Filed March 7, 2016
Opinion By: Sonia Sotomayor
A real estate investment trust organized under Maryland law is subject to the long-standing rule that an unincorporated entity possesses the citizenship of all its members, which includes its shareholders under § 8-101(c) of the Maryland REIT Law (the "MRL"), for diversity jurisdiction purposes.
Plaintiffs, three corporate citizens of Delaware, Nebraska and Illinois, filed an action over a contract dispute in a Kansas court. Defendant, a real estate investment trust organized under the MRL, removed to the Federal District Court for the District of Kansas. The Court accepted jurisdiction and found for defendant.
On appeal, the Tenth Circuit raised the jurisdiction issue and determined that the parties failed to demonstrate diversity of citizenship. The Court applied two different tests to determine the citizenship of the corporate plaintiffs and the unincorporated defendant. It found that the corporate plaintiffs were citizens of the states where they were chartered and had their principal places of business. The unincorporated defendant’s citizenship must be based on that of its members, which include its shareholders. Having failed to provide a record of the shareholders’ citizenship, the parties failed to prove they were citizens of different states. In a unanimous decision, the U.S. Supreme Court affirmed.
Historically, only humans were considered citizens for diversity jurisdiction purposes. Eventually, the Court created a limited exception for corporations to be considered citizens of the states where they were incorporated; an exception Congress later codified and expanded to include the states where the principal place of business was located. Congress never expanded this exception to any artificial entities other than corporations. The long-standing rule for unincorporated entities is that diversity jurisdiction in a suit by or against the entity depends on the citizenship of all its members.
The Court noted that it has not expressly defined “members.” Here, absent anything in the record to indicate who defendant’s members are, Maryland law establishes its membership. The Court found that the MRL establishes that a real estate investment trust is an unincorporated business trust or association for the benefit and profit of its shareholders, who possess ownership interests and voting power. MRL §§ 8-704, 8-101. As such, these shareholders have powers and position analogous to the shareholders of a joint-stock company or the partners in a limited partnership, both of whom the Court has previously found to be “members” of their entities.
Defendant argued that anything called a “trust” possesses the citizenship of its trustees alone, and not its shareholders. The Court found that defendant is not a traditional trust, however. In Maryland, a real estate investment trust is a separate legal entity that can sue or be sued. MRL §§ 8-102, 8-301. Like in other states, the label “trust” is applied to entities that bear little resemblance to the traditional trust. A traditional trust is not a distinct legal entity at all, but rather a “fiduciary relationship” that could not be haled into court.
The opinion is available in PDF.