Law360 (August 17, 2020, 8:17 PM EDT) -- A Pittsburgh-area strip mall's dispute over whether its loan servicer can directly seize tenants' rent payments doesn't belong in federal court because the mall is owned by a business trust with one beneficiary living in Canada, rendering it a "stateless party" that can't sue in federal court, a judge ruled Monday.
Chief U.S. District Judge Mark R. Hornak said that North Hills Village LLC, which operates the sprawling suburban strip mall in Ross Township, Pennsylvania, met the criteria for being a business trust. And because a business trust's citizenship can be defined by all of its members, the "stateless" American citizen living in Canada carried through layers of beneficiaries and partners and scuttled the mall's bid for federal jurisdiction over its case, the judge said.
"If NHV Trust is a business trust, then its citizenship is that of all its members. One of its members is a partnership, which assumes the citizenship of all its partners. One of those partners is an American citizen domiciled abroad," Judge Hornak wrote in his opinion. "So … one constituent part of NHV's citizenship as relevant for these purposes would be a so-called 'stateless' party. And that status would be fatal to diversity jurisdiction."
Because he found that the mall was run by a business trust whose citizenship was as stateless as one of its beneficiaries, Judge Hornak dismissed the case without prejudice for lack of subject matter jurisdiction.
North Hills Village LLC filed the case in late March against Wells Fargo Bank and LNR Partners LLC, a subsidiary of Starwood Property Trust, seeking to stop the servicers of the mall's 2016 loan from exercising a "cash sweep" that would put all its tenants' rents toward its debt, rather than going into an account with Wells Fargo that lets the mall cover its maintenance and operating costs after its monthly payment obligations were met.
North Hills Village had claimed the COVID-19 crisis and the monthslong closures of several of its tenants had already pushed it to a breaking point, and it had met its obligations by signing a last-minute lease renewal early in the year with Burlington Coat Factory, one of its anchor tenants.
LNR countered that the cash sweep was triggered because Burlington got a rent reduction in its lease renewal, but the mall's loan agreement and cash management agreement said NHV had to charge Burlington or a replacement tenant the same amount or more. The pandemic-related losses, LNR argued, were not a reason to grant an injunction.
The parties had reached several "standstill" agreements not to go through with the cash sweep while the dispute was being resolved, Judge Hornak noted.
For purposes of citizenship, the defendants were residents of Maryland, Connecticut and South Dakota. The North Hills Village Shopping Center Trust, the sole member of North Hills Village LLC, claimed it was a "traditional" trust whose citizenship rested solely on the residence of its trustee — in this case, commercial real estate developer Ira Gumberg, a Pennsylvania resident.
Judge Hornak said the shopping center "hedged its bets" in also arguing in its amended complaint that none of the trust's beneficiaries were citizens of the same states as the defendants.
"Effectively, the amended complaint spells out that, for diversity purposes, it does not matter whether NHV Trust is a business or traditional trust. Diversity jurisdiction would be satisfied either way from the plaintiff's perspective," the judge wrote. "But some of that turned out to not be exactly the case."
Under the Third Circuit's 2008 ruling in Swiger v. Allegheny Energy Inc. , American citizens living abroad can't sue or be sued in federal court as they are neither "citizens of a state" nor "citizens or subjects of a foreign state," the opinion said, so the expatriate member of the partnership listed as a beneficiary of the NHV Trust would halt the case if the trust were indeed a business trust.
To determine that the NHV Trust was a business trust, Judge Hornak said he examined the form and purpose of the trust. While it had not been filed as a business trust with the Pennsylvania Department of State and appeared to fall under an exemption to the state's definition of business trusts that benefit investors in rental properties, the Third Circuit also said labels under state law are not the only means to define a business trust, the judge wrote.
Under an analysis of the NHV Trust's purpose, the judge said it was more clearly a business venture. It had "indicia of corporateness" such as being formed by investors who expected a return on their investments; the investors who created the trust were also its only beneficiaries; the continuation of the trust would not be affected by the death of any of its beneficiaries; and the beneficiaries had the power to control the trustee and amend the terms of the trust, the opinion said.
"These terms and provisions of the NHV Trust convincingly demonstrate that the trust is intended for a bargained-for exchange rather than donative transfer purposes," Judge Hornak wrote.
Counsel for North Hills Village, LNR and Wells Fargo did not immediately respond to requests for comment Monday.
LNR and Wells Fargo are represented by Joel M. Walker, Elinor Murarova, Gerald J. Schirato Jr., Meagen Leary, Rachel M. Good and Paul E. Chronis of Duane Morris LLP.
North Hills Village is represented by Mark C. Zheng, Daren S. Garcia, Joseph R. Miller and John M. Kuhl of Vorys Sater Seymour and Pease LLP, and Mary-Jo Rebelo of Burns White LLC.
The case is North Hills Village LLC v. LNR Partners LLC et al., case number 2:20-cv-00431, in the U.S. District Court for the Western District of Pennsylvania.
--Editing by Haylee Pearl.
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