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9th Cir. Holds That Citizenship of Bank Acting as Trustee Generally Controls for Diversity Purposes

The U.S. Court of Appeals for the Ninth Circuit held that the Supreme Court of the United States’ decision in Americold Realty Trust v. ConAgra Foods, Inc. did not upset the Supreme Court’s prior holding in Navarro Ass’n v. Lee, and that “when a trustee files a lawsuit or is sued in her own name her citizenship is all that matters for diversity purposes.”

Accordingly, the Ninth Circuit held that the trial court properly exercised its jurisdiction over the matter where the bank — acting as trustee — was sued in its own name, and along with the other named defendants, was of diverse citizenship with the plaintiff.

A copy of the opinion in Demarest v. HSBC Bank USA, NA is available at:  Link to Opinion.

The plaintiff borrower took out a loan, and the loan was later securitized and the deed of trust was assigned to the bank, which acted as trustee for a trust. The trust was governed by a pooling and servicing agreement, which provided that all “right, title and interest” in the trust were conveyed to the bank “for the use and benefit of the Certificateholders,” and the bank was given the power to hold the trust’s assets, sue in its own name, transact the trust’s business, terminate servicers, and engage in other necessary activities.

In her complaint, the borrower asserted various causes of action under California law, including wrongful foreclosure.  The borrower named, among others, the bank.

The defendants removed the matter to the trial court based on diversity jurisdiction.  The notice of removal specifically stated that it was filed on behalf of, among others, the bank as trustee for the trust.  The notice further stated that the bank was incorrectly sued in its name only, without referencing the trust.

The notice asserted that the bank was a national banking association organized under the laws of the United States, with its main office in Virginia, and was therefore a citizen of Virginia for diversity purposes.

Because no defendant was, like the borrower, a citizen of California, the notice concluded that diversity jurisdiction was established and removal was proper.

The trial court agreed and the matter remained in federal court.  The trial court subsequently granted summary judgment in favor of the defendants.

The borrower appealed.  On appeal, she did not contest the trial court’s summary judgment decision, but instead only challenged the court’s subject matter jurisdiction over the action.

As you may recall, federal subject matter jurisdiction – specifically, diversity jurisdiction – exists where an action is between “citizens of different states,” and the “matter in controversy exceeds the sum or value of $75,000.”  It requires “complete diversity” of citizenship, meaning that “the citizenship of each plaintiff is diverse from the citizenship of each defendant.”

The borrower argued that the defendants failed to establish diversity jurisdiction because, following Americold, they were required to demonstrate the citizenship of the trust’s investors, and could not simply rely on the citizenship of the bank as its trustee.

In addressing the argument, the Ninth Circuit first discussed two other pertinent Supreme Court decisions, Navarro and Carden v. Arkoma Associates.

The Ninth Circuit explained that in Navarro, the Supreme Court reaffirmed that “a trustee is a real party to the controversy for purposes of diversity jurisdiction when he possesses certain customary powers to hold, manage, and dispose of assets for the benefit of others.”

However, in Carden, the Supreme Court held that “diversity jurisdiction in a suit by or against the [limited partnership] entity depends on the citizenship of ‘all the members.’”  The Supreme Court further explained that Navarro was consistent with that rule because it “did not involve the question whether a party that is an artificial entity other than a corporation can be considered a ‘citizen’ of a State, but the quite separate question whether the parties that were undoubted ‘citizens’ . . . were the real parties to the controversy.”

The Ninth Circuit noted that although other “[c]ourts applying Navarro and Carden to the question of a trust’s citizenship for diversity purposes have reached different conclusions,” in 2006 it had held in Johnson v. Columbia Props. Anchorage, LP that “[a] trust has the citizenship of its trustee or trustees.”

However, in 2016 the Supreme Court decided Americold, in which it addressed “how to determine the citizenship of a ‘real estate investment trust.’”  In analyzing the issue, the Supreme Court noted that under the applicable state law, a “real estate investment trust” was not a corporation, but instead “an ‘unincorporated business trust or association’ in which property is held and managed ‘for the benefit and profit of any person who may become a shareholder.’”

Thus, the Supreme Court determined that the real estate investment trust’s “shareholders appear[ed] to be in the same positions as the shareholders of a joint-stock company or the partners of a limited partnership – both of whom we viewed as members of their relevant entities,” and “therefore conclude[d] that for purposes of diversity jurisdiction, [the real estate investment trust’s] members include its shareholders.”

However, the Supreme Court expressly stated that it was not overturning Navarro, but instead distinguished it noting that “Navarro had nothing to do with the citizenship of [a] trust,” rather it “reaffirmed a separate rule that when a trustee files a lawsuit in her name, her jurisdictional citizenship is the State to which she belongs.”

In applying Americold to its case, the Ninth Circuit stated that “[a]lthough [the borrower] suggests that Americold constituted a sea change in how courts determine the citizenship of a trust, we do not find the decision to be quite so momentous.  Indeed, the Court clearly articulated that which we already knew: ‘when a trustee files a lawsuit or is sued in her own name her citizenship is all that matters for diversity purposes.’”

The Ninth Circuit ruled that because the borrower sued the bank in its own name, and did not mention the trust either in the caption or in the complaint’s list of defendants, “Americold holds that, because [the bank] as trustee was ‘sued in [its] own name, [its] citizenship is all that matters for diversity purposes.’”

Accordingly, “[t]he parties were . . . completely diverse, and the trial court properly exercised diversity jurisdiction over the action.”

After reaching its ruling, the Ninth Circuit noted in dicta that there was potential conflict between its decision in Johnson that “[a] trust has the citizenship of its trustee or trustees” and Americold where the Supreme Court concluded that the citizenship of nontraditional trusts should be determined based on their members, not trustees.

After discussing the differences between “traditional trusts” and other artificial entities to which states have applied the “’trust’ label,” the Ninth Circuit concluded that “Johnson remains good law when applied to what Americold labelled traditional trusts.”

Moreover, “in such a case, as Navarro held, the trustee is the real party in interest, and so its citizenship, not the citizenships of the trust’s beneficiaries, controls the diversity analysis.”

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Jeffrey Karek practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in defending consumer finance lawsuits in both state and federal trial courts, and on appeal. Such litigation includes allegations brought under TILA, HOEPA, RESPA, FDCPA, TCPA, FCRA, and state consumer protection statutes, including in the defense of putative class actions. Jeff received his Juris Doctor from the University of Michigan Law School, and graduated magna cum laude with a Bachelor of Business Administration degree from Western Michigan University.

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