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NATIONAL CITY BANK v. FIDELCO GROWTH INVESTORS

February 17, 1978

NATIONAL CITY BANK and ROYAL SCOTSMAN INNS CORPORATION
v.
FIDELCO GROWTH INVESTORS and LATIMER & BUCK ADVISERS, INC.



The opinion of the court was delivered by: LUONGO

 National City Bank, a federally-chartered national banking association with headquarters in Ohio, and Royal Scotsman Inns Corporation, a South Carolina corporation, brought this diversity action in May of 1975, seeking (1) an order compelling specific performance of certain real estate contracts, (2) consequential and punitive damages for breach of certain contracts, and (3) compensatory and punitive damages for certain tortious conduct. The complaint names as defendants Fidelco Growth Investors (Fidelco), a common law business trust primarily engaged in the business of a real estate investment trust, and Latimer & Buck Advisers, Inc., a Pennsylvania corporation.

 On October 26, 1977, a few days before a scheduled pretrial conference, Fidelco moved to dismiss the complaint under Rule 12(b)(1) on the ground that the requisite diversity of citizenship is lacking. See generally 28 U.S.C.A. § 1332(a) (Supp. 1977). At the pretrial conference on November 3, 1977, I directed counsel to create a record establishing the citizenship of the owners of the beneficial interests in Fidelco, as well as the nature of a real estate investment trust (REIT), in order that the jurisdictional issue might be determined prior to trial. See Fed. R. Civ. P. 12(d). Such record has been created and briefs submitted. Opportunity was afforded for hearing and oral argument, but the parties have opted to rely on the record and written briefs.

 The issue raised by Fidelco's motion is how a federal court should determine the citizenship of a business trust for the purposes of diversity jurisdiction. Fidelco, a common law business trust, Stipulation para. 1, contends that it should be treated as an unincorporated association, in which event Fidelco would be a citizen of each and every state of which one or more of its members are citizens. See, e.g., United Steelworkers v. R.H. Bouligny, Inc., 382 U.S. 145, 15 L. Ed. 2d 217, 86 S. Ct. 272 (1965); Chapman v. Barney, 129 U.S. 677, 32 L. Ed. 800, 9 S. Ct. 426 (1889); Carlsberg Resources Corp. v. Cambria Sav. & Loan Ass'n, 554 F.2d 1254, 1258 & n.15 (3d Cir. 1977) (citing cases). Plaintiffs, on the other hand, argue that Fidelco should be treated as a conventional trust, in which event it would be a citizen only of those states of which one or more of its trustees are citizens. See, e.g., Bullard v. City of Cisco, 290 U.S. 179, 78 L. Ed. 254, 54 S. Ct. 177 (1933); General Heat & Power Co. v. Diversified Mortgage Investors, 552 F.2d 556, 557-58 n.1 (3d Cir. 1977); 3A Moore's Federal Practice P 17.04 at p. 17-27 (2d ed. 1948). To treat Fidelco, which has shareholders in both Ohio and South Carolina, as an unincorporated association would destroy the complete diversity of citizenship required to maintain this action; *fn1" to treat it as a conventional trust would preserve complete diversity. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L. Ed. 435 (1806); Carlsberg Resources Corp. v. Cambria Sav. & Loan Ass'n, supra, 554 F.2d at 1257-58.

 It may be well to note at the outset that this case does not present the question whether a business trust such as Fidelco may be treated as a corporation for the purposes of diversity jurisdiction. See generally 28 U.S.C. § 1332(c) (1970) ("[A] corporation shall be deemed a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.") That question has uniformly been answered in the negative. E.g., Riverside Mem. Mausoleum, Inc. v. UMET Trust, 434 F. Supp. 58, 59-60 (E.D. Pa. 1977); Lincoln Assocs., Inc. v. Great American Mortgage Investors, 415 F. Supp. 351, 355-56 (N.D. Tex. 1976); Carey v. U.S. Indus., Inc., 414 F. Supp. 794 (N.D. Ill. 1976); Jim Walter Investors v. Empire-Madison, Inc., 401 F. Supp. 425, 427-28 (N.D. Ga. 1975); Larwin Mortgage Investors v. Riverdrive Mall, Inc., 392 F. Supp. 97, 98-99 (S.D. Tex. 1975). When faced with that question in an earlier case, I, too, concluded that a business trust could not be treated as a corporation in determining its citizenship in a diversity case. Fox v. Prudent Resources Trust, 382 F. Supp. 81, 92-93 (E.D. Pa. 1974). Although the plaintiffs express their displeasure with these decisions which plainly have reduced the business trust's amenability to suit in diversity cases, they do not contend that Fidelco should be treated as a corporation. Rather, they urge that it be treated as a conventional trust.

 The plaintiffs raise two arguments in support of their position. First, they emphasize that at the time this action was filed, Fidelco, a common law business trust, qualified for certain favorable tax treatment as a real estate investment trust, or REIT, under sections 856-58 of the Internal Revenue Code. Stipulation para. 2. See generally I.R.C. §§ 856-58 (Supp. V 1975) (amended 1976); 26 C.F.R. §§ 1.856 to 1.858-1 (1977). To qualify as a REIT, an organization must satisfy numerous conditions; in particular, it must be managed by one or more "trustees." See I.R.C. § 856(a)(1) (Supp. V 1975) (amended 1976); 26 C.F.R. § 1.856-1(b)(1), (d)(1) (1977). The plaintiffs continue: "Fidelco, having qualified as a trust under a federal statute intended to supply tax relief to such entities engaged in real estate transactions, should not now be treated by a federal court as something other than a trust for purposes of determining its citizenship." Memorandum of Law on Diversity Jurisdiction (Document No. 70) at 5-6.

 This argument, however, sweeps too broadly. That an organization qualifies as a REIT is undoubtedly relevant to, but scarcely conclusive on, the question whether it should be treated as a conventional trust. See Larwin Mortgage Investors v. Riverdrive Mall, Inc., supra, 392 F. Supp. at 101. The latter question must be determined by assessing the organization's "intrinsic nature and purpose . . . as a business enterprise," Lincoln Assocs., Inc. v. Great American Mortgage Investors, supra, 415 F. Supp. at 354, and the organization's REIT status is but a single fact to be considered in that evaluation. *fn2"

 The plaintiffs' second argument seemingly acknowledges that a business trust's citizenship cannot be determined solely on the basis of its REIT status. This argument, in essence, is that "reality requires recognition of a business trust as a citizen solely of the states where its trustees reside." Brief in Opposition to Defendants' Motion (Document No. 66) at 5. I believe the following brief discussion will demonstrate that if reality is the touchstone, Fidelco, like most business trusts, should be treated as an unincorporated association rather than as a conventional trust.

 The business trust, to begin with

 
"is a form of business organization . .. consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to time be the holders of transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided. These certificates, which resemble certificates for shares of stock in a corporation and are issued and transferred in like manner, entitle the holders to share ratably in the income of the property, and, upon termination of the trust, in the proceeds."

 Hecht v. Malley, 265 U.S. 144, 146-47, 68 L. Ed. 949, 44 S. Ct. 462 (1924) (footnote omitted). In Morrissey v. Commissioner, 296 U.S. 344, 80 L. Ed. 263, 56 S. Ct. 289 (1935), *fn3" Chief Justice Hughes, writing for a unanimous Court, distinguished the business trust from the conventional trust:

 
"In what are called 'business trusts' the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains. Thus a trust may be created as a convenient method by which persons become associated for dealings in real estate, the development of tracts of land, the construction of improvements, and the purchase, management and sale of properties; or for dealings in securities or other personal property; or for the production, or manufacture, and sale of commodities; or for commerce, or other sorts of business; where those who become beneficially interested, either by joining in the plan at the outset, or by later participation according to the terms of the arrangement, seek to share the advantages of a union of their interests in the common enterprise." 296 U.S. at 357.

 Later on in the Morrissey opinion, Chief Justice Hughes examined the similarities between the business trust and the corporation:


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