In re Ltd.

• Decision Date: 24 June 2011
• Docket Number: Adversary No. 2:11–ap–00725.,Bankruptcy No. 2:08–bk–07465–RJH.
• Citation: 55 Bankr.Ct.Dec. 20,452 B.R. 776
• Parties: In re MORTGAGES LTD., Debtor.ML Liquidating Trust, Plaintiff,v.Mayer Hoffman McCann P.C., a professional corporation; CBIZ, Inc., a corporation; and CBIZ MHM, LLC, a limited liability company, Defendants.
• Court: U.S. Bankruptcy Court — District of Arizona

452 B.R. 776

55 Bankr.Ct.Dec. 20

In re MORTGAGES LTD., Debtor.ML Liquidating Trust, Plaintiff,

v.Mayer Hoffman McCann P.C., a professional corporation; CBIZ, Inc., a corporation; and CBIZ MHM, LLC, a limited liability company, Defendants.

Bankruptcy No. 2:08–bk–07465–RJH.

Adversary No. 2:11–ap–00725.

United States Bankruptcy Court, D. Arizona.

June 24, 2011.

Todd M. Adkins, Jennings, Strouss and Salmon, Phoenix, AZ, for Debtor.David F. Adler, Shimshon Balanson, Katherine Virginia Brown, Jones Day, Cleveland, OH, for Defendants.Christopher Anthony Caserta, Nicholas J. Dicarlo, Dicarlo Caserta McKeighan & Phelps PLLC, Scottsdale, AZ, for Plaintiff.

OPINION AND ORDER DENYING MOTION TO REMAND

RANDOLPH J. HAINES, Bankruptcy Judge.

This motion to remand raises essentially three questions: (1) what is the citizenship of a post-confirmation liquidating trust for purposes of diversity jurisdiction; (2) is litigation vested in a post-confirmation liquidating trust sufficiently “related to” the bankruptcy case for bankruptcy jurisdiction; and (3) may a bankruptcy court remand “on any equitable ground” if diversity jurisdiction also exists? The Court concludes that both diversity jurisdiction and bankruptcy jurisdiction exist, and that remand on equitable grounds is not permissible.

Background Facts

Mortgages Ltd. was one of the oldest hard money lenders in Arizona. At least in recent years, almost all the money lent was raised from local private investors. Mortgages Ltd. continued making development and construction loans, or at least loan commitments, even after the credit and real estate markets collapse of 2006. Ultimately, however, in the summer of 2008 the president (the son of the founder) committed suicide and its bankruptcy case followed shortly thereafter.

In the summer of 2009, the official committee of investors confirmed a liquidating plan of reorganization. That First Amended Plan of Reorganization created a liquidating trust and vested in it all of the Debtor's non-loan assets, specifically including all of the Debtor's causes of action and avoidance actions (other than actions seeking collection on promissory notes and loans).¹ The Debtor continued to exist as a Reorganized Debtor, so that it could continue to function as the loan servicer for the outstanding loans. However, the ownership of the Reorganized Debtor was entirely vested in the liquidating trust, and the Reorganized Debtor entered into a sub-servicing agreement with ML Manager LLC to service the outstanding loans on behalf of the Loan LLCs.

A little over a year later, the liquidating trust filed suit in state court against the Debtor's former accountants and auditors asserting various claims of accounting malpractice and negligent misrepresentation. The complaint asserted that Defendants had issued audits in 2005, 2006 and 2007 that were materially false and misleading, that were not prepared in conformity with generally accepted accounting principles, that concealed the Debtor's true financial condition and that artificially prolonged its existence and deepened its insolvency.

The Defendants removed the complaint to federal District Court, asserting both diversity jurisdiction ² and bankruptcy jurisdiction.³ Immediately after removal, the defendants also moved in the District Court to have the case referred to Bankruptcy Court under the District Court's General Referral Order and Local Bankruptcy Rule 5011–1.⁴

In November, Defendants filed a motion to dismiss the complaint and plaintiff filed a motion to remand the matter to state court. Visiting District Judge Ralph Beistline granted the motion to refer the case to this Bankruptcy Court, without ruling on either the pending motion for remand or the motion to dismiss. The Plaintiff Liquidating Trust then obtained a hearing in this Court on its pending motion to remand. After oral argument, the Court took the motion under advisement.

Diversity Jurisdiction Exists, Based on the Trustee's Citizenship

Defendants contend that complete diversity exists because they are citizens of Kansas (Mayer Hoffman) and Ohio (CBIZ and CBIZ MHM), while citizenship of the Plaintiff Liquidating Trust is Georgia, based on the citizenship of its Trustee, Kevin O'Halloran. The Plaintiff Liquidating Trust, however, contends that complete diversity is lacking because a trust takes the citizenship of both its trustee and all of its beneficiaries, and that one of the investor beneficiaries is an Ohio resident, the same as Defendant CBIZ.

In Johnson,⁵ the Ninth Circuit held: “A trust has the citizenship of its trustee or trustees.” That holding was necessary to the result—that diversity jurisdiction existed—because one of the (indirect) members of a defendant LLC was a trust.

As support for its conclusion that a trust has the citizenship of its trustee, the Ninth Circuit provided a “ see ” citation to the Supreme Court holding in Navarro.⁶ In Navarro, the issue was whether diversity jurisdiction existed over a suit brought by a trustee of a business trust, when one of the beneficiaries of that business trust had the same citizenship as the defendant. The defendant argued that the real estate investment business trust, although in form an express trust, was essentially an unincorporated association. The opinion in Navarro therefore framed the question: “Fidelity is an express trust, and the question is whether its trustees are real parties to this controversy for purposes of a federal court's diversity jurisdiction.” ⁷ In answering that question, the Navarro opinion noted that as early as 1808 trustees of an express trust were entitled to bring diversity actions in their own names and based on their own citizenship. ⁸ It also noted that in 1870, the court had held that jurisdiction based upon the citizenship of individual trustees “is not defeated by the fact that the parties whom they represent may be disqualified. [Citation omitted] ‘[T]he residents of those who may have the equitable interest’ is simply irrelevant.” ⁹ Finally, the court also cited Bullard, holding that the result would not differ when the trust beneficiaries were numerous and widely scattered, so long as the trustee had legal title to trust assets and had the customary authority to hold, manage and dispose of assets for the benefit of others.¹⁰ In such cases, “[t]he beneficiaries were not necessary parties and their citizenship was immaterial.” ¹¹

Thus so long as the trustee's powers are both customary and real and substantial, there is no allegation of sham or collusion and the trustees are not “mere conduits,” then “they are real parties to the controversy,” which may be maintained in diversity jurisdiction “without regard to the citizenship of the trust beneficiaries.” ¹²

Plaintiffs nonetheless argue, in effect, that the clear holding in Navarro was subsequently overruled by Justice Scalia's five-four majority opinion in Carden.¹³ Carden addressed the question whether the citizenship of the limited partners must be taken into consideration in determining the existence of diversity jurisdiction when a party is a limited partnership. Because that was the only issue in that case, necessarily anything it might have had to say about diversity jurisdiction involving trusts would be at best dictum. In the course of deciding that the citizenship of limited partners must be considered, Justice Scalia's opinion made the general observation that a corporation is the only artificial entity that has its own citizenship, and that for all other artificial entities the citizenship of the members must also be considered. In the course of rejecting the plaintiff's argument that there was more than one exception to that general principle, because Navarro held that a trust had the citizenship of its trustee, Justice Scalia explained that Navarro did not hold that “the trust had attributes making it a ‘citizen.’ ” ¹⁴ Instead of holding that a trust has any citizenship, Justice Scalia explained, Navarro simply applied the rule “more than 150 years old,” that “a trustee is a real party to the controversy,” so his citizenship is determinative.

To argue that dictum has some implication for diversity jurisdiction in cases involving trusts, plaintiff seizes on the fact that the suit in Navarro was brought in the name of the trustees, rather than in the name of the trust itself. But nothing in either Navarro or Carden suggests the name of the plaintiff is controlling. The issue underlying Navarro, and why the Supreme Court granted certiorari, was whether a business trust, or a real estate investment trust, should be treated for diversity purposes as a trust or instead as an unincorporated association. The Fifth Circuit concluded it should be treated as a trust, and that citizenship for purposes of diversity jurisdiction should be that of the real parties in interest, which for a trust is the trustees.¹⁵ The Third ¹⁶ and Fourth Circuits,¹⁷ and Justice Blackmun's lone dissent in Navarro,¹⁸ instead concluded that business trusts should be regarded not as trusts but instead as unincorporated associations, for which the real parties in interest are the members so their citizenship should be controlling for diversity purposes. Those conclusions generally relied on the Supreme Court's holding in Morrissey¹⁹ that business trusts should be taxed as unincorporated associations instead of as trusts, an analysis that Navarro expressly held to be irrelevant.²⁰ But none of those opinions ever suggested that if it were regarded as a trust, instead of a business association, the real parties in interest might be the beneficiaries of the trust, whose citizenship should control. Instead, all of the opinions were in agreement with the 150–year–old rule that the trustee is the real party in interest, whose citizenship is controlling. They recognized that if the REITs were treated as trusts, “[t]he result, of course, would be to treat a REIT as a citizen of every state in...