RT DESTIN ASSOCIATES LLC v. NEXPOINT REAL ESTATE ADVISORS LP (2021)

ORDER

Pending is the Defendant NexPoint Real Estate Advisors, LP's Second Rule 12(b)(1) Motion to Dismiss for Lack of Diversity Jurisdiction. ECF No. 23. The Court stayed all deadlines in the case pending a ruling and granted Plaintiff's request for a period of jurisdictional discovery related to the parties’ citizenship. Supplemental briefing has now been filed, and the matter is ripe for a ruling. On careful review, the motion is granted for lack of subject matter jurisdiction.

I. BACKGROUND

On July 7, 2020, Plaintiff RT-Destin Associates LLC (“RT-Destin”) filed this breach of contract suit against Defendants NexPoint Real Estate Advisors LP (“NexPoint”) and Lawyers Title Company (“Lawyers Title”). The dispute arises out of NexPoint's alleged default on an agreement with RT-Destin (the seller) to purchase an Embassy Suites hotel located in Destin, Florida. Lawyers Title holds the deposited funds in escrow, which are in dispute.¹ In the Amended Complaint, RT-Destin asserts it is entitled to recover the deposit money in the amount of $1.9 million plus interest for the breach and seeks an injunction requiring Lawyers Title to release the deposited funds plus interest to RT-Destin.

The citizenship allegations in the Amended Complaint include that RT-Destin and NexPoint are both unincorporated entities, and therefore, the citizenship of all their members must be considered.² RT-Destin's current individual and corporate members are citizens of New York, Connecticut, Louisiana, and Delaware. In addition, one member is a trust, KEG Trust, formed under the laws of Louisiana, which had three trustees at the time suit was filed—two of whom are citizens of Louisiana, and the third allegedly “inactive” trustee, Patti H. Burns, was a citizen of Texas.³ It is alleged that Ms. Burns has not participated in the affairs of the trust for many years. It is further alleged despite a pre-suit investigation to identify NexPoint's members, its members are unknown. RT-Destin alleges, however, that based on its search of public records, nothing suggests any that partner of NexPoint is a citizen of any state in which RT-Destin is a citizen.

NexPoint has filed a second motion to dismiss for lack of diversity jurisdiction on grounds that both entities share Texas citizenship.⁴ NexPoint notes that RT-Destin acknowledged its Texas citizenship in the Amended Complaint. Also, NexPoint provided the affidavit of its executive vice president, Matthew R. McGraner, to establish its own citizenship. He stated that one of NexPoint's “indirect owners,” James Dondero, is a resident of Texas.⁵ ECF No. 23-1. After conducting jurisdictional discovery, NexPoint presented interrogatory answers and KEG Trust documents delineating the powers of its trustees. Ms. Burns is listed as one of three trustees, with no limitations shown on her status as trustee other than that the trustees may exercise powers based on the consent of two. NexPoint also confirms by its own interrogatory answers that it is a citizen of Texas, because Dondero is a citizen of Texas, as well as citizen of Delaware, stating that one member trust has a trustee, the Commonwealth Trust Company, which has a Delaware address.⁶ Thus, NexPoint also argues that the parties’ shared Delaware citizenship also destroys diversity.

In supplemental briefing, RT-Destin now agrees that the jurisdictional discovery confirms NexPoint is a citizen of Texas. However, RT-Destin disputes that it is a citizen of Texas, maintaining that because Ms. Burns had not participated in the affairs of the trust for many years, her citizenship should be discounted. Additionally, RT-Destin argues that diversity is not defeated by NexPoint's mere conclusory assertion that Commonwealth Trust Company has a Delaware address. RT-Destin argues that there is no record evidence to establish whether Commonwealth Trust Company is a corporation and, if so, no evidence establishes its state of incorporation and principal place of business.

II. DISCUSSION

Diversity jurisdiction exists only when there is complete diversity of citizenship between the parties, see 28 U.S.C. § 1332; Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365, 377, 98 S.Ct. 2396, 57 L.Ed.2d 274 (1978); and “[c]itizenship for diversity purposes is determined at the time the suit is filed,” MacGinnitie v. Hobbs Grp., LLC, 420 F.3d 1234, 1239 (11th Cir. 2005). Attacks on subject matter or diversity jurisdiction under Fed. R. Civ. P. 12(b)(1) come in two forms, either factual or facial. Lawrence v. Dunbar, 919 F.2d 1525, 1528-29 (11th Cir. 1990). A factual attack is at issue here. “Factual attacks” challenge “the existence of subject matter jurisdiction in fact, irrespective of the pleadings, and matters outside the pleadings, such as testimony and affidavits, are considered.” Id.; see also Stalley ex rel. U.S. v. Orlando Reg'l Healthcare Sys., Inc., 524 F.3d 1229, 1233 (11th Cir. 2008). If the plaintiff cannot cure the deficient allegations of diversity, the court is constitutionally obligated to dismiss the action. See Travaglio v. Am. Exp. Co., 735 F.3d 1266, 1268–69 (11th Cir. 2013); see also Douse v. Canoe Creek Homeowner's Ass'n, Inc., No. 21-10174, 2021 WL 3205731, at *3 (11th Cir. July 29, 2021) (“When a district court lacks subject-matter jurisdiction, it has no power to enter a judgment on the merits and must dismiss the action.” (internal quotations omitted)).

Diversity jurisdiction in a suit by or against an unincorporated entity depends on the citizenship of all its members. Americold Realty Trust v. Conagra Foods, Inc., 577 U.S. 378, 381, 136 S.Ct. 1012, 194 L.Ed.2d 71 (2016) (quoting Carden v. Arkoma Assocs., 494 U.S. 185, 195, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990)). However, “a ‘traditional trust’ holds the citizenship of its trustee, not of its beneficiaries.” Alliant Tax Credit 31, Inc. v. Murphy, 924 F.3d 1134, 1143 (11th Cir. 2019) (noting a traditional trust ordinarily describes a fiduciary relationship with regard to property where the trust cannot sue or be sued as an entity). To determine whether a trust is traditional, the Court looks to “the law of the state where the trust is formed.” Id. (internal quotations omitted). Additionally, as noted earlier, see supra Note 3, “diversity of citizenship is assessed at the time the action is filed.” Freeport-McMoRan, Inc. v. K N Energy, Inc., 498 U.S. 426, 428, 111 S.Ct. 858, 112 L.Ed.2d 951 (1991).

In this instance, there is no dispute that KEG Trust was formed under the laws of Louisiana and is a member of RT-Destin. By the terms of the governing trust documents, KEG Trust has three named trustees. ECF No. 29-3. Their power may be exercised on consent of two trustees, but it is the settler's expressed intent that the trust will always function with three trustees. Id. at 11, 15. These trustees have all powers under Louisiana law and are authorized to hold and distribute the trust property, among other powers and privileges. Id. at 11–15. The documents reflect that a traditional trust was formed, and the parties do not argue otherwise. See Crosstex Energy Servs., LP v. Texas Brine Co., LLC, 253 So. 3d 806, 812 (La. App. 2018) (under Louisiana law, a trust is the relationship resulting from the transfer of property to a person for administration as a fiduciary, and the trustee is the person to whom property is transferred). Therefore, KEG trust holds the citizenship of each of its trustees, and RT-Destin has acknowledged in the Amended Complaint that at the time suit was filed, Ms. Burns, a Texas citizen, was a trustee. That is the beginning and end of the diversity dispute in this case. Diversity is lacking because RT-Destin was a Texas citizen when suit was filed, and it concedes that NexPoint has Texas citizenship as well.

The Court has considered and rejects as unpersuasive RT-Destin's argument that the citizenship of Ms. Burns should be disregarded, finding no convincing support for the proposition. RT-Destin points to the Supreme Court's decision in Navarro Savings Association v. Lee, 446 U.S. 458, 461, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980). There the Court explained that “a federal court must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy,” and held that the “active trustees” of a trust with control over the assets held in their names were the real parties in interest for purposes of establishing diversity jurisdiction. Id. at 461, 465, 100 S.Ct. 1779. RT-Destin focuses on the phrase “active trustee” and reasons that, by contrast, the citizenship of an “inactive trustee” can be disregarded. The Court disagrees. The Navarro Court did not use the phrase “inactive trustee” but distinguished an “active trustee” (one who holds title, manages property, and has a right to sue in his own name) from a “naked trustee” (one who lacks power to sue and serves as a “mere conduit[ ] for a remedy flowing to others”). Id. (quoting McNutt, for Use of Leggett v. Bland, 43 U.S. 9, 2 How. 9, 14, 11 L.Ed. 159 (1844)). The Court in Navarro concluded that a traditional trustee with legal title who managed assets and had the power to sue in his or her own name was the real party in interest such that the citizenship of the beneficiaries did not need to be considered. As the Supreme Court has repeatedly reminded litigants, “Navarro had nothing to do with the citizenship of [a] ‘trust’ ” but rather answered the question of whether a trustee who filed suit in her own name was in fact the real party to the controversy for purposes of federal jurisdiction, as opposed to the beneficiary shareholders, such that jurisdiction was based on the trustee's citizenship. Americold Realty Trust, 577 U.S. at 382–83, 136 S.Ct. 1012 (citing Carden v. Arkoma Assocs., 494 U.S. 185, 192–193, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990)).⁷ Thus, the inquiry in Navarro turned on the nature of the trust and the powers granted to the trustee in a case where the trustee brought suit in his own name.

While the record reflects that Ms. Burns had chosen to be inactive in the trust's affairs for several years and that the trust documents allow two trustees to out vote the other when exercising their vested powers, the trust documents placed no restrictions on her powers as trustee. No replacement had been named to take her place pursuant to its terms.⁸ Thus, her status as trustee of a traditional trust did not differ in any sense from the other two trustees, who remained more actively involved, and there is no basis for disregarding her citizenship.

RT-Destin also argues that the situation is analogous to that of Lenon v. St. Paul Mercury Ins. Co., 136 F.3d 1365, 1371-73 (10th Cir. 1998), in which the Tenth Circuit affirmed the dismissal of one trustee as dispensable in order to preserve diversity jurisdiction. The case is not binding on this Court, and the undersigned does not find it sufficiently analogous to this situation to be persuasive. In Lenon, an ERISA trust and four individual trustees had filed the suit. To preserve diversity, the court dismissed one trustee who had filed suit in his own name and was a party; it did not disregard the citizenship of an unincorporated party to the suit, as RT-Destin would have the Court do here. Here, the trustees did not file suit and are not parties who could be dismissed. Instead, because KEG Trust itself is a member of RT-Destin, the citizenship of each KEG trustee establishes the citizenship of this unincorporated entity (RT-Destin) that is a party to the suit. Again, the Tenth Circuit did not approve of disregarding the citizenship of a party, and there is no comparable authority cited in the Eleventh Circuit for disregarding the citizenship of one underlying member of an unincorporated entity. And, as already noted, the Eleventh Circuit has stated that the citizenship of a traditional trust is that of its trustees, not its beneficiaries. Alliant Tax Credit 31, Inc., 924 F.3d at 1143. Also, “any changes in a party's citizenship that occur after filing are irrelevant.” Harris v. Garner, 216 F.3d 970, 983 (11th Cir. 2000).

In sum, because RT-Destin and NexPoint were both citizens of Texas at the time suit was filed, diversity jurisdiction was not established, and the case must be dismissed for lack of subject matter jurisdiction.⁹

Accordingly, NexPoint's Second Rule 12(b)(1) Motion to Dismiss for Lack of Diversity Jurisdiction, ECF No. 23, as supplemented, ECF No. 29, is GRANTED, and the case is DISMISSED without prejudice. The Clerk is directed to close the file.

DONE and ORDERED this 9th day of September 2021.

FOOTNOTES

1.   The Court has excused Lawyers Title from participating in the proceedings because it is joined in this lawsuit solely in its capacity as an escrow agent and makes no claims to the funds at issue.

2.   “[D]iversity jurisdiction in a suit by or against [an unincorporated] entity depends on the citizenship of ‘all [its] members.’ ” Americold Realty Trust v. Conagra Foods, Inc., 577 U.S. 378, 381, 136 S.Ct. 1012, 194 L.Ed.2d 71 (2016) (quoting Carden v. Arkoma Assocs., 494 U.S. 185, 195-96, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990), second alteration in original).

3.   The record reflects that Ms. Burns died in December 2020, five months after suit was filed. Her death subsequent to the commencement of suit does not impact the analysis in this case, because “diversity of citizenship is assessed at the time the action is filed.” Freeport-McMoRan, Inc. v. K N Energy, Inc., 498 U.S. 426, 428, 111 S.Ct. 858, 112 L.Ed.2d 951 (1991).

4.   The first motion to dismiss was a facial challenge that was denied without prejudice after the Court found the pleading sufficient on the grounds challenged. However, the original complaint had only listed the citizenships of the KEG Trust beneficiaries, who are all citizens of Louisiana or Connecticut. The Court required RT-Destin to identify the citizenship of KEG Trust's trustees, resulting in RT-Destin filing the Amended Complaint.

5.   Lawyers Title is alleged to be a citizen of Texas as well, but its citizenship is disregarded because its sole participation in the suit is as an escrow of the deposit money, with no interest in the suit. See ECF No. 21 (excusing Lawyer's Title from participation in the suit).

6.   NexPoint lists its sole member as NexPoint Advisors, L.P., which has two partners: (1) NexPoint Advisors GP, LLC, whose sole member is James Dondero, a citizen of Texas, and (2) the Dugaboy Investment Trust, whose three trustees are: (a) Nancy Marie Dondero, Family Trustee, a citizen of Florida, (b) Commonwealth Trust Company, Administrative Trustee, with an address in Delaware, and (c) Grant James Scott, III, Independent Trustee, residing in North Carolina. ECF No. 29-1.

7.   The Supreme Court concluded in Americold Realty that, for a business trust, which is an unincorporated entity capable of bringing suit in its own name, as opposed to a traditional trust, its jurisdictional citizenship is that of its member beneficiaries. Americold Realty Trust, 577 U.S. at 382–83, 136 S.Ct. 1012.

8.   The Trust document provides that if a trustee becomes unwilling to serve, the remaining trustees are empowered to “and shall forthwith designate a replacement,” and intends that there will at all times be three trustees. ECF No. 29-3, at 14-15 (emphasis added).

9.   Also, because diversity is defeated by the parties’ shared Texas citizenship, the Court need not address NexPoint's alternate argument pertaining to shared Delaware citizenship.

M. CASEY RODGERS, UNITED STATES DISTRICT JUDGE