GBForefront, L.P. v. Forefront Management Group, LLCGBForefront, L.P. v. Forefront Management Group, LLC
- Reporters:
- ,
- Before:
- Jordan, Roth, Mariani
JORDAN, Circuit Judge.
This case requires us to consider whether, in assessing diversity-of-citizenship jurisdiction under
Based on the distinction we recognize today between
I. BACKGROUND
Following an investment opportunity gone awry, the details of which are immaterial at this point, GBForefront, L.P., filed suit in the District Court against Forefront Management Group, LLC (“FMG“); Forefront Caрital Management, LLC; Forefront Capital Markets, LLC; and Forefront Advisory, LLC, (collectively, the “Defendants“) for breach of contract and unjust enrichment. Initially, GBForefront, which is a limited partnership, had sued only FMG, a limited liability company (or “LLC“), and alleged that the Court had diversity jurisdiction under
After years of litigation, GBForefront accepted an offer
It was not. GBForefront soon alleged that “[c]ertain Forefront entities”2 had dеfaulted on the terms of the settlement agreement, and it thus moved for entry of the consent judgment. (J.A. at 923). With the assistance of new counsel, the Defendants cross-moved to dismiss the case for lack of subject matter jurisdiction, claiming that GBForefront had not adequately pled the citizenship of FMG and that complete diversity was lacking when the lawsuit was initially filed. The parties briefed the issue of diversity jurisdiction, but then came a twist. The Supreme Court issued its opinion in Americold Realty, specifically dealing with the citizenship of trusts.
After holding a hearing and considering the parties’ supplemental briefing on the new precedent, the District Court granted the Defendants’ motion to dismiss because the Court determined the membership of GBForefront included at least three trusts whose beneficiaries were citizens of New Jersey3 and FMG also had a member who was a citizen of New Jersey.4
The Court reasoned that Emerald Investors instructed it not to
GBForefront timely appealed the dismissal.
II. DISCUSSION5
On appeal, GBForefront argues that the Americold Realty holding described by the District Court applies only to business trusts, while the trusts composing GBForefront are traditional trusts whose citizenship is based only on the citizenship of their trustees. The Defendants of course disagree, asserting that Americold Realty requires that the citizenship of trust beneficiaries always be accounted for when determining diversity jurisdiction. The Defendants further
A. General Principles of Diversity Jurisdiction
It is fundamental that federal courts must have subject matter jurisdiction before reaching the merits of a case, and, аs its name indicates, jurisdiction based on diversity of citizenship requires that opposing parties be citizens of diverse states. Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 418 (3d Cir. 2010). Under the dictates of
Most rules for determining the citizenship of natural persons and business entities are well-established. Zambelli Fireworks, 592 F.3d at 419. The citizenship of a natural person is the state where that person is domiciled. Id. The citizenship of a corporation is both its state of incorporation and the state of its principal place of business. Id. A partnership, as an unincorporated business entity, assumes the citizenship of all its partners. Id. Likewise, a limited liability company is a citizen of all the states of its members. Id. at 420. But, as this case demonstrates, there are still some rules in flux. Hence the challenge to jurisdiction we address here.
When a party raises an issue regarding a jurisdictional defect, courts must determine whether the challenge is a facial attack or a factual attack. Constitution Party of Pa. v. Aichele, 757 F.3d 347, 357 (3d Cir. 2014). “A facial attack ... is an argument that considers a claim on its face and asserts that it is insufficient to invoke subject matter jurisdiction of the court because, for example, ... there is no indication of a diversity of citizenship among the parties[.]” Id. at 358.
“A factual attack, on the other hand, is an argument that there is no subject matter jurisdiction because the facts of the case ... do not support the asserted jurisdiction.” Id. To resolve
The Defendants here mounted both a facial challenge and a factual challenge to GBForefront‘s assertion of diversity jurisdiction.
B. Facial Challenge To Diversity Jurisdiction
In the District Court, the Defendants’ facial challenge was “that GBForefront never alleged the citizenship of the members of the LLC defendant entities” in its complaint. (J.A. at 6.) The Court recognized that issue but did not resolve it because the Court concluded that diversity jurisdiction was lacking based on the Defendants’ factual challenge.8 On
The Defendants are indeed correct that GBForefront failed to plead the citizenship of FMG‘s members. It failed even to plead its own citizenship. Instead, GBForefront, a limited partnership, alleged that Warren Weiner, who was the sole member of the general partner of GBForefront and also the sole member of the general partner of the limited partner of GBForefront, was a “resident” of Pennsylvania and that “none of [FMG‘s] members are residents of Pennsylvania“; nothing is mentioned about citizenship.9 (J.A. at 719-20); see supra notе 1. Alleging residency alone is insufficient to plead diversity of citizenship, McNair v. Synapse Grp. Inc., 672 F.3d 213, 219 n.4 (3d Cir. 2012), while changing allegations of residency to ones of citizenship fortifies a complaint against a facial attack on jurisdiction, assuming there are no other obvious flaws. See Lincoln Benefit Life Co. v. AEI Life, LLC, 800 F.3d 99, 107 (3d Cir. 2015) (“A State X plaintiff may therefore survive a facial challenge by alleging that none of the defendant association‘s members are citizens of State X.“).
The clear pleading problem here may be amenable to
GBForefront‘s diversity allegations appear to be nothing more than inartful drafting on a technical point, albeit a serious one. Accordingly, because the factual record on appeal is insufficient for us to determine whether complete diversity existed when the comрlaint was filed, see infra Section II.C, we instruct the District Court to give GBForefront
C. Factual Challenge To Diversity Jurisdiction
We turn next to the Defendants’ factual challenge to diversity jurisdiction, which is simply that complete diversity was lacking when the lawsuit was filed.
When a business entity consists of constituent parts that are also business forms, the inquiry into jurisdictional citizenship “can become quite complicated. ... [T]he citizenship of unincorporated associations must be traced through however many layers of partners or members there may be.” Lincoln Benefit Life Co., 800 F.3d at 105 n.16 (internal quotation marks and citation omitted). This is such a case, with trusts serving as limited partners of a limited partnership that is in turn a limited partner of GBForefront. See supra note 1 (describing GBForefront‘s ownership structure). And that is on just one side of the “v.” The Defendants’ factual challenge hinges on the proper interpretation of Americold Realty in determining the citizenship of the several trusts that are layered within GBForefront.
1. Jurisdictional Citizenship When A
Through a progression of cases, the Supreme Court has established three rules for determining jurisdictional citizenship when а trust is involved in a lawsuit.
First, in Navarro Savings Association v. Lee, 446 U.S. 458 (1980), the Court said that, when a trustee sues or is sued on behalf of a trust, the citizenship of the trust is based on that of the trustee alone. Id. at 465-66; see also Americold Realty, 136 S. Ct. at 1016. In such cases, trustees may invoke diversity jurisdiction based on their own citizenship, without accounting for the citizenship of the trust‘s beneficiaries. Navarro, 446 U.S. at 465-66. In Navarro, eight individual trustees of a trust organized under Massachusetts law sued a savings association in federal court on a breach of contract claim. Id. at 459. The citizenship of the trustees differed from that of the savings association, but some of the trust‘s beneficiaries were citizens of the same state as the savings association. Id. at 460. Because the trustees who initiated the lawsuit “possesse[d] certain customary powers to hold, manage, and dispose of” trust properties, the trustees were permitted “to sue in their own right, without regard to the citizenship of the trust beneficiaries.” Id. at 464-66. Although the trust in some respects more closely resembled a business association than a traditional trust, the Supreme Court said that when trustees initiate a lawsuit in their own name or are the target of a suit, courts consider only the citizenship of the trustees for purposes of determining diversity jurisdiction. Id. at 465-66; see also Americold Realty, 136 S. Ct. at 1016.
Second, in Carden v. Arkoma Associates, 494 U.S. 185 (1990),
Finally, in Americold Realty, the Supreme Court decided that thе citizenship of a business trust includes the citizenship of all its members. 136 S. Ct. at 1016. The dispute involved a group of corporations whose goods perished in a warehouse fire. Id. at 1014. They brought a breach-of-contract suit in state court against the warehouse owner, which was a real estate investment trust (“REIT“). Id. The REIT removed the case to federal court based on diversity jurisdiction. Id. On
Citing our decision in Emerald Investors Trust v. Gaunt Parsippany Partners, 492 F.3d 192 (3d Cir. 2007), the Supreme Court noted the challenge courts have had in deciding how to assign citizenship for jurisdictional purposes when a trust is a party to a suit. Id. The Court said:
confusion regarding the citizenship of a trust is understandable and widely shared. See Emerald Investors ... (discussing various approaches among the Circuits). The confusion can be explained, perhaps, by tradition. 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. Navarro, 446 U.S., at 462–466 ... . 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. (some citations omitted). The Court then went on to distinguish business trusts from traditional trusts, as follows:
Many States, however, have applied the “trust” label to a variety of unincorporated entities that have little in common with this traditional template. Maryland, for example, treats a real estate investment trust as a “separate legal еntity” that itself can sue or be sued. So long as such an entity is unincorporated, we apply our “oft-repeated rule” that it possesses the citizenship of all its members. Carden, 494 U.S., at 195, ... . But neither this rule nor Navarro limits an entity‘s membership to its trustees just because the entity happens to call itself a trust.
Id. (citation omitted).
While there has been some question about what the Court meant when it said, “[f]or a traditional trust, therefore, there is no need to determine its membership, as would be true
That interpretation of Americold Realty is consistent with the larger context of the Court‘s opinion, which focuses on the distinction between traditional trusts and business trusts, while a contrary reading is not. It would be inconsistent with Americold Realty to say, as the Defendants urge here, that a traditional trust cannot be brought into court but nevertheless can sue or be sued as an entity. Wang, 843 F.3d at 494.
In sum, following the clarification in Americold Realty, the citizenship of a traditional trust is only that of its trustee, while that of a business entity called a trust is that of its constituent owners. Americold Realty thus effectively abrogates our conclusion in Emerald Investors that traditional and business trusts need not be treated differently when determining citizenship for diversity jurisdiction. Emerald Investors, 492 F.3d at 198 n.10. Emerald Investors involved a trust suing partnerships to “recover[] on two unpaid promissory notes and foreclosure of ... mortgages securing the notes.” Id. at 193. To determine diversity jurisdiction, the
Americold Realty, necessarily changes that conclusion. As already explained, it instructs that there is a difference of jurisdictional significance between traditional trusts – which embody a fiduciary relationship – and business trusts – which, though they bear the “trust” name, are uninсorporated business entities. Given the Supreme Court‘s analysis, we now recognize the abrogation of that part of our holding in Emerald Investors that treated the analysis of the jurisdictional citizenship of business trusts the same as that of traditional trusts.
2. Distinguishing Between Traditional And Business Trusts In This Case
The remaining question is how to distinguish between
There are thus at least two inquiries a court should undertake when deciding whether, for diversity purposes, a trust is of the “traditional” or “business” variety. First, the court ought to look to the law of the state where the trust was formed to determine whether the trust has the status of a juridical pеrson. Raymond Loubier, 858 F.3d at 730-31 (looking to Florida state law); Wang, 843 F.3d at 494-95 (looking to D.C. law). Comparing the state law on business trusts and more traditional trust relationships may facilitate a determination of which type is better suited to describe the trust at issue. Wang, 843 F.3d at 494-95. At the same time, however, the particular labels affixed by state law are not of themselves determinative. See Americold Realty, 136 S. Ct. at 1016 (noting that a trust entity‘s membership is not limited to only its trustees “just because the entity happens to call itself a trust“); Navarro, 446 U.S. at 472 & n.5 (Blackmun, J., dissenting) (arguing that state law is “relevant” but not
The second, and closely related, inquiry the court should make focuses on the purpose of the trust – a traditional trust facilitates a donative transfer, Wang, 843 F.3d at 495, while a business trust implements a bargained-for exchange, Strong, supra, at 14-15. Principles described in the Second Restatement of Trusts, a source on which we have relied to identify whether an express trust has been created, see In re Penn Cent. Transp. Co., 484 F.2d 1300, 1305 (3d Cir. 1973) (citing Restatement (Second) of Trusts § 2 (1959)), can be informative in that inquiry.13
Here, the Defendants argue that, even if the trusts at issue were traditional trusts, we should still look to their beneficiaries to determine diversity bеcause of the trusts’ positioning within the layers of GBForefront‘s ownership structure. The Defendants point out that the trusts did not initiate the lawsuit, and rather are relevant only for
The rules for determining citizenship do not change depending on whether a trust is embedded within another business entity. See Lincoln Benefit Life Co., 800 F.3d at 105 n.16 (stating rule to trace citizenship through “however many layers of partners or members there may be” (citation omitted)); cf. Johnson v. SmithKline Beecham Corp., 724 F.3d 337, 348-49 (3d Cir. 2013) (determining citizenship of plaintiff LLC, whose sole member was a corporation, as the states of incorporation and principal place of business of the corporation). Given the Supreme Court‘s decision in Americold Realty, the jurisdictional citizenship of а traditional trust is only that of its trustee. That rule is definitive.
Unfortunately, the record on appeal is insufficient for us to apply that rule to resolve the Defendants’ factual challenge to diversity jurisdiction in this case. In particular, the record is insufficient because GBForefront comprised five trusts but the record only contains the trust instrument for one of them. We must, therefore, remand to the District Court with instructions for it to determine, based on the foregoing guidance, whether
III. CONCLUSION
Accordingly, we will vacate the District Court order dismissing the case for lack of diversity jurisdiction and remand for further proceedings consistent with this opinion.