Lincoln Associates, Inc. v. Great Am. Mortg. Investors

• Decision Date: 24 June 1976
• Docket Number: No. CA 3-76-0553-C.,CA 3-76-0553-C.
• Parties: LINCOLN ASSOCIATES, INC., a corporation v. GREAT AMERICAN MORTGAGE INVESTORS, a Real Estate Investment Trust, et al.
• Court: U.S. District Court — Northern District of Texas

415 F. Supp. 351

LINCOLN ASSOCIATES, INC., a corporation v. GREAT AMERICAN MORTGAGE INVESTORS, a Real Estate Investment Trust, et al.

No. CA 3-76-0553-C.

United States District Court, N. D. Texas, Dallas Division.

June 24, 1976.

Roger D. Marshall and Carl E. Glaze, Freytag & Marshall, Dallas, Tex., for plaintiff.

Sam Day, McDonald, Sanders, Ginsburg, Phillips, Maddox & Newkirk, Fort Worth, Tex., for Great Am. Mortg. Investors.

Ernest E. Figari, Jr., Merrill L. Hartman and David P. Seikel of Hewett, Johnson, Swanson & Barbee, Dallas, Tex. and L. Robert Lieb, Lieb, Wolff & Samson, West Orange, N. J., for Institutional Investors Trust.

MEMORANDUM OPINION AND ORDER

WILLIAM M. TAYLOR, Jr., Chief Judge.

Plaintiff, a Texas corporation with its principal office and place of business in Dallas, Texas, brought this suit against defendants in the 191st District Court of Dallas County, Texas, seeking specific performance of a Note Purchase Agreement by defendants, and alternatively damages for alleged breach of such agreement. In addition, plaintiff seeks the appointment of a receiver for the assets of Great American Mortgage Investors (GAMI), and Institutional Investors Trust (IIT), and an injunction against all defendants from disbursing or dissipating the remaining assets of defendants.

IIT removed the suit to federal court on April 19, 1976, on the basis of diversity jurisdiction.¹ Plaintiff filed a Motion to Remand the case to state court, and upon considering that motion the Court was of the opinion that diversity of citizenship did not exist. On May 5, 1976, the Court entered an order remanding this cause to the state court based on lack of subject matter jurisdiction of this Court. On May 7, 1976, IIT requested and was granted a stay of the order of remand for the purpose of presenting briefs and argument in opposition to the remand. After having considered the briefs of the parties and the oral arguments heard on June 7, 1976, the Court is of the opinion that the following Order should be entered.

It is a fundamental principle that federal courts are courts of limited jurisdiction and are empowered to hear only those cases specifically authorized to be heard by a jurisdictional grant from Congress pursuant to Article III of the Constitution.

The dominant note in the successive enactments of Congress relating to diversity jurisdiction, is one of jealous restriction, of avoiding offense to state sensitiveness, and of relieving the federal courts of the overwhelming burden of "business that intrinsically belongs to the state courts," in order to keep them free for their distinctive federal business.

Indianapolis v. Chase National Bank, 314 U.S. 63, 76, 62 S.Ct. 15, 20, 86 L.Ed. 47 (1941). See also Wright, Federal Courts 15 (2d ed. 1970). Obviously, if jurisdiction is vested in the federal courts, then neither a crowded docket nor the possibility of a more expeditious resolution by the state court nor anything else can deprive litigants of a federal forum. Thermtron Products, Inc. v. Hermansdorfer, 423 U.S. 336, 96 S.Ct. 584, 46 L.Ed.2d 542, 44 L.W. 4085 (1976). On the other hand,

the policy of the statute conferring diversity jurisdiction upon the district courts calls for its strict construction. The power reserved to the states, under the Constitution, to provide for the determination of controversies in their courts may be restricted only by the action of Congress in conformity to the judiciary sections of the Constitution . . .. Due regard for the rightful independence of state governments, which should actuate federal courts, requires that they scrupulously confine their own jurisdiction to the precise limits which the statute has defined.

Healy v. Ratta, 292 U.S. 263, 270, 54 S.Ct. 700, 703, 78 L.Ed. 1248 (1934). If the facts in this case do not fall within the precise bounds of the grant of diversity jurisdiction in 28 U.S.C. § 1332, then the Court simply cannot entertain this case.

The issue before the Court is the determination of the citizenship of IIT for diversity purposes. This determination is strictly a matter of federal law. Stifel v. Hopkins, 477 F.2d 1116 (6th Cir. 1973). IIT contends that it should be treated as an ordinary trust, so that its citizenship is determined by reference to the citizenship of its trustees. See Bullard v. City of Cisco, 290 U.S. 179, 54 S.Ct. 177, 78 L.Ed. 254 (1933). Plaintiff contends that IIT should be treated as an unincorporated association, whose citizenship is determined by looking to that of IIT's individual shareholders. IIT also contends that in the event the Court finds that IIT is an unincorporated association for diversity purposes, then the Court should "characterize" it as a limited partnership or as a corporation for purposes of determining its citizenship. A resolution of the issue of IIT's citizenship turns on a determination of the nature of the business enterprise of IIT.

IIT is a Massachusetts real estate trust,² organized under a Declaration of Trust dated May 22, 1970. IIT is an investment vehicle which has transferable shares publicly traded on the New York Stock Exchange³ and is subject to regulation by the Securities and Exchange Commission. IIT's shareholders have the right to elect trustees,⁴ and to remove them with or without cause.⁵ IIT's trustees have the power to invest in or purchase real estate assets and any other real and personal property.⁶ Distributions of net profits, surplus, capital and assets are made to the shareholders from time to time as the trustees deem proper.⁷ The Declaration of Trust requires the consent of its shareholders for certain transactions.⁸ Annual and special shareholders' meetings are to be held,⁹ and the Declaration of Trust is subject to termination or amendment by vote of two-thirds of the shareholders.¹⁰ Finally, IIT was organized so that it can elect to be treated as a Real Estate Investment Trust (REIT) for tax purposes under Sections 856, 857, and 858 of the Internal Revenue Code of 1954.

With regard to IIT's contention that for diversity purposes it should be treated as an ordinary trust rather than as an unincorporated association, this Court is guided by the Supreme Court's articulation of the difference between an ordinary trust and a business trust or association:

The nature and purpose of the cooperative undertaking will differentiate the association from an ordinary 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 . . . 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.

Morrissey v. Commissioner of Internal Revenue, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263 (1935).

When one considers the abovementioned characteristics of IIT in light of the Supreme Court's analysis, it becomes manifestly clear that IIT is not an ordinary trust. It is a business trust or association, and, in view of the mandate to narrowly construe and confine diversity jurisdiction,¹¹ this Court cannot treat it as an ordinary trust for diversity purposes. Rather, it must be treated as an unincorporated association.

This result is in accord with that in Larwin Mortgage Investors v. Riverside Mall, Inc., 392 F.Supp. 97 (S.D.Tex., 1975), which dealt with the specific issue before this Court, that is, the treatment of a business or real estate trust for diversity purposes.¹² Relying on Morrissey, supra, which held that business trusts should be taxed as unincorporated associations rather than as ordinary trusts, the court held that a business trust which qualified for tax treatment as an REIT is to be treated for diversity purposes as an unincorporated association.

IIT maintains that the Morrissey-Larwin reasoning is inapplicable to this case since IIT has elected not to qualify as an REIT for tax purposes at the present time.¹³ This argument is without merit. The issue before the Court turns not upon an election by IIT under the tax code which results in its being a "real estate trust" rather than a "real estate investment trust," but rather upon the intrinsic nature and purpose of IIT as a business enterprise. The Morrissey analysis of types of entities and enterprises is clearly applicable to the case at bar, and dictates IIT's treatment as an unincorporated association. Nothing in that opinion indicates that the Supreme Court would treat a business trust any differently for purposes of determining diversity jurisdiction.

IIT next argues that if the Court decides to treat it as an unincorporated association for diversity purposes, then the Court should "characterize" it as a limited partnership or as a corporation for purposes of determining its citizenship. The Supreme Court's decision in Steelworkers v. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965) precludes this Court from giving IIT a fictional citizenship once it is determined that IIT is an unincorporated association for diversity purposes. Bouligny mandates that the citizenship of an unincorporated association is the citizenship of each of its members. This rule obtains even when state law and Federal Rule 17(b) permit the association to sue or be sued as an entity and declare that it is to be treated as if it were a corporation. See Wright-Miller-Cooper, Federal Practice and Procedure, § 3630 at 840-841, and cases cited therein.

IIT maintains that it is unlike a labor union, the entity before the court in Boulign...