Supreme Court Reinforces Strict Rule On Citizenship of Unincorporated Entities for Diversity Jurisdiction to the Detriment of Publicly-Traded REITs

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Article III of the U.S. Constitution extends the jurisdiction of federal courts to “[c]ontroversies … between Citizens of different States.” U.S. Const. art. III, § 2, cl. 1. “This rule is easy enough to apply to humans, but can become metaphysical when applied to legal entities.” Americold Realty Trust v. ConAgra Foods, Inc.

In a unanimous decision in Americold, the Supreme Court reiterated its strict rule regarding the citizenship of non-corporate entities when determining diversity jurisdiction.  As Justice Sotomayor wrote:  “While humans and corporations can assert their own citizenship, other entities take the citizenship of their members.” Id. The court concluded that the “members” of a Maryland real estate investment trust (“REIT”) include its shareholders. Id. at *4.  This decision could prevent large, publicly-traded REITs from invoking diversity jurisdiction to access federal courts.

Americold was a state-law case, in which several corporations sued the owner of a warehouse for damages following a fire. The owner, now known as Americold Realty Trust, is a REIT created under Maryland law, which recognizes REITs as separate legal entities that can sue and be sued. Id. at *4.  The case was originally filed in state court in Kansas, but Americold removed the case to federal court.  The District Court accepted jurisdiction and resolved the dispute. Id. at *2.

On appeal, the Tenth Circuit raised the issue of subject matter jurisdiction. The parties responded that the District Court had original jurisdiction because the parties were “citizens of different States” as codified in 28 U.S.C. § 1332(a)(1). Id. The Tenth Circuit disagreed.  The corporate plaintiffs were citizens of the states where they were incorporated and had their principle place of business.  28 U.S.C. § 1332(c)(1).  But because Americold was not a corporation, the Tenth Circuit ruled that it was a citizen of all states in which its “members” were citizens, and that “members” included all of the REIT’s shareholders.  Because there was no record of the citizenship of Americold’s shareholders, the Tenth Circuit held the parties had failed to make the required showing that plaintiffs were “citizens of different States” than the defendants.  The Tenth Circuit remanded the case to the District Court with orders to vacate its judgment on the merits and remand the case back to state court. ConAgra Foods, Inc. v. Americold Logistics, LLC. The Supreme Court affirmed.

In Americold, the Supreme Court stressed that while Congress has codified citizenship standards for corporations (28 U.S.C. §1332(c)(1)), it has “never expanded this grant of citizenship to include artificial entities other than corporations[.]” Americold, at *3.  For unincorporated entities like a REIT, the court reiterated its “oft-repeated rule that diversity jurisdiction in a suit by or against the entity depends on the citizenship of ‘all [its] members.’” Id. (quoting Carden v. Arkoma Assocs., 494 U.S. 185, which quoted from Chapman v. Barney, 129 U.S. 677) (alteration in original).

The court admitted that it had never expressly defined the term “members”, but noted that it had “equated an association’s members with its owners or ‘the several persons composing such association.’” Americold, at *3 (quoting Carden, 494 U.S. at 196) (internal quotation omitted).  By applying this tenet to specific States’ laws, the court has “identified the members of a joint-stock company as its shareholders, the members of a partnership as its partners, the members of a union as the workers affiliated with it, and so on.” Id. (citing cases).  For a REIT created under Maryland law, the court held that its members include its shareholders. Id. at *4.

The Americold decision greatly limits the ability of publicly-traded REITs (with shareholders in all or nearly all states) to invoke diversity jurisdiction.  According to the National Association of Real Estate Investment Trusts (“NAREIT”), which filed an amicus brief in the case, about 80% of publicly-traded REITs are organized under Maryland law.  According to NAREIT, because REITs may be sued anywhere they may own property, “the protections of diversity jurisdiction [are] particularly important to them.” NAREIT Br. at 5.  But pleading diversity may be nearly impossible for REITs if they must ascertain the citizenship of millions of shareholders.

Some federal courts are strict in their pleading requirements for diversity jurisdiction. See, e.g., In re Bank of Am. Corp. Sec., Derivative, & ERISA Litigation, (“Because the Derivative Plaintiffs have not alleged the citizenship of each of the [defendant limited liability companies’] members, they have not alleged facts sufficient to invoke this Court’s subject matter jurisdiction by reason of diversity of citizenship.” (citation omitted))  Some judges will dismiss a diversity complaint at the outset, with leave to replead, if the plaintiff has failed to plead details concerning its citizenship and the alleged citizenship of defendants.[1]  A REIT may not be able to assert such facts.  And, as noted by NAREIT, if a REIT is a defendant in a state court suit and one of the REIT’s shareholders is a citizen of that state, the REIT would not be able to remove the case on diversity grounds (even if there was diversity) because 28 U.S.C. § 1441(b)(2) bars removal when a defendant is a citizen of the state where the action was filed.  NAREIT Br. at 1-2.

The bright-line rule that the Supreme Court re-affirmed in Americold maintained the “‘doctrinal wall’ between corporate and unincorporated entities” for diversity purposes. Americold, at *5 (quoting Carden, 494 U.S. at 190).  While this may make access to federal courts more difficult for REITs, in addition to LLCs, partnerships and other state-law creatures, the court reaffirmed that relief from this rule may only come from Congress. Id. (“Then as now we reaffirm that it is up to Congress if it wishes to incorporate other entities into 28 U.S.C. § 1332(c)’s special jurisdictional rule.”).  Unless Congress grants REITs such relief, many publicly-traded REITs will be litigating state law suits in state court.

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[1] If some of those shareholders are limited liability companies, for example, the REIT would have to ascertain the membership of the LLC – information to which it may not have access. Just like a REIT, an LLC is a citizen of any state of which any of its members is a citizen. Handelsman v Bedford Village Associates Ltd Partnership; Cosgrove v. Bartolotta.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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