2007 D e c i sion s O p inion s of the U nit e d S t a t e s C our t of Appe al s for the Thir d C ir c uit

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P r e c e de n t i al or N on-P r e c e de n t i al : P r e c e de n t i al

D ock e t N o . 05-3706

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U N IT E D S T A T E S C O U R T O F A P P E A LS F O R T H E T H IR D C IR C U IT

Nos. 05-3706 and 05- 4134

EM ERA L D I

NV EST OR S TR

UST

v

. GAUN T PA RSI PPA

NYPAR TN ERS ; 119 CHERRY HI L LASSOCI ATES, L .L .C.; 99 CHERRY HI L LASSOCI ATES, L .P.; HO RSE HE AD S CO MME RCIAL DE VE L OPM EN T PA RTN ERS , L .P.; RECKSON OPERATI

NG PARTNERSHI P, L .P.; J OHN DO ES 1 THROUGH 10

Ga un t Pa rs ipp any Part ne rs ; 119 Cherry

Hill Associates, L .L .C.; 99 Cherry Hill Associates, L .P.; Ho rs e he a ds Comme rc ia l Deve lopment Partners, L .P.; Reckson Ope ratingPartnership, L .P.,

Appellants in No. 05-3706

EMERAL D I

NVESTORS TRUST, Appellant in No. 05-4134

v

. GAUN T PA RSI PPA

NYPAR TN ERS ; 119 CHERRY HI L LASSOCI ATES, L .L .C.; 99 CH ERR

Y H I L LASS OC I AT ES L .P. ; HORSEHEADS COMMERCI AL DEVEL OPMENT PARTNERS, L .P.; R ECKSON OPERATI

NG PARTNERSHI P, L .P.; J OHN DO ES 1 THROUGH 102 On Appea l from the United States District Court f o r th e D i s tr i c to f

N e wJ e r s e y (D.C. Civ. No. 02-1939) Ho n o rab l e W i l l i am J

. M art i n i , Di s tri ctJ u d ge

Argued Nove mber 8, 2006

BEF ORE: SL OVI TER, CHAGARES, and GREENB ERG, Circuit J udg es (F iled: J une 13, 2007)

W. J ames Cousins (argued) McGowa n & Cousins P.O. Box 391 L itchfield, CT 06759
Attorney s for Appe llants in No. 05-3706 and Appe llees in No. 05-4134

Kenne th L . L eiby , J r. (a

rgued) Richard J. S hackle ton Shackleton & Hazeltine 159 Millburn Ave. Millburn, NJ 07041 Attorney s for Appe llant in No. 05-4134 and Appe llee in No. 05-3706

OPI NI ONOF TH E CO UR T

GREENB ERG, Circuit J udg e.

I . I NTRODUCTI ON The pa rties appe al and c ross-appe al from a judgme nt and order s in this action that Emerald Investors Trust (“ Emera ld Trust”) broug ht, predicated on the district cour t’s asser ted diversity

ofClearly , we do have appe llate jurisdiction. 1

3 citizenship j urisdiction, seekingrec overy on two unpaid promissory notes and for eclosure of the mortg ag es sec uringthe notes. The dis tr ic t c ourt , o ve r t

he de fe nd ants ’ o bje c tio n, he ld t hat it ha d d ive rs ity of c iti zen sh ip j ur isd ic tio n b e c a us e the so le be ne fi c iary

of Em e ra ld Trust was Eme rald Investors L td. (“Emer ald L td.”), a corpor ation incorpora ted in the B ritish Virg in I slands wher e it had its principal place of business, and the de fenda nt partner ships, all of which ar e undoubtedly

citizens of states within the United States, are not citizens of the Br itish Virgin I slands.

As alwa y s, after we a re satisfied of our own jur isdiction, the 1 thr e sh old , a

nd , in de e d, a s it

tur ns out, t he on ly iss ue on thi s a pp e a l is whether the district court ha d subject matter jur isdiction. I nasmuch a s we c ann ot d e te rm ine if

the dis tr ic t c ourt

ha d d ive rs ity

of c iti zen sh ip jurisdiction and there is no other basis for it to have exercised jur isd ic tio n, we do no t r e a c h th e me ri ts o f t he c a se . Rathe r, we wi ll
rema nd the matter to the district c ourt to resolve the jurisdictional iss ue a ft e r a llo wi ngdis c ov e ry and c on du c tin g any

he ari ngthat it d e e m s n e c e s s ar

y.

I I . F AC TS A

ND PRO CED UR

AL HI STO RY

De fe nd ants , G a

un t Pa rs ipp any Pa rt ne rs , 1 19 Che rr

y Hi ll Associates, L .L .C., 99 Cherry Hill Associates, L .P., and Horsehe ads Commercial De velopment Partner s, L .P., whose three principal
owner s and par

tners we re N ewby

Toms, Mitchell W olff, and Joel Hoffma n (the “ partne rs”) , wer e in the business of owningand op e ratin g of

fi c e bu ild ing s. Th ou g h th e thr e e pa rt ne rs c on du c te d th e ir business throug h these four entities, Horsehe ads wa s the only one exis ting at the time that Emerald Tr ust filed the complaint in this case. Neve rtheless, a ll of the four e ntities, along w ithin R eckson O perating Partnership, L .P., have bee n defe ndants in this case a nd all five entities filed the first, a

nd as it turns out, the principal appe al af ter completion of the district cour t proce eding s.
The c ase ma

y be tra ced ba ck to J anuar

y 1994, when the proper ties the partne rs owned in Par sippany , New Jersey , which consisted of two sites, the 99 Cher ry Hill property

and the 119 Cher

ryThe fa cts in this case a re un u sually

complicated but we have 2 f o c u s e d o nw h a tn e e d s t o b e e x p l a i n e d f o r p ur p o s e s o f th i s o p i n i o n

. If
we we re re a c hin g the me ri ts o f t he c a se we wou ld hav e ha d to e xpla in
muc h mo re . T he dis tr ic t c ourt se t fo rt h the fa c ts a t g re a te r l e ng th i n it s opinion i n Emera ld I nvestors Trust v. Ga unt Parsippany

Partners, N o. 02-CV-1939, 2005 WL1705779 (D.N.J. J uly 21, 2005).
Their four entit ies wer e also parties to these ag ree ments but we 3 need not de tail which entity was a party to which agree ment. Rather, a s a conve nience we r efe r to the agree ments as if only the par tners sig ned the m.
We d o n ot d e ta il the e nti tie s’ ro le s in the se a g re e me nts

. 4

4 Hi ll p ro pe rt

y (“ the NJ pr op e rt ie s” ), we re pe rf or min g po or ly

. Th is

2 circ umstance c aused the partne rs to ref inance these prope rties with the United B ank of K

uwait (“ the United B ank”) , an under taking requiring them to increa se the de bt on property they owned in Hor sehea ds, New York, by $2 milli on to be used by

the par tners for the NJ properties. At tha t ti me the pa

rt ne rs e nte re d into c e rt a in a g re e me nts re latin g to the re financ ing. First, they ag ree d to treat the $2 million as a loan 3 from them, rather than f

rom United B ank, to the entities that owne d the NJ properties eve n though United Ba nk supplied the $2 milli on. In exchang e, ea ch of the two entities owning the NJ properties g ave eac h of the pa

rtners a note for $333,333.33 se cure d by a mortg ag e that was subordinate to the United B ank’s se nior mortg ag e. The notes bore a 12% annua l rate of

interest and w ere due on De cembe r 31, 1999. The pa

rtners c reated the subordinate d mortg ag es to protec t their equity

in the proper

ties from par

tnership cr editors. As a r esult of the subordinated mor

tga g es, the pa

rtners a ppear ed to be se cure d
cre ditors instead of equity owner s with respec t to the $2 mill ion. The partne rs also ente red into par ity ag ree ments that provided that they ranke d equally

amongthemselves with re spect to pay ment of or
secur ity on the loans.

There afte r, the re lationship among Toms, Wolff, and H offman de te ri or a te d le a din g To ms t o s e e k to wi thd ra w f ro m th e ir bu sin e ss dealing s. Acc ording ly , in 1996 the partne rs beg an neg otiating the terms of a n ag ree ment for Hof

fman a nd Wolff to acquire Toms’s interests in the Horse heads a nd NJ proper

ties. As a re sult of the neg otiations, the partner s simult aneously enter ed into six related ag ree ments. First, they

enter ed into two mortg ag e modification 4 ag ree ments modifying the notes and subordinated mortg ag es so thatTh is s um i nc lud e d p ri nc ipa l and int e re st. 5

5 the sum due on ea ch wa s increa sed fr om $333,333.33 to $583,333.33 with the notes simultaneously becomingnon-intere st bearing . At the same time the fa ce va lue of the note s was re duced to $250,000, the reduc tion being c ontinge nt on installm ent pay ments on them being timely made. The mortg ag e modification ag ree ments also provided that repa y ment was to be ma de only to the extent that any

ref inancing
or sa le of the pr op e rt ie s r e su lte d in “ ne t pr oc e e ds .” Th e pa

rt ne rs a lso enter ed into two subordination ag ree ments with United Ba nk that pr ov ide d th a t th e pa

rt ne rs we re no t e nti tle d to any pa y me nt o n th e ir loans until the senior United B ank mortg ag es we re “ paid in full.” F ina lly , th e pa

rt ne rs e nte re d into t

wo se c on d mo rt g a g e pa

ri ty
a g re e me nts pr ov idi ngfo r t he m to sh are e qu a lly

in a ny “ ne t pr oc e e ds ”
rea liz ed fr om a sale of

the prope rties. In August 1997 Toms assigne d his notes and mortg ag es to Emera ld Trust, an entity that he contr olled.

In August 1998 Reckson, which is completely separ ate f

rom and indepe ndent of the othe r four defe ndants, purcha sed the NJ pr op e rt ie s f

or $1 9, 90 5, 00 0. As fa

r a s w e c an a sc e rt a in t

his purc ha se wa s i nan arm s -l en gthtra n s ac t i o n

. At th att i m e, ev en th o u gh
a pp ro ximate ly

$2 4, 00 0, 00 0 w a s d

ue to Unit e d B a

nk on the de bts its mortg ag es on the NJ properties sec ured, it neve rtheless a cce pted $16,459,664.95 on the debts and mortg ag es and discha rg ed the 5
mor tg a g e s, tr e a tin g the m a s “ satis fi e d. ” Ap p. a t 20 1. Ac c or din g to defe ndants, United B ank discha rg ed its mortga g es on the NJ pr op e rt ie s f

or le ss t ha n w a s d ue on the m be c a

us e the a pp ro ximate ly $8 mil lio n s ho rt fa ll t o s a tis fy the ob lig a tio ns to Unit e d B ank in f ull
was a dded to the debt that the mor tga g e United B ank held on the Horsehe ads prope rty

secur ed.

Wolff and Hoff

man also dischar g ed their subor dinated mortg ag es on the NJ properties mar king the m as “pa id and satisfied” upon rec eipt of $1,202,729.44 in the for m of Reckson Ope rating Units. Accor ding to Wolff and H offman, the y did so beca

use they had no nee d to retain the mortg ag es. Emer ald Trust, howe ver, did not discharg e the subordinated mortg ag es that Toms had a ssigne d it. Thus, at the closingon the sale of the NJ properties to Reckson all of the mortg ag es in favor

of United B ank, Wolff, and Hof fman on the N J proper ties were satisfied, leaving the subordinated mortg ag es previously

held by Toms but since assig ned to Emera ld Trust as theWe are addre ssing only pree x isting debt a

nd are not considering 6 any new mortg ag e that Rec kson may have place don the prope rties for if the re wa s suc h a mo rt g a g e it w ou ld n ot b e mate ri a l to the iss ue on thi s a pp e a l.
At that point the Emera ld T rust’s mortg ag es no longe r may have 7 been subor dinated to any other mortgag e as the Unit ed B ank mortg ag es to which t h e E me r a ld mortga g es had be en subordinate d wer e discha rg ed. We, however , are not making a ny deter mination o n that point which
c ou ld i nv olv e int

ri c a te pr inc ipl e s o f N e w Je rs e y law. Se e Ea st Rutherford Sav. L oan & Bldg. A ss’n v. Neblo, 139 A. 172 (N.J . Ch. 1927).
6 on ly outst and ingmor

tg a g e s o n th e pr op e rt ie s. Ina smu c h a s E me ra ld 6 Trust’s mortg ag es re mained outstanding , Hoffma n and Wolff enter ed into an indemnity

ag ree ment with Reckson’s title insurance company fo r t he NJ pr op e rt ie s p ro mis ingto i nd e mni fy it s ho uld Em e ra ld T ru st make a ny claims on the NJ properties by rea son of the liens cr eate d by the mortg ag es that Toms assig ned to it. On Dec ember 31, 1999, when Emera ld Trust’s notes sec ured by the NJ properties came due, none of the def endants nor a

ny one else paid the notes, de faults that ca used Emera ld Trust to file this action on April 25, 2002, to rec over on the notes and to for eclose its subordinated mortg ag es on the NJ pr op e rt ie s. 7
Subsequently , Emera ld Trust moved for summar y judgme nt seekinga judg ment of for eclosure but on Aug ust 30, 2004, the district court de nied Emera ld Trust’s motion and on October 29, 2004, the court a lso denied a motion Emera ld Trust filed see king
rec onsideration of the August 30, 2004 order. The court ther eaf ter conducte d a benc h trial on the merits of the c ontroversy in J anuar y 2005. Prior to and duringthe trial the de fenda nts did not raise any issue reg ardingthe cour

t’s subject matter jur isdiction which, as we have no te d, Em e ra ld T ru st p re dic a te d o n d ive rs ity of c iti zen sh ip betwee n Emera ld Trust on one hand a nd the def

endants on the othe r. The de fenda

nts, however , did raise a

n issue reg ardingdiversity of citizenship i n post-trial submissions . To resolve the jurisdictional iss ue the dis tr ic t c ourt

dir e c te d th e pa

rt ie s to su bmi t a ff ida vit s explaining their c itiz enship following which it hear d oral a rgument reg ardingthe par

ties’ citizenship and the court’ s diversity jurisdiction. At the or a l argume nt t

he de fe nd ants re qu e ste d a n o pp or tun ity to eng ag e in furthe r discover y on the jurisdictional issue but the court reje cted that r equest, thoug h it did permit the parties to submit furtherThis conclusion was dire ctly contra ry to a dictum in Gener al 8 Heat & Power Co. v. Diversifie d Mortg ag e I nvestors, 552 F.2d 556, 557 n.1 (3d C ir. 1977), i n which in a case invol ving a business trust we said, without lim iting the ty

p e of trust to which w e we re r efe rring , that “the citizenship of a trust is ge nera lly that of the trustee .”
A c ourt ’s a c c e pti nga pa

rt y ’s re pr e se ntatio n as to i ts c iti zen sh ip 9 mig ht b e pr ob le matic a l a s a pa rt y by a fa lse c on c e ssi on

se e min g ly

c ou ld
c r e a t e s u b j e c tm a t t e r j ur i s d i c t i o n b y c o n s e n t , s o m e th i n g i t

c an n o td o

. In this case, howe ver, w e ar e satisfied that the conc ession was c orre ct as we can disc ern nothingin the rec ord sug g esting that any defe ndant could be a citizen of the B ritish Virg in I sla n d s or wa s a citizen any wher e other tha n in the Un ite d St a te s.
7 briefingon the issue. Ultimately

the cour t found that Emera ld Trust was an
un inc or po rate d b us ine ss t

ru st a nd it c on c lud e d th a t th e law a pp lie d in this circuit direc ts a court to look to the citizenship of the trust’s benef iciarie s when de termining the citizenship of such a trust. As we 8

a lr e a dy have ind ic a te d, the c ourt fo un d th a t E me ra ld T ru st’ s so le benef iciary was Emer ald L td., a cor

poration incorpor ated in the B ri tis h V ir g in I sla

nd s w he re it a lso ha d it s p ri nc ipa l pl a c e of bu sin e ss, and thus Emera ld Trust was a c itiz en of the Br itish Virgin I slands for jurisdictional purposes. I t is int ere sting that this finding was inconsistent with Emerald Trust’s c omplaint in thi s case as it asserte d in the complaint that it was a c itiz en of F lorida. Inasmuch a s de fe nd ants c on c e de d th a t th e y we re no t c iti zen s o f t

he B ri tis h V ir g in I slands and undoubtedly

wer e citizens of states within the United State s, the c ourt

c on c lud e d th a t it

did have div e rs ity

of c iti zen sh ip subject matter jur isdiction. 9

After deter mining that it had jurisdiction the district court
rea ched the merits of the c ase w ith respec t to which it concluded:

At its c or e , th is c a se c on c e rn s tw o p art ne rs ’ a tte mpt to dispose of sec ured pr operties without the conse nt of their for mer pa rtner de spite their forme r par tner’s
se c ur e d inte re sts in t

he pr op e rt ie s. Un a

ble to o bta in T o m s ’ c o n s e n tt o r e l e a s e h i s m o rt g a g e s o nth e [N J] pr op e rt ie s, Wolf

f a nd Ho ff man d e c ide d to take the ir
c ha nc e s th a t un de r t

he re le va nt a g re e me nts ( s p e c if ic a ll y , th e [m o rtg a g e mo d if ic a ti o na g r e e me n ts ])8 they would owe nothingto Toms despite the proper ties’ sale. The y

there fore ag ree d to indemnify the title insurer on the tra nsaction. Hoff

man and W o l ff , h o we v er , m i s ca l cu l at ed

. Un d er th e [ m o rt gage mod if ic a tio n a g re e me nts ] Eme ra ld w a s e nti tle d to
rec over on its notes at lea st its s hare of the $2,659,994.65 in net proce eds fr om the sale of the pr op e rt ie s. Ho we ve r, De fe nd ants havin g br e a c he d th is and other obligations under the [mortga g e modification
a g re e me nts ], th e [mor

tg a g e mod if

ic a tio n a g re e me nts ]
c e a se d to pla c e any

lim itatio n o n E me ra ld’ s r ig hts under the notes and mortg ag es af ter De cembe r 1999. Nor did the Subordination Ag ree ments or Second Mortg ag e Parity

Ag ree ments continue to place any limit ations on Emera ld’s rig hts under the notes a nd mortg ag es once [Unit ed B ank], Hoffman, a nd Wolff
re le a se d th e ir

mor tg a g e s. Thus , w he n th e no te s c ame du e in D e c e mbe r 1 99 9 a

nd no thi ngwa s p a id, Em e ra ld beca me entitled to rec over on the terms stated on the fac es of its notes and mortg ag es.
Emera ld I nvestors Trust v. Ga unt Parsippany

Partners, N o. 02-CV1939, 2005 WL1705779, at *6 (D.N .J . J uly 21, 2005).

Acc ording ly , the district court found that Emerald Tr ust was due $583,333.33 on ea ch note, plus 12% in pre judgme nt interest, a rate that the par

ties had fixed, calculations that y ielded a total jud g me nt o f $ 1, 19 3, 67 8. 52 . T his c a lc ulatio n d id n ot a llo w E me ra ld all of the intere st it sought to rec over. O f cour se, if def endants did not pay this sum t here would be a sa le of the N J proper ties to satisfy

the judgme nt. Defe ndants then appe aled f rom the orde r ente ring judgme nt and Emera ld Trust cross-a ppeale d from the or der de nying its mot ion for summary

judgme nt, the order

denying r econside ration of the de nia l of

that mo tio n, and

the jud g me nt a

nd or de r p art ia lly denying its cla im for intere st.

I I I . J URI SDI CTI ON AND STANDARD OF REVI EW

Th e dis tr ic t c ourt

a tte mpt e d to e xer c ise div e rs ity of c iti zen sh ip jurisdiction pursuant to 28 U.S.C. § 1332(a) and w e have jurisdiction pursuant to 28 U.S.C. § 1291. The par ties raise nume rous issues onWe addre ss cer tain of the de fenda

nts’ ar guments at this point 10 be c a us e the ir dis po sit ion wi ll n ot b e c on tr oll ingand it i s c onve nie nt t o consi der the m at the outset of the discussion sec tion of the opinion. Def endants a rgue: (1) Emera ld Trust is a traditional express trust and
no t, as the dis tr ic t court he ld, an unin c or po rate d b us ine ss t

ru st, and , th

us , we should look to the citizenship of its trustee who it a sserts is a citizen of F lo ri d a ( Ap p ar en t l y

E m er al d T ru s twh i ch al l ege d

i nth e c o mp l aint

that it w a s a c iti zen of F lor ida or ig ina lly a lso be lie ve d that c iti zen sh ip o f i ts trustee controlled.); (2) even if Emera ld Trust is a business trust and we sh ou ld l oo k to the c iti zen sh ip o f i ts b e ne fi c iary , E me ra ld Ltd. , to
9 this appeal a

nd cross-a

ppeal whic h we would r eview unde r var ious standards if w e re ache d them. But our disposition of this appeal beg ins and ends with an e x amination of whe ther the district c ourt had subject matter jur isdiction. Thus, the principle that a de termination of “[w]hether the district court possesse d subject matter jur isdiction is an i s s u e o f l aww h i c hth i s c o urtr e v i e w s d e n o v o ” g o v e r n s o ur r e v i e w

. In re Phar -Mor, Inc. L itig., 172 F .3d 270, 273 (3d Cir. 1999). I f we deter mined that the district court did not have subject matter jur isd ic tio n w e wo uld

dir e c t it to d ism iss the c a se e ve n at th is l a te stag e of the litigation. See Gr eat S. Fir e Proof Hote l Co. v. J ones, 177 U.S. 449, 453-54, 20 S.Ct. 690, 691-92 (1900).

I V. DI SCUS SI ON

As we have e xpla ine d, the dis tr ic t c ourt de c ide d th a t it

c ou ld
e xer c ise div e rs ity

of c iti zen sh ip j ur isd ic tio n b e c a us e : ( 1) Em e ra ld Trust is an unincorpor ated business trust; (2) a court de termines the citizenship of an unincorporated business trust by deter mining the citizenship of its benef

iciary or bene ficiar ies; (3) the sole be nefic iary is E me ra ld Ltd. , a

c or po ra tio n in c or po rate d in

the B ri tis h V ir g in I slands and havingits principal place of business there ; and (4) none of the de fenda

nts are c itiz ens of the B ritish Virg in I slands. The c ourt did not consider the c itiz enship of Micha el Houlis, a citizen of Florida , the trustee of

Emera ld Trust, in making this deter mination. This appea l require s us to determine whe ther, whe n asce rtainingthe
c iti zen sh ip o f a

tr us t f or div e rs ity of c iti zen sh ip p ur

po se s, we sh ou ld look to the citiz enship of the trust’s be nefic iary , its trustee, or both, or
use an a lternative me thod to determine c itiz enship based on the functions of the truste e and be nefic iary with respec t to manag ement of the tr us t in the pa rt ic ula r c a se

. I t is

10deter mine Emera ld Trust’s citizenship, Emera ld L td.’s principal plac e of business is in New York. Thus, Eme rald Tr ust is a citizen of

New Y ork and there would not be complete diversity of citizenship b etwee n Emer ald Trust and the defe ndants; and (3) Emera ld Trust, though the pla int if f, is no t the re a l pa

rt y to t he c on tr ov e rs y

and thu s it s c iti zen sh ip is n ot t he de te rm inativ e fa c tor

in a div e rs ity of c iti zen sh ip a

na ly sis

. Our re sear ch, howe ver, ha s not led us to conclude tha t the ty pe of trust ca lls for a dif

ference in treatment whe n deter mining a tr

ust’s citizenship for diversity

of citizenship jurisdictional purposes. The distinction between a

traditional express trust and a busine ss trust is t hat “[i] n what ar e ca lled ‘business trusts’ the obje ct is not to hold and
conser ve par ticular property , with incidental power s, as in the traditional ty pe of trusts, but to provide a medium for the c onduct of a business a nd sharing its g ains.” Morrissey v. Comm’r of Interna l Rev., 296 U.S. 344, 356-57, 56 S.Ct. 289, 294-95 (1935). The case s defe ndants cite do not support its contention calling for differ ential t reatment based on the ty pe of trust. Moreove r, Emer ald Trust may be, as the district court believe d,
a bu sin e ss tr

us t for the tr

us t ag re e me nt sta

te s: “T he purp os e of

the Tr us t shall be to make, ho l d , liquidate, and distribute investments of any lawful k i n d o r char acte r in trust for a nd for the be nefit of Gr antor, without reg ard to a

ny rule of pr udent i nvestment by

fiduciar ies.” App. at 319. The r efe renc e to nonapplica bility of lim itations on fiduciaries sug g ests that Emera ld Trust may not be a traditional express trust. But
we re a c h n o c on c lus ion

on that po int

. Def endants’ se cond ar g ument is also without merit as the re cord
no w a pp e ars . T he distri ct court de te rm ine d th a t th e B ri tis h V ir g in I sla nd s w a s E me ra ld L td.’ s p ri nc ipa l pl a c e of bu sin e ss, ba sin g its deter mination on the affida

vit of R. J ohn Usher, the direc tor of the
c o m p a ny , V a l d e x I

nv e stm e nts L td. , th a t c a

us e d th e fo rm a tio n o f E me ra ld Tr us t. U sh e r s tate d th a t th e Em e ra ld Ltd. ’s on ly of fi c e wa s in th e B ri tis h Vi rg in I sla

nd s and a ll o f i ts d ir e c tor s a lw ay s h ave be e n in the B ri tis h Virg i n I slands. Whil e def endants c halleng e this conclusion, they have not demonstrated that the c orporation’s principal pl ace of business was in New Yor

k.

De fe nd ants ’ thi rd argume nt is a lso un pe rs ua siv e be c a

us e defe ndants ad v ance it in an attempt to invoke a “r eal pa rty to the
c on tr ov e rs y ” te st that th e Sup re me Cou rt re je c te d in Card e n v . A rk oma Associates, 494 U.S. 185, 187 n.1, 110 S.Ct

. 1015, 1017 n.1 (1990), a s the Court observe d in that case that not a si ng le case cited by the dissent
10su pp or te d th e a sse rt ion

that the “ re a l pa

rt y to t he c on tr ov e rs y ” te st i s r e l e v an tt o th e c i t i z e n s h i p f o r d i v e r s i ty p ur

p o s e s o f anart i f i c i a l e n t i ty. Of c ou rs e , a s w e e xpla in b e low , th e te st w ithre sp e c t to the c iti zen sh ip of an e ntity

is disti nct from the te st applie d wi t h re s pect to the citizenship of trustees if they sue in their own names. When trustee s sue in t h ei r o wn names it is critica l that they be the r eal pa

rties to the
c o n tr o v e r s y.
De fe nd ants a lso make the argume nt r e late d to the ir re a l pa rt y in int e re st c on te nti on that Em e ra ld Tr us t c ou ld n ot b ri ngthi s a c tio n in its
ow n n ame a s “ a

tr a dit ion a l e xpre ss t

ru st is n ot r e c og nize d a s a se pa rate entity w it hc a p a c it y to s u e o r

b e s u e d

in it s o w nn ame.” Appellants/cross- appellee s’ br. at 24. We r ejec t this argument. Under Fe dera l Rule of Civil Procedur e 17(a ) “[e]very action shal l b e prosec uted in t he name of the re a l pa

rt y in int e re st. ” Ce rt a inl y , in a smu c h a s T oms m a d e h i s a s s i g n m e n t s o f h i s n o t e s an d m o rt g a g e s t o E m e r a l d T r u s t , in ordinary understanding Emera ld T rust would be reg arde d as the real pa rt y in i nte re st as it ho lds the no te s a nd mor tg a g e s th a t it

se e ks to
e nf or c e in t his a c tio n. In s ho rt , w e c ann ot u nd e rs tand why if Em e ra ld Trust has the c apac ity to hold the not es and mortga g es it should not have the ca pacity to enforc e them.

In this re g ard we po int out that a de te rm inatio n th a t a

tr us t it se lf is the re a l par

ty in int e re st wit

h th e c a pa c ity to s ue or be su e d c an e xist side by side with a rule r equiring t h at the citizenship of the trustee or benef iciary or both deter

mines the trust’s citizenship for diversity of citizenship purposes. On this point , howeve r, as we sha ll ex plain later,
we a re not pre cluding defe ndants from ma k i ng an alter eg o argument wi thre s p ec tt o E m er al d T ru s to nth e r em an d

th atwe ar e o rd er i n g. See infra note 21. While it i s true that Rule 17(a) indicates that a trustee of an e xpre ss t

ru st “ may ” su e in i ts o wn name wi tho ut j oin ingthe tr us t
as a plaintiff, the rule does not requir e that he do so a nd does not provide that an express trust ca

nnot sue in its own name.

11 surprising that at this date af ter so many

y ear s of litigation involving trusts that the method for de termination of a tr ust’s citiz enship rathe r than beingsettled is a subject of great differ ence s of opinion. 1. The Supreme Court: Navar ro Saving s and Carde n.

In 1978, we looked to the c itiz enship of both the trustee s and the inv e sto rs (b e ne fi c iari e s) in d e te rm ini ngthe c iti zen sh ip o f a tr us t for diver sity

purposes. Riverside Me m’l Mausoleum, Inc. v. UMETActually our holding in Riverside w as not completely clea r as 11 there we we re f

ocusingon the ef

fec t on a citizenship det er m i n at ion of the citizenship of the investors in an ac tion a gai n s t a trust. R iverside, 58 1 F .2 d at 65. But we are c on fi de nt t hat in Riv e rs ide we int e nd e d to hold that a cour

t should examine the citizenship of the trustees a nd the benef iciarie s to determine the c itiz enship of the trust as w e complete d our discussion on the juris d i cti onal point by indicating that “we
c on c lud e , a s di d th e dis tr ic t c ourt , th a t w e mus t lo ok to t he c iti zen sh ip of the [tr us t] inv e sto rs and no t sim

ply that of the tr

us te e s. ” I d. (e mph a sis added) . Thoug h we a cknowledg e that in rea chingour conc lusion we are relying on our

use of the w ord “ s i m p l y ” in Riverside a nd that we there fore are placingour re liance on a n arguable point, still we think our
rea ding of

Riverside is corr ect, though we acknow ledg e that ther e may be a c ontrary view. See Navarr o Sav. Ass’n v. L ee, 446 U .S. 458, 466
n. 1, 10 0 S. Ct. 17 79 , 17 84 n. 1 (1 98 0) (B la c kmu n, J., dis se nti ng ). In th is
re g ard we po int out that on ly 15 months be fo re we de c ide d Ri ve rs ide , in Gene ral He at & Power Co. v. Diversifie d Mortg ag e Investors, 552 F .2d 556, 557 n.1 (3d Cir. 1977), in a dict um in a case involving, as the district court held was true of E mera ld Trust, a business trust, we indicated that “ the citizenship of a trust is ge nera lly

that of the trustee .” Thus , it wa s p e rf e c tly log ic a l in

Riv e rs ide to u se the wo rd “ sim ply ” to harmonize Riverside with Gene ral He at as we presum e t hat when w e decide d Riverside we wer e aw are of Ge nera l Heat. B ut even if our
rea ding of

Riverside is not corre ct and in Riverside w e intended to sa y that only the citizenship of the investors matt er ed, and thereby jettison the Gene ral He at dictum, we would r eac h the re sult we do in this case.

W e e mp h a s i z e th a ti nR i v e r s i d e w e h a d n o n e e d t o u s e “ s i mp l y” if the citizenship of t he trustee s was not to be examined. Rather, w e could have omitted “simpl y ” an d said “look to the citizenship of the [t rust] i nvestors and n o t t h at of the truste es.” B ut if we do not look at bo th t he n “ sim ply” ha s n o me anin g . We be lie ve that the dis tr ic t court in Riverside spoke only

of t he bene ficiar ies as diver sity jurisdiction in that
case turned on their c itiz enship. In t h i s re gard w e point out that the district court decided Ri verside le ss than four months afte r we decide d Ge ne ra l H e a t, s e e Riv e rs ide Me m’ l Ma us ol eum , I nc . v . U ME T T ru st, 434 F. Supp. 58 (E.D. Pa. 1977), and we doubt that, dictum or not, the dis tr ic t c ourt

wo uld have de c lin e d to f

oll owGe ne ra l H e a t. O n a pp e a l,
we a g ree d wi t h the district court with re spect to looking to the benef iciarie s but it was at least i mplicit in our opi nion that the trustees should be consider ed as w ell.

12 Trust, 581 F.2d 62, 65 ( 3d Cir. 1978). But since Riverside, the 1113 Supreme Court has de cided Na varr o Savings A ssociation v. L ee, 446 U. S. 4 58 , 1 00 S.Ct . 1 77 9 ( 19 80 ), and Card e n v . A rk oma

As so c iate s, 494 U.S. 185, 110 S.C t. 1015 (1990), which r equire us to reconside r Riv e rs ide a s w e have no t c on sid e re d th e pla c e of a tr us t’ s c iti zen sh ip sin c e the se Sup re me Court de c isi on s.

In Nava rro, e ight individual trustees of a business trust, suing in their own name s, broug ht an ac tion for bre ach of contra ct. 446 U.S. at 459-60, 100 S.Ct. at 1781. The plaintiffs pre mised fede ral jurisdiction on diversity

of citizenship, an alleg ation that the defe ndants disputed, as they claimed that the tr

ust benefic iaries, a

nd not the trustees, we re the rea l parties to the contr oversy and the
c iti zen sh ip o f t

he be ne fi c iari e s f

ro m who m th e y

we re no t di ve rs e should control. Thus, the question befor e the Court wa s whether “trustee s of a business trust may invoke the diver sity

jurisdiction of the fe dera l courts on the basis of the ir own citizenship, rather tha n that of the trust’s be nefic ial share holders.” I d. at 458, 100 S.Ct. at 1780- 81.

The Court looked at the role of the trustees a nd the share holders with re spect to the trust. Unde r the trust, the trustee s had exclusive authority

over the proper

ty . I d. at 459, 100 S.Ct. at 1781. Moreove r, the de clar ation of trust “a uthorized the trustees to take leg al title to trust assets, to invest thos e asse ts for the be nefit of the share holders, and to sue and be sue d in their ca pacity as trustee s.” I d. at 464, 100 S.Ct. at 1784. I n contra st, the share holders did not have such authority . I d.

The Court found that “ a trustee is a rea l party to the controve rsy

for pur poses of diver sity

jurisdiction when he possesse s cer tain customary

power s to hold, manag e, and dispose of assets for the bene fit of others,” and “[t]he trustees in this case have such power s.” I d. at 464, 100 S.Ct. at 1783-84. The Court conc luded that “trustee s who meet this standard [may ] sue in their own rig ht, without reg ard to the c itiz enship of the trust bene ficiar ies.” I d. at 465-66, 100 S.Ct . at 1784.
Ten y ear s later in Carde n, the plaintiff, a limited par tnership, broug ht a complaint conc erninga contr act dispute in a district c ourt relying on dive rsity

of citizenship for fe dera l jurisdiction. 494 U.S. at 186, 110 S.Ct . at 1016. The Court re jected the limit ed par

tnership’s attempt to ext end a c orporation’s artificial- person tre atment to the partne rship for the pur

poses of de termining citizenship, i d. at 189, 110We express the tests in the singula r with r espec t to the tr

ustee 12

and be ne fi c ia

ry becau se we a

re tr e a tin g thi s c a se a s w e fi nd it w ith
r e s p e c t t o E m e r a l d

T r u s t , i

. e

. , o n e tr

u s t e e an d

o n e b e n e f

i c i ar y. Ob vio us ly

if the re are mor e tr

us te e s o r b e ne fi c iari e s th e n the t est i s a pp lie d to a ll the tr

us te e s and

be ne fi c iari e s.
14 S.Ct . at 10 18 , a

nd fu rt he r r e je c te d th e lim ite d p art

ne rs hip ’s a tte mpt

to have the Court determine c itiz enship of the pa rtnership “ solely

by
re fe re nc e to t

he c iti zen sh ip o f i ts g e ne ra l pa rt ne rs , w ith out r e g ard

to the citizenship of its l imited partners.” I d. at 192, 110 S.Ct at 1019. T h e C o urtc o n c l u d e d

th a ti na s u i tb y o r a g a i n s tanart i f

i c i a l e n t i ty, diversity of citizenship “depends on the citizenship of ‘all the members.’ ” I d. at 195, 110 S.Ct. at 1021 (citation omitt ed). Car den distinguished Navarr o, rema rkingthat “Navarr o had nothing to do wi th t he c iti zen sh ip o f t

he ‘t ru st, ’ s inc e it w a s a

su it b y the tr us te e s in their own names.” I d. at 192-93, 110 S.Ct. at 1020. Thus, in light of Na

varr o and Carde n, the Supreme Court ha s established the f

ollowing r

ules. In a suit by

or ag ainst the individual trustees of a

trust, where the trustees “ possess[ ] cer tain customary power s to hold, manag e and dispose of assets,” the ir citizenship, and not that of the trust bene ficiar ies, is controlling f or diversity

of citizenship purposes. Navar ro, 446 U.S. at 464-66, 100 S.Ct. at 1783- 84 . T he ru le , h ow e ve r, is d if fe re nt whe n a

n a rt if ic ia l e nti ty

su e s o r i s su e d in its ow n n ame . In th a t si tuatio n, be c a us e art if ic ia l e nti tie s, unlike corpor ations, are not “citizens” under 28 U .S.C. § 1332, diversity jurisdiction by

or ag ainst an ar

tificial entity

depends on the
c iti zen sh ip o f “ a ll the me mbe rs .” Card e n, 49 4 U .S. a t 19 5, 11 0 S. Ct. at 1021.

2. Th e fo ur

a lte rn a tiv e s.

In the light of

Nava rro a nd Carden a

nd other c ases that we have e x amined we conclude that a cour t might deter

mine the citizenship of a trust by

selec ting among f

our possible tests: (a) look to the citizenship of the trustee only ; (b) look to the citizenship of the benef iciary only ; (c) look to the c itiz enship of either the trustee or

the benef iciary dependingon who is in control of the trust in the particula r ca se; or (d) look to the citiz enship of both the trustee and th e b e n e f i c i ar y. 12
(a) look to the citiz enship of the trusteeI n Hi cklin and Johnson t rusts were amongthe owner s of the 13 entities involved, either a limit ed liability company in Hicklin, 439 F.3d at 347, or a

limit ed par

tnership in J ohnson, 437 F.3d at 896-97.

15 Nava rro, thoug h involving an a ction that the trustees themselves brought, could be under stood as sug g esting that a cour t should look to t he citizenship of the trustee in de termining the citizenship of a trust without reg ard to the c itiz enship of the benef iciary , so long a s the trustee “ possesses ce rtain customar y power s to hold, manag e, and dispose of assets for the bene fit of others.” N avar

ro, 446 U.S. at 464, 100 S.Ct. at 1783. I n the
c ir c ums tanc e s, it i s n ot s ur pr isi ngtha

t so me c ourt s o f a

pp e a ls, wi th citation to Navar

ro, have held that the “c itiz enship of a tr ust is that of the tr us te e .” Hi c kli n E ng ’g , L .C. v. B art e ll, 43 9 F .3 d 3 46 , 3 48 (7 th Cir. 2006); see a lso J ohnson v. Columbi a Props. Anchor ag e, L P, 437 F .3 d 8 94 , 8 99 (9 th C ir . 2 00 6) (“ A tru st h a s th e c iti zen sh ip o f i ts trustee or trustees.” ); Indiana Ga s Co. v. Home Ins. Co., 141 F.3d 314, 318 (7th Cir. 1998). Indeed, be fore Nava rro, in a dic tum in Genera l Heat & Power

Co. v. Diversified Mortg ag e Investors, 552 F .2d 556, 55 7 n .1 (3 d Ci r. 19 77 ), we sa id “ the c iti zen sh ip o f a tr us t is g e ne ra lly that of the trustee .”

We are reluc tant, howeve r, to ag ree with those courts, or f or that matter re g ard our selves as c onfined by Gene ral He at, as we do not join in thos e cour

ts’ rea ding of

Nava rro in cr eatingthis bright-line rule, a nd surely their opinions are inconsistent with Ri verside. Moreove r, we decide d Gene ral He at bef ore River side and be fore the Supreme Court dec ided Nava rro a nd Carden. N avar

ro simply does not say that the citizenship of a trustee de termines the c itiz enship of a trust. After a ll, as the Court emphasized in Carden, in Navarr o the trustees we re suingin their own name s and, as we alre ady have
rec og nized, “[t ]he question before the Court . . . was whe ther ‘tr ustees of a business trust may

invoke the diver sity

jurisdiction of the fede ral courts on the ba sis of their own citizenship, rather than that of the trust’s benef

icial share holders.’” Trent Rea lty Assocs. v. F irst Fed. Sav. & L oan Ass’n of

Philadelphia, 657 F.2d 29, 32 ( 3d Cir. 1981) (quoting Nava

rro, 446 U.S. at 458, 100 S.Ct. at 1780-81).

In c on tr a st t o N ava

rr o, in t he a bo ve c a se s, a s w e ll a s in

thi s case , the question is what is the citizenship of an entity when the
e nti ty its e lf is a pa rt y to t he a c tio n. Na

va rr o s imp ly

do e s n ot a dd

re ss 13 that question as Carde n made c lear when it said that “N avar

ro had nothing to do with the citizenship of the ‘trust,’ since it was a suit byAc tua lly Rile y argua bly may no t be inc on sis te nt wit h H ic kli n 14

and John so n a s Ri le y

inv olv e d a

bu sin e ss t

ru st a nd the tr us ts i nv olv e d in Hi c kli n an d J ohns on

a pp e ar t o h ave be e n tr a dit ion a l e xpre ss t ru sts

. Thoug h we do not distinguish betwe en bus i n ess t rusts and traditional express trusts when deter mining citizenship, an argument can be made that there should be such a dist i n ct i o n. Yet we note that it might be tho ug ht that ina smu c h a s N ava rr o invo lve d tr

us te e s o f a

bu sin e ss t

ru st if th e r e is a d is ti n c ti o n b e tw e e n e xp r e s s an d b u s in e s s tr usts for citizenship purposes the results of the thre e c as es woul d have be en re ve rs e d. Th is a

no ma ly on ly c an r e inf

or c e our unwi ll ingne ss t o dis tin g uis h b e tw e e n b us ine ss t ru sts and e xpre ss t ru sts fo r c it ize ns hip purp os e s.
16 the trustees in their own names.” Carden, 494 U .S. at 192-93, 110 S.Ct at 1020. We are not at liberty to disreg ard this observation.

Ad dit ion a lly , th e tr

us te e -o nly

ru le in a n a c tio n b y

the tr us t itself seems to contra dict Carden be cause that case held that an

“ art if ic ia l e nti ty ,” a

te rm that w e wi ll tre a t a s in c lud inga tr us t, s ho uld assume the c itiz enship of all of its “membe rs.” I d. at 195, 110 S.Ct. at 10 26 . T he tr

us te e -o nly

ru le may c on tr ave ne Card e n b e c a

us e it disreg ards the c itiz enship of the trust’s be nefic iary who may be in a position si milar to that of the limited partner s in a limit ed par tnership. (b) look to the citizenship of the bene ficiar y The Court of Appe als for the Eleventh Circuit took the differ ent appr oach that Carden made clea r that the c itiz enship of the “member s,” who it believe d wer e only the bene ficiar ies, deter

mines the citizenship of a business trust. See Riley v. Merr ill L y

nch, Pierc e, F e nn e r & Smith, Inc . 2 92 F .3 d 1 33 4, 13 38 (1 1th Cir . 2 00 2)

. Th is

14 alternative, though not inconsistent with Carde n unless, of cour se, a trustee is a me mber of the trust, is not t he best rule beca use in many
case s the bene ficiar

y -only rule may lead to an untowa

rd re sult, as for example, would be the situation if a trust in which the be nefic iary has d e l e g a t e d a l l c o n tr o l o f

th e tr u s tt o th e tr

u s t e e b r i n g s th e a c t i o n

. It
se e ms t o u s th a t r e lia

nc e on ly on the c iti zen sh ip o f t

he be ne fi c iary

in these c ircumstance s would be inconsistent with the rea sons justi fying the exist ence of diversity

of citizenship jurisdiction because in that situation it is logica l to think t hat if the trust had a local adva

ntag e or fac ed a loc al pre

judice it would be on the ba sis of the identification ofI t lo ngha s b e e n r e c og nize d that th e ne e d f or bo th t he re a lity 15 and the pe rc ep t i on of impartial administration of justice is the re ason justify ing the exis tence of diversity of citizenship j urisdiction. See B ank of the U.S. v. De veaux, 9 U.S. (5 Cranch) 61, 87, 3 L . Ed. 38 (1809).

In f a c t, i na smu c h, a s th e pa

rt ie s c ann ot by con se nt i nv e st a 16 fe de ra l c ourt

wi th s ub je c t matte r jur isd ic tio n, the Wri g ht & Mil le r r ule in a particular case in which the court’s suspicions we re a roused mig ht require the same ty

pe of pr ocess in a case in which no par ty questioned the cour t’s subject matter jur isdiction.
17 th e tr u s t e e n o tth e b e n e f

i c i ar y. 15
(c) look to the citiz enship of either the trustee or the bene ficiar

y dependingon who is in control of the trust in the pa rt ic ula r c a se

T h e th i r d a l t e r n a t i v e i s a

l e s s d e f i n i t e , c a s e
- b y - c a s e r

u l e

. In this reg ard Wrig ht & Miller in their w ell known treatise sugg est that “[t] he citizenship of an ac tive trustee, r ather than that of the be ne fi c iari e s o f t

he g ra nto r, is d e c isi ve , b ut a g a in a dif fe re nt r e su lt i s rea ched w ith reg ard to a

passive trustee who has only a nake d leg al title to the property .” 13B Charles Ala n Wright & Arthur R. Miller, F e de ra l Pr a c tic e and

Pr oc e dure § 3 60 6 ( 2d

e d. 19 84 ) ( fo otn ote omitted). The proble m with this rule is that it places a g reat and
unnece ssary

burden on both the litig ants and the c ourts themselves. The Wrig ht & Miller r

ule would re quire that in ea ch ca se whe re a trust is a party

and the plaintiff r elies on the c ourt’s diversity of citizenship j urisdiction, the court would have to monitor jurisdictional discovery to the same e x tent that it monit ors any discovery

in the case , and make finding s with respec t to the roles of the truste e and benef iciary in the aff airs of the trust, all in a case that might be dis mis se d, or , if

re mov e d f

ro m a state c ourt , r e mand e d to it. 16

Con sid e ri ngthe burd e ns c re a te d b y a c a se -b y -c a se a

pp ro a c h, it is n ot s ur pr isi ngthat so me c ourt s o f a pp e a ls h ave “ re sis te d e ff

or ts t o base de terminations of citizenship on functional consider ations.” May Dep’ t Stores Co. v. Fed. Ins. Co., 305 F.3d 597, 599 (7th Cir. 2002);
see a lso Kuntz v. L amar

Corp., 385 F.3d 1177, 1183 ( 9th Cir. 2004) (“[J ]urisdi ctional rules should be a s simple as possible, so that the tim e of lit ig ants and

jud g e s is no t w a ste d d e c idi ngwh e re a c a se should be broug ht and so that fully litigated c ases a

re not set at18 na ug ht. ” ) ( qu oti ngCot e v. Wad e l, 7 96 F .2 d 9 81 , 9 83 (7 th C ir . 1 98 6) ); Sa a de h v . F aro uk i, 1 07 F .3 d 5 2, 57 (D .C. Cir . 1 99 7) ; SH R L td. P’ sh ip
v

. B r a un , 8 8 8 F

. 2 d

4 5 5 , 4 5 8

- 5 9 ( 6 th

Ci r

. 1 9 8 9 )

. T h o u g hw e r e c o g n iz e that, a s th is c a se de mon str a te s, re je c tio n o f t

he Wri g ht & Mil le r r

ule will not ensure that a dive rsity of citizenship determination will not
re qu ir e dis c ov e ry

and a he ari ng , w e ne ve rt

he le ss w ou ld b e re luc tant t o adopt a c ase- by -ca se test and ther eby ag g ravate the burde n on the litigants and the courts that we have ide ntified.

(d) look to the citizenship of both the tr u s t e e an d th e b e n e f i c i ar y
The fina l alternative is to look t o the citizenship of both the tr u s te e an d th e b e n e f ic ia r y in a ll c a s e s in

w h ic ha tr u s t i s a p arty

. We consider that approa ch to be be st for seve ral re asons. Fir st and fo re mos t, t

his ru le do e s n ot c on tr a dic t th e Sup re me Court pr e c e de nt i n either N avar

ro and Car den, which, of

course , we c annot do. Nava rro is not im plicated be cause it dealt with a situation in which the trustees broug ht the action in their own na mes, a situation differ ent from that here in which the trust is the plaintiff. More over, the dual trusteebenef iciary rule doe s not offend Car den, a c ase w e discuss at g reater leng th below, bec ause the dual appr oach a sks a cour t to look at the citizenship of all of the “membe rs,” at least the bene ficiar y of the

“ art if ic ia l e nti ty ,” and

me re ly dir e c ts a c ourt to l oo k a t th e c iti zen sh ip of the trustee as we ll.

The c oncer

n with respec t to Carden is raise d by treating that
case as applying to a

trust. I n this reg ard w e point out that, so far a s we are awa

re , h ist or ic a lly

the te rm “ me mbe rs ” ha s n ot b e e n a pp lie d in the context of a trust. Neve rtheless, a pplying Ca

rden to a trust, as we shall expl ain below we do not see why a trust’s “me mbers” inc lude
on ly its be ne fi c iary

and no t it s tr us te e . O f c ours e , if

a tr us te e is a
me mbe r o f a

tr us t th e n w he n Ca

rd e n is a pp lie d to a

tr us t, a c ourt in deter mining its citiz enship must consider the trustee ’s citizenship.

A s e c on d r e a so n f

or a do pti ngthe du a l tr

us te e -b e ne fi c iary

ru le is that it obvi ates the possibility of an illog ical outcome unde r a trustee or benef iciary -only

approa ch in a c ase in whic h the trustee controls the trust and the be nefic iary is merely passive, or vic e ver sa. A thir d r e a so n is that a

br ig ht- lin e ru le is p re fe ra ble to a c a se -b y -c a se functional rule as it is the most efficient rule to utili ze in determining whether a district cour

t has subject matter

jurisdiction.19 Moreove r, the dua l rule appr oach be st acc ommodates our “conc erns of

judicial economy

and of due respe ct for the principles of fede ralism” whe n “matter s of diversity jurisdiction are implicate d.” CarlsbergRes. Corp. v. Cambria Sav. & L oan Ass’n, 554 F .2d 1254, 1256 (3d Cir. 1977). In Carlsberg , we r ecognized that the ext ension of diversity

jurisdiction would impose additional burdens on a fede ral judicial sy stem which alre ady

strains to proce ss case s that are
ne c e ssa ri ly lod g e d w ithit. Re la xati on of div e rs ity
re qu ir e me nts , inte nti on a l or oth e rw ise , in e vit a

bly wi ll incre ase a cce ss to the fede ral c ourts by litigants now confine d to state courts, ther eby aug menting the volume of business of the f eder al tribunals. Such an
occur renc e also may

postpone or eve n fore stall the vindication of the rig hts of litigants–cr iminal and civil–who are proper ly

in the fede ral c ourts.

Ev e n mo re se ri ou s w ou ld b e the dis se rv ic e re nd e re d to the ca rdinal pre cepts of f

eder alism . . . . By

its very
natur e , th e div e rs ity

jur isd ic tio n o f t

he fe de ra l c ourt s interfe res with the a

utonomy of state tribuna ls by div e rt inglit ig a tio n, or din ari ly ha nd le d b y su c h c ourt s, to fede ral for

ums. Although the r

ule of Er ie R.R. v. Tompkins, [ 304 U.S. 64, 55 S.C t. 817 (1938)]
re qu ir ingthat st a te law b e a pp lie d in div e rs ity c a se s, operates to ameliorate the dislocative impac t of such diversion, the fa ct re mains that diversity jurisdiction preve nts the states from a djudicating and re solving important matters that they otherwise w ould handle. Since conf

lict resolution constitutes one of the c ore public functions of state g overnme nt, the exercise of div e rs ity jur isd ic tio n n e c e ssa

ri ly e nc ro a c he s, in s ome fa sh ion , o n th e a

bil ity of the state s to e ng a g e in t

his traditional ac tivity

.
I d. at 1256-57 (f

ootnote omitted); see also City of Indianapolis v. Chase Nat’l Ba

nk of N.Y., 314 U .S. 63, 76, 62 S.C t. 15, 20 (1941) (“ Th e do min ant n ote in t

he su c c e ssi ve e na c tme nts of Con g re ss relating to diver sity

jurisdiction is one of jealous re striction, of avoiding offe nse to state sensitiveness, a nd of re lieving the fede ral
c ourt s o f t

he ov e rwhe lmi ngburd e n o f b us ine ss t hat in tr ins ic a lly be lon g s to the state c ourt s in or de r t o k e e p th e m f

ro m f or the irWe r ealize that in c ases dealing with a claim that a f

eder al cour

t 17 should abstain from adjudicat i n g a matter the Supreme Court ha s indicated that the district c ourts have a “virtually

unflag g ing oblig ation . . . to exercise the jurisdiction g iven them.” Col o rado River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 1246 (1976). More over, The rmtron Products, Inc. v. He rmansdorf er, 423 U.S. 336, 96 S.C t. 584 (1976), make s it clear that a di s t ri ct cour t
ma y no tr e m an d

a c a s e p r o p e r l y

r e m o v e d t o i tf r o ma s t a t e c o urtto reduc e its docket as that motivation is not a rea son statutorily authorized for a rema nd. But these case s are not instructive on t h e very differ ent ques ti o n h e r e w h ic h d e a ls w it h d e te r mi n in g w h e th e r th e c o urt ha s juris d i ct i o nra th er

th an wh et h er

i t s h o u l d ex er ci s e j uri s d i ct i o nth ati td oes have.
Obvi ously , in view of our inter nal oper ating proce dures, se e 18 Third Circuit I OP 9.1 , i f p ossible we should rea ch the r esult we do. Neve rtheless, Nav ar ro and Carde n, which the Supre me Court decide d
a ft e r R ive rs ide , h ave c omp e lle d u s to re c on sid e r t he re su lt w e re a c he d in that opini o n

. We hasten to add, howe ver, that even in the a bsence of Riverside we would rea ch the result we do a nd, in the light of N avar

ro and Carde n, would do so even if in River s i d e we intended to hold that
a cour t should look onl y

to the benef

iciary in det ermininga trust’s citizenship.
20 distinctive feder al business.”) ( internal quotation marks omitted). The comments that we ma de 30 y ear s ag o in Carlsbergwith respec t to the burd e ns on

the fe de ra l c ourt s n oware tr ue to a n e nh anc e d d e g re e a s it is a matter of

common knowledg e that ther e has be en a ma ssive incre ase in the qua

ntity of litigation in the feder al cour ts for the last 30 ye ar s , f ar o u t p a c i n g th e g r o w thi nth e s i z e o f th e f e d e r a l j u d i c i ar

y. 17

For the fore g oing r easons, a fter c onsideringNava rro a nd Card e n, we re a ff

ir m th e ru le that w e a do pte d a lmo st 3 0 y e ars a g o in Riverside that the c itiz enship of both the trustee and the be nefic iary sh ou ld c on tr ol i n d e te rm ini ngthe c iti zen sh ip o f a tr us t. 18

In rea chingour re sult we discuss Carden f urther be cause we rec og nize that that case mig ht be under stood as pointing to a benef iciary -only

rule. Thus, it is important to emphasize that the issue befor e the Court in Carde n was ve ry differ ent than the issue now befor e us. In Carden the issue was whe ther a court c an look to the
c iti zen sh ip o f l e ss t

ha n a ll o f t he pa rt ne rs of a lim ite d p art

ne rs hip to deter mine the par

tnership’s citizenship. See Carde n, 494 U.S. at 186,21 11 0 S. Ct. a t 10 16 (“ Th e qu e sti on pr e se nte d in

thi s c a se is whe the r, in a suit broug ht by

a limited partner ship, the citiz enship of the limited partne rs must be taken into ac count to deter mine diversity

of citizenship among the pa

rties.”) . In its holdi ng , the Court “re ject[ed] the c on te nti on

that to de te rm ine , f

or div e rs ity purp os e s, the c iti zen sh ip of an a rtificial entity , the cour

t may consult the citizenship of less than
a ll o f t he e nti ty ’s me mbe rs .” I d. a t 19 5, 11 0 S. Ct. a t 10 21 (e mph a sis added)

. Thus , it

is c le ar t hat Ca rd e n te lls us that a

c ourt mus t take int o acc ount not “less than all of the e ntity ’s member s” whe n deter mining the citizenship of an ar

tificial entity . Obviously , beca use the Court was lookingat a pa

rtnership, whic h is owned by all the par

tners who
un de r a ny the or y are its on ly

me mbe rs , th e re c ou ld n ot b e a ne e d to look to any

persons other

than the par

tners and othe r than the pa rtners there could be no one else to look to. But bec ause Car den wa s dealing wi th a pa rt ne rs hip , th e Cou

rt did no t de a l w iththe e nti re ly se pa rate qu e sti on of wh e the r c iti zen sh ip t

re a tme nt m ay

e xten d to ind ivi du a ls i n a dd iti on to “ me mbe rs ” wi th r e sp e c t to oth e r e nti tie s, and in a ny e ve nt, the Court did not consider the c ritical question of who is a “ member” of such e ntities.

Our d e c isi on

c ann ot b e inc on sis te nt w iththe ho ldi ngin Carden a s we a

re not c oncluding that a cour t may “consult the
c iti zen sh ip o f l e ss t

ha n a ll o f t he e nti ty ’s me mbe rs ” in a c iti zen sh ip deter mination. Rather, our opinion does not offe nd Carden no matter how one de cides to def

ine “membe r” in the c ontext of a trust. I f a trustee is not a “ member,” then rather than lookingto “less than all of the e nti ty ’s me mbe rs ,” we are loo kin g be yon d th at c ri te ri on be c a us e of the unique c hara cter istics of a trustee , a situation that Carden doe s not addre ss. On the other ha nd, if a trustee is a “membe r,” the n clea rly we must look to his citiz enship under Ca rden. I n either circ umstance, our

holding is not inconsistent with Carden.

Mo re ov e r, a ssumin g that Ca rd e n g ov e rn s tr

us ts a nd that a court should look only

to the citizenship of a trust’s “member s” for the purposes of

diversity of citizenship, we believe that a “me mber,” a term left unde fined by

Carden which thus can be applied to diffe rent artificia l entities in various way s, includes a trust’s trustee as we ll as its beneficia

ry . We rea ch this conclusion in rec og nition of the law that a tr us te e is m or e tha

n a me re mana g e r o f a

tr us t in a smu c h a s ti tle to a trust’s assets is fra g mented with its leg al title being vested in the trustee a nd its equitable title being vested in the be nefic iary . See In reWe point out t hat while our tre atment of a trustee a s a member 19 of a tr us t is c a te g or ic a l and thu s is no t fa c t spe c if ic , a tru ste e is l ike ly

to be c omp e ns a te d f

ro m th e a sse ts of the tr

us t, t ho ug h in thi s c a se the tr

us t ag ree ment provided that the c ompensation of the trustee was to be an expense of Emer al dL td., the benef iciary of the trust. Indeed, F lorida la w , p ur s u an t t o w h ic hE me r a ld T r u s t w a s e s ta

b li s h e d , p r o v id e s th a t “ [i ]f the terms of a trust do not specify the trustee’ s compensation, a tr ustee is entitled to compensation that is r easona ble under the circ umstances.” Fla. Stat. Ann. § 736.0708 ( West 2007). New Yor k law, the s tate of which def

endants c laim Emerald Ltd. and thus Emera ld Trust are citizens, provides amongnumerous provisions dea li n g with a trustee’ s c omp e ns a tio n, tha

t “ [a] tr us te e of an e xpre ss t

ru st s ha ll b e e nti tle d to commissions and the allowanc e of his ex p enses a nd compensation . . . .” N.Y.C.P.L .R. § 8005 (McKinney 1981). By rea son of a trustee ’s rig ht to compensation for

his service s his lega l interest in a trust is likely to be
a benef icial interest and thus suppor ts a conclusion that he is a membe r of the tr us t.
22 Columbi a Ga s Sy s. I nc., 997 F .2d 1039, 1059 (3d Cir. 1993); Restatement (Sec ond) of Tr usts § 2 cmt. f (1959). A c ourt should not ignor e the leg al intere st held by the trustee a s Congr ess itself has treated it as important as the e quitable intere st held by a bene ficiar

y

. Thus, in requiringthat a judg e must rec use himself in ca ses in which h e h as a “ fi n an ci al i n t er es t , ” C o n gre s s d ef i n es th att ermas i n cl u d i n g a leg al or e quitable owner ship interest. See 28 U.S.C. § 45 5(b) (4 ), (d )( 4) . O ve ra ll, we se e no re a so n w hy a tr us te e , w ho , in fac t, has a sig nificant owne rship interest in the title to the assets of the trust in addition to m anag ement re sponsibili ties, should not be deeme d a “me mber” of a trust for purposes of de termining the trust’s citizenship i n a diver sity

of citizenship case. See also 11 U.S.C. § 19 541(a) (1) ( with exceptions “all leg al or e quitable intere sts of the debtor” become proper

ty of the ba nkruptcy estate)

. Finally in adopting the dual appr oach to de termining citizenship of a trust we point out that our result is not inconsistent with Chapman v. Ba

rney , 129 U.S. 677, 682, 9 S.C t. 426, 428 (1889). That ca se conc luded in a re sult that sti ll is followed that corporations but not unincorporate d business entities are citizens for purposes of div e rs ity of c iti zen sh ip. We a

re in n o w ay

a c tin g inc on sis te ntl y

wi th that pr inc ipl e a s w e do no t su g g e st t hat a tr us t sh ou ld b e a ssi mil a te d to the status of

a c or po ratio n f or div e rs ity purp os e s, a

ta sk that if it i s to be done a t all is for Congr ess and not for us. See Carde n, 494 U.S. at 196-97, 110 S.Ct. at 1022.We base our statements relating to the parties’ citizenship on 20 the r e c o r d a s it n o w e xis ts

. T h e r e f o r e w e d o n o t p r e c lu d e th e district
c ourt fr om c omi ngto con tr ary c on c lus ion s a ft e r f

ull dis c ov e ry

and , if
nece ssary , a hea

ringon the jurisdictional issue. We do observe, ho we ve r, that in a smu c h a s Ga un t Par sip pa

ny Part ne rs , 1 19 Che rr

y Hi ll Associates L .L .C., and 99 Cherry Hill Associates, L .P., did not ex ist at the tim e that Em e ra ld Tr us t fi le d the c omp la int in this cas e, t he ir
c iti zen sh ip mig ht no t be re le va nt fo r div e rs ity

purp os e s. Se e Mid lanti c Nat’l B ank v. Ha

nsen, 48 F .3d 6 9 3 , 6 9 6 (3d Cir. 1995) (“ Whether div e rs ity jur isd ic tio n e xists is d e te rm ine d by e xami nin g the c iti zen sh ip of the pa rties at the time the c omplaint was filed.”) . We, h o we v er, do not decide this point but note that o n the re mand if the district cour t decide s that without these three entities it has subject matter jurisdiction the n i ts h o u l d

d o s o

. M o r e o v e r , w e d o n o tf i n d i tn e c e s s ar

y i nthi s opinion to ex plain the history of the four

entities. We a lso point out that even thoug h our re fer ence s to the parties’ citizenship ar e in the prese nt tense, a s Midlantic mak es clea r, the inquiry

on rema nd should be on citizenship when the complaint was f iled.
As we e xpla ine d abov e, def e nd ants dis pute that th e B ri tis h 21 Virg in I slands is Emerald Ltd.’s principal plac e of business as they
c on te nd that N e w Y or

k is its p ri nc ipa l pl a c e of bu sin e ss. De fe nd ants raised this point in the district c ourt, but the court de nied their re quest for

“ jur isd ic tio na l di sc ov e ry” a s it be lie ve d th a t th e re wa s in c on tr ov e rt ibl e e vid e nc e de mon str a tin g that Eme ra ld L td. ’s pr inc ipa l pl a c e of bu sin e ss was in the B ritish Virg in I slands. Thus, defe ndants could not uncover fac ts to support their New Yor k clai m

. In consideringthe question of Emera ld L td.’s citizenship we note that defe ndants contend that it may be the a lter e go of Toms and his, wife , L aurie Kra us. I f nec essar

y , the district court should consider this ar g ument on rema nd.
23 3. Ap pli c a tio n o f t

he du a l a pp ro a c h to thi s c a se
We n owa

pp ly the tr us te e -b e ne fi c iary

ru le we have a do pte d to the fa cts here . The fa cts relating to the c itiz enship of the pa rties fo llo ws

. Th e pla int if

f i s E me ra ld T ru st, the be ne fi c iary of wh ic h is 20 Emera ld L td., a cor

poration incorpor ated in the B ritish Virg in I slands with its principal place of business there a s well. Michae l Houlis, a 21 F lor ida c iti zen , is the tr

us te e of Em e ra ld T ru st.
Def endant Rec kson Operating Par tnership, L .P., is a Delawa re limit ed par

tnership whose sole g ener al par tner is Reckson Assoc iates Realty Corp., a Mar

yland cor poration with its principal place ofI t a pp e ars tha

t Re c ks on

a tte mpt s to k eep th e ide nti ty of its 22 limit ed par

tners conf idential i nsofar

as possible. Obviously , howeve r, the distri ct court must know who they are and whe re the y

are citizens
and its ne e d f or that in fo rm a tio n w ill tr

ump Re c ks on ’s po lic ie s.
Th e c iti zen sh ip o f a

p a r t n e r s h i p i s d e te rm ine d b y

the c iti zen sh ip 23 of “a ll of the entit y ’s member s,” i.e., the c itiz enship of both the g ener al and limited partner s. Carden, 494 U .S. at 195, 110 S.C t. at 1021.
Domicile is what matters f or the purposes of dete rmining 24

c iti zen sh ip; re sid e nc e is d if fe re nt:
A dif f e r e n c e b e tw e e nth e c o n c e p ts of residenc e and domicile ha s long be en r e c o g n i z e d

. A p e r s o ni s g e n e r a l l y a re sid e nt of any state wi th whic h h e ha s a we ll- se ttl e d c onne c tio n .

. . . ‘ Inte nt to
rema in inde finitely ’ in the State need not be shown in orde r to be c onsidered a

24 business in New Yor

k. Acc ordingto an af

fidavit filed in the post-trial jurisdictional inquiry

proce eding s, “among ” its limi ted par tners ar e “individuals residingin New Yor k, Florida , Connecticut, Virg inia, Ne w Je rs e y , M ary

land , A ri zon a , a

nd I lli no is. ” Ap p. a t 28 5 ( e mph a sis added)

. 22

De fe nd ant H or se he a ds Comme rc ia l D e ve lop me nt P art ne rs , L .P., is a lim ited partne rship whose sole g ener al par tner is Horse heads Comme rc ia l D e ve lop me nt, Inc ., a Ne w Y or k c or po ratio n. I ts s ole limit ed par

tner is Stratford B usiness Associates, L .P., a limit ed pa rt ne rs hip wi th i ts g e ne ra l pa rt ne r C ann on

Str e e t Pr op e rt ie s, L .L .C. (itself a limited liability

company with New Jersey

citizens W olff and Hoffma n as its sole members), a

nd with limi ted par

tners Wolff and Hoffma n.
Thus , a s th e re c or d n owsta nd s, pla int if

f E me ra ld T ru st appea rs to be a c itiz en of the Br itish Virgin I slands (the c itiz enship of the bene ficiar

y corpor ation) and F lorida (the c itiz enship of its trustee). Def endant Rec kson, a limited partner ship, has a limited partner or partne rs that “r esides or r eside” in Florida but we do not know the 23 state or state s of Reckson’ s citiz enship inasmuch as the district court did not make a de termination as to the domicile and thus the citizenship of its limit ed par tners. I t does appe ar that defe ndant 24resident of a state. Martinez v. By

num, 4 6 1 U. S . 321, 338-39, 103 S.Ct. 1839, 1847-48 (1983) ( citations omitt ed). O n the other ha nd, [c]it ize ns hip is s y

nony mou s w ith dom i cile, and the domicile of an individual is hi s true, fixed and perma nent home and pla ce of

habitation. I t i s th e p l a c e t o w h i c h , w h e n e v e r h e is ab s en t , h e h as th e i n t en t i o no f r et urn i n g .

. . . A n indi vid

ua l c an c ha

ng e do mic ile instantly . To do so, two things a re require d: [ h]e must t ake up r esidenc e at the ne w dom icile and

he mus t in te nd

to
rema in there.

McCann v. Newma

n Irre vocable Trust, 458 F.3d 281, 286 (3d Cir. 2006) (citations and inter

nal quotation marks omitted).
There could be a

further complication her e if, as now appear s 25 to be the ca se, Emer ald L td. is the benefic iary of Emer ald Trust and Em e ra ld Ltd. is a

c iti zen of the B ri tis h V ir g in I sla

nd s. I n th a t c a se Emer al d T ru s t would be a c itiz en of the Br itish Virgin I slands. The
c omp lic a tio n w ou ld a

ri se if any of

the de fe nd ants are c iti zen s o r s ub je c ts of a f oreig n state i n wh i ch event ther e would be c itiz ens or subjec ts of a for eig n state on bot h sides of the c ontroversy . See Dr esser Indus., I nc. v. Un de rwri te rs a t L loyd’ s o f L on do n, 10 6 F .3 d 4 94 (3 d Ci r. 19 97 ); F ie ld
v. Volkswag enwe rk AG, 626 F .2d 293 (3d Cir. 1980). We, howeve r, ar e not addre ssing that possibili ty beca use, as we said above , we c an disce rn
25 Horsehe ads is not a citizen of the B ritish Virg in I slands. Clearly our unce rtainty

as to the citizenship of the parties
re qu ir e s u s to re mand

thi s c a se to t

he dis tr ic t c ourt

to d e te rm ine if

it ha s d ive rs ity

of c iti zen sh ip j ur isd ic tio n. In th is r e g ard the c iti zen sh ip of Re c ks on ’s lim ite d p art

ne rs may be piv ota l a s th e tr

us te e of Em e ra ld Trust appa

rently is a citizen of Florida

and Rec kson also may

be a citizen of Florida be cause more ofte n than not an individual who resides in a

state is a citizen of that state a nd Reckson has a

limit ed partne r or pa

rtners who reside in F lorida. Ther efor e we have grave doubts as to whether

the district court ha d subject matter jur isdiction in this case. 25nothing in the r ecor d that sug g ests that a def endant c ould be a c itiz en any wher e other

than in the United S tates. See supr a note 9. Neve rtheless we are awa

re of that possibili ty and if it a rises the district court may have to de al with it on remand.
We h ave no re a so n at th is t ime to c on sid e r whe the r E me ra ld 26 Trust could appe al the orde r deny ing it summary

judgme nt and t he orde r denying re ar g ument of the orde r deny ing summar

y judgme nt. We do state , ho we ve r, that th e se or de rs mig ht b e moo t in vie w o f t he outc ome of the tr ia l and

the e ntr y of the July 21 , 200 5 judg me nt. We m e nti on thi s
26 V. CONCLUSI ON

For the fore g oing r easons we will vacate the judg ment and order s from which the parties have appe aled a nd cross-a

ppeale d, namely the orde r ente ringjudgme nt of J uly 21, 2005, in favor of Emera ld Trust, the order

of August 30, 2004, denying E mera ld Trust’s motion for summary

judgme nt, the order

of Oc tober 29, 2004, denying E mera ld Trust’s motion for rea rgument and re consideration with respec t to the Aug ust 30, 2004 order, a nd the judg ment and orde r of August 31, 2005, partially denying E mera ld Trust’s reque st for prejudg ment interest. We will remand the matter to the district cour t wh ic h s ho uld

a llo w f ull dis c ov e ry

on the iss ue of

the pa rt ie s’
c iti zen sh ip. No thi ngthat w e have state d w ithre sp e c t to the fa c ts relating to the pa

rties’ c itiz enship will bind the district court on the
rema nd from makingcontra

ry fac tual finding s predicated on the more complete r ecor d that will be develope d on the re mand.

At the c on c lus ion

of dis c ov e ry

the dis tr ic t c ourt , at it s discretion, may

hold such hea

ringor hea

ring s, if any , as it reg ards
ne c e ssa ry to d e te rm ine its jur isd ic tio n, and sh a ll m ake fi nd ing s a s to wh e the r i t ha s su

bje c t matte r j ur isd ic tio n in thi s c a se . In ma

kin g tho se finding s it will apply

the principles that we have se t forth. I t then either w ill reinstate the judg ment and orde rs we ha ve vac ated or dismiss the ac tion, dependingupon whether it determines that it does or does not have jurisdiction. But nothing he rein shall pre clude the district court fr om modify ing its judg ment or orde rs in acc ordanc e wi th a ny pr oc e dure a

pp lic a ble un de r t

he F e de ra l Ru le s o f C ivi l Pr oc e dure . Se e F e d. R. C iv. P. 6 0. We d o n ot r e ta in j ur isd ic tio n s o that any further appea ls in thi s matter shall be f rom the re instated judgme nt and orde rs, the orde r for dismiss al to be ente red on the
rema nd, or such other

judgme nts or order s as may be ente red on the
re mand

. Th e pa

rt ie s w ill be ar t

he ir ow n c os ts o n th is a

pp e a l. 26point because we do not wa nt to impl y

that the s u m m ary

judgme nt order s are not moot and are appeala ble. R ather , we state no opinion on that po int

. 27