Opinion ID: 1447172
Heading Depth: 1
Heading Rank: 6

Heading: look to the citizenship of both the trustee and the beneficiary

Text: The final alternative is to look to the citizenship of both the trustee and the beneficiary in all cases in which a trust is a party. We consider that approach to be best for several reasons. First and foremost, this rule does not contradict the Supreme Court precedent in either Navarro and Carden, which, of course, we cannot do. Navarro is not implicated because it dealt with a situation in which the trustees brought the action in their own names, a situation different from that here in which the trust is the plaintiff. Moreover, the dual trustee-beneficiary rule does not offend Carden, a case we discuss at greater length below, because the dual approach asks a court to look at the citizenship of all of the members, at least the beneficiary of the artificial entity, and merely directs a court to look at the citizenship of the trustee as well. The concern with respect to Carden is raised by treating that case as applying to a trust. In this regard we point out that, so far as we are aware, historically the term members has not been applied in the context of a trust. Nevertheless, applying Carden to a trust, as we shall explain below we do not see why a trust's members include only its beneficiary and not its trustee. Of course, if a trustee is a member of a trust then when Carden is applied to a trust, a court in determining its citizenship must consider the trustee's citizenship. A second reason for adopting the dual trustee-beneficiary rule is that it obviates the possibility of an illogical outcome under a trustee or beneficiary-only approach in a case in which the trustee controls the trust and the beneficiary is merely passive, or vice versa. A third reason is that a bright-line rule is preferable to a case-by-case functional rule as it is the most efficient rule to utilize in determining whether a district court has subject matter jurisdiction. Moreover, the dual rule approach best accommodates our concerns of judicial economy and of due respect for the principles of federalism when matters of diversity jurisdiction are implicated. Carlsberg Res. Corp. v. Cambria Sav. & Loan Ass'n, 554 F.2d 1254, 1256 (3d Cir.1977). In Carlsberg, we recognized that the extension of diversity jurisdiction would impose additional burdens on a federal judicial system which already strains to process cases that are necessarily lodged with it. Relaxation of diversity requirements, intentional or otherwise, inevitably will increase access to the federal courts by litigants now confined to state courts, thereby augmenting the volume of business of the federal tribunals. Such an occurrence also may postpone or even forestall the vindication of the rights of litigantscriminal and civilwho are properly in the federal courts. Even more serious would be the disservice rendered to the cardinal precepts of federalism. . . . By its very nature, the diversity jurisdiction of the federal courts interferes with the autonomy of state tribunals by diverting litigation, ordinarily handled by such courts, to federal forums. Although the rule of Erie R.R. v. Tompkins, [304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)] requiring that state law be applied in diversity cases, operates to ameliorate the dislocative impact of such diversion, the fact remains that diversity jurisdiction prevents the states from adjudicating and resolving important matters that they otherwise would handle. Since conflict resolution constitutes one of the core public functions of state government, the exercise of diversity jurisdiction necessarily encroaches, in some fashion, on the ability of the states to engage in this traditional activity. Id. at 1256-57 (footnote omitted); see also City of Indianapolis v. Chase Nat'l Bank of N.Y., 314 U.S. 63, 76, 62 S.Ct. 15, 20, 86 L.Ed. 47 (1941) (The dominant note in the successive enactments of Congress relating to diversity jurisdiction is one of jealous restriction, of avoiding offense to state sensitiveness, and of relieving the federal courts of the overwhelming burden of business that intrinsically belongs to the state courts in order to keep them from for their distinctive federal business.) (internal quotation marks omitted). The comments that we made 30 years ago in Carlsberg with respect to the burdens on the federal courts now are true to an enhanced degree as it is a matter of common knowledge that there has been a massive increase in the quantity of litigation in the federal courts for the last 30 years, far outpacing the growth in the size of the federal judiciary. [17] For the foregoing reasons, after considering Navarro and Carden, we reaffirm the rule that we adopted almost 30 years ago in Riverside that the citizenship of both the trustee and the beneficiary should control in determining the citizenship of a trust. [18] In reaching our result we discuss Carden further because we recognize that that case might be understood as pointing to a beneficiary-only rule. Thus, it is important to emphasize that the issue before the Court in Carden was very different than the issue now before us. In Carden the issue was whether a court can look to the citizenship of less than all of the partners of a limited partnership to determine the partnership's citizenship. See Carden, 494 U.S. at 186, 110 S.Ct. at 1016 (The question presented in this case is 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.). In its holding, the Court reject[ed] the contention that to determine, for diversity purposes, the citizenship of an artificial entity, the court may consult the citizenship of less than all of the entity's members. Id. at 195, 110 S.Ct. at 1021 (emphasis added). Thus, it is clear that Carden tells us that a court must take into account not less than all of the entity's members when determining the citizenship of an artificial entity. Obviously, because the Court was looking at a partnership, which is owned by all the partners who under any theory are its only members, there could not be a need to look to any persons other than the partners and other than the partners there could be no one else to look to. But because Carden was dealing with a partnership, the Court did not deal with the entirely separate question of whether citizenship treatment may extend to individuals in addition to members with respect to other entities, and in any event, the Court did not consider the critical question of who is a member of such entities. Our decision cannot be inconsistent with the holding in Carden as we are not concluding that a court may consult the citizenship of less than all of the entity's members in a citizenship determination. Rather, our opinion does not offend Carden no matter how one decides to define member in the context of a trust. If a trustee is not a member, then rather than looking to less than all of the entity's members, we are looking beyond that criterion because of the unique characteristics of a trustee, a situation that Carden does not address. On the other hand, if a trustee is a member, then clearly we must look to his citizenship under Carden. In either circumstance, our holding is not inconsistent with Carden. Moreover, assuming that Carden governs trusts and that a court should look only to the citizenship of a trust's members for the purposes of diversity of citizenship, we believe that a member, a term left undefined by Carden which thus can be applied to different artificial entities in various ways, includes a trust's trustee as well as its beneficiary. We reach this conclusion in recognition of the law that a trustee is more than a mere manager of a trust inasmuch as title to a trust's assets is fragmented with its legal title being vested in the trustee and its equitable title being vested in the beneficiary. See In re Columbia Gas Sys. Inc., 997 F.2d 1039, 1059 (3d Cir.1993); Restatement (Second) of Trusts § 2 cmt. f (1959). A court should not ignore the legal interest held by the trustee as Congress itself has treated it as important as the equitable interest held by a beneficiary. Thus, in requiring that a judge must recuse himself in cases in which he has a financial interest, Congress defines that term as including a legal or equitable ownership interest. See 28 U.S.C. § 455(b)(4),(d)(4). Overall, we see no reason why a trustee, who, in fact, has a significant ownership interest in the title to the assets of the trust in addition to management responsibilities, should not be deemed a member of a trust for purposes of determining the trust's citizenship in a diversity of citizenship case. [19] See also 11 U.S.C. § 541(a)(1) (with exceptions all legal or equitable interests of the debtor become property of the bankruptcy estate). Finally in adopting the dual approach to determining citizenship of a trust we point out that our result is not inconsistent with Chapman v. Barney, 129 U.S. 677, 682, 9 S.Ct. 426, 428, 32 L.Ed. 800 (1889). That case concluded in a result that still is followed that corporations but not unincorporated business entities are citizens for purposes of diversity of citizenship. We are in no way acting inconsistently with that principle as we do not suggest that a trust should be assimilated to the status of a corporation for diversity purposes, a task that if it is to be done at all is for Congress and not for us. See Carden, 494 U.S. at 196-97, 110 S.Ct. at 1022. 3. Application of the dual approach to this case We now apply the trustee-beneficiary rule we have adopted to the facts here. The facts relating to the citizenship of the parties follows. [20] The plaintiff is Emerald Trust, the beneficiary of which is Emerald Ltd., a corporation incorporated in the British Virgin Islands with its principal place of business there as well. [21] Michael Houlis, a Florida citizen, is the trustee of Emerald Trust. Defendant Reckson Operating Partnership, L.P., is a Delaware limited partnership whose sole general partner is Reckson Associates Realty Corp., a Maryland corporation with its principal place of business in New York. According to an affidavit filed in the post-trial jurisdictional inquiry proceedings, among its limited partners are individuals residing in New York, Florida, Connecticut, Virginia, New Jersey, Maryland, Arizona, and Illinois. App. at 285 (emphasis added). [22] Defendant Horseheads Commercial Development Partners, L.P., is a limited partnership whose sole general partner is Horseheads Commercial Development, Inc., a New York corporation. Its sole limited partner is Stratford Business Associates, L.P., a limited partnership with its general partner Cannon Street Properties, L.L.C. (itself a limited liability company with New Jersey citizens Wolff and Hoffman as its sole members), and with limited partners Wolff and Hoffman. Thus, as the record now stands, plaintiff Emerald Trust appears to be a citizen of the British Virgin Islands (the citizenship of the beneficiary corporation) and Florida (the citizenship of its trustee). Defendant Reckson, a limited partnership, has a limited partner or partners that resides or reside in Florida [23] but we do not know the state or states of Reckson's citizenship inasmuch as the district court did not make a determination as to the domicile and thus the citizenship of its limited partners. [24] It does appear that defendant Horseheads is not a citizen of the British Virgin Islands. Clearly our uncertainty as to the citizenship of the parties requires us to remand this case to the district court to determine if it has diversity of citizenship jurisdiction. In this regard the citizenship of Reckson's limited partners may be pivotal as the trustee of Emerald Trust apparently is a citizen of Florida and Reckson also may be a citizen of Florida because more often than not an individual who resides in a state is a citizen of that state and Reckson has a limited partner or partners who reside in Florida. Therefore we have grave doubts as to whether the district court had subject matter jurisdiction in this case. [25]