France v. Thermo Funding Co.
| Decision Date | 12 November 2013 |
| Docket Number | No. 13 Civ. 712(SAS).,13 Civ. 712(SAS). |
| Parties | Thales Alenia Space FRANCE, Plaintiff, v. THERMO FUNDING COMPANY, LLC, Defendant. |
| Court | U.S. District Court — Southern District of New York |
OPINION TEXT STARTS HERE
Elliot E. Polebaum, Esq., Fried, Frank, Harris, Shriver & Jacobson LLP, Eugene N. Hansen, Esq., Fried, Frank, Harris, Shriver & Jacobson LLP, Washington, DC, for Plaintiff.
Gerald S. Greenberg, Esq., Taft Stettinius & Hollister LLP, Cincinnati, OH, for Defendant.
In this action for an alleged breach of contract, defendant Thermo Funding Company, LLC (“Thermo”) challenges this Court's subject-matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). Plaintiff Thales Alenia Space France (“Thales”), a French company, claims diversity of citizenship because the action is between a citizen of a State (Thermo) and a citizen of a foreign state (Thales). Thermo claims that it too is a citizen of a foreign state, and thus diversity of citizenship is lacking.
As a limited liability company, Thermo takes the citizenship of its members. The sole membership interest in Thermo is held by a trust. While the sole trustee is a citizen of Colorado, one of the trust's beneficiaries is domiciled in Australia.1 The question is whether Thermo's citizenship is determined by the citizenship of the trust's beneficiaries, or solely by that of its trustees.
Because the trust here is a traditional, testamentary trust—not a business or statutory trust 2—only the trustees' citizenships are considered for diversity purposes. As such, complete diversity of citizenship exists and this Court has subject-matter jurisdiction over this action.
Thales is a French aerospace company involved in the manufacture of satellites,3 while Thermo is a private equity firm organized as a Colorado limited liability company (LLC).4 This case arises from a series of contracts stemming from Thermo's controlling ownership interest in Globalstar, Inc., a provider of satellite voice and data services that contracted with Thales to purchase a fleet of satellites.5 The amount in controversy exceeds $75,000.6 For a full description of the contractual relations between the parties which gave rise to this action, see this Court's Opinion and Order dated June 25, 2013.7
The sole membership interest in Thermo is held in the James Monroe Revocable Trust (“the Trust”).8 The Trust was created in 1997 and is currently governed by a “First Restatement of Declaration and Agreement of Trust” dated August 10 of that year.9 The grantor of the trust is also its current sole trustee, James Monroe, III.10
The Trust is an inter vivos trust established under Colorado law 11—it is not a business or statutory trust registered as a business entity.12 The grantor—Monroe—reserves the right to “amend, modify or revoke” the Trust at any time.13 He is also entitled to all income derived from trust assets, as well as any part of the principal of the Trust, subject to his discretion.14 In short, Monroe has absolute discretion during his lifetime as to the existence of the Trust and the disposition of trust assets.
Upon Monroe's death, the income from the Trust shifts to his wife, and the trustee is empowered to distribute amounts from the principal to her at its discretion.15 Upon the death of Monroe's wife, or upon Monroe's death if he survives her, the trust distributes set amounts to several named beneficiaries.16 After this, the residual goes to either a limited partnership or an additional trust established for the benefit of Monroe's children.17
Both parties agree that Monroe is a citizen of Colorado. 18 Thus, if Monroe's citizenship is all that can be ascribed to Thermo, diversity of citizenship is not in dispute. However, one of the named beneficiaries in the Trust Agreement is Vicky Monroe Harris, Monroe's sister. 19 Harris is a citizen of the United States, the United Kingdom, and Australia, and is domiciled in Australia.20 If Thermo's citizenship is determined by that of Harris, then this Court lacks subject-matter jurisdiction.21 Thus, the sole question is whether Thermo's citizenship is determined by reference to the Trust's beneficiaries, or solely by the citizenship of its trustee.
Federal Rule of Civil Procedure 12(b)(1) requires the dismissal of a claim when a federal court lacks subject matter jurisdiction. The proponent of jurisdiction (typically the plaintiff) bears the burden of establishing subject matter jurisdiction by a preponderance of the evidence.22
In considering a motion to dismiss for lack of subject matter jurisdiction, “ ‘the court must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of plaintiff,’ ” 23 However, “ ‘jurisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it.’ ” 24 In fact, “where jurisdictional facts are placed in dispute, the court has the power and obligation to decide issues of fact by reference to evidence outside the pleadings, such as affidavits.” 25 “In deciding the motion, the court ‘may consider affidavits and other materials beyond the pleadings to resolve the jurisdictional issue, but [it] may not rely on conclusory or hearsay statements contained in the affidavits.’ ” 26
IV. APPLICABLE LAWA. Diversity Jurisdiction and Alienage
District courts can exercise subject-matter jurisdiction over actions containing only state law claims where the amount in controversy exceeds $75,000 and the opposing parties are “citizens of a State and citizens or subjects of a foreign state.” 27 This is commonly known as “alienage diversity.” 28
Federal jurisdiction may not be asserted on the basis of diversity unless “the citizenship of each plaintiff is diverse from the citizenship of each defendant.” 29 For alienage diversity, this means that “[t]he presence of aliens on two sides of a case destroys diversity jurisdiction.” 30 Additionally, United States citizens domiciled abroad are treated as neither citizens of a foreign state nor citizens of a particular U.S. state, and will therefore destroy diversity jurisdiction in any case to which they are a party.31
B. Garden and Diversity for Unincorporated Associations
While a corporation takes the citizenship of both the state in which it is incorporated and the state where “it has its principal place of business,” 32 the same is not true for other business entities. In Carden v. Arkoma Associates,33 the Supreme Court reaffirmed the longstanding rule that the citizenship of an unincorporated entity—in that case a limited partnership—derives from the citizenships of “all of the entity's members.” 34 This holding applies to limited liability companies (LLCs) as well.35
The reasoning in Carden applies to a broad range of unincorporated associations and business entities.36 For example, some federal courts have held that business trusts take the citizenship of their beneficiaries (in some cases referred to as “shareholders”).37 However, a traditional trust—essentially a nexus of contract between the grantor and the trustee(s)—differs from a business or statutory trust in several important ways.
C. Distinguishing Traditional and Business Trusts
A trust is best defined as a contract or fiduciary relationship between a holder of property (called the grantor, settlor, or trustor) and one or more trustees.38 The settlor transfers legal title to the trust property (also known as the res) to the trustees, 39 who then carry out the manifested “intention[s] of the settlor” 40 and maintain, use, or distribute the property to benefit the beneficiaries of the trust.41 This form, commonly used for gift or estate-planning purposes, is what I will call a traditional trust.
A traditional trust may be created in several ways—three of which follow:
(a) a transfer by the will of a property owner to another person as trustee for one or more persons; or
(b) a transfer inter vivos by a property owner to another person as trustee for one or more persons; or
(c) a declaration by an owner of property that he or she holds that property as trustee for one or more persons.... 42
The first of these is known as a “testamentary trust” while the latter two are known as “inter vivos trust[s].” 43
While the term “trust” typically refers to the traditional gift and estate planning trusts described above, the term has also been used to describe another legal form: the business or statutory trust.
“[I]n general the term ‘business trust’ has been used ‘to denote an unincorporated organization created for profit under a written instrument or declaration of trust, the management to be conducted by compensated trustees for the benefit of persons whose legal interests are represented by transferable certificates of participation, or shares.’ ” 44
Business trusts are more akin to business entities—such as limited partnerships, LLCs, or even corporations—than to the traditional trusts described above.45 In fact, Colorado law excludes business trusts from the definition of trusts within that state's probate code.46
A leading treatise on trusts notes the key distinction between the two forms as follows:
The most significant characteristic of the business trust, and the most important distinction between such trusts and ordinary trusts established by will or inter vivo, lies in the fact that the business trust is organized not as a means of effecting a gift or transfer but as a device for profit making through the combination of capital contributed by a number of investors.47
Other distinctions between the two types of trusts include whether the trust was “established to run a business enterprise,” 48 as well as the power of “the beneficiaries to elect and...
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