LOS ANGELES—Unincorporated REITs and other entities with a similar organization or governed by comparable laws that are currently in federal court litigation based on diversity jurisdiction should examine whether they may be subject to a jurisdictional challenge based on a recent court decision, according to sources in this exclusive Q&A below. Sources Alexis Miller Buese is an associate and Bridget S. Johnsen is a partner in Sidley Austin LLP's Los Angeles office.

The views expressed in their answers below are exclusively those of the authors and do not necessarily reflect those of Sidley Austin LLP and its partners.

GlobeSt.com: What happened in Americold Realty Trust v. Conagra Foods, Inc.?

Bridget Johnsen and Alexis Miller Buese: The Supreme Court was asked to decide a simple issue—the citizenship of a Maryland unincorporated real estate investment trust for purposes of federal diversity jurisdiction, which exists only if none of the plaintiffs is a citizen of the same state as any of the defendants. In its March 2016 opinion, the Supreme Court decided that an unincorporated entity formed under Maryland law is a citizen of all states in which its members and shareholders are citizens. Because there was no record in the case of the citizenship of the shareholders of the REIT, the parties had not shown federal diversity jurisdiction when the case was removed from state to federal court. As a result, the federal court never had jurisdiction to hear the case that had been decided in favor of the REIT.

GlobeSt.com: Why did the Supreme Court hear the case?

Johnsen and Buese: It wanted to address the “confusion” regarding the citizenship of unincorporated entities. The Supreme Court rejected the position taken by many courts holding that the citizenship of business trusts is based on the trustees rather than shareholders or members.

GlobeSt.com: What factors were considered when deciding the case?

Johnsen and Buese: The Supreme Court applied what it described as the “oft-repeated rule”, which is to look at the citizenship of the members of an artificial entity. The Supreme Court also distinguished unincorporated entities from corporations. Congress has adopted a specific exception for corporations and limited their citizenship to where the entity is incorporated and has its principal place of business (essentially, its headquarters), but the Supreme Court declined to extend this rule to the unincorporated Maryland REIT. The Supreme Court also refused to liken the REIT to a traditional trust, the latter of which is not a distinct legal entity so the citizenship of the trustee is determinative in disputes. Rather, Maryland law treated the REIT as a separate legal entity, making the citizenship of its shareholders relevant. Finally, because the shareholders in the Maryland REIT have “ownership interests” and votes in the trust, they are like partners in a limited partnership or shareholders of a joint-stock company, which have the citizenship of all of their partners or members.

GlobeSt.com: Is the Americold decision a first?

Johnsen and Buese: While the rationale for the decision goes back over one hundred years, the Supreme Court had not directly addressed the citizenship of an unincorporated REIT or similar entities. As the states adopted various organizational structures for such entities, the number of conflicting federal court opinions on this issue grew, leading to the recent clarification.

GlobeSt.com: What is the significance of the Americold case?

Johnsen and Buese: When the citizenship of an unincorporated REIT includes every state where its shareholders are citizens, it is markedly more difficult to have diversity jurisdiction in a dispute with a widely-held unincorporated REIT. This limits the access of these entities to the federal courts and leaves the resolution of such disputes to the state courts, which often have fewer resources for addressing complex matters.

GlobeSt.com: Does this decision apply to only REITs?

Johnsen and Buese: While the decision arose in the context of a specific Maryland REIT, the Supreme Court's reasoning would apply to other unincorporated trusts and REITs organized under similar state laws.

GlobeSt.com: Could the law change?

Johnsen and Buese: The short Supreme Court opinion in Americold adopts a bright line distinction between unincorporated entities and corporations that will not change absent an affirmative act by Congress to expand the scope of diversity jurisdiction for unincorporated entities, which is unlikely.

GlobeSt.com: What is the take away from this decision?

Johnsen and Buese: Unincorporated REITs and other entities with a similar organization or governed by comparable laws that are currently in federal court litigation based on diversity jurisdiction should examine whether they may be subject to a jurisdictional challenge based on Americold, which can be made at any time, including after a favorable decision. In the long term, these entities should evaluate whether the benefits of increased access to federal court justify converting an incorporated trust to a corporation or consider contractual alternative procedures for resolving disputes, including arbitration or judicial reference.

This answers in this Q&A have been prepared for informational purposes only and does not constitute legal advice, according to the sources. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.

Bridget S. Johnsen is a partner at Sidley Austin LLP

Alexis Miller Buese is an associate at Sidley Austin LLP

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Supreme Court Clarifies Citizenship for Unincorporated REITs

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