Surely we’ve all heard this maxim, and in a forthcoming article, Jonathan J. Ossip reminds us that when federal diversity for trusts is concerned, the key word is “you.” In Navarro Savings Association v. Lee,1 the federal district court dismissed an action filed by the trustees of a Massachusetts business trust on their own behalf, holding that a business trust is a citizen of every state where its shareholders reside (which, on the facts, destroyed diversity). The U.S. Supreme Court reversed and held that the trustees were the real parties to the controversy because as trustees, they had exclusive power over the trust assets, as if they were sole owners of the trust assets individually. Subsequent to Navarro, the article argues, the federal courts have largely made a hash out of determining trust citizenship, particularly that of business trusts. To bring some order to the jurisprudence, the author advocates applying different rules to traditional estate planning or gift trusts and business trusts.
The article offers a concise overview of citizenship determination. Corporations have had a special rule since at least 18442 and, as the current federal diversity statute3 provides, a corporation is a citizen of every state or foreign state in which it’s been incorporated and where it has its principal place of business. A more general rule applies to other entities, including partnerships, limited liability companies (LLCs) and joint stock companies: The citizenship of the members is determinative.4
What about trusts? The article notes at least two cases in which the rule for traditional trusts is likely governed directly by Navarro because the trustees of traditional trusts have legal title to the trust property and control over it, subject to a fiduciary duty, of course, whereas the beneficiaries are “passive recipients” only.5 However, neither case dealt with a traditional trust: In Northern Trust Company, the trust company was the agent for a group of sellers of stock, and Goldstick involved a Maryland real estate investment trust.
Most recently, in France v. Thermo Funding Company, LLC,6 a district court dealt with a single-member LLC owned by the revocable trust of a Colorado resident who was grantor and trustee. One of the beneficiaries of the trust was the grantor’s sister, a U.S. citizen living abroad, and if the trust’s citizenship were determined by referring to her, then the court would have lacked jurisdiction (U.S. citizens living abroad aren’t citizens of any U.S. state nor any foreign state; thus, the federal courts lack diversity jurisdiction over them). The court determined that this was a traditional, estate-planning trust, with the trustee as the real party to the controversy. Thus, the citizenship of the trustee was all that mattered. The opinion doesn’t focus on the peculiar nature of a revocable trust that might, for many purposes, be thought of as the alter ego of the grantor, at least so long as the grantor has the capacity to revoke it.
Business trusts, on the other hand, are the subject of confused jurisprudence. Some courts have looked to the trustees, others to the beneficiaries and at least one7 to both. The author advocates a common sense rule that a business trust should be considered like other entities, and the citizenship of the beneficiaries should be looked to. Interestingly, the Uniform Statutory Trust Act (2009) notes in Section 308 that a statutory trust can sue and be sued in its own right, suggesting a recognition that the citizenship of its beneficiaries would be looked to for diversity purposes.
An important issue not addressed in the article for trust and estate practitioners is the proliferation of special trustees, advisors, trust protectors and the like. Will the citizenship of each of them be considered? Only the citizenship of those with fiduciary authority? Will an advisor who can direct distributions be considered in the same manner as one who has control over investments? Indeed, when custody is a routine function and individuals other than the trustee make all the significant decisions, should it be the citizenship of the decisionmakers entirely that matters? Undoubtedly, these questions will interest or plague us for years to come.
1. Navarro Savings Association v. Lee, 446 U.S. 458 (1980).
2. Louisville, Cincinnati, & Charleston R.R. Co. v. Letson, 43 U.S. (2 How.) 497.
3. 28 U.S.C. Section 1332(c)(1).
4. Carden v. Arkoma Associates, 494 U.S. 185 (1990).
5. The article cites the interpretation given Navarro in Northern Trust Company v. Bunge Corp., 899 F.2d 591 (7th Cir. 1990): (“[i]n addition, trustees of express trusts who have legal title to trust property and who sue in their own names can establish diversity based on their own citizenship rather than that of the trust’s beneficiaries,” also citing Goldstick v. Icm Realty, 788 F.2d 456 (7th Cir. 1986)).
6. France v. Thermo Funding Company, LLC, No. 13 Civ. 712(SAS), 2013 WL 5996148 (S.D.N.Y. Nov. 12, 2013).
7. Emerald Investors Trust v. Gaunt Parssipany Partners, 492 F.3d 192 (3d Cir. 2007).