On March 7, 2016, the United States Supreme Court issued its opinion in Americold Realty Trust v. Conagra Foods, Inc., 136 S. Ct. 1012 (2016), holding that the citizenship of a real estate investment trust (REIT) for diversity purposes is determined by the citizenship of each of its members or shareholders. Americold, 136 S. Ct. at 1017. The Court also held that the same rule applies to a variety of unincorporated entities that have the “trust” label applied to them, but are not a “traditional trust.” Id. at 1016. With regard to what a traditional trust is, and how its citizenship should be determined, the Court explained:
Traditionally, a trust was not considered a distinct legal entity, but a ‘fiduciary relationship’ between multiple people. Such a relationship was not a thing that could be haled into court; legal proceedings involving a trust were brought by or against the trustees in their own name. And when a trustee files a lawsuit or is sued in her own name, her citizenship is all that matters for diversity purposes. For a traditional trust, therefore, there is no need to determine its membership, as would be true if the trust, as an entity, were sued.
Id. (internal citations omitted). The Court further explained that unincorporated legal entities that might bear the “trust” label—such as REITS, joint-stock companies, and limited partnerships—are distinguished from traditional trusts by the fact that the members, beneficiaries, or shareholders of such entities have ownership interests in the trust’s assets and voting power with regard to how the trust’s assets are held and managed. Id. In a traditional trust, those powers are held by the trustee.
Since the Americold decision was issued, mortgage borrowers throughout the nation have increasingly sought to remand cases involving a mortgage-backed securities trust (MBS Trust) on the theory that such trusts are unincorporated legal entities like REITs rather than traditional trusts. Courts hearing these motions have reached differing conclusions and results, but a common theme, until now, has been a lack of close scrutiny or analysis of the true nature of MBS Trusts.
In May v. New Century Mortg. Corp., No. H-16-1272 (S.D. Tex. Sep. 19, 2016), the court carefully analyzed the applicability of Americold by examining the relevant pooling and servicing agreement (PSA) to determine whether the MBS Trust is a traditional trust or an unincorporated legal entity bearing the “trust” label.
The Mays initially filed suit in Texas state court against Deutsche Bank National Trust Company, as Trustee of the GSAA Trust 2004-NC1, among other parties. Deutsche Bank (or “Trustee”) removed the case before any other defendants had been served, asserting diversity as the basis for jurisdiction. After removal, the Mays amended their complaint to join GSAA Trust 2004-NC1 (the “Trust”) as a separate defendant, and they contemporaneously filed a motion to remand, arguing that because the Trust had been named as a separate defendant, its citizenship counted and was determined by the citizenship of all of its certificateholders. Deutsche Bank responded by attaching a copy of the applicable PSA and arguing that, because the Trustee has exclusive power to hold, manage, and dispose of the Trust’s assets, the Trust’s citizenship was irrelevant because it was not a real party to the controversy and was a traditional trust.
When an MBS Trust is Sued, Only the Citizenship of the Trustee Matters for Diversity Purposes Because the Trustee is the Real Party to the Controversy and MBS Trusts are Traditional Trusts, not Unincorporated Legal Entities
The court began its analysis by recognizing the long-standing rule that “a federal court must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy.” Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 461 (1980). Thus, the court concluded, the dispositive issue is whether the Trust is a real party to the controversy or only a nominal party to be disregarded for jurisdictional purposes.
The court proceeded to explain that the factors governing whether the Trust is a real party to the controversy are essentially the same as the factors used to determine whether the Trust is a traditional trust as opposed to an unincorporated legal entity such as a REIT. If the relationship between the Trust’s beneficiaries (i.e., the certificateholders) and the Trustee is one of principal to agent, then the Trust would fall under the category of unincorporated legal entity. If, however, the Trustee acts independently as a principal for the benefit of the beneficiaries, a fiduciary relationship is created and the Trust is a traditional trust.
Relying heavily on the terms of the applicable PSA, the court found that the Trustee holds all of the rights, title, and interest to the Trust’s assets, and that actions taken on behalf of the Trust are authorized and empowered by the Trustee rather than the certificateholders. In contrast, the court noted that the certificateholders’ power is essentially limited to removing the Trustee, and that such power falls short of having authority to direct the Trustee’s actions. Because the court found that the Trustee had sole power to hold, manage, and dispose of the Trust’s assets pursuant to the PSA, the court held that the Trust is a traditional trust and is not a real party to the controversy. The court, therefore, disregarded the citizenship of the Trust and concluded that Deutsche Bank had established diversity jurisdiction.
Finally, the court distinguished its decision from another case in the Southern District of Texas, Juarez v. DHI Mortg. Co., Ltd., No. H-15-3534, 2016 WL 3906296 (S.D. Tex. July 19, 2016), where another district judge remanded a case under similar facts but with very little analysis. The court pointed out that in Juarez, the defendant failed to provide the court with a copy of the PSA and failed to direct the court to the relevant provisions in the PSA establishing that the trustee holds legal title with the power to hold, manage, and dispose of the trust’s assets.