasoned they were real parties to the controversy and “control[ed] the litigation.” Id. at 465, 100 S.Ct. at 1784 (internal quotation marks omitted). The Supreme Court explained that “[f]or more than 150 years, the law has permitted trustees who meet this standard to sue in their own right, without regard to the citizenship of the trust beneficiaries.” Id. at 465-66, 100 S.Ct. at 1784.
2. Carden v. Arkoma Associates
Ten years after Navarro, the Supreme Court encountered a related issue and addressed “whether, in a suit brought by a limited partnership, the citizenship of the limited partners must be taken into account to determine diversity of citizenship among the parties.” Carden v. Arkoma Associates, 494 U.S. 185, 186, 110 S.Ct. 1015, 1016 (1990). The lawsuit was filed in federal court by a limited partnership organized under Arizona law against two individuals, citizens of Louisiana, who moved to dismiss on the basis that one of the partnership's limited partners was also a Louisiana citizen. Id., 110 S.Ct. at 1016. The district court denied the motion, and the case ultimately proceeded to a bench trial, where the limited partnership prevailed. The Fifth Circuit affirmed on appeal and concluded that the limited partnership's citizenship turned on that of the general partners alone. Id. at 186-87, 110 S.Ct. at 1016-17.
The Supreme Court reversed, rejecting the argument that in determining the limited partnership's citizenship, a court could look to the citizenship of less than all of the entity's members and held that “diversity jurisdiction in a suit by or against the entity depends on the citizenship of all the members.” Id. at 195, 110 S.Ct. at 1021 (internal quotation marks omitted).
The limited partnership relied, in part, on Navarro to support its argument. The limited partnership asserted that in Navarro, the Supreme Court looked to the trustees and their role to determine the citizenship of the trust, and so in the instant case, the Supreme Court should consider the management powers of the general partners in determining the limited partnership's citizenship. Id. at 191-93, 110 S.Ct. at 1019-20. The Supreme Court disagreed and clarified that Navarro “did not involve the question whether a party that is an artificial entity other than a corporation can be considered a citizen of a State, but the quite separate question whether parties that were undoubted citizens (viz., natural persons) were the real parties to the controversy.” Id. at 191, 110 S.Ct. at 1019 (internal quotation marks omitted). The Supreme Court underscored that “Navarro had nothing to do with the citizenship of the trust, since it was a suit by the trustees in their own name.” Id. at 192-93, 110 S.Ct. at 1020 (internal quotation marks omitted).
Although Carden clarified the scope of Navarro and reaffirmed the Supreme Court's “oft-repeated rule” that the citizenship of an unincorporated entity for the purposes of diversity jurisdiction is determined by the citizenship of all of its members, the Supreme Court did not define “members” or provide guidance for how to determine what entities constitute the members of other unincorporated entities. Twenty-five years later, the Supreme Court revisited the issue in Americold.
3. Americold Realty Trust v. Conagra
In 2015, the Supreme Court granted certiorari in Americold to “resolve confusion among the Courts of Appeals regarding the citizenship of unincorporated entities.” Americold, 577 U.S. at 380, 136 S.Ct. at 1015. More specifically, the Court was confronted with determining the citizenship of a real estate investment trust (“REIT”) organized pursuant to Maryland law. Americold, 577 U.S. at 382, 136 S.Ct. at 1015. The case involved a contract dispute arising from a warehouse fire. Corporations whose property was destroyed in the fire sought compensation from Americold Realty Trust, the REIT that owned the warehouse. Id. at 379, 136 S.Ct. at 1014. The plaintiffs filed the action in Kansas state court; the REIT removed the suit to federal district court, which accepted jurisdiction and held in favor of the REIT. Id. at 379-80, 136 S.Ct. at 1014.
On appeal, the Tenth Circuit requested additional briefing regarding the district court's exercise of jurisdiction and ultimately concluded that complete diversity was lacking. Id. at 380, 136 S.Ct. at 1014-15. In reaching that conclusion, the Tenth Circuit disagreed that “a trust's citizenship is determined exclusively by the citizenship of its trustees.” Conagra Foods, Inc. v. Americold Logistics, LLC, 776 F.3d 1175, 1177 (10th Cir. 2015), aff'd sub nom, Americold Realty Trust v. Conagra Foods, Inc., 577 U.S. 378, 136 S.Ct. 1012 (2016). Instead, the Tenth Circuit, analyzing the Supreme Court's decisions in Navarro and Carden, reasoned that “[w]hen a trustee is a party to litigation, it is the trustee's citizenship that controls for purposes of diversity jurisdiction, ” but “[w]hen the trust itself is party to the litigation, the citizenship of the trust is derived from all the trust's ‘members.'” Conagra, 776 F.3d at 1182.
The Supreme Court affirmed and concluded that the REIT's citizenship derived from its members which, under Maryland law, were the trust's shareholders, not its trustee. The Supreme Court began by “adher[ing] to our oft-repeated rule that diversity jurisdiction in a suit by or against the entity depends on the citizenship of ‘all [its] members.'” Americold, at 381, 136 S.Ct. at 1015 (alteration in original) (quoting Carden, 494 U.S. at 195, 110 S.Ct. at 1021). But while the term “members” had been used by the Supreme Court since 1889 regarding the citizenship of a company, see Chapman v. Barney, 129 U.S. 677, 682, 9 S.Ct. 426, 428 (1889), the Court had never indicated who or what should be considered a member of an unincorporated entity. As a result, the Court acknowledged, confusion abounded. Americold, 577 U.S. at 383, 136 S.Ct. 1016 (“confusion regarding the citizenship of a trust is understandable and widely shared”); see also Zoroastrian Center & Darb-E-Mehr Of Metropolitan Washington, D.C. v. Rustam Guiv Foundation Of New York, 822 F.3d 739, 748 (4th Cir. 2016) (“Despite over two centuries of federal litigation involving trusts, the method for determining a trust's citizenship was long unsettled and the subject of much debate”).
The Court thus turned to determining the composition of the REIT's membership. Finding nothing in the record directly addressing the issue, the Supreme Court turned to state law for guidance. Americold, 577 U.S. at 382, 136 S.Ct. at 1015-16. Maryland law defines a REIT as “an unincorporated business trust or association formed under this title in which property is acquired, held, managed, administered, controlled, invested, or disposed of for the benefit and profit of any person who may become a shareholder.” Md. Code Ann., Corps. & Ass'ns § 8-101(c). The Court reasoned that the REIT's shareholders “have ownership interests” and “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.” Americold, 577 U.S. at 382, 136 S.Ct. at 1016 (internal quotation marks omitted) (citing Carden, 494 U.S. at 192-96, 110 S.Ct. at 1019-22). The Court therefore held that the REIT's shareholders were members of the REIT. Id. at 383, 136 S.Ct. at 1016. Citizenship of the REIT thus turned on the citizenship of its shareholders, eliminating complete diversity and requiring remand to state court. Id. at 380, 136 S.Ct. at 1015.
In reaching its decision, the Court distinguished between a “traditional trust” that is a “fiduciary relationship between multiple people” and not a distinct legal entity, and, in contrast, “the trust label” applied to other unincorporated entities, such as the REIT, that are separate legal entities and can sue or be sued. Id. at 383, 136 S.Ct. at 1016 (internal quotation marks omitted). The Court rejected the REIT's argument that “anything called a ‘trust' possesses the citizenship of its trustees alone, not its shareholder beneficiaries as well.” Id. at 382, 136 S.Ct. at 1016. The REIT relied on the Court's earlier decision in Navarro to support its argument that a REIT's citizenship should be determined by its trustee, but the Court clarified that the rule set out in Navarro applies only when a trustee files a lawsuit in their own name, as distinct from when the trust files suit as a distinct legal entity. Id. at 382-83, 136 S.Ct. at 1016.
B. MSR Trust's Sole Member Is Its Beneficial Owner, Not The Trustee
Neither MSR Trust nor Nationstar dispute that the Trust's citizenship is determined by the citizenship of its members. The sole disagreement centers on who properly qualifies as a “member” of the Trust: the Trustee, the ultimate beneficial owner Natixis, or both. Americold does not directly answer that question. MSR Trust and Nationstar do not cite any other cases that squarely provide the answer, and the Court is not aware of any. But taking into account the Trust Agreement, the Delaware law governing the Trust, the Supreme Court's holdings and rationales provided in Americold and its predecessors, as well as Americold's progeny, a clear answer emerges: MSR Trust's only member is its beneficial owner Natixis.
As the Supreme Court did in Americold, the Court first looks to the record before it. The only document in the record that would shed light on identifying MSR Trust's members is the governing trust agreement, which does not define “members” and does not otherwise identify the Trust's members. Other features of the Trust Agreement, however, do aid the analysis and will be referenced where relevant in the ensuing discussion.
In defining what the Trust's Administrator is not, the Trust Agreement separately refers to a “member” and a “trustee, ” among several other descriptors. See Trust Agreement § 11.01. That distinction may suggest some recognition by the Trust signatories that a trustee is something different than, and therefore not, a member. But that interpretation overreaches; theoretically, the two terms could overlap. Moreover, the section in question clarifies the role of the Administrator; it is not directed at the relationship, if any, between a trustee and member. Accordingly, the Court does not base its opinion on the separate reference to member and trustee in § 11.01.
Following the next step of the approach taken in Americold, the Court turns to the relevant state law governing unincorporated entities. MSR Trust is a statutory trust organized under Delaware law. Delaware law defines a statutory trust as an
unincorporated association ... under which property is ... managed ... by a trustee ... for the benefit of such person or persons as are or may become beneficial owners . including but not limited to a trust of the type known at common law as a “business trust, ” or “Massachusetts trust, ” or a trust qualifying as a real estate investment trust ..Del. Code Ann. tit. 12, § 3801(i). The statute does not define or identify the members of such a trust. Rather, like the Maryland statute in Americold, the Delaware statute distinguishes between the role of trustee and that of a beneficial owner. See e.g., Md. Code Ann., Corps. & Ass'ns § 8-101(c) (“an unincorporated business trust or association formed under this title in which property is acquired, held, managed, administered, controlled, invested, or disposed of for the benefit and profit of any person who may become a shareholder”); § 8-202(b)(v) (trustees to be elected by shareholders); § 8-205 (removal of trustees by shareholders).
Under the MSR Trust Agreement, beneficial owners hold certificates and are termed “Certificate Holders, ” the equivalent of REIT shareholders. (See Trust Agreement §§ 1.01 at “Beneficial Owner”; 3.01(a).)
That is significant because the Supreme Court likened the REIT's beneficial owners, or shareholders, to the constituents that the Court has deemed to be the members of other unincorporated entities. Specifically, the Court reasoned that since REIT property is held and managed “for the benefit and profit of any person who may become a shareholder, ” those shareholders have “ownership interests” much like the shareholders of a joint-stock company or the partners of a limited partnership - “both of whom [the Supreme Court] viewed as members of their relevant entities.” Americold, 577 at 382, 136 S.Ct. at 1016 (internal quotation marks omitted). Similarly, in the present case, the property held by MSR Trust is held and managed “for the benefit of ... beneficial owners.” Del. Code Ann. tit. 12, § 3801(i).
Under the Trust Agreement, the Trustee does not even have legal ownership of the Trust's property; instead “[l]egal title to all the Trust Property . shall be vested at all times in the Trust as a separate legal entity.” (Trust Agreement § 2.07(a).) The Trustee thus does not have any ownership interest, legal or beneficial, in the trust property. The only entity with an ownership interest is the beneficial owner, Natixis, and thus is the only constituent of the Trust like the shareholders of a joint-stock company or the partners of a limited partnership that the Court has deemed to be “relevant entities.” As such, the only member of the MSR Trust is Natixis.
When, as here, the member of an artificial entity is itself an artificial entity, courts engage in an “upstream analysis” and identify the membership of each successive entity. Palmiotti v. JAF Carrier L.L.C., No. 15-CV-2365, 2017 WL 1166364, at *2 (E.D.N.Y. March 28, 2017) (citing Bayerische Landesbank, New York Branch v. Aladdin Capital Management LLC, 692 F.3d 42, 49 (2d Cir. 2012)). Here, the ultimate entity, for which there is no more “upstream, ” is Natixis.
In addition to focusing on ownership interests, the Supreme Court's trilogy of cases ascribe significant import to the distinction between traditional trusts and business trusts, particularly in regard to their capacity to sue or be sued. As the Court explained in Americold, a traditional trust is not a separate legal entity but rather a “fiduciary relationship between multiple people” and therefore “not a thing that could be haled into court.” Americold, 577 U.S. at 383, 136 S.Ct. at 1016 (internal quotation marks omitted). That is why, traditionally, lawsuits involving a trust were brought by or against the trustee in their own name.
More recently, however, states “have applied the ‘trust' label to a variety of unincorporated entities that have little in common with this traditional template.” Id. at 383, 136 S.Ct. at 1016. By example, the Supreme Court highlighted that Maryland treats a REIT as “a separate legal entity that itself can sue or be sued.” Id. 577 U.S. at 383, 136 S.Ct. at 1016 (internal quotation marks omitted). Similarly, Delaware statutory trusts, like MSR Trust, are distinct entities that can bring and be subject to legal actions. Del. Code Ann. tit. 12, § 3804(a). Here, in particular, the Trust Agreement expressly empowers the Trust to sue and be sued in its own name (Trust Agreement § 2.01) and confirms that, unlike the trustee of a traditional trust, the Trustee neither acts in its individual capacity, nor owes any fiduciary duties, with exceptions for the implied contractual covenant of good faith and fair dealing. (Trust Agreement, §§ 4.08, 5.04.) MSR Trust falls squarely in the category of non-traditional trusts, similar to the REIT in Americold, that can sue - just as MSR Trust has done here - or be sued in its own name, again obviating any rationale to consider the Trustee to be a member of the Trust.
The Court is not persuaded by MSR Trust's arguments as to why its Trustee should be deemed a member in addition to its beneficial owner. For instance, MSR Trust argues that the Trustee should be deemed a member because the Trustee “has significant responsibilities and interests” in its “role” of managing property for the benefit of the beneficial owners. (Mem. at 7.) The Court agrees that the Trustee has significant responsibilities. See Del. Code Ann. tit. 12, § 3801(i), (j) (designating trustee as the party responsible for carrying on the business activities of a statutory trust); see also Trust Agreement §§ 2.03, 4.01. But neither Americold nor any case cited by MSR Trust establishes the type or amount of work performed by a trustee as a metric for determining whether the trustee is a member of the trust.
MSR Trust relies on a case from this District that rejects precisely the argument that MSR Trust advances; that case states that “[w]hile [the trustee's] powers as administrative trustee may be relevant for determining whether SDTC may be deemed a real party to the controversy under Navarro, and thus capable of suing or being sued on behalf of the trusts, a trustee's powers have no bearing on the citizenship of the trust.” Quantlab Financial, LLC, Quantlab Technologies Ltd. (BVI) v. Tower Research Capital, LLC, 715 F.Supp.2d 542, 549 (S.D.N.Y. 2010) (internal quotation marks omitted). As discussed below, Quantlab, which reached a conclusion different than the one set forth herein, preceded the Supreme Court's decision in Americold and relied on an out of Circuit case that has since been abrogated. The Court references Quantlab here simply to indicate the inconsistency in MSR Trust's argument.
MSR Trust also points to language in Americold that it argues may imply that a trustee can be included in a trust's membership, or at the very least does not preclude it: “But neither [the rule that an unincorporated entity possesses the citizenship of its members] nor Navarro limits an entity's membership to its trustees just because the entity happens to call itself a trust.” Americold, 577 U.S. at 383, 136 S.Ct. at 1016. By stating that an entity's membership is “not limit[ed] to its trustees, ” so the argument goes, the Supreme Court implicitly acknowledged that trustees are members of a business trust, even if the beneficial owners are as well. But that is not what Americold held; rather, it held that the REIT's owners were members, thereby destroying diversity of citizenship. 577 U.S. at 382, 136 S.Ct. at 1015-16. Moreover, there are at least three reasons why the referenced language should not be construed to be an imprimatur by the Supreme Court on including trustees as a members of business trusts.
First, as explained above, the Supreme Court has likened membership to ownership. See id. at 383, 136 S.Ct. at 1016 (noting that shareholders and partners are the members, respectively, of a joint-stock company and a limited partnership) (citing Carden, 494 U.S. at 192-96, 110 S.Ct. at 1019-22). Pursuant to both Delaware law and the Trust Agreement, MSR Trust is managed for the benefit of its beneficial owner, i.e., Natixis. Natixis has full ownership interest in the MSR Trust's property; the Trustee has none.
Second, the Supreme Court has emphasized the distinction between traditional trusts, where lawsuits are brought by and against the trustee in their individual capacity, and non-traditional trusts which are separate legal entities, capable of suing and being sued. See id. at 383-84, 136 S.Ct. at 1016-17. Nationstar correctly points out that in bringing the underlying action, MSR Trust sued Nationstar in its own name, indicating that the Trust's beneficial owner, and not the Trustee, is the true party in interest in the case. (Opp. at 5.)
Third, post-Americold decisions, though not having been presented with the precise issue, have indicated that trustees are not members of business trusts. Before addressing those cases, however, a decision from the Second Circuit merits mention. See Raymond Loubier Irrevocable Trust v. Loubier, 858 F.3d 719, 722 (2d Cir. 2017). Although Loubier involved a traditional trust, the case is instructive for how the Second Circuit has construed and applied Americold.
The parties in Loubier were involved in an inheritance dispute related to the assets of Raymond Loubier, which were conveyed to revocable and irrevocable trusts in his name and the name of his wife. Id. at 721. Two of the irrevocable trusts and a contingent trust beneficiary sued two of the revocable trusts and Loubier's wife, as trustee of the revocable trusts. Id. The district court dismissed for lack of subject matter jurisdiction because the plaintiffs did not establish complete diversity. Id. The Second Circuit vacated the decision on the basis that traditional trusts could not sue or be sued in their own name and remanded for determination of the individual trustees' citizenship. Id. at 731-32.
The Second Circuit began its analysis with a review of the same Supreme Court trilogy of cases set forth above. In doing so, it used language suggesting that the only members of the business trust in Americold were the shareholders. For example, the Second Circuit observed that “the [Supreme] Court concluded that one looked to the citizenship of the REIT's shareholders, as they were the ‘members' of that particular legal entity.” Id. at 727 (emphasis added) (citing Americold, 577 U.S. at 382-83, 136 S.Ct. at 1016). Similarly, referencing the statute governing the trust in Americold, the Second Circuit stated that “Maryland law effectively defined those members as the REIT's shareholders.” Id. at 728 (emphasis added). The Delaware law governing the MSR Trust effectively does so as well.
The Second Circuit also highlighted the two material traits distinguishing business trusts such as the REIT in Americold from traditional trusts with which they “have little in common”: ownership and ability to sue or be sued. As to the former, the Second Circuit remarked that the Supreme Court's conclusion that “one looked to the citizenship of the REIT's shareholders, as they were the ‘members' of that particular legal entity” was a logical extension of the Supreme Court's discussion equating an entity's members with its owners. Id. at 727. As to the latter, the Second Circuit stated:
[B]ecause the party trusts here are not organized according to state law as distinct juridical entities but, rather, are traditional trusts, establishing only fiduciary relationships, they are incapable of being haled into court except through their trustees. Thus, it is the trustees' citizenship that must determine diversity, not the citizenship of trust beneficiaries.Id. at 731; see also id. at 722 (“legal proceedings involving such traditional trusts are effectively brought by or against their trustees and, thus, it is the trustees' citizenship, not that of beneficiaries, that matters for purposes of diversity”).
In short, although the Second Circuit did not confront the issue presented here, its analysis in Loubier suggests it would reach the conclusion that the only members of MSR Trust are its shareholders, and that the citizenship of the Trustee is not relevant to determining diversity jurisdiction.
Two post-Americold cases from courts of appeals outside the Second Circuit state that conclusion directly, although as in Loubier, the courts in those cases were charged with determining the citizenship of traditional trusts. See Demarest v. HSBC Bank USA, N.A., 920 F.3d 1223 (9th Cir. 2019); GBForefront, L.P. v. Forefront Management Group, LLC, 888 F.3d 29 (3d Cir. 2018). In Demarest, the Ninth Circuit concluded that because the trustee of the traditional trust at issue was named as the defendant, the Navarro rule, left intact by Americold, applied: “‘when a trustee files a lawsuit or is sued in her own name, her citizenship is all that matters for diversity purposes.'” 920 F.3d at 1228 (quoting Americold, 577 U.S. at 382, 136 S.Ct. at 1016). As in Loubier, the court in Demarest stressed the distinction between traditional trusts and business trusts and summarized the Americold holding as “ultimately concluding] that the citizenship of other, nontraditional trusts ... should be determined based on their members, not their trustees.” Id. at 1229 (emphasis added). Again, the Demarest court was not asked to determine the citizenship of a business trust. But its characterization of Americold at the very least countenances against imbuing the Americoldexcerpt about Navarro not limiting an entity's membership to its trustees with the meaning that MSR Trust suggests it may carry.
In GBForefront, the Third Circuit decided a case that asked it to consider “whether, in assessing diversity-of-citizenship jurisdiction under 28 U.S.C. § 1332(a), the citizenship of a traditional trust is determined differently than that of a business trust.” 888 F.3d at 32. The decision abrogated, at least in part, the Court's decision in Emerald Investors Trust v. Gaunt Parsippany Partners, 492 F.3d 192 (3d Cir. 2007), which, as discussed below, is a case relied on by MSR Trust and by other cases cited by MSR Trust. In abrogating Emerald Investors, the Third Circuit reaffirmed Americold's distinction between traditional and business trusts and described the Supreme Court's decision as “declaring that, because a business trust is an artificial legal entity and a traditional trust is not, the citizenship of a traditional trust must be determined differently than that of a business trust.” Id. at 39. The Third Circuit went on to state that “following the clarification in Americold Realty, the citizenship of a traditional trust is only that of its trustee, while that of a business entity called a trust is that of its constituent owners.” Id. (emphasis added). The Third Circuit thus drew the same conclusion from Americold that the Ninth Circuit did in Demarest: a business trust's members are only its constituent owners and do not include its trustees.
In sum, the Trust Agreement, Delaware law, the Supreme Court's decision in Americold, and case law since Americold all suggest that the citizenship of a business trust like MSR Trust is determined based on the citizenship of its beneficial owners, not its trustee.
C. The Pre-Americold Cases Relied On By MSR Trust Do Not Lead To A Different Outcome
MSR Trust relies on three opinions, all issued before the Supreme Court's decision in Americold, holding that a trust's membership included its trustee. (Mem. at 8-9.) Two of the cases are from this District, and one is from the Third Circuit. MSR Trust acknowledges that these cases pre-date Americold but asserts that nothing in the Americold opinion undermines or alters the citizenship analysis those courts undertook. The Court disagrees. None of those cases had the benefit of, and did not employ, Americold's analysis that membership of a business trust is to be determined differently than the membership of a traditional trust. Moreover, they are all grounded in Emerald Investors, the decision the Third Circuit later abrogated in GBForefront. The Court thus begins its discussion of those cases with Emerald Investors.
MSR Trust curiously also cites as support a postAmericold case from this Circuit that only further supports finding that the Trust's members do not include its Trustee. See SPV-LS, LLC v. Bergman, No. 15-CV-6231, 2019 WL 2257244, (E.D.N.Y. Jan. 14, 2019), R. & R. adopted, 2019 WL 1552914 (E.D.N.Y. Apr. 10, 2019). In Bergman, the court analyzed the citizenship of a Delaware statutory trust for jurisdictional purposes. The trust agreement noted that the trust was created to hold insurance policies on behalf of a limited liability company, which was the trust's sole beneficiary. The court held that the limited liability company's citizenship was therefore imputed to the trust. The court did not discuss the citizenship of the trustee. See id. at 17. Bergman thus does not support the proposition that a business trust's citizenship is that of both its trustee and beneficiaries. To the contrary, given its focus solely on citizenship of the beneficiary, the case suggests the opposite.
In Emerald Investors, an unincorporated business trust filed suit seeking recovery on two unpaid promissory notes and foreclosure of the mortgages securing the notes. 492 F.3d at 193, 196. The trust argued that diversity jurisdiction was proper because its sole beneficiary was a corporation incorporated in the British Virgin Islands, where it also maintained its principal place of business, and none of the defendant partnerships were citizens of the British Virgin Islands. Id. at 193. The district court agreed and reached the merits of the case. On appeal, the Third Circuit vacated and remanded.
The Third Circuit considered:
whether, when ascertaining the citizenship of a trust for diversity of citizenship purposes, we should look to the citizenship of the trust's beneficiary, its trustee, or both, or use an alternative method to determine citizenship based on the functions of the trustee and beneficiary with respect to management of the trust in the particular case.Id. at 198. In light of the Supreme Court's decisions in Navarro and Carden, the Third Circuit presented four possible ways to determine the citizenship of a trust: (1) look to the citizenship of only the trustee; (2) look to the citizenship of only the beneficiary; (3) look to the citizenship of either the trustee or the beneficiary, depending on which is in control of the trust; or (4) look to the citizenship of both the trustee and the beneficiary. Id. at 201. Significantly, and contrary to what the Supreme Court would later hold in Americold, the Third Circuit rejected defendant's argument that “the type of trust calls for a difference in treatment when determining a trust's citizenship for diversity of citizenship jurisdictional purposes.” Id. at 198 n.10.
Instead, the court did not distinguish between business trusts and traditional trusts and considered what it deemed to be the “best” approach for determining citizenship of a trust. Id. at 203. The Third Circuit concluded that considering the citizenship of both the trustee and the beneficiary for purposes of diversity jurisdiction was the best approach because it did not offend Supreme Court precedent (which, of course, did not at the time include Americold), avoided situations where either the trustee or beneficiary was a passive figurehead, and was an efficient, bright-line rule that avoided case-by-case determinations. Id. at 203-04.
Emerald Investors preceded Americold by nine years. Two years after Americold, the Third Circuit abrogated Emerald Investors precisely because it failed to distinguish between traditional trusts and business trusts. See GBForefront, 888 F.3d at 39 (“Americold Realty thus effectively abrogates our conclusion in Emerald Investors that traditional and business trusts need not be treated differently when determining citizenship for diversity jurisdiction”). Accordingly, Emerald Investors holds no precedential value with respect to the present issue. Indeed, as noted above, the Third Circuit in GBForefront construed Americold to hold that “the citizenship ... of a business entity called a trust is that of its constituent owners.” Id.
A few years after Emerald Investors, but well before Americold or GBForefront, the Honorable Denise L. Cote of this District, issued a decision in Quantlab Financial, LLC, Quantlab Techs. Ltd. (BVI) v. Tower Research Capital, LLC, 715 F.Supp.2d 542, 547 (S.D.N.Y. 2010). In Quantlab, the plaintiff LLC sued the defendant LLC alleging violation of a noncompete agreement. After receiving notice that complete diversity may not exist between the parties, the district court sua sponte directed the plaintiff to show cause why the action should not be dismissed for lack of subject matter jurisdiction. Id. at 543. The defendant LLC was a citizen of New York for the purposes of diversity jurisdiction. The membership of plaintiff LLC contained several layers of unincorporated entities, the ultimate members of which were two trusts who shared a trustee. Id. at 546-47. The Court framed the issue as “[w]hether complete diversity exists in this case thus hinges on whether the citizenship [of the trustee] should be considered in determining the citizenship of [the plaintiff LLC], ” and concluded that the citizenship of the trustee “may not be ignored when analyzing the citizenship of the ... trusts for purposes of diversity jurisdiction.” Id. at 547, 549. In its analysis, however, the court discussed and relied on Navarro, which determined the citizenship of a traditional trust; earlier decisions from this District involving traditional trusts; and the Third Circuit's decision in Emerald Investors, which was later abrogated because it failed to account for the differences between traditional and other trusts. Id. at 547-49. Accordingly, Quantlab no longer provides persuasive authority.
The Court acknowledged with a “but see” cite an S.D.N.Y. case holding, as described by the Court, that “citizenship of ‘member, beneficiary or shareholder' of business trust [was] determinative for diversity purposes. Quantlab, 715 F.Supp.2d at 548 (citing FMAC Loan Receivable Trust 1997-C v. Strauss, No. 03-CV-2190, 2003 WL 1888673, at *1 (S.D.N.Y. April 14, 2003). The Court noted, however, that the court in FMAC was not required to, and did not, hold that the citizenship of the trustee should be disregarded. 715 F.Supp.2d at 549.
The second pre-Americold case from this District that MSR Trust relies on also does not advance the ball because it is entirely grounded on Quantlab. In Greentech Capital Advisors Securities, LLC v. Enertech Environmental, Inc., No. 11-CV-451, 2011 WL 1795318 (S.D.N.Y. April 29, 2011), the court held that citizenship of the trustee of a “trust that is a member of the plaintiff limited liability company” should be imputed to the trust. The only authority on which the court relied in its brief two-page opinion was Quantlab. Greentech thus falls away for the same reasons that Quantlab does.
D. The Concerns Raised In Quantlab Are Not Implicated In This Case
Although Quantlab is no longer sound in light of Americold (and GBForefront), Judge Cote's reasoning bears further discussion as it addresses concerns, previously raised in Emerald Investors, that merit consideration even after Americold.
First, the court opined that “since a trustee may be the public face of a trust, taking the trustee's citizenship into account is consistent with the purpose behind diversity jurisdiction, namely to provide an impartial forum for out-of-state parties who might be subject to prejudice in local state courts.” Quantlab, 715 F.Supp.2d at 548 (internal quotation marks omitted); see also Emerald Investors, 492 F.3d at 202 (“in many cases the beneficiary-only rule may lead to an untoward result, as for example, would be the situation if a trust in which the beneficiary has delegated all control of the trust to the trustee brings the action ... because in that situation it is logical to think that if the trust had a local advantage or faced a local prejudice it would be on the basis of the identification of the trustee not the beneficiary”).
To be sure, the rationale behind diversity jurisdiction should be taken into account. But avoiding prejudice, or obtaining undue advantage, by presenting the trustee, and not the beneficial owner, as the “public face” of the trust is not implicated here. The Trust filed this case, and by advocating a position that would send the case back to state court evidently is not concerned about any potential prejudice. And the Court finds it difficult to believe that the Trust would gain an advantage in State Court by virtue of the fact that a large national bank, rather than a French business entity, is the public-facing Trustee. Moreover, Natixis will hardly be kept behind the scenes because its U.S. subsidiary, Natixis Real Estate Capital Inc., executed the contracts at issue in the dispute.
Second, Judge Cote raised the issue of a “preference for simple jurisdictional rules.” Quantlab, 715 F.Supp.2d at 549. The court resisted a rule that would require an involved analysis of the “functions and powers of a trustee in order to determine whether that trustee's citizenship should be considered for purposes of diversity jurisdiction.” Id. (citing Emerald Investors, 492 F.3d at 203). The decision in this case does not require an involved analysis of the Trustee's functions and powers. Rather, as explained above, the determination of whether the trustee is a member is based primarily on ownership and the Trust's ability to sue and be sued in its own name.
Accordingly, the Court finds that a ruling in this case that only the beneficial owner is a member of the Trust would not have the negative ramifications that concerned the courts in Emerald Investors and Quantlab.
E. Principles Of Comity, Federalism, And Judicial Economy Are Not Violated By Maintaining This Case In Federal Court
MSR Trust suggests that any doubt regarding this Court's jurisdiction warrants remand to state court out of respect for federal judicial resources, comity with state courts, and the narrow construction to be given to the removal statute. (Mem. at 11-12.) See Somlyo v. J. Lu-Rob Enterprises, Inc., 932 F.2d 1043, 1045-46 (2d Cir. 1991) (“In light of the congressional intent to restrict federal court jurisdiction, as well as the importance of preserving the independence of state governments, federal courts construe the removal statute narrowly, resolving any doubts against removability”). The latter concern is readily dispensed with; the question presented here does not require the Court to construe the removal statute. Rather, in the context of determining whether diversity jurisdiction exists, the Court is confronted with determining who qualifies as a member of a Delaware business trust.
Judicial resources also are not a reason for the Court to find that the Trustee is not a member of MSR Trust whose citizenship must be considered in determining diversity. MSR Trust rightly notes that judicial resources as well as the parties' resources may be squandered if this Court, the Court of Appeals, or the Supreme Court were to later determine that the Trustee is a member. In that event, diversity would not exist, there would be no basis for federal jurisdiction, and various events, decisions, or even verdicts from earlier in the case could be “rendered a nullity.” MSR Trust therefore argues that “out of respect” for those resources, the Court should resolve any doubt against removability. (Mem. at 12.) See Federal Insurance Company v. Tyco International Ltd., 422 F.Supp.2d 357, 368 (S.D.N.Y. 2006) (“one practical consideration for the heavy presumption against suspect removal is that it conserves judicial resources”).
The Court by no means dismisses concern for resources of both the courts and the parties. But, again, the Court does not find the question of whether the Trustee is a member of the Trust to be doubtful. As explained above, although no Court has squarely held that a trustee cannot be a member of a business trust, there is no doubt in this case that the Trustee is not a member of the Trust. The Trust Agreement, the Delaware trust law, Supreme Court precedent, and decisions of the Second Circuit, Third Circuit, and Ninth Circuit all suggest that the Trustee is not a member. The only countervailing authorities are the district court cases pre-dating Americold and grounded in Emerald Investors, which the Third Circuit abrogated in light of Americold.
Finally, the Court recognizes the importance of federalism, comity with state courts, and Congressional intent to limit the jurisdiction of federal courts. See Lupo, 28 F.3d at 274. But Congress has granted defendants the statutory right to remove cases from state court to federal court where defendants can establish complete diversity. Here, the Court finds that Nationstar has done so. MSR Trust possesses the citizenship of its ultimate beneficial owner, not its trustee. As the owner, Natixis, is a citizen of France, and Nationstar is a citizen of Delaware and Texas. Complete diversity is present and supports removal. If Congress prefers that business trusts have less access or exposure to federal court by virtue of diversity jurisdiction, it can establish a specific rule of citizenship for those entities, as it has for corporations. This Court, however, should not fashion such a rule by entertaining the fiction that the Trustee is a member of the MSR Trust.
CONCLUSION
For the foregoing reasons, the Court recommends that the motion to remand be DENIED. To the extent not addressed above, the Court has considered MSR Trust's arguments and finds them to be without merit.
OBJECTIONS AND APPEAL
Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days to file written objections to this Report and Recommendation. Such objections shall be filed with the Clerk of the Court, with extra copies delivered to the Chambers of the Honorable George B. Daniels,
United States Courthouse, 500 Pearl Street, New York, New York 10007, and to the Chambers of the undersigned, United States Courthouse, 500 Pearl Street, New York, New York 10007. Failure to file timely objections will result in a waiver of objections and will preclude appellate review.
Respectfully Submitted,