07 March 2016

Maryland REITs are like LLCs for Diversity Jurisdiction, Not Trusts

The U.S. Supreme Court Ruling

The U.S. settled a significant split of the circuit courts of appeal on the classification of Maryland business trusts (the most common organizational form of REITs) for diversity jurisdiction purposes in Americold Realty Trust v. ConAgra Foods, Inc. today.


Maryland Business Trusts

Maryland is the Delaware of real estate investment trusts (REITs) which are a federal income tax recognized passthrough entity similar to mutual funds for real estate portfolios.  These entities are organized as Maryland business trusts which typically have large numbers of publicly held shares, are managed by a board of trustees, and critically have the power under state law to sue and be sued.

Diversity Jurisidiction

Under federal law, diversity jurisdiction which provides access to the federal courts when the Plaintiffs and Defendants in a lawsuit have no state in common (something called "complete diversity") and the amount in controversy is more than $75,000 (occasionally updated by Congress).

State and territorial law corporations are considered citizens of the state where they are incorporated and the state where they have a principal office; federally chartered corporations are citizens of the state where they have their principal office in the United States.

Ordinary common law trusts are not entities and instead have trustees who sue and are sued in their official capacity in lieu of suing the trust entity, on the old chancery court theory that equity acts on the person.

All other commonly used entity forms (e.g. partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), limited liability limited partners (LLLPs), limited liability companies (LLCs), and limited partnership associations (LPAs)) are citizens of every state where their partners, members, or other owners reside.

The Case

The REIT in the case argued that it should be treated as a trust for diversity jurisdiction, since it was called a trust and only the citizenship of the members of the Board of Trustees would be relevant. The Defendants who had a real estate dispute with the trust argued that it should be treated as an LLC since it was an unincorporated entity that was not a corporation.  Amici and the U.S. Solicitor General suggested that treating it as a corporation would be appropriate since it had publicly traded shares and in general was similar to a corporation in most other respects even though it was not called one.

The U.S. Supreme Court unanimously held in a short formalistic decision deferred to ancient precedents on the matter and held that since this entity could sue and be sued under state law that it was not really a trust, even though it was called one, and that since it was not called a corporation that it was an unincorporated business entity.  Therefore, the diversity jurisdiction applicable to LLCs applies to Maryland business trusts.


The rule chosen by the U.S. Supreme Court is simple to apply to future cases.  It has the net effect that REITs will almost never be eligible for diversity jurisdiction in federal court, since it will typically have shareholders in almost every state where it has members, and because it will be very hard for it to prove that no shareholder is a citizen of the state where it is in litigation, because its shares are constantly traded in the securities markets.

For REITs, which deal with real estate, where the main impact will be felt, this will keep lots of high end real estate litigation out of the federal courts (where it probably doesn't belong), and is unlikely to lead to much unfairness, because it is hard to argue that major property owners in a state, even they are basically absentee landlords, are likely to face serious discrimination in state courts.  After all, doing business in real estate (usually investment and commercial real estate) in a jurisdiction almost always makes it necessary for the owner to engage local counsel to deal with it anyway.

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