Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-15-01153/USCOURTS-ca7-15-01153-0/pdf.json

Parties Involved:
Inheritance Capital Group, LLC
Appellant
Orix Real Estate Capital, Inc.
Appellee
RTP LLC
Appellant

Document Text:

In the

United States Court of Appeals

For the Seventh Circuit ____________________

Nos. 14-3671 & 15-1153

RTP LLC and RSCD OPPORTUNITY FUND I, LLC (formerly 

known as Inheritance Capital Group, LLC),

Plaintiffs-Appellants,

v.

ORIX REAL ESTATE CAPITAL, INC.,

Defendant-Appellee.

____________________

Appeals from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 13 C 350 — Charles P. Kocoras, Judge.

____________________

ARGUED SEPTEMBER 29, 2015 — DECIDED JULY 1, 2016

____________________

Before WOOD, Chief Judge, and EASTERBROOK and RIPPLE,

Circuit Judges.

EASTERBROOK, Circuit Judge. ORIX Real Estate Capital 

made a loan of about $41 million to RTP, enabling it to buy a

commercial building in North Carolina. The loan is nonrecourse, but both RTP and Inheritance Capital Group signed 

conditional guarantees that take effect if the borrower comCase: 15-1153 Document: 37 Filed: 07/01/2016 Pages: 7
2 Nos. 14-3671 & 15-1153

mits a default. (Inheritance has a new name, but we use the 

original, which appears throughout the litigation and the 

underlying documents.) The loan papers specify in detail 

what defaults activate the guarantees.

When the real estate market turned down, the building’s 

sole tenant decided not to renew its lease. RTP did not find a 

new tenant willing to pay as much. Contending that several 

events of default had occurred, ORIX accelerated the loan 

and demanded that RTP and Inheritance make good the outstanding debt. They replied with this suit, which seeks a declaration that they do not owe ORIX anything beyond what 

can be paid out of the building’s assets. Ruling in ORIX’s favor, the district court ordered RTP and Inheritance to pay 

about $30 million. 2014 U.S. Dist. LEXIS 124654 (N.D. Ill. Sept. 

8, 2014). RTP, a special-purpose vehicle formed for this 

transaction, does not have any assets beyond the building. 

But Inheritance does. It is a subsidiary of Detroit’s retirement 

plans (both general civil-service employees and the police 

and fire departments), which contain billions of dollars.

This suit began in a state court of Illinois. ORIX removed 

it under the diversity jurisdiction of 28 U.S.C. §1332(a)(1). 

See 28 U.S.C. §1441(a). ORIX, a corporation, has two citizenships: Delaware (where it is incorporated) and Texas (where 

it has its principal place of business). 28 U.S.C. §1332(c)(1); 

Hertz Corp. v. Friend, 559 U.S. 77 (2010). Both RTP and Inheritance are limited liability companies, which have the citizenships of their members. See Cosgrove v. Bartolotta, 150 F.3d 

729 (7th Cir. 1998); see also Carden v. Arkoma Associates, 494 

U.S. 185 (1990). Inheritance has two members: the General 

Retirement System of the City of Detroit, and the Police and 

Fire Retirement System of the City of Detroit. RTP has mulCase: 15-1153 Document: 37 Filed: 07/01/2016 Pages: 7
Nos. 14-3671 & 15-1153 3

tiple members, all of them undoubtedly citizens of Michigan 

or New York except for ICG Ellis Road, LLC, which has the 

retirement funds as members. So whether this suit was removable depends on the citizenships of these two funds.

Both retirement funds are organized as trusts under 

Michigan law but can sue and be sued in their own names. 

ORIX relies on May Department Stores Co. v. Federal Insurance 

Co., 305 F.3d 597, 599 (7th Cir. 2002), and Hicklin Engineering, 

L.C. v. Bartell, 439 F.3d 346, 348 (7th Cir. 2006), both of which 

understood Navarro Savings Ass’n v. Lee, 446 U.S. 458 (1980), 

to stand for the proposition that the citizenship of every trust 

is the citizenship of its trustees. ORIX represented that all 

members of the funds’ boards of trustees are citizens of 

Michigan. RTP and Inheritance did not dispute this assertion 

(even though the record does not contain information about 

the citizenship of Edsel Jenkins, who was among the trustees

on the date the suit was removed). The district judge decided the merits of the controversy without discussing subjectmatter jurisdiction.

After the case was argued in this court, we deferred its 

resolution pending the Supreme Court’s decision in Americold Realty Trust v. ConAgra Foods, Inc., 136 S. Ct. 1012 (2016), 

which posed the question whether Navarro establishes a rule 

applicable to all kinds of trusts. After Americold was released, 

we asked the parties for their views about its effect on this 

case. With those views in hand, we are ready to decide this 

appeal.

Americold holds that Navarro does not establish a special 

rule for trusts—indeed is not about trusts at all. The Justices 

explained that Navarro follows the normal rule that the citizenship of the litigant controls. A trust often is a fiduciary 

Case: 15-1153 Document: 37 Filed: 07/01/2016 Pages: 7
4 Nos. 14-3671 & 15-1153

relation between two people, the trustee and the beneficiary. 

When the trustee sues (or is sued), the trustee’s citizenship 

matters. And when the beneficiary sues or is sued, or a trust 

litigates in its own name, again the citizenship of the party

controls.

So what is a trust’s citizenship? Americold has a clear answer: “While humans and corporations can assert their own 

citizenship, other entities take the citizenship of their members.” 136 S. Ct. at 1014. The Court added that “Navarro reaffirmed a separate rule that when a trustee files a lawsuit in 

her name, her jurisdictional citizenship is the State to which 

she belongs—as is true of any natural person. This rule coexists with our discussion above that when an artificial entity 

is sued in its name, it takes the citizenship of each of its 

members.” Id. at 1016 (emphasis in original; citation omitted). The trusts themselves, not the trustees, are the members 

of the two LLCs. Detroit’s two pension funds contract (and 

litigate) in their own names. These trusts therefore have the 

citizenships of their own members. The jurisdictional views 

expressed in Hicklin and May Department Stores (and the 

many similar decisions in this circuit and elsewhere) did not 

survive Americold.

RTP and Inheritance tell us that in 2013, when the suit 

was removed, 59 beneficiaries of the retirement plans resided in Texas or Delaware. Citizenship depends not on residence but on domicile, which means the place where a person intends to live in the long run. It is possible to reside in 

one state while planning to return to a long-term residence 

in another state. Although it is exceedingly unlikely that all 

59 beneficiaries who lived in Texas or Delaware in 2013 were 

there only temporarily, RTP and Inheritance recognize that 

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Nos. 14-3671 & 15-1153 5

ORIX is entitled to try to prove their transience if it wants. 

They ask us to remand to the district court for that purpose.

ORIX opposes that proposal, contending that all members of the retirement funds must be citizens of Michigan, 

because workers generally live within Detroit’s borders and 

cannot commute from Texas or Delaware. This supposes that 

a “member” for the purpose of Americold is whatever the entity calls a member. Like most pension funds, Detroit’s distinguish between active employees still contributing to the 

funds (called “members” by these funds and “participants” 

by some others) and persons eligible for or currently drawing benefits (usually called “beneficiaries”). ORIX wants us 

to hold that only current workers count as the pension 

funds’ “members” for the jurisdictional inquiry.

Americold observes that no statute defines “members” for 

the purpose of §1332 but that “we have equated an association’s members with its owners or the several persons composing such association.” 136 S. Ct. at 1015 (citation and internal quotation marks omitted). The Court thought that equity investors in a real-estate investment trust are its “members” because they reap the gains and suffer the losses of the 

enterprise—and it did not matter that the trust called those 

people “shareholders” rather than “members.” Similarly it 

does not matter that Detroit’s pension funds call some people “members” and others (often the same people at different times) “beneficiaries.” People in their active work lives, 

the same people after retirement, and family members entitled to pension or other payments on the accounts of current 

and retired workers, all have financial interests in the pension trusts. It would make little sense to look only at current 

Case: 15-1153 Document: 37 Filed: 07/01/2016 Pages: 7
6 Nos. 14-3671 & 15-1153

workers for the purpose of determining pension funds’ citizenships.

In Americold and its predecessors (including Carden), the 

Justices treated as members all persons who had the equivalent of equity interests in the association. It did not include 

banks and other entities that had made debt investments. It

might be possible to treat beneficiaries of defined-benefit 

pension plans as debt investors: their rights depend on contractual promises rather than on the performance of the 

funds’ investments. Drawing a distinction between debt and 

equity is problematic, however, unless there is equity. Stockholders and owners of other equity interests have residual 

claims in a business; they get whatever is left after everyone 

else is paid. Detroit’s pension funds do not have equity 

claimants in this sense; the beneficiaries themselves get the 

profits of the funds’ investments (either by an increase in 

their benefits, or via an increase in the probability of being 

paid as much as they have been promised). Pension funds 

are in this respect similar to mutual banks and insurers, 

merging the roles of debt and equity investors. Perhaps Detroit’s taxpayers are residual claimants in the sense that, if 

the pension funds’ investments do well, the taxpayers need 

to chip in less to make the funds stable. It would not be sensible, however, to treat all taxpayers as “members” of the 

pension funds. This leaves the employees and beneficiaries 

as members and correspondingly raises grave doubt about 

the existence of complete diversity of citizenship.

ORIX contends that “after the parties have spent hundreds of thousands of dollars on attorneys’ fees and judgment has been entered[,] remand is not warranted.” But in 

the federal system a defect in subject-matter jurisdiction reCase: 15-1153 Document: 37 Filed: 07/01/2016 Pages: 7
Nos. 14-3671 & 15-1153 7

quires a suit’s dismissal, no matter how much the parties 

have spent and no matter how late in the proceedings the 

defect comes to light. Thoughtful people, including the 

members of the American Law Institute, have questioned 

this approach. See Study of the Division of Jurisdiction between 

State and Federal Courts 64–66, 366–74 (ALI 1969); Charles 

Alan Wright, Restructuring Federal Jurisdiction: The American 

Law Institute Proposals, 26 Wash. & Lee L. Rev. 185, 204 

(1969). But changing the Supreme Court’s longstanding approach, which dates to Capron v. Van Noorden, 6 U.S. (2 

Cranch) 126 (1804), would require a statute. This suit must 

be dismissed if any participant or beneficiary of either pension fund is a citizen of Texas or Delaware.

ORIX may think it pointless to conduct a detailed inquiry 

into the domiciles of the 59 persons who resided in these two 

states in 2013, especially because it would become necessary 

to consider the possibility that beneficiaries who then resided elsewhere (say, Oklahoma or Maryland) were domiciliaries of Texas or Delaware at the time. But ORIX may 

choose its own litigation strategy.

The judgment of the district court is vacated, and the case 

is remanded for further proceedings consistent with this 

opinion. If ORIX chooses not to seek an adjudication of the 

domicile of the 59 persons who in 2013 lived in Texas or Delaware, then the district court must remand this litigation to 

state court.

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