RTP LLC v. Orix Real Estate Capital, Inc.

In the

United States Court of Appeals
For the Seventh Circuit
____________________

Nos. 14-3671 & 15-1153
RTP LLC and RSCD OPPORTUNITY FUND I, LLC (formerly
known as Inheritance Capital Group, LLC),
Plaintiffs-Appellants,

v.

ORIX REAL ESTATE CAPITAL, INC.,
Defendant-Appellee.
____________________

Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 13 C 350 — Charles P. Kocoras, Judge.
____________________

ARGUED SEPTEMBER 29, 2015 — DECIDED JULY 1, 2016
____________________

Before WOOD, Chief Judge, and EASTERBROOK and RIPPLE,
Circuit Judges.
EASTERBROOK, Circuit Judge. ORIX Real Estate Capital
made a loan of about $41 million to RTP, enabling it to buy a
commercial building in North Carolina. The loan is nonre-
course, but both RTP and Inheritance Capital Group signed
conditional guarantees that take effect if the borrower com-
2 Nos. 14-3671 & 15-1153

mits a default. (Inheritance has a new name, but we use the
original, which appears throughout the litigation and the
underlying documents.) The loan papers specify in detail
what defaults activate the guarantees.
When the real estate market turned down, the building’s
sole tenant decided not to renew its lease. RTP did not find a
new tenant willing to pay as much. Contending that several
events of default had occurred, ORIX accelerated the loan
and demanded that RTP and Inheritance make good the out-
standing debt. They replied with this suit, which seeks a dec-
laration that they do not owe ORIX anything beyond what
can be paid out of the building’s assets. Ruling in ORIX’s fa-
vor, the district court ordered RTP and Inheritance to pay
about $30 million. 2014 U.S. Dist. LEXIS 124654 (N.D. Ill. Sept.
8, 2014). RTP, a special-purpose vehicle formed for this
transaction, does not have any assets beyond the building.
But Inheritance does. It is a subsidiary of Detroit’s retirement
plans (both general civil-service employees and the police
and fire departments), which contain billions of dollars.
This suit began in a state court of Illinois. ORIX removed
it under the diversity jurisdiction of 28 U.S.C. §1332(a)(1).
See 28 U.S.C. §1441(a). ORIX, a corporation, has two citizen-
ships: Delaware (where it is incorporated) and Texas (where
it has its principal place of business). 28 U.S.C. §1332(c)(1);
Hertz Corp. v. Friend, 559 U.S. 77 (2010). Both RTP and Inher-
itance are limited liability companies, which have the citi-
zenships of their members. See Cosgrove v. Bartolotta, 150 F.3d
729 (7th Cir. 1998); see also Carden v. Arkoma Associates, 494
U.S. 185 (1990). Inheritance has two members: the General
Retirement System of the City of Detroit, and the Police and
Fire Retirement System of the City of Detroit. RTP has mul-
Nos. 14-3671 & 15-1153 3

tiple members, all of them undoubtedly citizens of Michigan
or New York except for ICG Ellis Road, LLC, which has the
retirement funds as members. So whether this suit was re-
movable depends on the citizenships of these two funds.
Both retirement funds are organized as trusts under
Michigan law but can sue and be sued in their own names.
ORIX relies on May Department Stores Co. v. Federal Insurance
Co., 305 F.3d 597, 599 (7th Cir. 2002), and Hicklin Engineering,
L.C. v. Bartell, 439 F.3d 346, 348 (7th Cir. 2006), both of which
understood Navarro Savings Ass’n v. Lee, 446 U.S. 458 (1980),
to stand for the proposition that the citizenship of every trust
is the citizenship of its trustees. ORIX represented that all
members of the funds’ boards of trustees are citizens of
Michigan. RTP and Inheritance did not dispute this assertion
(even though the record does not contain information about
the citizenship of Edsel Jenkins, who was among the trustees
on the date the suit was removed). The district judge decid-
ed the merits of the controversy without discussing subject-
matter jurisdiction.
After the case was argued in this court, we deferred its
resolution pending the Supreme Court’s decision in Amer-
icold Realty Trust v. ConAgra Foods, Inc., 136 S. Ct. 1012 (2016),
which posed the question whether Navarro establishes a rule
applicable to all kinds of trusts. After Americold was released,
we asked the parties for their views about its effect on this
case. With those views in hand, we are ready to decide this
appeal.
Americold holds that Navarro does not establish a special
rule for trusts—indeed is not about trusts at all. The Justices
explained that Navarro follows the normal rule that the citi-
zenship of the litigant controls. A trust often is a fiduciary
4 Nos. 14-3671 & 15-1153

relation between two people, the trustee and the beneficiary.
When the trustee sues (or is sued), the trustee’s citizenship
matters. And when the beneficiary sues or is sued, or a trust
litigates in its own name, again the citizenship of the party
controls.
So what is a trust’s citizenship? Americold has a clear an-
swer: “While humans and corporations can assert their own
citizenship, other entities take the citizenship of their mem-
bers.” 136 S. Ct. at 1014. The Court added that “Navarro reaf-
firmed a separate rule that when a trustee files a lawsuit in
her name, her jurisdictional citizenship is the State to which
she belongs—as is true of any natural person. This rule coex-
ists with our discussion above that when an artificial entity
is sued in its name, it takes the citizenship of each of its
members.” Id. at 1016 (emphasis in original; citation omit-
ted). The trusts themselves, not the trustees, are the members
of the two LLCs. Detroit’s two pension funds contract (and
litigate) in their own names. These trusts therefore have the
citizenships of their own members. The jurisdictional views
expressed in Hicklin and May Department Stores (and the
many similar decisions in this circuit and elsewhere) did not
survive Americold.
RTP and Inheritance tell us that in 2013, when the suit
was removed, 59 beneficiaries of the retirement plans resid-
ed in Texas or Delaware. Citizenship depends not on resi-
dence but on domicile, which means the place where a per-
son intends to live in the long run. It is possible to reside in
one state while planning to return to a long-term residence
in another state. Although it is exceedingly unlikely that all
59 beneficiaries who lived in Texas or Delaware in 2013 were
there only temporarily, RTP and Inheritance recognize that
Nos. 14-3671 & 15-1153 5

ORIX is entitled to try to prove their transience if it wants.
They ask us to remand to the district court for that purpose.
ORIX opposes that proposal, contending that all mem-
bers of the retirement funds must be citizens of Michigan,
because workers generally live within Detroit’s borders and
cannot commute from Texas or Delaware. This supposes that
a “member” for the purpose of Americold is whatever the en-
tity calls a member. Like most pension funds, Detroit’s dis-
tinguish between active employees still contributing to the
funds (called “members” by these funds and “participants”
by some others) and persons eligible for or currently draw-
ing benefits (usually called “beneficiaries”). ORIX wants us
to hold that only current workers count as the pension
funds’ “members” for the jurisdictional inquiry.
Americold observes that no statute defines “members” for
the purpose of §1332 but that “we have equated an associa-
tion’s members with its owners or the several persons com-
posing such association.” 136 S. Ct. at 1015 (citation and in-
ternal quotation marks omitted). The Court thought that eq-
uity investors in a real-estate investment trust are its “mem-
bers” because they reap the gains and suffer the losses of the
enterprise—and it did not matter that the trust called those
people “shareholders” rather than “members.” Similarly it
does not matter that Detroit’s pension funds call some peo-
ple “members” and others (often the same people at differ-
ent times) “beneficiaries.” People in their active work lives,
the same people after retirement, and family members enti-
tled to pension or other payments on the accounts of current
and retired workers, all have financial interests in the pen-
sion trusts. It would make little sense to look only at current
6 Nos. 14-3671 & 15-1153

workers for the purpose of determining pension funds’ citi-
zenships.
In Americold and its predecessors (including Carden), the
Justices treated as members all persons who had the equiva-
lent of equity interests in the association. It did not include
banks and other entities that had made debt investments. It
might be possible to treat beneficiaries of defined-benefit
pension plans as debt investors: their rights depend on con-
tractual promises rather than on the performance of the
funds’ investments. Drawing a distinction between debt and
equity is problematic, however, unless there is equity. Stock-
holders and owners of other equity interests have residual
claims in a business; they get whatever is left after everyone
else is paid. Detroit’s pension funds do not have equity
claimants in this sense; the beneficiaries themselves get the
profits of the funds’ investments (either by an increase in
their benefits, or via an increase in the probability of being
paid as much as they have been promised). Pension funds
are in this respect similar to mutual banks and insurers,
merging the roles of debt and equity investors. Perhaps De-
troit’s taxpayers are residual claimants in the sense that, if
the pension funds’ investments do well, the taxpayers need
to chip in less to make the funds stable. It would not be sen-
sible, however, to treat all taxpayers as “members” of the
pension funds. This leaves the employees and beneficiaries
as members and correspondingly raises grave doubt about
the existence of complete diversity of citizenship.
ORIX contends that “after the parties have spent hun-
dreds of thousands of dollars on attorneys’ fees and judg-
ment has been entered[,] remand is not warranted.” But in
the federal system a defect in subject-matter jurisdiction re-
Nos. 14-3671 & 15-1153 7

quires a suit’s dismissal, no matter how much the parties
have spent and no matter how late in the proceedings the
defect comes to light. Thoughtful people, including the
members of the American Law Institute, have questioned
this approach. See Study of the Division of Jurisdiction between
State and Federal Courts 64–66, 366–74 (ALI 1969); Charles
Alan Wright, Restructuring Federal Jurisdiction: The American
Law Institute Proposals, 26 Wash. & Lee L. Rev. 185, 204
(1969). But changing the Supreme Court’s longstanding ap-
proach, which dates to Capron v. Van Noorden, 6 U.S. (2
Cranch) 126 (1804), would require a statute. This suit must
be dismissed if any participant or beneficiary of either pen-
sion fund is a citizen of Texas or Delaware.
ORIX may think it pointless to conduct a detailed inquiry
into the domiciles of the 59 persons who resided in these two
states in 2013, especially because it would become necessary
to consider the possibility that beneficiaries who then resid-
ed elsewhere (say, Oklahoma or Maryland) were domicil-
iaries of Texas or Delaware at the time. But ORIX may
choose its own litigation strategy.
The judgment of the district court is vacated, and the case
is remanded for further proceedings consistent with this
opinion. If ORIX chooses not to seek an adjudication of the
domicile of the 59 persons who in 2013 lived in Texas or Del-
aware, then the district court must remand this litigation to
state court.