Petition — Navarro Savings Assn. v. Lee

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IN THE | SEP 19 1979

Supreme Court of the Anited States

"FAK, IR., CLERK

OCTOBER TERM, 1979 - ——

NAVARRO SAVINGS ASSOCIATION,

Petitioner,

LAWRENCE F. LEE, JR., BERT A. BETTS,

ROBERT M. GREEN, WILLIAM A. LANE, JR.,

JAMES B. McINTOSH, FREDERICK H. SCHROEDER,

JOHN W. YORK and JACK H. QUARITIUS,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Of Counsel: BERNUS Wm. FISCHMAN

LACKSHIN & NATHAN 707 Central National Bank Building

707 Central National Bank Building 2100 Travis

2100 Travis Houston, Texas 77002

Houston, Texas 77002 LAWRENCE S. FISCHMAN

WEIL, CRAIG & FISCHMAN, P.C. 3030 One Main Place

3030 One Main Place Dallas, Texas 75250

Dallas, Texas 75250 Attorneys for Petitioner

AEE ALLIEN IRE NG RMS EE TS SI AEN ERNE Ie ene ae

Washington, 0.C. e CLB PUBLISHERS’ e LAW PRINTING CO. e (202) 393-0625

(i)

TABLE OF CONTENTS

pp.

REFERENCE TO PRIOR DECISIONS

STATEMENT OF JURISDICTION

ISSUE PRESENTED FOR REVIEW

STATUTORY PROVISIONS CONSTRUED

STATEMENT OF FACTS

POINTS OF ARGUMENT

CONCLUSION

APPENDICES:

Opinion of the United States District Court in

Cause No. 3-74-1231 C; 416 F.Supp. 1186

TE er

Opinion of the United States Court of Appeals

for the Fifth Circuit in Cause No. 76-3350; 597

F.2d 421 (Sth Cir. 1979)

i ee eS eS Oe ££ ek 2 8 6 8 ©

ARGUMENT AND AUTHORITIES ............

SUMMARY OF THE ARGUMENT .........

5a. Ms 27a

(ii)

TABLE OF AUTHORITIES

Cases:

Allen-West Commission Co. v. Brashear (Cir. Ct.E.D.

Pale: SN hg es no a Ae ee AAR EO 18

Baer v. United Services Automobile Association,

§03 F.2d 393 (2nd Cir. 1974) ......ceeees odie ane a 10

Bullard v. City of Cisco, 290 U.S. 179, 54 S.Ct. Pe

yeh, £2 Me 8). Bere ee eee ee

Carey v. U.S. Industries, Inc., 414 Supp. 794 (N.D. ea

8 errr eer wer ee ree eee ee ,

Chase Manhattan Mortgage and Realty Trust v.

Pendley, 405 F.Supp. 593 (N.D. Ga. 1975) ..... 6 , passim

Curb and Gutter Dist. No. 37 v. Parrish, 110 F.2d

UL Be Bee PEER ey rere eee ee 18

Des Moines Navigation and R.R. Co. v. lowa

Homestead Company, 123 U.S. 552, 8 S.Ct.

iy Mee Melee yj er eer ro ee 18

Dodge v. Tulleys, 144 U.S. 451, 12 S.Ct. 728, 36 -

ee Fs ere sre ere ee ee ee

Fox v. Prudent Resources Trust, 382 F.Supp. 81

CET. Pe. ORE ac ik kh ck ed eee nce sa ees xs 10

Heck v. A. P. Ross Enterprises, Inc., 414 F.Supp.

971 (ND? Ml. 1076) 2... chee cee dese ccs edad 6,13

Houston Oil Company v. Village Mills Co., 241 S.W.

122 (Tex. Comm. App. 1922, holding approved)....... 18

Independence Mortgage Trust v. White, 446 F.Supp.

130 @D: Ove. FTE) cic ce ce needs Sarat 6,13,14

i e Investors v. Riverdrive Mall, Inc., |

ye pti if toe 3... | eer 6 passim

Lincoln Associates, Inc. v. Great American Mortgage

Investors, 415 F.Supp. 351 (N.D. Tex. 1976) .... Ovassim

Lowry v. International Brotherhood of Boilermak-

ers, 259 F.2d 568 (Sth Cir. 1958) .........2 ee eeee 10

(iii)

Mas v. Perry, 489 F.2d 1396, reh. den. 492 F.2d

1242 (Sth Cir. 1974), cert. den., 419 U.S. 842,

95 S.Ct. 74, 42 L.Ed.2d 70

Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct.

ee ge

National City Bank v. Fidelco Growth Investors,

446 F.Supp. 124 (E.D. Pa. 1978) .............

Ray v. Bird and Son, 519 F.2d 1081 (Sth Cir.

a ets eee ee ce a,

Riverside Memorial Mausoleum v. UMET Trust, 581

eee Lae,» | i

Shainwald v. Lewis, 108 U.S. 158, 2 S.Ct. 385, 27

L.Ed. 691 (1883)

pe i ES leer en

Susquehanna & Wyoming Valley R.R. & Coal Co. v.

Blatchford, 78 U.S. (11 Wall.) 172, 20 L.Ed.

RMD ch ye ele eee eres keg Sy Cae

United Steelworkers v. R. H. Bouligny, Inc., 382

US. 145, 86 S.Ct. 272, 15 L-Ed.2d 217 (1965) ..

Jim Walter Investors v. Empire-Madison, Inc., 401

F.Supp. 425 (N.D. Ga. 1975)

Statutes:

United States Code:

28 U.S.C. §1332(a)

Rules:

Federal Rules of Civil Procedure:

Rule 17(a)

Texts & Treatises:

C. Wright, A. Miller & E. Cooper, Federal Practice

& Procedure:

Vol. 13, §3630 at 836 (1975)

Vol. 13, §3630 at 848 (1975)

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7 F AAS SO 8 O88 8 OS B48 4 & Oo Se

ee eee ee Se SSeS. 8) eS. 6 Sa -& OS eS SS GS

5 passim

6 passim

2 ye

. Spassim

6,12,15

IN THE

Supreme Court of the United States

OCTOBER TERM, 1979

No.

NAVARRO SAVINGS ASSOCIATION,

Petitioner.

LAWRENCE F. LEE, JR., BERT A. BETTS,

ROBERT M. GREEN, WILLIAM A. LANE, JR.,

JAMES B. McINTOSH, FREDERICK H. SCHROEDER,

JOHN W. YORK and JACK H. QUARITIUS,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

REFERENCE TO PRIOR DECISIONS

The opinion of the District Court of the United

States for the Northern District of Texas, Honorable

William M. Taylor, Judge Presiding in Cause No.

3-74-1231 entitled “Lawrence F. Lee, Jr., et al. v.

Navarro Savings Association” is found at 416 F.Supp.

1186 (N.D. Tex. 1976).

The opinion of the United States Court of Appeals

for the Fifth Circuit in Cause No. 76-3550, likewise

entitled, is reported at 597 F.2d 421 (Sth Cir. 1979).

As required by Supreme Court Rule 23(i), true and

correct copies of the opinions of the Courts below are

appended hereto.

STATEMENT OF JURISDICTION

The Supreme Court of the United States has jurisdic-

tion of this cause as shown by the following:

1. The judgment of the United States Court of

Appeals for the Fifth Circuit as to which review is

sought is dated and was entered of record on June 18,

1979.

2. The Suggestion for Rehearing En Banc filed by

Petitioners (Appellees in the Court below) was denied

August 1, 1979. By order entered August 15, 1979, the

United States Court of Appeals for the Fifth Circuit

stayed the issuance of its mandate pending Petition for

Writ of Certiorari to this Court through and including

September 16, 1979; and subsequent order extended to

September 21, 1979.

3. The Supreme Court of the United States has

jurisdiction to review the judgment in question by Writ

of Certiorari pursuant to 28 U.S.C. §1254(1).

ISSUE PRESENTED FOR REVIEW

Whether for purposes of the diversity jurisdiction of

the District Courts of the United States, the citizenship

of areal estate investment trust should be determined with

reverence to the citizenship of its trustees rather than

that of its beneficial shareholders by application of

“real party in interest” rules or for any other reason.

STATUTORY PROVISIONS CONSTRUED

This case involves construction of the provisions of

28 U.S.C. §1332(a) which provides as follows:

§ 1332. Diversity of citizenship: amount in contro-

versy; costs.

(a) The district courts shall have original juris-

diction of all civil actions where the matter in

controversy exceeds the sum or value of $10,000.

exclusive of interest and costs, ana is between—

(1) citizens of different States:

(2) citizens of a State and citizens or subjects

of a foreign state;

(3) citizens of different States and in which

citizens or subjects of a foreign state are

additional parties; and |

(4) a foreign state, defined in section 1603(a)

of this title, as plaintiff and citizens of a State

or of different States.

STATEMENT OF THE FACTS

This case was originally brought in the State District

Court of Texas, 116th Judicial District sitting at Dallas

County, Texas in March, 1974 by Lawrence F. Lee, Jr..

Bert A. Betts, Robert M. Green, William A. Lane, Jr.,

James B. McIntosh, Frederick H. Schroeder, John W.

York and Jack H. Quaritius, each of whom are Trustees

of Fidelity Mortgage Investors, a real estate investment

trust, with its principal offices at Jacksonville, Florida,

against the Petitioner, Navarro Savings Association, as

Defendant.!' The substantive cause of action was for

Navarro’s alleged fraud and breach of contract in the

issuance and dishonor of a loan commitment letter by

Navarro, a corporate citizen of Corsicana, Navarro

County, Texas.

Following evidentiary proceedings and the resulting

transfer of the case to the State District Court at

Navarro County, Texas, the Trustees dismissed the State

action and refiled in the United States District Court

for the Northern District of Texas. The Plaintiff-

Trustees brought the action in their capacity as Trustees

only and asserted the existence of federal diversity

jurisdiction.

Upon Navarro’s motion, the question of lack of

complete diversity was raised; and the District Court

thereupon granted leave to the Trustees to amend their

complaint. Although the Amended Complaint alleged

three additional grounds of jurisdiction as alternatives

to diversity, the District Court dismissed the Amended

Complaint, concluding that the Trustees had failed to

sustain their burden of establishing jurisdiction. Spe-

cifically, by his memorandum opinion and order, the

Court below determined that diversity jurisdiction did

not exist in that the residence of the shareholders of

FMI—as opposed to that of the Trustees only—was

controlling. The District Court further determined that

the Trustees had failed.to establish any of the other

'For clarity, reference to the Petitioner will be made by the

name of “Navarro” and reference to the Respondents will be by

the name of “Trustees.” Reference to Fidelity Mortgage Investors

as an entity will be as “FMI.”

ese.

alleged bases for Federal jurisdiction.’

On appeal to the United States Court of Appeals for

the Fifth Circuit, the Trustees emphasized, as they did

in the District Court, the question of diversity jurisdic-

tion. The Court of Appeals reversed, by a 2-1 majority,

holding that the Trustees were “the real parties in

interest” and, their citizenship being completely diverse

to that of Navarro, jurisdiction under 28 U.S.C.

§ 1332(a) was proper. In its opinion, the panel majority

focused only on the diversity jurisdiction issue and,

concluding that the District Court had erred in dismiss-

ing the case, did not reach the remaining grounds for

Federal jurisdiction.

In a dissenting opinion, Judge Vance concluded that

‘a party cannot unilaterally confer subject matter —

jurisdiction on a Federal Court by declaring who is to

represent the trust in legal actions.”’

It is respectfully submitted that the opinion of the

majority of the Court of Appeals in this cause is in

direct conflict with the opinion of the Supreme Court

in United Steelworkers v. R. H. Bouligny, Inc., 382

U.S. 145, 86 S.Ct. 272, 16 L.Ed.2d 217 (1965) and

Morrissey v. Commissioner of Internal Revenue, 296

U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263 (1935). This is a

case of first impression in this Court and clearly

>The other grounds alleged were the Securities Act of 1934:

class action under Rule 23.2 of the Federal Rules of Civil

Procedure; and Federal Bankruptcy Act jurisdiction, FMI having

become a debtor-in-possession subsequent to the filing of the

Original Complaint. The District Judge determined that the claim

under the 1934 Act was frivolous; that the class action procedure

was unavailable; and that Navarro had not consented to Bank-

ruptcy Act jurisdiction.

overrules the decisions of the district courts of several

circuits in Larwin Mortgage Investors v. River Drive

Mall, Inc., 392 F.Supp. 97 (S.D. Tex. 1975); Jim Walter

Investors v. Empire-Madison, Inc. ,401 F.Supp.425 (N.D.

Ga. 1975): Chase Manhattan Mortgage & Realty Trust

vy. Pendley, 405 F.Supp. 593 (N.D.Ga. 1975); Lincoln

Associates, Inc. v. Great American Mortgage Investors,

415 F.Supp. 351 (N.D. Tex. 1976); Carey v. U.S.

Industries, Inc., 414 F.Supp. 794 (N.D. Ill. 1976); Heck

v. A. P. Ross Enterprises, Inc., 414 F.Supp. 971 (N.D.

Ill. 1976); Independence Mortgage Trust v. White, 446

F.Supp. 120 (D. Ore. 1978); National City Bank vy.

Fidelco Growth Investors, 446 F.Supp. 124 (E.D. Pa.

1978).

So far as is known to counsel for Navarro, the only

decision of any other Circuit concerning this issue is

Riverside Memorial Mausoleum vy. UMET Trust, 581

F.2d 62 (3rd Cir. 1978) wherein the Court denied

diversity jurisdiction. Accordingly, the decision of the

Court of Appeals in the instant case is contrary to all

prior cases in which the issue of citizenship of an

unincorporated business association has been presented.

Most importantly, it is respectfully suggested that the

opinion of the appeals Court majority in this cause is,

as observed by its dissent, an extension of diversity

jurisdiction to a category of litigants not previously

contemplated by Congress.

For the reasons stated, it is respectfully suggested

that this cause merits consideration by the Supreme

Court of the United States and that upon due consid-

eration, the decision of the majority of the Court of

Appeals in Cause No. 76-3550 should be reversed.

ARGUMENT AND AUTHORITIES

ISSUE: WHETHER THE CITIZENSHIP OF

AN UNINCORPORATED BUSINESS ASSO-

CIATION—A “REAL ESTATE INVEST-

MENT TRUST”’—FOR THE PURPOSES OF

THE DIVERSITY JURISDICTION OF THE

DISTRICT COURTS OF THE UNITED

STATES, IS THAT OF EACH OF ITS

SHAREHOLDERS.

SUMMARY OF THE ARGUMENT

The District Court properly concluded that it lacked

diversity jurisdiction because the citizenship of FMI was

not, as Trustees contended, determined by either the

place of business of FMI or the residence of the

Trustees selected as Plaintiffs. Rather, as an unincorp-

Orated business association or “‘Massachusetts Business

Trust,” the citizenship of FMI must be determined by

the residence of each of its shareholder beneficiaries.

FMI, as a “business trust’ has as its object the

conduct of business and sharing of the profits as

distinguished from the traditional express trust the

object of which is to hold and conserve particular

property with incidental powers of management con-

ferred upon its Trustees. FMI’s counsel stipulated in the

District Court that at all material times some of its

beneficial interest owners were residents of Texas.

Accordingly, FMI lacks the requirement of complete

diversity required by 28 U.S.C. §1332(a).

The Court of Appeals majority, in analyzing the

organic composition of FMI in the context of diversity

jurisdction analogized to the “real parties in interest.”

This analysis incorrectly focused upon those provisions

of the trust instrument governing the -relationship

between the shareholders and the Trustees. The em-

phasis upon the Trustees’ extensive control over the day

to day management of the REIT s assets is misplaced.

Analysis of the degree of control vested in the Trustees

is relevant for determining whether personal liability

may be imposed upon the shareholders of the Trust.

The similarities between the “business trust” and the

corporate form of enterprise, i.e., transferability of

interests, continuity of business activities, delegated

management, etc., more than outweigh the similarities

between this business form and the conventional trust.

POINTS OF ARGUMENT

A real estate investment trust is an unincorpo-

rated business association rather than an express

trust; accordingly, the residence of each of its

shareholder beneficiaries is determinative upon the

issue of citizenship for diversity purposes pursuant

to 28 U.S.C. §1332(a).

Fidelity Mortgage Investors (“FMI’’) is by its own

admission a profit-oriented ‘‘business trust,” the prin-

cipal occupation of which is the investment of the trust

capital in mortgage loans on real property. According to

the declaration of trust which created FMI, apparently

much of the day-to-day business of the trust is managed

by its Board of Trustees, while the shareholder benefici-

aries have the authority to elect and remove trustees

and to approve any sale or other disposition of assets

comprising 50% or more of the trust estate. Admitted-

ly, FMI has many of the attributes of an incorporated

entity such as a centralized management, transferability

of shares, continuity of business, etc. Were FMI a

corporation or an entity which should be treated as a

corporation, and considering its principal place of

business to be without the State of Texas. it is clear

that diversity of citizenship would exist with the Texas

Defendant, Navarro Savings Association.? However,

both here and in the Courts below the Trustees have

disclaimed any theory of corporate enterprise choosing

instead to rely on the theory that the Trustees, through

their inherent powers under the declaration of trust. are

the “true parties in interest” as such term is defined in

Rule 17 of the Federal Rules of Civil Procedure.‘

Relying upon the case of Larwin Mortgage Invest-

ments v. Riverdrive Mall, Inc., 392 F. Supp. 97

(S.D.Tex. 1975) and other cases which are discussed

infra, the District Court concluded that the citizenship

of FMI was properly determined with reference to the

residence of each of its shareholder beneficiaries. In

that the Trustees failed to sustain their burden to plead

and prove* the absence of any Texas shareholders in

FMI, (and, in fact, stipulated their existence) the

presence of whom would destroy the complete diversity

requirement of 28 U.S.C. §1332(a), diversity jurisdic-

tion was lacking.®

°12 C. Wright, A. Miller and E. Cooper, Federal Practice and

Procedure §3630 at 836 (1975).

“Memorandum Opinion and Order of Judge Taylor at foot-

note 1; Appellants’ Brief in the Court of Appeals at page 5.

*Ray v. Bird and Son, 519 F.2d 1081 (Sth Cir. 1975).

°Strawbridge v. Curtiss, 3 Cranch (7 U.S.) 267 (1806);

Shainwald v. Lewis, 108 U.S. 158, 2 S.Ct. 385, 27 L.Ed. 691

(1883); Mas v. Perry, 489 F.2d 1396, reh.den. 492 F.2d 1242

(Sth Cir. 1974), cert.den. 419 U.S. 842, 95 S.Ct. 74, 42 L.Ed.2d

70.

In Larwin, Judge Cox considered the precise issues

presented in this case. Larwin Mortgage Investments was

a California real estate investment trust which advanced

funds fu: interim financing of a construction project in

Laredo, Texas. The shares of beneficial interest were

publicly held by several thousand shareholders and

traded on the New York Stock Exchange. The declara-

tion of trust establishing Larwin provided that:

“While legal title to the trust assets rests exclu-

sively in the trustees, the shareholders (holders of

beneficial interest) are empowered to remove

trustees, with or without cause, and fill trustee

vacancies. Additionally, shareholders’ consent must

be obtained before the consummation of any

transaction which involves the disposition of more

than 50% of the trust estate.” [Footnotes

omitted] 392 F.Supp. at 100.

The Court considered Larwin’s two contentions: (i) that

it was a juridical entity in and of itself, whose

citizenship was California; and (ii) alternatively, that as

an active trust, only the residence of its trustees should

be considered for diversity purposes. 392 F.Supp. at 98.

Judge Cox determined that the decision of the

United States Supreme Court in United Steelworkers v.

R. H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272,

15 L.Ed.2d 217 (1965) effectively foreclosed judicial

recognition of unincorporated associations as juridical

entities for diversity purposes.’ The Court then deter-

7See also Baer v. United Services Automobile Association, 503

F.2d 393 (2nd Cir. 1974); Fox v. Prudent Resources Trust, 382

F.Supp. 81 (E.D.Pa. 1974); Lowry v. International Brotherhood

of Boilermakers, 259 F.2d 568 (Sth Cir. 1958); 13 C. Wright, A.

Miller and E. Cooper, Federal Practice and Procedure §3630 at

848 (1975).

mined that the characteristics of Larwin as a business

organization—particularly the rights of the beneficial

interest holders to approve certain transactions and to

elect or remove the manager-trustees— predominated

Over its Owtward appearance as a conventional trust.

The Court analogized to the question before the United

States Supreme Court in Morrissey v. Commissioner,

296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263 (1935)

where it was observed that:

“The object [of the business trust] 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 business and

sharing its gains.” 296 U.S. at 357, 56 S.Ct. at

295.

Concluding that it is the responsibility of Congress to

change the citizenship status of such trusts for diversity

purposes, Judge Cox dismissed Larwin’s alternative

contention.

In National City Bank yv. Fidelco Growth Investors.

446 F.Supp. 124 (E.D.Pa. 1978) Judge Luongo re-

viewed all the relevant authorities and concluded that

the reasoning applied in Larwin, supra, was appropriate.

In Fidelco, the REIT was the defendant in a diversity-

based suit and was, in ‘fact, the party alleging the lack

of jurisdiction. Recognizing “the significant difference

between the business trust and the conventional trust-

differences both in purpose and structure...” the court

concluded that the REIT could not be treated as a

conventional trust and must therefore be treated as an

unincorporated association. 446 F.Supp. at 128.

In Fidelco, the plaintiffs emphasized the degree of

control exercised by the trustees over the business and

assets of the REIT. The Court observed:

“This,[plaintiffs] contend, makes Fidelco a conven-

‘tional trust, rather than an unincorporated associa-

tion such as a partnership. I cannot agree. True,

under the general rule, the degree of control vested

in the trustees. largely determines whether an

entity will be treated as trust or partnership when

personal liability is sought to be imposed on the -

shareholders. See, e.g. Hecht v. Malley, supra, 265

U.S. at 147, 44 S.Ct. 462 (discussing Mass.

decisions); 16A W. Fletcher, Cyclopedia of the

Law of Private Corporations, §8230 at 554-55,

8261 (1962 & Supp. 1977). The issue in this case

is entirely different. It is whether a business trust

sufficiently resembles a conventional trust to be

accorded like treatment in the determination of its

citizenship for diversity purposes. Thus, as was the

case with Fidelco’s REIT status, the control vested

in the trustees does not, without more, require

that Fidelco be treated as a trust. Nor does

Fidelco’s REIT status, when taken together with

the trustee’s extensive control over its affairs,

require that Fidelco be viewed as a trust. Both

characteristics evidence some similarities between

Fidelco and the conventional trust, but in my

view, this similarity is largely offset by the several

dissimilarities referred to earlier.” 446 F.Supp. at

129.

That Larwin and Fidelco deal squarely ‘with the issue

presented here cannot be denied. That every other

reported decision has followed the rationale of Larwin

is likewise indisputable. See, e.g. Riverside Memorial

Mausoleum v. UMET Trust, 581 F.2d 62 (3rd Cir.

1978); Jim Walter Investors v. Empire-Madison, Inc.,

401 F.Supp. 425 (N.D.Ga. 1975); Chase Manhattan

Mortgage and Realty Trust v. Pendley, 405 F.Supp. 593

(N.D.Ga. 1975); Lincoln Associates, Inc. v. Great

American Mortgage Investors, 415 F.Supp. 351

(N.D.Tex. 1976); Carey v. U.S. Industries. Inc.. 414

F.Supp. 794 (N.D.IIl. 1976); Heck v. AP. Ross Enter-

prises, Inc., 414 F.Supp. 971 (N.D.II. 1976): Indepen-

dence Mortgage Trust vy. White, 446 F.Supp. 120

(D.Ore. 1978).

In each of those cases the same arguments advanced

here were rejected with the observations that “Pleas for

extension of the diversity jurisdiction to hitherto

uncovered broad categories of litigants ought to be

made to the Congress and not to the Court,” Bouligny,

supra 382 U.S. 145, 150-151, 86 S.Ct. 272, 275: and

that “to rule otherwise would render the decisions

relied upon above a nullity and allow federal jurisdic-

tion to be created at the will of the litigants.” Chase

Manhattan, supra, 405 F.Supp. 593, 595.

The theory that the Trustees are the real parties in

interest as that term is defined in Rule 17(a) F.R.Civ.P.

is incorrect. In the Chase Manhattan case, supra, the

Court rejected this argument for two reasons: First,

that each of the prior decisions to the effect that

citizenship of the shareholders is controlling implicity

presumes that they are the real parties in interest; and

second, the substantive State law granting the trustees

capacity to sue in their own names does not bestow

diversity jurisdiction. Each of the District Court deci-

sions cited above are in accord with this construction.

Under the holding of the panel majority in this case,

the beneficial interest holders of a real estate invest-

ment trust may create or destroy diversity jurisdiction

through the simple device of removal or appointment of

a trustee having a residence which, when compared to

the opposing party, suits the REIT’s purpose. Navarro

urges that this goes beyond the intent of Congress and

conflicts with the Bouligny case, supra.

The opinion of the Court of Appeals majority in this

case holds that Rule 17(a) is correctly applied in the

facts of this case. However, it is respectfully submitted

that Rule 17(a) does not comprehend the “business

trust” as distinguished from the conventional trust. In

holding, in effect, that under Rule 17(a) the declaration

of trust governing the association of shareholders in a

Massachusetts-type business trust controls, the majority

relegates the determination of Federal jurisdiction to

such shareholders and presumably, would permit them

to create or destroy diversity as from time to time may

suit their purposes. In this case, while the Trustees

admittedly have a great deal of control over the

day-to-day management of the business of FMI, it is

still the case that the beneficial interest holders ulti-

mately have the power of removal of the Trustees by

simple majority vote.

It will be recalled that in /ndependence Mortgage

Trust v. White, supra, the business trust was attempting

to defeat diversity jurisdiction. It is not difficult to

imagine the situation where a business trust such as

FMI might, in a case of sufficient importance, remove

one or more trustees and substitute others so as to

create or destroy diversity jurisdiction as suits the

immediate purpose.

In this case, the record is not clear as to whether all

trustees of FMI were joined as Plaintiffs since, on the

Amended Complaint, some of the names which originally

appeared have been dropped. Whether there are trustees

of FMI who are citizens of the State of Texas and

wether the Trustees are themselves beneficial interest

holders in the association does not appear from the

record. However, the potential for abuse is apparent.

Thus, resort to the trust instrument to determine the

real parties in interest is of questionable value because

of the transitory nature of the results and the potential

for abuse.

The opinion of the Court of Appeals in the instant

case further holds that the case of Morrissey. y.

Commissioner of Internal Revenue, 296 US. 344, 56

S.Ct. 289, 80 L.Ed. 263 (1935) is inapposite. In that

case, the business trust was held to be an unincorpo-

rated association for the purpose of taxation. It is

respectfully suggested that the panel majority errs in so

holding. The characterization of the REIT for tax

purposes, while not necessarily controlling, is instructive

for determining its status for other related purposes

including Federal Court jurisdiction.

A fair reading of Larwin clearly militates against the

conclusion that Judge Cox considered the tax treatment

of REIT’s as determinative. The Court observed: “The

problem of whether Larwin should be treated, for

diversity purposes, as a trust or as an unincorporated

association, appears analogous to that before the Su-

preme Court in Morrissey...” 392 F.Supp. at 100

(emphasis added); and further stated:

“The advantageous treatment of such publicly-held

trusts under certain provisions of the Internal

Revenue Code of the United States does not

require the courts to treat any such trusts as a

traditional trust.’ 392 F.Supp. at 101.

In each of the other cited cases, it is clear that the

respective courts were applying the Morrissey reasoning

by analogy only.* As Judge Taylor observed in Lincoln

*Lincoln Associates v. Great American Mortgage Investors,

supra, 415 F.Supp. at 354-55; Jim Walter Investors v. Empire-

Madison, Inc., supra, 401 F.Supp. at 429. Apparently, in the

other cited cases, the taxation aspect of REIT’s was of even less

weight or not a factor at all in the ultimate decision.

Associates, supra, and reiterated in his opinion in this

case.

“The issue before the Court turns not upon an

election by [the REIT] 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 [the REIT] as a

business enterprise.’ 415 F.Supp. at 354

Indeed, analysis of the Supreme Court’s opinion in

Morrissey, indicates it is not mere semantics to state

that this Court was concerned not with the question of

the tax treatment of the trust in question, but rather

whether such trust, as a business enterprise, was

sufficiently distinct from a traditional “‘trust’’ as to

render it an “‘association’’ for any purpose including

incidentally, taxation. Morrissey, supra, 296 U.S. at

356-60, 56 S.Ct. at 295-96; Fidelco, supra, 446 F.Supp.

at 127, n.3.

From the foregoing analysis of the relevant cases two

important facts are clear: (i) that Morrissey dictates

that a “business trust” organized for the purpose of

conducting an on-going business, dynamic in its inter-

ests, ownership and trustee-management, is an unincorp-

orated business association regardless of its characteriza-

tion as a “trust” and (ii) that Bouligny requires that for

diversity purposes an unincorporated association—once

it is properly so characterized—has as its citizenship the

residence of each of its constituent members or interest

holders. Applying the Supreme Court decisions to

REIT’s, each of the District Courts have properly

concluded that the large, publicly traded REIT’s lack

the requirement of complete diversity where there are

shareholders residing in the same state as the opposing

party.

—

Faced with the obvious direct precedental effect of

the Bouligny-Morrissey analysis as applied in Larwin,

etc. the Trustees in their brief before the Court of

Appeals argued that (i) the Larwin group of cases are

factually distinguishable and (ii) if not distinguishable,

the cases are wrong in failing to apply a “traditional

analysis’ to determine the real parties in interest. The

opinion of the majority appears to have rejected the

contention that the Larwin cases are distinguishable.

The second argument, that “traditional analysis”

should be applied in this case, is based upon several

cases of less than recent vintage, the precedental value

of which is questionable when applied to the facts of

this case. Thus, in each of Susquehanna & Wyoming

Valley R.R. & Coal Co. vy. Blatchford, 78 U.S. (11

Wall.) 172, 20 L.Ed. 1979 (1870); Dodge v. Tulleys,

144 U.S. 451, 12 S.Ct. 728, 36 L.Ed. 501 (1892); and

Bullard v. City of Cisco, 290 U.S. 179, 54 S.Ct. 177,

78 L.Ed. 254 (1933), the Supreme Court was con-

cerned with express trusts created for the purpose of

securing payment of mortgages on real property or as in

Cisco, coupon bonds issued by a municipality. In no

instance was the trusteeship created for the purpose of

operating an on-going business with the attendant

features of transferrable shares, continuity of interest,

purchase, replacement and sale of*’assets, sharing of

profits, etc. While in each case, the trustees involved

were invested with varying degrees of authority, their

powers were always tied ultimately to some specific res

or indenture transaction. As the Court determined in

Morrissey, supra, the superficial indicia common to

both entities, such as vesting the trustee with legal title

to the assets, is not controlling. Rather it is the purpose

for which the trusteeship is created which controls.°

Fidelco, supra, 446 F.Supp. at 127, n.3.

The opinion of the Court of Appeals quotes at some

length the provisions of the promissory note from

Rockwall Estates, Inc. payable to the individual trustees

and the commitment letter allegedly issued by Navarro

to Rockwall Estates, Inc. Navarro, of course, is not

alleged to be a party to the promissory note transaction

and in any event, Navarro believes that the terms of a

contractual instrument between a third party and the

Trustees could not serve to confer diversity jurisdiction

on the Federal Court. More importantly, neither the

promissory note nor the commitment letter are material

in determining the status of FMI for diversity purposes.

The provisions of the Declaration of Trust referred to

in the opinion of the Court of Appeals should not be

considered the determinative factor of FMI’s status for

federal jurisdictional purposes. In the dissenting

opinion, Judge Vance cites the opinion of Judge James

C. Hill, then a District Judge, in the case of Chase

Manhattan Mortgage & Realty Trust v. Pendley, 405

°The cases of Curb and Gutter Dist. No. 37 v. Parrish, 110

F.2d 902 (8th Cir. 1940); and Allen-West Commission Co. v.

Brashear (Cir.Ct. E.D.Ark. 1910), cited by the Trustees involved

similar facts. Parrish involved the trustee in a municipal bond

situation; Allen-West involved a real estate deed of trust. The

precedental value of Dodge v. Tulleys, supra, and Houston Oil

Company v. Village Mills Co., 241 S.W.122 (Tex.Comm.App.

1922, holding approved) are further diminished by the fact that

in those cases, the representative parties were also the true

parties in interest and all being before the Court, the question of

lack of jurisdiction was insignificant. See Des Moines Navigation

and R.R. Co. v. Iowa Homestead Company, 123 U.S. 552, 8

S.Ct. 217, 31 L.Ed. 212 (1887).

F.Supp. 593 (N.D.Ga. 1975):

“Stated simply, since the business trust has the

status of an unincorporated association, its citizen-

ship will control the issue of diversity even if the

plaintiff were allowed to substitute the individual

trustees as the named plaintiffs. The court is of

the opinion that to rule otherwise would render

the decisions relied upon above a nullity and allow

federal jurisdiction to be created at the will of the

litigants. To say that diversity jurisdiction exists if

the Trustees sue on behalf of the Trust, but does

not exist if the Trust sues acting through the

Trustees, is to honor form over substance and

create problems where none now exist. If the

Trustees may sue and create jurisdiction, then may

one trustee or two or fewer than all sue and

establish jurisdiction? If the Trustees may sue on a

promissory note, may they sue on all contracts?

For torts? The court is reinforced in its conclusion

by the tone and philosophy expressed by the

United States Supreme Court in United Steelwork-

ers of America, AFL-CIO v. R. H. Bouligny Inc.,

382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217

(1965) to the effect that if diversity jurisdiction is

to be extended to hitherto uncovered broad

categories of litigants it ought to be done by the

Congress and not the courts.”405 F.Supp. at 595.

The majority’s approach of determining diversity

jurisdiction “on a case by case basis (there being no

statutory model) to determine which class [of member-

ship in the organization] has exclusive power to control

and manage the trust’ will, as pointed out by the

dissenting opinion, lead to divergent results and an

entire new body of jurisdictional precedents where none

is necessary.

The Court’s analysis limiting Bouligny to labor

unions is not a fair reading of that case. The court

there simply held that the citizenship of an unincorpo-

rated association is that of each of its members. To

restrict the application of Bouligny to labor unions is to

create a sort of ‘“‘second-class citizenship” for such an

association.

In summary, the opinion of the Court of Appeals in

sustaining diversity jurisdiction constitutes the extension

of that right to a class of litigants not heretofore

contemplated by Congress and an open invitation to use

artificial means to create subject matter jurisdiction

which otherwise would not exist. The decision in this

case overrules not only all prior decisions of the district

courts where the issue was squarely presented, but

conflicts with the Third Circuit’s opinion in Riverside

Memorial Mausoleum, supra, and the controlling prece-

dents established in Bouligny and Morrissey, supra. It is

respectfully submitted that the opinion of the panel

majority is in error and should be reversed.

CONCLUSION

For the reasons stated, it is respectfully submitted

that the Supreme Court of the United States should

grant the Writ of Certiorari to the United States Court

of Appeals for the Fifth Circuit in Cause No. 76-3550

and that upon due consideration the opinion of the Court

of Appeals should be reversed and the dismissal of this

case for want of jurisdiction by the district court affirmed

in all respects.

Respectfully submitted,

BERNUS WM. FISCHMAN

LAWRENCE S. FISCHMAN

Attorneys in Charge for

Petitioner Navaro Savings

Association

1186 le

416 FEDERAL SUPPLEMENT

Lawrence F. LEE, Jr., et al.

NAVARRO SAVINGS ASSOCIATION.

No. CA 3-74-1231-C.

United States District Court,

}. D. Texas,

Dallas Division.

July 28, 1976.

Trustees of Massachusetts real estate

investment trust brought action against

savings association fo recover for alleged

breach of loan commitment agreement.

Defendant moved to dismiss for want of

subject matter jurisdiction. The District

Court, William M. Taylor, Jr., Chief Judge,

held that since, among other things, plain-

tiff was an investment vehicle authorized to

issue negotiable shares for public offering,

its citizenship, for diversity purposes, was

governed by the citizenship of the benefici-

aries rather than that of the trustees, that

fact that trust was presently under supervi- -

‘sion of bankruptcy court did not warrant a

different conclusion since diversity was to

be determined as of time action was com-

menced, i. e., prior to filing of bankruptcy

orders, that fact that trust did not presently

qualify as a real estate investment trust for

federal tax purposes also did not require a

different result on question of diversity jur-

isdiction, that since state law allowed real

estate investment trusts to sue and be sued

as entities plaintiffs could not bring suit as

a class action, that jurisdiction could not be

founded on the Bankruptcy Act where de-

fendant did not consent to suit and that

federal question jurisdiction was absent

since there was no valid claim under the

federal securities laws.

Case dismissed.

1. Courts @315

For diversity purposes, a real estate

investment trust is governed by the citizen-

ship of each of its beneficiaries, rather than

by the citizenship of the trustees. 28 U.S.

C.A. § 1332(a).

2. Courts #315

Massachusetts real estate trust, which

was an investment vehicle authorized to

issue negotiable shares for public offering,

was to be treated as an unincorporated

association for purposes of diversity juris-

diction; hence, citizenship of beneficiaries,

rather than that of the trustees, was deter-

minative. 28 U.S.C.A. § 1332(a).

3. Courts @315

Enactment of legislation permitting

real estate investment trusts to escape tax-

ation as associations did not overrule the

Morrissey decision, which concluded that

business trusts should be taxed as unincor-

porated associations rather than as ordinary

trusts, which principle was used for purpose

of determining diversity jurisdiction in suits

involving business trusts. 28 U.S.C.A.

4 1332(a); 26 U.S.C.A. (1.R.C.1954) §§ 856—

4. Courts 315

Diversity is determined as of time the

action is commenced; hence, fact that trust

was under supervision of a bankruptcy

court which, at least, temporarily suspended

all powers of the shareholders over the trus-

tees did not mean that, for diversity pur-

poses, reference was to be had to the citi-

zenship of the trustees, rather than the

beneficiaries, since the bankruptcy orders

were not entered until after action was

commenced. 28 U.S.C.A. § 1332(a).

5. Courts 315

Fact that powers of trustees of Massa-

chusetts business trust were very broad did

not require that, for purpose of diversity

jurisdiction, citizenship was to be deter-

mined by reference to the trustees, rather

than to the beneficiaries. 28 U.S.C.A.

§ 1332(a).

6. Courts #315

Fact that Massachusetts business trust

did not presently qualify as a real estate

investment trust for federal tax purposes

did not require that, for purpose of diversi-

ty jurisdiction, citizenship be determined by

reference to the trustees, rather than the

beneficiaries since its intrinsic nature and

purpose as a business enterprise were such

that it could not be treated as either a

corporation or an ordinary trust. 28 U.S.

C.A. § 1332(a).

7. Federal Civil Procedure @18]

Mere fact that every party-plaintiff

named as a class representative in suit was

a citizen of a state other than that of the

defendant did not mean that suit brought

by Massachusetts business trust could be

maintained as diversity class action suit

since state law allowed real estate invest-

ment trusts to sue and be sued as entities

and, hence, suit could not properly be

brought as a class action. Fed.Rules Civ.

Proc. rules 17(b), 23.2, 28 U.S.C.A.; Ver-

non’s Ann.Tex.Civ.St. art. 6138a, § 6(A){2).

8. Federal Civil Procedure @18]

Civil rule providing that members of an

unincorporated association may bring suit

as a class by naming certain members as

representative parties must be read in con-

junction with rule that the capacity of an

unincorporated association to sue is to be

determined by the law of the state in which

the district court is held; hence, if state law

allows the association to sue as an entity,

then a class action is not available. Fed.

Rules Civ.Proc. rules 17(b), 23.2, 28 U.S.C.A.

9. Bankruptcy ®=293(4)

Bankruptcy Act did not confer jurisdic-

tion on federal district court of suit brought

by Massachusetts business trust to recover

damages resulting from alleged breach of

loan commitment agreement, on _ theory

that in any suit brought by the receiver or

trustee the defendant could consent to jur-

isdiction where none would otherwise exist,

where defendant never consented to federal

jurisdiction; fact that it was not until three

months after plaintiffs filed their com-

plaints alleging diversity jurisdiction that

defendant moved to dismiss for want of

jurisdiction did not constitute implied con-

sent to jurisdiction since motion to dismiss

was filed before plaintiffs submitted their

first amended complaint, which raised issue

of Bankruptcy Act jurisdiction. Bankr.Act,

§ 28, sub. b, 11 U.S.C.A. § 46(b).

10. Securities Regulation e=12

Savings association’s loan commitment

letter was not a “security” within the

meaning of the Securities Exchange Act.

Securities Exchange Act of 1934, § 10(b), 15

U.S.C.A. § 78j(b).

See publication Words and Phrases

for other judicial constructions and

definitions.

11. Securities Regulation 1

Securities Exchange Act was not in-

tended to insure American businesses

against bad debts. Securities Exchange

Act of 1934, § 10(b), 15 U.S.C.A. § 78}(b).

James A. Ellis, Jr., Carrington, Coleman,

Sloman, Johnson & Blumenthal, Dallas

Tex., for plaintiffs.

Bernus Wm. Fischman, Lackshin, Nathan

& Berg, Houston, Tex., Lawrence Fisch-

man, Weil, Craig & Fischman, Inc., Dallas,

Tex., William P. Weir, Fort Worth, Tex.,

for defendant.

MEMORANDUM OPINION AND ORDER

WILLIAM M. TAYLOR, Jr., Chief Judge.

This suit was brought by the above

named plaintiffs as trustees of Fidelity

Mortgage Investors (FMI), a Massachusetts

business trust, against defendant Navarro

Savings Association for damages resulting

from the breach of a loan commitment

agreement.

Defendant has moved to dismiss the case

for want of subject matter jurisdiction, F.R.

C.P. 12(b)(1). Plaintiffs have responded by

amending their complaint to allege four

separate grounds upon which jurisdiction

might properly be based. The Court has

reviewed each of those grounds, and finds

that none is strong enough to repel defend-

ant’s jurisdictional attack.

DIVERSITY OF CITIZENSHIP

Plaintiffs primarily contend, in opposition

to defendant’s motion to dismiss, that when

a real estate investment trust (REIT), such

as FMI, brings suit in federal court, the

citizenship of the trustees, not the benefici-

aries, is the determinative factor for diver-

sity purposes. Under this view of the law,

jurisdiction of this Court would be proper

under 28 U.S.C. § 1332(a), since none of the

plaintiff trustees are citizens of Texas.

Defendant disputes plaintiffs’ contention,

citing several rece. t cases in which other

federal district courts have held that for

diversity purposes, an REIT is an unincor-

porated association in which case the citi-

zenship of the beneficiaries is controlling,

not the citizenship of the trustees.

Larwin Mortgage Investors v. Riverdrive

Mall, Inc., 392 F.Supp. 97 (S.D.Tex.1975)

was the first reported case to address this

issue. In that case, Judge Cox reviewed

the plaintiff's claim that for diversity pur-

poses, an REIT should be treated either as a

corporation or as an ordinary trust. If an

REIT were a corporation, then citizenship

would be determined by looking to the state

of incorporation or principal place of busi-

ness. If a trust, then citizenship of the

10a

trustees would be determinative.!

Feeling constrained by the United States

Supreme Court’s opinions in Steelworkers v.

Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15

L.Ed.2d 217 (1965) and Morrissey v. Com-

missioner of Internal Revenue, 296 U.S. 344,

56 S.Ct. 289, 80 L.Ed. 263 (1935), Judge Cox

held that for diversity purposes, a business ~

trust which qualified as an REIT under the

Internal Revenue Code must be treated as

an unincorporated association, making the

citizenship of each of the beneficiaries de-

terminative of jurisdiction.”

1. Plaintiffs in the case at bar have not contend-

ed that FMI should be treated as corporation

for diversity purposes; only that it should be

treated as a trust.

2. Judge Cox’ reliance on Bouligny and Morris-

sey was well-placed. The issue before the

Court in Bouligny was whether a labor union,

for diversity purposes, is a citizen of the state

of its principal place of business, or a citizen of

the state of each of its members. The Court

opted for the latter view, suggesting that any

expansion of diversity jurisdiction was a mat-

ter for the Congress, not the Courts.

lla

Although Larwin was the first case to

explore the issue of REIT citizenship for

diversity purposes, it has not been the last.

Other federal district courts have con-

sidered the question, and each one has con-

curred in the Larwin result. See Saul v.

Farnale, Inc., Civil Action No. 74-H-128

(S.D.Tex., July 8, 1975), and Risk v. Jones,

Civi! Action No. 75-97A (N.D.Ga., June 19,

1975).

[1] Against the above authority, plain-

tiff trustees of FMI have asserted their

belief that Larwin was incorrectly decided,

and have offered several arguments in sup-

port of that belief. At the time those argu-

ments were urged by plaintiffs, the issue of

REIT citizenship was one of first impres-

sion in this Court. That is no longer the

case. This Court has subsequently rendered

a decision in Lincoln Associates, Inc. v.

Great American Mortgage Investors, 415

F.Supp. 351 (N.D.Tex.1976), in which it held

that the citizenship of an REIT for diversi-

ty purposes is governed by the citizenship

of each of its beneficiaries. That holding

12a

must also apply to the case at bar.

[2] The jurisdictional facts in the two

cases are virtually identical. Like the de-

fendant REIT in Lincoln, FMI is a Massa-

chusetts real estate trust,’ organized under

a Declaration of Trust. FMI is an invest-

ment vehicle authorized to issue negotiable

shares for public offering.£ The powers of

FMI’s trustees are nearly the same as those

of the trustees in Lincoln, and the powers

of the shareholders are equally similar.

Given these similarities in fact, similarity in

law must logically result.

The Court in Morrissey was faced with a deter-

mination of the treatment of a business trust

for tax purposes. It ultimately concluded that

business trusts should be taxed as unincorpo-

rated associations rather than as ordinary

trusts, reasoning that the object of a business

trust is “not to hold and conserve particular

property, . . . but to provide a medium

for the conduct of a business and sharing its

gains.”

296 U.S. at 357, 56 S.Ct. at 295.

3. Declaration of Trust, Section 1.3

4. Declaration of Trust, Section 6.1]

l3a

Most of the arguments asserted by FMI

in support of its diversity claim were ad-

dressed by this Court in Lincoln. First,

plaintiffs argue that the Larwin court’s re-

liance on Morrissey was misplaced because

Morrissey was a tax case, and the charac-

terization of an entity for tax purposes

should not control its characterization for

diversity purposes. That argument was

dispelled in Lincoln:

The Morrissey analysis of types of enti-

ties and enterprises is clearly applicable

to the case at bar, and dictates [the

REIT’s}] treatment as an unincorporated

association. Nothing in that opinion indi-

cates that the Supreme Court would treat

a business trust any differently for pur-

poses of determining diversity jurisdic-

tion.

Supra, at page 354.

[3] Second, plaintiff contends that Con-

gress overruled much of Morrissey when it

enacted legislation to permit REIT’s to es-

cape taxation as associations, under §§ 856-

08 of the Internal Revenue Code of 1954.

14a

Such an interpretation, however, reads too

much into the statute. Congress did not

alter Morrissey’s definition of “business

trusts,” it merely granted more favorable

tax treatment to REIT’s. And absent more

explicit legislation, this Court will adhere to

the Morrissey definition. For, as the Su-

preme Court concluded in Bouligny, “pieas

for extension of the diversity jurisdiction to

hitherto uncovered broad categories of liti-

gants ought to be made to the Congress and

not to the Courts.” Supra, 382 U.S. at

150-51, 86 S.Ct. at 275.

[4,5] Plaintiffs additionally maintain

that as trustees of FMI, their powers over

the trust are so broad that the citizenship of

each of them should control for the purpose

of determining diversity jurisdiction. They

attempt to buttress this argument with the

fact that FMI is now under the supervision

of a Bankruptcy Court,’ which at least tem-

porarily suspends all powers of its share-

holders over its trustees.

5. See affidavit of Arthur Milam, which contains

the bankruptcy court orders.

1Sa

This latter argument is not valid. Diver-

sity is determined as of the time the action

is commenced, Louisville, N. A. & C. R. Co. ©

v. Louisville Trust Co., 174 U.S. 552, 19

S.Ct. 817, 48 L.Ed. 1081 (1899), and the

bankruptcy orders upon which plaintiffs

rely were not entered until after the case at

bar was commenced on December 13, 1974.

As to plaintiffs’ main argument that the

trustees’ pawers are so broad as to make

their citizenship determinative of jurisdic-

tion, this Court need only commend plain-

tiffs to Lincoln which dealt with trustees’

powers of similar scope:

When one considers the . . . char-

acteristics of [the REIT] in light of the

Supreme Court’s analysis [in Morrissey ],

it becomes manifestly clear that [the

REIT] is not an ordinary trust. It is a

business trust or association, and, in view

of the mandate to narrowly construe and

define diversity jurisdiction, this Court

cannot treat it as an ordinary trust for

diversity purposes. Rather, it must be

treated as an unincorporated association

(footnote omitted).

l6a

Supra, at page 354.

[6] Plaintiffs finally suggest that Lar-

win is inapplicable to their case, because

FMI is not now qualified as an REIT for

tax purposes. The Court responded to this

sanie suggestion in Lincoln:

This argument is without merit. The

issue before the Court turns not upon an

election by [defendant] 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 [defend-

ant] as a business enterprise.

Supra, at page 354. Although FMI is not

officially recognized as an REIT for tax

purposes, its “intrinsic nature and purpose”

as a business enterprise are such that it

cannot be treated as either a corporation or

an ordinary trust. Hence the citizenship of

its shareholders must be the determinative

factor for diversity purposes.

17a

CLASS ACTION

[7,8] Plaintiffs have alternatively al-

leged that suit has been properly brought in

this Court as a class action under FRCP

23.2. That rule provides that members of

an unincorporated association may bring

suit as a class by naming certain members

as representative parties, provided that

those parties “will fairly and adequately

protect the interests of the association and

its members.”

Not coincidentally, every party-plaintiff

named as a class representative in the case

at bar is a citizen of a state other than

Texas. Therefore, plaintiffs contend, the

diversity of citizenship requirement has

been met.

The Court is not so inclined. Rule 23.2

must be read in conjunction with Rule

17(b), which orders that the capacity of an

unincorporated association to sue be deter-

mined by the law of the state in which the

district court is held. If state law allows

the association to sue as an entity, then a

class action under Rule 23.2 is not available.

18a

Suchem, Inc. v. Central Aguirre Sugar Co.,

52 F.R.D. 348 (D.P.R.1971).

Since Texas law allows REIT’s to sue and

be sued as entities, Tex.Rev.Civ.Stat.Ann.

art. 6138A § 6(A)(2) (1961), plaintiffs cannot

properly bring this suit as a class action.

BANKRUPTCY JURISDICTION

[9] Absent diversity or class action jur-

isdiction, plaintiffs further contend that

§ 23(b) of the Bankruptcy Act® confers

jurisdiction on the Court because 1) a debt-

or-in-possession occupies the same position

as a receiver or trustee, and 2) under the

Bankruptcy Act, a defendant, in a suit

brought by a receiver or trustee, can con-

sent to jurisdiction where none otherwise

would exist.

6. Section 23(b) reads as follows: ‘Suits by the

receiver and the trustee shall be brought or

prosecuted only in the courts where the bank-

rupt might have brought or prosecuted them if

proceedings under this Act had not been insti-

tuted, unless by consent of the defendant, ex-

cept as provided in sections 60, 67, and 70 of

this Act.” 11 U.S.C. § 46(b) (1964).

19a

The Court does not reach the question of

whether plaintiff trustees, as debtors-in-

possession, occupy the same position as re-

ceivers in bankruptcy, because it is clear

from the facts that defendant has never

consented to jurisdiction in this cause.

A brief review of pertinent facts is in

order. Plaintiffs filed their complaint on

December 18, 1974, alleging jurisdiction

based on diversity of citizenship. On Janu-

ary 10, 1975, defendant answered, and re-

quested a stay of the proceedings. On Jan-

uary 30, 1975, plaintiffs were adjudged

debtors-in-possession of FMI. Defendant

did not file its motion to dismiss for want of

jurisdiction until March 16, 1976, and plain-

tiffs now claim the delay served to imply

consent to jurisdiction.

The Court is not persuaded. The cases

cited by plaintiffs that deal with consent

involved suits brought by persons in their

capacities as receivers or trustees in bank-

ruptcy. The case at bar does not fall into

that category.

Plaintiffs should be reminded that de-

20a

fendant’s motion to dismiss was filed before

plaintiffs submitted their first amended

complaint, which effectively superseded

their original complaint. 3 J. Moore, Feder-

al Practice § 15.08[7] (2d ed. 1975). They

should also take note of the well established

principle that “[i]t is never too late for a

party, or the court on its own motion, to

assert lack of jurisdiction over the subject

matter.” C. Wright, Federal Courts § 69,

at 292 (2d ed. 1972).

FEDERAL QUESTION JURISDICTION

[10,11] Plaintiffs’ hodge-podge of juris-

dictional allegations ends with a claim that

their injuries were the result of defendant’s

violation of Section 10(b) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78)(b)

(1970), and its implementing Rule 10b-5, 17

C.F.R. § 240.10b--5 (1975). Plaintiffs have

alleged no facts in support of this claim,

and perhaps rightly so, since it has abso-

lutely no merit.

Suffice it to say that 1) defendant's com-

mitment letter is not a “security,” see Unit-

2lha

ed Housing Foundation, Inc. v. Forman, 421

U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621

(1975), cf. United States v. Austin, 462 F.2d

724 (10th Cir. 1972), and 2) the Securities

Exchange Act of 1934 was never intended

to insure American businesses against bad

debts. As the Fifth Circuit noted in Bellah

v. First National Bank of Hereford:

We doubt that Congress intended by [this

Act] to render federal judges the guardi-

ans of all beguiled makers or payees.

495 F.2d 1109 at 1113-14 (5th Cir. 1974).

Having reviewed each of the jurisdiction-

al allegations offered by plaintiffs, the

Court.is of the opinion that it lacks jurisdic-

tion over the subject matter of this lawsuit.

Accordingly, the case must be dismissed.

O° E Key NUMBER SYSTEM

22a

Michael McHALHE, Plaintiff,

David MATHEWS, Secretary of Health,

Education and Welfare, Defendant. |

No. 75 Civ. 5636-LFM.

United States District Court,

S. D. New York.

July 30, 1976.

Claimant sought review of denial of

disability benefits by the Secretary of

Health, Education and Welfare. The Dis-

trict Court, MacMahon, J., held that testi-

mony hy vocational expert that there were

a number of office and factory jobs in the

area which the claimant could perform sus-

tained denial of benefits.

Dismissed.

1. Social Security and Public Welfare

e= 148

Judicial review of denial of disability

benefits by the Secretary of Health, Educa-

23a

tion and Welfare is limited to a determina-

tion of whether the Secretary’s administra-

tive decision is supported by substantial evi-

dence. Social Security Act, § 20K(g), 42

U.S.C.A. § 405(g).

2. Social Security and Public Welfare

@= 149

Decision of administrative law judge to

deny disability benefits became the final

decision of the Secretary of Health, Educa-

tion and Welfare when it was approved by

the appeals council.

3. Social Security and Public Welfare

@=> 143.5(2)

Eligibility for disability insurance bene-

fits under social security requires a showing

by a claimant that he is unable to engage in -

substantial gainful activity by reason of a

physical or mental impairment which can be

expected to result in death or to last for a

continuous period of at least 12 months.

Social Security Act, § 223(d), 42 U.S.C.A.

§ 423(d).

24a

4. Social Security and Public Welfare

e148

Determinations by the Secretary of

Health, Education and Welfare as to the

facts concerning claimant’s disability are

conclusive if supported by substantial evi-

dence; rule applies not only as to findings

of basic evidentiary facts but also as to the

inferences and conclusions to be drawn

from them. Social Security Act, § 205(g),

42 U.S.C.A. § 405(g).

5. Social Security and Public Welfare

e= 148 :

Court cannot set aside Secretary of

Health, Education and Welfare’s denial of

disability benefits if the record contains evi-

dence which a reasonable mind would ac-

cept as adequate to support that determina-

tion. Social Security Act, § 205(g), 42 U.S.

C.A. § 405(g).

6. Social Security and Public Welfare

@=> 143.5(10)

Testimony by vocational expert that

37-year-old carpenter who had suffered leg

injury could, in view of his prior work as a

25a

tion of the issues. The trial court can treat

the pretrial order as amended by the con-

gent of the parties. See Mains v. United

States, 508 F.2d 1251, 1259 (6th Cir. 1975);

Bucky v. Sebo, 208 F.2d 304, 305 (2d Cir.

1953). In such a case, the court properly

can enter a judgment that decides issues

outside the scope of the original pretrial

order. :

[4] The parties in this case disagree on

_ whether they actually tried the entire pat-

ent.. The district court’s opinion notes that

the other claims in the patent “are depend-

ent upon claim 1 for their validity,” but the

record does not show whether the parties

could present additional evidence with re-

spect to the patent claims not identified in

the pretrial order. We therefore vacate the

part of the judgment that invalidates pat-

ent claims other than claims 1, 2, 3, and 7,

and remand for the district court to deter-

mine whether the parties actually litigated

or wish to litigate the remaining claims in —

the patent. After giving the parties an

opportunity to adduce new evidence and

26a

arguments on the remaining patent claims,

the district court may amend the pretrial

order and enter an appropriate judgment.

Accordingly, the judgment is affirmed in-

sofar as it invalidates claims 1, 2, 3, and 7 of

Patent No. 3,797,680 and declares that Per-

fection-Cobey has not infringed those

claims. The judgment is vacated insofar as

it invalidates other claims in the patent,

and the case is remanded for further pro-

ceedings consistent with this opinion.

Affirmed in part; Vacated in part; and

Remanded.

Oo E Key NUMBER SYSTEM

27a

Lawrence F. LEE, Jr., et al.,

Plaintiffs-Appellants,

Vv.

NAVARRO SAVINGS ASSOCIATION,

: Defendant-Appellee.

No. 76-3550.

United States Court of Appeals,

Fifth Circuit.

June 18, 1979.

A.suit for breach of contract was dis-

missed by the United States District Court

for the Northern District of Texas, at Dal-

las, William M. Taylor, J., 416 F.Supp. 1186,

for lack of jurisdiction. On appeal by the

plaintiffs, the Court of Appeals, Ainsworth,

Circuit Judge, held that in view of specific

provisions of a declaration of trust, and in

view of fact that a promissory note was

specifically made payable to order of trus-

tees, it was citizenship of plaintiff trustees,

the real parties in interest, and not that of

beneficiary shareholders to which the Court

would look to discern diversity of citizen-

28a

ship in an action brought by the trustees _

against a savings association for breach of

commitment to lend money for payment of |

the note.

Reversed and remanded for trial on the

merits.

Vance, Circuit Judge, dissented and

filed opinion.

Federal Courts #290

In view of specific provisions of decla-

ration of trust, and in view of fact that

promissory note was specifically made pay-

able to order of trustees, it was citizenship

of plaintiff trustees, the real parties in in-

terest, and not that of beneficiary share-

holders to which Court would look to dis-

cern diversity of citizenship in action

brought by trustees against savings associa-

tion for breach of commitment to lend mon-

ey for payment of note. 28 U.S.C.A.

§§ 1331, 1332; Fed.Rules Civ.Proc. rules

17(a), 23.2, 28 U.S.C.A.; Securities Ex-

change Act of 1934, § 1 et seq., 15 U.S.C.A.

§ 78a et seq.

James A. Ellis, Jr., Don R. Hanmer, Dal-

las, Tex., for plaintiffs-appeliants.

Ernest E. Figari, Jr. (Institutional Inves-

_ tors Trust), David P. Seikel, Dallas, Tex.,

amicus curiae.

Bernus W. Fischman, Houston, Tex.,

Lawrence Fischman, Dallas, Tex., for de-

fendant-appellee.

Appeal from the United States District

Court for the Northern District of Texas.

Before BROWN, Chief Judge, and AINS-

WORTH and VANCE, Circuit Judges.

AINSWORTH, Circuit Judge:

The question for decision is whether the

district court correctly dismissed this suit

for lack of jurisdiction.

Plaintiffs are eight individuals, all non-

Texas citizens and trustees of Fidelity

Mortgage Investors, a Massachusetts busi-

ness trust (FMI), who filed this complaint

30a

as representatives of FMI seeking damages

for breach of contract against defendant

Navarro Savings Association, a Texas cor-

poration, in the sum of $1,174,525.17 plus

interest and attorneys’ fees.

Jurisdiction is asserted by plaintiffs un-

der both the diversity of citizenship and

federal question provisions of law. 28

U.S.C. §§ 1832, 1831. The district court

rejected both bases of citizenship! We

disagree with the district court’s ruling and

hold that jurisdiction should have been

maintained under diversity of jurisdiction.

It is thus unnecessary that we consider

1. The district court in a written opinion held

that the citizenship of each of the numerous

shareholders of the trust rather than the eight

trustee plaintiffs was determinative of jurisdic-

tion and diversity. of citizenship was therefore

lacking. Other contentions of plaintiffs relative

to the right to maintain a class action under

Federal Rules of Civil Procedure, Rule 23.2

(pertaining to actions by representative parties

on behalf of members of an unincorporated

association), and to federal question jurisdic-

tion under the Securities Exchange Act of 1934,

"were also denied. |

3la

whether there is also federal question juris-

diction.

According to the allegations contained in:

plaintiffs’ complaint, on September 9, 1971,

the president of Rockwall Estates, Inc. exe-

cuted on behalf of the corporation a promis-

sory note to plaintiffs in the amount of-

$850,000 to evidence money lent to the cor-

poration. The note provided that the prin- “

cipal amount should become due and pay-

able two years from the date thereof but -

interest payments were to be due and pay--

able monthly. The promissory note provid-

ed in pertinent part as follows:

FOR VALUE RECEIVED, the under- -

signed Rockwall Estates, Inc., (herein-

after sometimes referred to as “Maker’”’),

hereby promises to pay to the order of

Laurence F. Lee, Jr., Bert A. Betts, Roy

B. Davis, Jr., N. Clement Slade, Jr., Rob-

' ert M. Green, Luther H. Hodges, James |

B. McIntosh, Arthur W. Milam, Jack H.

Quaritius, Frederick H. Schroeder and

John W. York, not individually, but as .

- Trustees of Fidelity Mortgage Investors, .

32a

a Massachusetts Business Trust, under

Declaration of Trust dated May 29, 1969 e;

(hereinafter referred to as “FMI”) and

their respective successor Trustees under —

said Declaration of Trust, with power to

protect, manage, sell, deliver, transfer,

endorse with or without recourse, modify,

extend, consolidate, coordinate and

spread with any other note, negotiate,

collect, discharge, accelerate, enforce

and/or without being limited by any of

the foregoing deal in any manner with

this note, the obligations represented

thereby, and exercise any right or option

contained in this note, the principal sum

of Eight Hundred Fifty Thousand and

00/100 ($850,000.00) Dollars, or so much

thereof that may be advanced, together

with interest thereon from the date of

advances on outstanding principal bal-

ance at the rate of five percent (5%) _

above the prime rate of interest charged

by Morgan Guaranty Trust Company of

New York, or its successors, on the busi- .

ness day preceding the first day of each

. guecessive month during the term hereof,

33a

but shall in no case be in excess of one

and one/half percent (144%) per month.

' According to the allegations of plaintiffs’

suit, prior to and contemporaneously with

the execution of the promissory note de-

scribed, defendant Navarro Savings Associ-

ation of Dallas, Texas, acting through its

_ president, executed loan commitment let-

ters to Rockwall Estates, Inc. dated July 26,

- 1971, which were delivered and accepted by

- Rockwall’s president at the closing of the

loan by FMI to Rockwall Estates, Inc. on

September 9, 1971. Under these “take out”

commitment letters defendant Navarro

agreed to loan to Rockwall Estates, Inc.

$850,000 any time between September 8,

1973 and August 31, 1974 “so that such sum

. could be used by Rockwall Estates, Inc. to

pay to Plaintiff the sums due under ‘the

note to them.” ?

. 2. The pertinent Navarro Savings Association

commitment letter to Rockwall Estates, Inc.

dated July 26, 1971, which was accepted by

Rockwall Estates, Inc. on September 9, 1971,

reads in part as follows:

1. Commitment. Subject to and upon the

fcontmued

34a

footnote contuued

terms and conditions contained herein, and in

consideration for the payment to Navarro

Savings Association (‘‘Association”), of the

sum of Eight Thousand Five Hundred Dollars

($8,500.00) as a commitment fee, Association

hereby agrees to loan to Rockwall Estates,

Inc., a Texas corporation, (“‘Borrower’’), at

any time during the period from and after

September 8, 1973, and until and including

August 31, °1974, the principal sum of Eight

Hundred Fifty Thousand Dollars ($850,-

000.00) (the ‘“Loan’’). |

2. Note and Deed of Trust. The indebted-

ness arising pursuant to the Loan shall be

evidenced by a promissory note (the ‘“‘Note’’),

executed by Borrower, dated the day the

Loan is made (the “Funding Date’”’), in princi-

pal amount of the Loan, bearing interest at a

.rate equal to the lesser of (a) a rate per

annum of five per cent (5%) over the prime

rate being charged by the Chase Manhattan

Bank (National Association) on the Funding

Date or (b) one and one-half per cent (1'2%)

per month, on the unpaid principal balance

from time to time remaining, with accrued

interest payable quarterly and with principal

and all accrued interest being finally due and

payable two (2) years after the Funding Date.

The Note shall be secured by a deed of trust

(the ‘Deed of Trust’) covering the real prop-

erty, described on Exhibit “A’’ attached here-

to and all improvements, fixtures and person-

_al property situated thereon (the “Mortgaged

fcontinued

35a

footnote continued

Property’’), granting to Association a valid,

legal and énforceable first and prior lien and

security interest on the Mortgaged Property,

subject to no liens, restrictions, encum-

brances, easements or other exceptions to

title except those approved in writing hereaf-

ter by Association. The Note and Deed of

Trust shall be substantially in the form of

Exhibits ‘“B’’ and “‘C” attached hereto and

incorporated herein by reference (with ap-

propriate blanks therein completed correct-

ly).

8. Pledge of Commitment. This Commit-

ment and the proceeds therefrom may be

pledged by Borrower or a security interest

may be granted by Borrower therein, but in

no event shall Association be required to

perform this commitment except in accord-

ance with its terms.

9..In the event this Commitment is

pledged as security for a loan to Borrower

from Fidelity Mortgage Investors under the

terms of the commitment letter from Fidelity

Mortgage Investors dated August 6, 1971, the

holder of such loan, upon thirty (30) days

written notice, may require Association to

make the loan committed hereby prior to

September 8, 1973; provided, however, at

the time of such notice and at the time of

closing of the loan, Borrower must have been

delinquent for more than sixty (60) days in

CONTINUCE

36a

Plaintiffs also alleged that on August 5,

1971, the president of defendant Navarro

sent to FMI through Ronald L. Langley for

its advisors a letter agreement (attached as

an exhibit) which provided that Navarro

would either purchase the Rockwall mort-

gage note of $850,000 or make available

funds for additional loan at any time the

note becomes delinquent. It was further

alleged that on September 9, 1971, at the

closing of the loan by FMI to Rockwall, the

president of defendant Navarro executed

and delivered the loan commitment letters

and orally stated to FMI’s representative

that the commitment fee had been actually

received by Navarro. Thereafter, on Sep-

tember 10, 1971, the president of Rockwall

assigned in writing the commitment letters

and obligations of defendant Navarro to

FMI. It is alleged that it was upon reliance

of the assignment and commitment letters

footnote continued

the payment of installments due on the loan

from Fidelity’ Mortgage Investors and Bor-

rower must have complied with all the terms

and provisions of this Commitment.

37a

that the loan of $850,000 was made by FMI

to Rockwall.

Plaintiffs further alleged that when

Rockwall Estates, Inc. became sixty days’

delinquent in the payment of installments

due on its loan to FMI, FMI gave defendant

Navarro notice to make the loan covered by

its commitment, but Navarro “breached its

obligation under the commitment to make

the loan in question” causing FMI to fore-

close on the Deed of Trust on real estate

securing the note, and resulting in damages

and a deficiency to plaintiffs in the amount

of $174,525.17 plus interest and attorneys’

fees as provided in the note plus $1,000,000

punitive and exemplary damages.

The allegations in the suit of plaintiffs,

trustees of FMI, disclose that under Article

III of the Declaration of Trust, “Trustees’

Power,” the trustees have the following

general power (3.1):

The Trustees shall have, without other

or further authorization, full, absolute

and exclusive power, control and authori-

ty over the Trust Estate and of the busi-

38a

ness and affairs of the Trust, free from

any power and control of the Sharehold-

ers, to the same extent as if the Trustees

were the sole owners of the Trust Estate

in their own right, subject only to the

limitations contained in this Declaration.

The Trustees may do and perform such

acts and things as in their sole judgment

and discretion are necessary and proper

for carrying out the purposes of the Trust

or conducting its business and affairs.

The enumeration of specific powers shall

not be construed as limiting the exercise

of general powers or any other specific

power. Such powers of the Trustees may

be exercised without order of or resort to

any court.

(emphasis supplied)

Article III, “Specific Powers,” (3.2r) of

the Declaration provides that the powers of

the trustees shall include the power “[t}o

collect, sue for and receive all sums of mon-

ey coming due to the Trust, and to prose-

cute, join, defend, compromise, abandon, or

adjust, any actions, suits, claims, demands

39a

or other litigation relating to the Trust, the

Trust Estate or the Trust’s affairs.”

Article I of the Declaration of Trust (1.1)

states in part that “the Trustees shall con-

duct and transact the activities of the

Trust, make and execute all documents and

instruments and sue and be sued in the

name of the Trust or in their names as

Trustees of the Trust.” |

A careful review of the Declaration of

Trust, as indicated above, amply supports

plaintiffs’ contention that as trustees of

FMI they are the real parties at interest,

exclusively entitled to enforce the rights at

issue in this case. In addition to the powers

already enumerated, plaintiffs as trustees

have absolute power to invest the capital

and funds of the trust, to lend money, and

to possess and exercise the rights incident

- to the ownership of mortgage loans. See

Declaration of Trust, Article 3.2(a), (b), (c),

(zg) and (k). Article IV states that the

trustees are “responsible for the general

policies of the Trust and for such general

supervision of the business of the Trust

40a

conducted by officers, agents, employees,

investment advisers or independent contrac- .

tors of the Trust as may be necessary to

insure that such business conforms to the

provisions of this Declaration.”

On the other hand, the shareholders’

rights are extremely limited, since they are

entitled only to the rights of equitable in-

terest owners or beneficiary shareholders,

without any powers of control or manage-

ment whatsoever. For example, Article 6.2,

“Rights of Shareholders,” in the Declara-

tion reads in pertinent part as follows:

The Shareholders shall have no legal

right, title or interest in or to the Trust

Estate and shall have no right to a parti-

tion thereof during the continuance of

the Trust. Shareholders shall, however,

be the equitable beneficiaries of the

Trust, but shall have only the rights pro- -

vided for in this Declaration and in the

Trustees’ Regulations. Except with re-

spect to matters in which the Sharehold-

ers are specifically given the right to vote .

_ by this Declaration, no action taken by P

4la

' the Shareholders at any meeting shall in

any way bind the Trustees.

Thus, according to the allegations of the

» suit and accompanying exhibits, it is appar-

ent that the general and specific powers

relating to the management and control of

, the FMI trust repose in the eight trustees

‘ who are plaintiffs in this suit. The Decla-

ration of Trust could not be more specific in

this regard. Likewise, the Rockwall prom-

_issory note of $850,000 was specifically

“made payable to the order of the eight

_trustees, plaintiffs herein, in their capacities

as trustees of FMI under the Declaration of

Trust.

The effect of the district court’s holding

“that the citizenship of each of the share-

holders must be considered rather than the

, citizenship of the individual trustees, in

_ practical effect, denies access to the federal

- courts of a business trust under diversity of

citizenship jurisdiction since it is virtually

impossible to establish the citizenship of

_ each of the approximately 9,500 beneficiary

shareholders.

Since the eight plaintiff trustees who are

42a

charged with the power to sue and be sued

on behalf of the trust, and who are the

persons in actual control of the trust and

the real parties in interest, are citizens of a

state other than Texas, and Navarro Sav-

ings is a citizen of Texas, there is complete

diversity between plaintiffs and defendant.

We look, therefore, to the citizenship of the

plaintiff trustees, not to that of the benefi-

' ciary shareholders, to discern diversity of

* citizenship in this case for purposes of juris-

diction. : ;

The Declaration of Trust clearly and un-

equivocally states that the real parties in

interest in matters affecting the FMI trust

are the named trustees. Their right to

prosecute the action is also provided by the

' Federal Rules of Civil Procedure, Rule

17(a), which reads in pertinent part as fol-

lows:

Every action shall be prosecuted in the

name of the real party in interest. An

executor, administrator, guardian, bailee,

3. Contra, Carlsberg Resources Corp. v. Camb-

ria Savings & Loan Association, 3 Cir., 1977,

43a

trustee of an express trust, a party with

whom or in whose name a contract has

been made for the benefit of another, or

a party authorized by statute may sue in

his own name without joining with him

the party for whose benefit the action is

brought; and when a statute of the Unit-

ed States so provides, an action for the

use or benefit of another shall be brought

in the name of the United States.

(emphasis supplied)

Thus, under the Federal Rules of Civil

Procedure the trustee of an express trust

may sue in a representative capacity on

behalf of the trust. FMI is not a party to

these proceedings. The trustees of the

trust are the plaintiffs, all of whom are of

non-Texas citizenship. It is unnecessary,

therefore, to look beyond the terms of the

Declaration of Trust, the provisions of the

promissory note, and the Federal Rules of

Civil Procedure to determine that the true

parties in interest in this case, in exclusive

control of the trust, with the sole right to

bring this action, are the eight trustee

44a

plaintiffs.

The trust here is analogous to a limited

partnership, and the citizenship of its bene-

ficiary shareholders should not be counted

in determining the existence of diversity

jurisdiction. The citizenship of the share-

holders shou!d be disregarded in the same

manner as was done by the Second Circuit

in Colonial Realty Corp. v. Bache & Co.,

1966, 358 F.2d 178, 184 (Friendly, J.), cert.

denied, 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d

-- 56 (1966), where the Court held that “a suit

brought against a New York partnership

must thus be considered to be against the

general partners only and identity of citi-

zenship between a limited partner and the

plaintiff does not destroy diversity.” *

The Comment, Limited Partnerships and

Federal Diversity Jurisdiction, 45 U.Chi.L.

Rev. 384, 407, states the real party in inter-

est principle very succinctly:

Thus, the principle unifying the appar-

ently conflicting jurisdictional precedents

554 F.2d 1254; Riverside Memorial Mausole-

um, Inc. v. UMET, 3 Cir., 1978, 581 F.2d 62.

45a

is not the “persons composing” rule but

' the “control” or “real party” concept.

The members of joint stock companies,

limited partnership associations, and gen-

eral partnerships “count” for diversity

purposes because all the members exer-

cise management powers. This control is

manifested in several ways: in the man-

agement role of the respective members,

their rights with respect to entity proper-

ty, their ability to effect dissolution of

the entity, their liability for the entity’s

debts and obligations, and in their capaci-

ty to sue and be sued on behalf of the

entity. Corporate shareholders and trust

beneficiaries, in contrast, have only “equi-

table” interests in their respective enti-

ties. Because limited partners do not en-

Joy the requisite control over the partner-

ship, they have only an “equitable” inter-.

est in proceedings brought by or against

the partnership, and thus, like corporate

shareholders and _ trust beneficiaries,

should not be counted for diversity pur-

poses. The result in Colonial Realty, far

from expanding the diversity jurisdiction,

46a

is but an application of a principle under-

lying the Supreme Court’s diversity juris-

diction decisions over the past 125 years.

(emphasis supplied) (footnotes omitted)

_The same Comment discusses the holdings

in the Colonial Realty and opposing Carls-

berg Resources cases in the following rea-

soned manner:

The Second Circuit, in Colonial Realty

Corp. v. Bache & Co., departed from the

tradition of dogmatic application of the

Chapman-Great Southern rule and held

that in suits involving limited partner-

ships the citizenship of only the general

partners is relevant for diversity pur-

poses. The court relied on the statutory

distribution of rights, powers, and respon-

sibilities between the general and the lim-

ited partners in concluding that the latter

should be disregarded in determining di-

versity. Although the decision has been

followed by courts in the Second and

Fourth Circuits, the Third Circuit, in

Carlsberg Resources Corp. v. Cambria

Savings & Loan Association, reached a

contrary result, finding that Colonial Re-

47a

alty was not a proper interpretation of

the “persons composing” test, but an un-

warranted exparsion of the scope of di-

versity jurisdiction. The majority in

Carlsberg Resources read the body of Su-

preme Court precedent as conclusively

foreclosing an approach that would dis-

tinguish between classes of association

members. |

Although the court in Colonial Realty

did not fully develop the reasoning be-

hind its decision, the result in that case

stands on solid ground. Examination of

Chapman and Great Southern reveals

that those cases did not reject a distinc-

tion for jurisdictional purposes between

classes of association members. On the

contrary, the rationale for such a distinc-

tion can be culled from a comparison of

the seemingly irreconcilable Marshall and

Chapman decisions. In Marshall the

Court observed that shareholders were

not real parties to livigation involving a

corporation and hence were irrelevant to

the jurisdictional test. In Chapman, on

the other hand, the joint stock company’s

48a

shareholders were clearly the parties con-

trolling the company, and their personal

assets stood behind the company’s debts.

The characteristics that compelled refer-

ence to all the association members in

Chapman are not found in the case of

limited partners, who are analogous to

corporate shareholders. A Jurisdictional

test that looks to the real parties to the

controversy not only makes sense of the

diversity precedents, but also accords well

with the protective policy underlying the

diversity jurisdiction, a policy which re-

mains vital today.

Id. at 417-18 (emphasis supplied).

It is pertinent to note that the two Su-

preme Court cases principally relied upon

by the district court as authority for dis-

missing this suit for lack of jurisdiction are

inappropriate and inapposite. United Steel-

4. Citations of cases referred to in the text, not

otherwise shown, are as follows: Chapman v.

Barney, 129 U.S. 677, 9 S.Ct. 426, 32 L.Ed. 800

(1889); Great Southern Fireproof Hotel Co. v.

Jones, 177 U.S. 449, 20 S.Ct. 690; 44 L.Ed. 842

(1900); Marshall v. Baltimore & Ohio R.R., 57

U.S. (16 How.) 314, 14 L.Ed. 953 (1853).

49a

‘ workers v. R. H. Bouligny, Inc., 382 U.S.

145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965),

cited by the district court as authority for

its holding that the citizenship of each of

_ the beneficiary shareholders is decisive for

«purposes of diversity jurisdiction, does not

"pertain to the circumstances here. In Boul-

,dgny the question was whether an unincor-

;. porated labor union should be treated as a

‘,citizen for purposes of federal jurisdiction

4-without regard to the citizenship of its

‘members, and the Court answered in the

. negative. However, we do not read in

, Bouligny a general rule that the courts

must look to all unincorporated associations’

:: membership to determine diversity jurisdic-

. tion. The present case differs on its facts

_from Bouligny since, under the express pro-

r visions of the Declaration of Trust here, the

,, trustees are designated as the ones in exclu-

“sive control of the trust, with power to sue

_and be sued on behalf of the trust, and no

_such authority is conferred on the benefi-

ciary shareholders. Additional!,, the Rock-

“wall promissory note here was made pay-

“able to the trustees who brought this suit.

Bouligny is applicable only to business

SO0a

| associations which seek federal court diver-

sity jurisdiction as entities. Here, the trus-

., tees sue as individual! representatives of the

TA. tS

trust, and assert federal jurisdiction as

such. No attempt is made by the individual

parties to become entities as occurred in

Bouligny. We note that the opinion in

Bouligny does not inform us who to look to

as the relevant members of the association

whose citizenship determines diversity juris-

diction. In Bouligny the Court was con-

cerned with an unincorporated association

having only one class of membership. In

the instant case, our real-party-in-interest

analysis notes that there is no single class

of membership, all with equal rights to

control and management such as in a gener-

al partnership. In the present case, another

class, the trustees, has the exclusive control

and management of the trust and the sole

right to sue and be sued. To decide which

class of membership or shareholders should |

be counted for diversity jurisdiction pur-

poses, it is necessary on a case-by-case basis

(there being no statutory model) to deter-

mine which class has exclusive power to

Sla

control and manage the trust. Here, the

trustees and their citizenship alone should

be looked to for the purposes of determin-

ing if each of them is diverse from that of

the defendant. “[A] close reading of Boul-

igny suggests that the Court’s language

concerning the limitations of the judicial

role can be restricted to the facts of the

case. The Court’s discussion of the difficul-

ties of fashioning a test for labor union

citizenship can be read as explaining why

only Congress could extend citizenship to

unions as entities.” (footnote omitted) 45

U.Chi.L.Rev. 384, 392.§

5. See 13 Am.Jur.2d, Business Trusts § 98

(1964), which reads as follows:

Jurisdiction of an action instituted in a feder-

al court in the name of the trustees of a

business trust will be governed by the resi-

dence of the trustees rather than the share-

holders, even though the latter may have the

beneficial interest and ultimate power of con-

trol of the business.

6. As the Comment in the Chicago Law Review

_ States more explicitly: ,

Bouligny should not be regarded as disposi-

tive of all business trust cases. The determi-

52a

Nor is the citation by the district court of

Morrissey v. Commissioner of Internal Rev-

footnote continucd

nation of proper parties for diversity pur-

poses should not turn on whether the entity

is of a “business” character, but on the allo-

cation of rights and liabilities between the

beneficiaries and the trustees. Analysis of

the cases from the perspective of the “real

party” principle suggests that some of the

recent REIT cases may have been decided

incorrectly. If a beneficiary of a business

trust is truly a passive investor who has no

significant voice in the management of the

trust, like the limited partner he should not

be deemed a party to the action.!17 Trust

agreement terms that permit the beneficiar-

ies to remove the trustees or to prevent

transfers of trust property do not seem to

vest the management of the trust in the bene-

ficiaries; such provisions only give benefici-

aries certain powers that corporate share-

holders commonly wield.189

'77 Under the theoretical model of the busi-

ness trust the role of the beneficiaries is clear-

ly distinguishable from that of the shareholder

in a joint stock company. The shareholders

of a joint stock company choose and control

. the company’s managers, who act as agents

of the shareholders. Crane & Bromberg, su-

pra note 32, at 179 n.19. Business trusts, on

foontinued)

S3a

enue, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed.

263 (1935), apposite. Morrissey involved

the question of the taxing of a trust under

existing statutory provisions. Diversity

jurisdiction was not at issue. The Court

held that the trust in Morrissey should be

taxed in the same way as a corporation

footnote continued

the other hand, are non-statutory variations of

traditional trusts. The Supreme Court, in

Hecht v. Malley, 265 U.S. 144 (1924), defined

a business trust as ‘‘an arrangement whereby

property is conveyed to trustees, in accord-

ance with the terms of an instrument of trust,

to be held and managed for the benefit of such

persons as may, from time to time, be the

holders of transferable certificates issued by

the trustees . . ..” Jd. at 146. The busi-

ness trust differs significantly from both the

joint stock company and the general partner-

ship in that the beneficiaries are not co-own-

ers of the trust property. Rowley & Sive,

supra note 32, at 632, 634. Legal title to trust

property is vested in the trustees, while the

beneficiaries have equitable title only.

‘These powers are also comparable to

those which limited partners may wield con-

sistently with their limited partner status un-

der more liberal limited partnership acts. See

Id. at 415 & nn. 178 & 180.

54a

under the statutory provision which defined

a corporation for tax purposes as including

“ ‘associations, joint-stock companies and in-

surance companies.’” The business trust

there was held to be an “Saeeeeee

association.”

Neither Bouligny nor Morrissey, there-

fore, controls the present case.

This suit is, therefore, maintainable un-

der diversity jurisdiction. We are, of

course, aware that the Judicial Conference

of the United States, by appropriate resolu-

tion, has requested that Congress change

the law so that federal courts may be di-

vested of diversity jurisdiction. However,

until Congress amends the statute in this

regard the federal courts are obliged to

take those suits properly before them as

diversity cases. This is such a case. Ac-

7. Cf. Commissioner of Internal Revenue v.

_ Horseshoe Lease Syndicate, 5 Cir., 110 F.2d

748, 749, cert. denied, 311 U.S. 666, 61 S.Ct. 24,

85 L.Ed. 427 (1940); see also Willowood Con-

dominium Assn. v. HNC Realty Co., 5 Cir.,

1976, 531 F.2d 1249, a case involving a REIT

where diversity jurisdiction was held to be

proper.

55a

cordingly, the judgment of the district

court dismissing the suit for lack of juris-

diction is reversed and the case is remanded

to the district court for trial on the merits.

REVERSED AND REMANDED.

VANCE, Circuit Judge, dissenting.

The issue presented is whether for pur-

poses of diversity jurisdiction the citizen-

ship of a business trust is determined by the

citizenship of its trustees, rather than that

of its beneficiary shareholders. The majori-

ty has elected to resolve this question by

undertaking a “real party in interest” anal-

ysis.' Concluding that the better view

‘ 1. The mere fact that legal title is vested in th:

trustees does not establish that they are th:

real parties. Nor is the fact that under th

declaration of trust the trustees are the partie

entitled to enforce the right dispositive of th:

issue. A party cannot unilaterally confer sub

" ject matter jurisdiction on a federal court b:

declaring who is to represent the trust in lega

actions. This court should look beyond mer:

appellations to determine who is a real party 1:

interest. See Miller v. Perry, 456 F.2d 63 (4t'

Cir. 1972). The primary function of categori:

ing a party as real party is to insure that an

(continued)

S6a

would base such determination on the citi-

zenship of each of the business trust’s bene-

ficiary shareholders, I dissent. This ap-

proach comports with the rule announced in

United Steelworkers v. R. H. Bouligny, Inc.,

382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217

(1965): an unincorporated association has as

its citizenship the domicile of each of its

individual members. | ‘

The business trust is analogous to an

unincorporated association. Unlike an ordi-

nary trust, a business trust is primarily an

investment vehicle whose object

footnote continued

judgment obtained by him will have its props

effect as res judicata. Advisory Committee

Notes, 39 F.R.D. 85. Here, a judgment obtai

ed by the trustees would have no greater pr:

clusive effect than a judgment secured by t)

beneficiary shareholders.

The majority's “real party in interest” anal:

sis necessitates ad hoc determinations a:

leads to divergent results. In some instances.

trial judge may be forced to decide the meri

of a case while determining the threshold juri

dictional issue.

57a

is not to hold and conserve particular

property, with incidental powers, as in

the traditional type of trusts, but to pro-

vide a medium for the conduct of a busi-

ness and sharing its gains.

Morrissey v. Commissioner of Internal Rev-

enue, 296 U.S. 344, 357, 56 S.Ct. 289, 295, 80

L.Ed. 263 (1935). Although Morrissey was

only concerned with the tax status of a

business trust, it does provide insight into

its business character:

What, then, are the salient features of

a trust—when created and maintained as

- @ medium for the carrying on of a busi-

ness enterprise and sharing its gains—

which may be regarded as making it

analogous to a corporate organization? A

corporation, as an entity, holds the title

to the property embarked in the corpo-

rate undertaking. Trustees, as a continu-

ing body with provision for succession,

may afford a corresponding advantage

during the existence of the trust. Corpo-

rate organization furnishes the opportuni-

ty for a centralized management through

representatives of the members of the

SSa

corporation. The designation of trustees,

who are charged with the conduct of an

enterprise, who act “in much the same

manner as directors,” may provide a simi-

lar scheme, with corresponding effective-

ness. Whether the trustees are named in

the trust instrument with power to select

successors, so as to constitute a self-per-

petuating body, or are selected by, or

with the advice of, those beneficially in-

terested in the undertaking, centraliza-

tion of management analogous to that of

corporate activities may be achieved. An

enterprise carried on by means of a trust

may be secure from termination or inter-

ruption by the death of owners of benefi-

cial interests and in this respect their

interests are distinguished from those of

partners and are akin to the interests of

members of a corporation. And the trust

type of organization facilitates, as does

corporate organization, the transfer of

beneficial interests without affecting the

continuity of the enterprise, and also the

introduction of large numbers of partici-

pants. The trust method also permits the

59a

limitation of the personal liability of par-

ticipants to the property embarked in the

undertaking.

Id. at 359, 56 S.Ct. at 296. The court then

concluded that the business trust was suffi-

ciently like a corporation that in reality it

constituted an association rather than a tra-

ditional trust. Jd. at 360, 56 S.Ct. 289.

The majority correctly notes that Boulig-

ny addresses only the issue of an unincorpo-

rated association’s domicile for diversity

purposes when the association sues as an

entity. It refuses, however, to apply Boul-

igny where, as here, individuals sue as rep-

resentatives of the entity. It seems to me

that such an approach honors form over

substance? and ignores the underlying ra-

2 Judge Hill, now a judge of this court, con-

demned the substitution of the trustees for the

trust as named plaintiffs. As a district court

judge he noted that:

To say that diversity jurisdiction exists if the

Trustees sue on behalf of the Trust, but does

not exist if the Trust sues acting through the

Trustees, is to honor form over substance

and create problems where none now exist.

if the Trustees may sue and create jurisdic-

tion, then may one Trustee or two or fewer

cunitdailac

60a

tionale of Bouligny :

pleas for extension of the diversity juris-

diction to hitherto uncovered broad cate-

gories of litigants ought to be made to

the Congress and not to the courts.

United Steelworkers v. R. H. Bouligny, Inc.,

382 U.S. at 150-151, 86 S.Ct. at 275. If the

decision in Bouligny were applied in this

case, there is no alternative but to find that

the citizenship of the beneficiary sharehold-

ers controls. This conclusion is in accord

with Riverside Memorial Mausoleum v.

UMET Trust, 581 F.2d 62 (8rd Cir. 1978)

footnote continued

than all sue and establish jurisdiction? If the

Trustees may sue on a promissory note, may

they sue on all contracts? For torts? The

court is reinforced in its conclusion by the

tone and philosophy expressed by the United

States Supreme Court in United Steelworkers

of America, AFL-CIO v. R. H. Bouligny, Inc.,

382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217

(1965) to the effect that if diversity jurisdic-

tion is to be extended to hitherto broad cate-

gories of litigants it ought to be done by the

Congress and not the courts.

Chase Manhattan Mortgage and Realty Trust v.

Pendley, 405 F.Supp. 593 (N.D.Ga.1975).

6la

and is supported by the overwhelming

weight of authority provided by district

court holdings. Lincoln Associates, Inc. v.

Great American Mortgage Investors, 415

F.Supp. 351 (N.D.Tex.1976); Chase Manhat-

tan Mortgage and Realty Trust v. Pendley,

405 F.Supp. 593 (N.D.Ga.1975); Jim Walter

Investors v. Empire-Madison, Inc., 401

F.Supp. 425 (N.D.Ga.1975); Larwin Mort-

gage Investors v. Riverdrive Mall, Inc., 392

F.Supp. 97 (S.D.Tex.1975); Independence

Mortgage Trust v. White, 446 F.Supp. 120

(D.Or.1978); National City Bank v. Fidelco

Growth Investors, 446 F.Supp. 124 (E.D.Pa.

1978); Heck v. A. P. Ross Enterprises, Inc.,

414 F.Supp. 971 (N.D.II1.1976); Carey v. U.

S. Industries, Inc., 414 F.Supp. 794 (N.D.III.

1976).

° ple scm ;

62a

UNITED STATES of America,

Plaintiff-Appellee,

Vv.

Larry EDDY and Raymond Daniel Eddy,

Defendants-Appellants. 7

No. 78-5527.

United States Court of Appeals,

Fifth Circuit.

June 18, 1979.

Defendants were convicted in the Unit-

ed States District Court for the Northern

District of Alabama, Clarence W. Allgood,

J., of two counts of unlawfully uttering and

publishing as true checks drawn upon the

United States Treasury, and they appealed.

The Court of Appeals, Simpson, Circuit

Judge, held that: (1) defendants could be

charged as principals in uttering an instru-

ment and convicted of aiding and abetting

such offense even though words “aid and

abet” did not appear in the indictment, and

(2) evidence was not sufficient to support

defendants’ convictions either as principals

63a

or as aiders and abetters.

Reversed.

1. Criminal Law 280

Person can be charged as principal in

uttering an instrument and be convicted of

aiding and abetting such offense even

though words “aid and abet” do not appear

in the indictment. 18 U.S.C.A. §§ 2, 495.

2. Criminal Law @1144.13(3)

In evaluating sufficiency of evidence to .

support conviction, Court of Appeals was

required to view evidence adduced at trial

in light most favorable to the Government.

3. Forgery @44(3)

Where defendants’ alleged guilt was

predicated on government theory that they

aided and abetted codefendant in uttering

checks, elements which Government had

burden of proving beyond reasonable doubt

were not only those of offense of uttering,

but also elements of offense of aiding and

abetting. 18 U.S.C.A. §§ 2, 495. — (

4. Forgery 16

Crime of uttering requires proof of

putting forth a false writing, some attempt

64a

to circulate a check by means of a fraudu-

lent representation that it is genuine and

also proof of defendant’s intent to en

18 U.S.C.A. § 495. :

5. Criminal Law @#=59(5)

Crime of aiding and abetting occurs if

an individual associates himself with a

criminal venture, participates in it as some-

thing he wishes to bring about, and seeks

by his actions to make it succeed. 18 Uz _

C.A. § 2.

6. Forgery 2—44(3)

Evidence in prosecution for uttering as

true checks drawn upon United States

Treasury was not sufficient to support de-

fendants’ convictions either as principals or

as aiders and abetters. 18 U.S.C.A. §§ 2,

495. os |

7. Criminal Law @422(1)

Witnesses #397 -

Testimony by Secret Service ails that

codefendant told agent that codefendant

received checks from defendants was not

hearsay as it was not offered or admitted to

prove truth of matter asserted but rather

for limited purpose of impeaching codefend-

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.