October 22, 2019

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October 21, 2019

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What Does Americold Realty Trust Have To Do With Rule 147?

Under Article III, Section 2 of the U.S. Constitution, the judicial power of the federal courts may extend to, among other things, controversies between citizens of different states.  When a party is a trust, in what state is the trust a citizen for purposes of the diversity jurisdiction of the federal courts?  There are several possible answers.  A trust might be deemed to be a citizen of the jurisdiction in which it is organized and where it has its principal place of business.  Alternatively, a trust might be considered a citizen in the jurisdiction(s) in which its trustees are citizens.  A third alternative would be to treat a trust as a citizen in the jurisdiction in which its members are citizens.  The U.S. Supreme Court yesterday chose the last option in Americold Realty Trust v. Conagra Foods, Inc., 2016 U.S. LEXIS 1652 (U.S. 2016).

The Court’s brief opinion by Justice Sonia Sotomayor noted that trusts traditionally have not been treated as separate legal entities.  Rather, the word “trust” describes a legal relationship between the trustee and the res.  Some states, however, apply the “trust” moniker to unincorporated associations.  As such, these trusts may sue and be sued in their own right. Under Americold Realty Trust, these trusts carry the citizenship of their members.

Some readers may recall my discussions last fall of the Securities and Exchange Commission’s proposal to revamp Rule 147.  Because the rule is a safe harbor for intrastate offerings exempt from registration under Section 3(a)(11) of the Securities Act of 1933, all sales must be “made only to persons that the issuer reasonably believes at the time of sale are residents of the state or territory in which the issuer has its principal place of business”.  The SEC is proposing to treat trusts in the same way as corporations – they will be deemed resident of the jurisdiction in which they have their principal place of business as defined by the rule.  However, trusts formed for the specific purpose of acquiring the securities will not be a resident of a state or territory unless all of the beneficial owners of that organization are residents of such state or territory.

The SEC’s proposed treatment of trust residency differs significantly from the Supreme Court’s rule for trust citizenship.  However, the Supreme Court was addressing an entirely different statute and even allowed that Congress could change the rules (“Then as now we reaffirm that it is up to Congress if it wishes to incorporate other entities into 28 U. S. C. §1332(c)’s special jurisdictional rule.”).  Thus, the Supreme Court’s opinion in Americold Realty Trust should not require the SEC to change its proposed definition of trust residency.

Maryland has proved to be a very popular state for organizing real estate investment trusts.  In fact, the trust at issue in Americold Realty Trust was organized under Maryland law.  Many readers may be unaware that California does devote a portion of its unincorporated association law to real estate investment trusts.  Cal. Corp. Code § 23000 et seq.  The law, however, is so antiquated that it continues to refer to the Internal Revenue Code of 1954.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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