Nomura Asset Acceptance Corp. Alternative Loan Trust, Series 2007-1 ex rel. HSBC Bank USA, N.A. v. Nomura Credit & Capital, Inc.
Docket: No. 13 Civ. 3138 (JPO)
Court: District Court, S.D. New York; June 24, 2014; Federal District Court
The plaintiff, a residential mortgage-backed securities trust, filed a lawsuit against the defendant, Nomura Credit Capital, Inc., the trust's sponsor. The plaintiff alleges that Nomura misrepresented the quality of many mortgages packaged in the trust. However, the court, led by Judge J. Paul Oetken, does not address the merits of the case due to a lack of subject matter jurisdiction. Consequently, the defendant's motion to dismiss is granted, resulting in the dismissal of the plaintiff's complaint without prejudice.
The background details include that Nomura established the plaintiff trust under New York common law via a Pooling and Servicing Agreement on April 1, 2007. The trust, with HSBC as trustee and GMAC Mortgage LLC and Wells Fargo as servicer and master servicer, respectively, received a pool of residential mortgages in May 2007 and subsequently issued securities backed by these loans. Nomura made representations regarding the loans' quality and promised to repurchase any that did not meet these conditions.
Nomura's motion to dismiss was based on Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, arguing both a lack of subject matter jurisdiction and failure to state a claim. The court determined that it lacks jurisdiction, so it did not evaluate the merits of the defendant's second argument regarding the claim's validity.
In discussing subject matter jurisdiction, the court explains that federal jurisdiction is limited, and for diversity jurisdiction to apply, there must be complete diversity between parties on opposing sides. The plaintiff's assertion of diversity is the sole basis for federal jurisdiction.
Plaintiff, a New York common-law trust, is pursuing a legal action through a National Banking Association based in Virginia, while the Defendant is a Delaware corporation operating in New York. The central issue is determining the citizenship of the trust, a matter on which courts have differing opinions. Five potential approaches exist for assessing a trust's citizenship: 1) the citizenship of the trustee; 2) the citizenship of the beneficiaries; 3) the citizenship of both the trustees and beneficiaries; 4) the citizenship of the state that created the trust; or 5) the citizenship of the entity controlling the litigation. The outcome of this case hinges on whether to consider the trustee's or beneficiaries' citizenship, since one beneficiary, AIG, is a New York citizen, which would compromise subject matter jurisdiction if beneficiaries are taken into account.
The Supreme Court's ruling in Carden v. Arkoma Associates clarified that legal entities, excluding corporations, do not share the citizenship of the state that created them, leaving the determination of a trust’s citizenship to the courts. The Second Circuit has not established a definitive stance on this issue, and district courts are divided, with some cases, such as Mills 2011 LLC v. Synovus Bank and Manufacturers and Traders Trust v. HSBC Bank USA, reflecting this split. Precedents like Navarro Sav. Ass’n v. Lee indicate that a trustee’s citizenship is relevant when acting in their own name, provided they possess customary powers over the trust's assets. Carden reaffirmed that a limited partnership's citizenship is based on the citizenship of all its members and did not alter the established rules for trusts.
Navarro clarified that it did not determine the citizenship of a trust, as the case involved trustees acting in their own names. The applicability of Carden, which pertains to limited partnerships, to express trusts remains uncertain. Many courts have referenced Navarro to assert that a trust shares the citizenship of its trustee, including cases like Mullins and Hicklin Engineering, but some of these decisions did not discuss Carden or focus on the citizenship question. Conversely, other courts have used Carden to differentiate Navarro, asserting that a trust’s citizenship may also be influenced by the citizenship of its beneficiaries. The excerpt critiques the reliance on Navarro in cases where the trustees sue in the trust's name, arguing this overlooks Carden's clarification that Navarro did not address how to determine a trust's citizenship. The Carden ruling maintains that artificial entities, including trusts, possess the citizenship of their members, supporting a more nuanced view than merely following Navarro.
Carden's terminology of "members" concerning interest-holders in unincorporated associations, particularly trusts, indicates a distinction from conventional legal definitions, as "members" is not typically used to describe trust parties. The Carden Court viewed trusts as analogous to unincorporated associations, addressing this through a detailed examination of the Navarro case. It emphasized a clear distinction in diversity jurisdiction between corporations and all other entities, asserting that trusts should not be treated differently due to terminology. The Court concludes that Carden applies to trusts, supported by persuasive opinions from Judges Greenberg, Nathan, and Boasberg, which reject a trustee-only approach and the real-party in interest test when the action is brought in the name of the trust. The rule established is that if a trust is the plaintiff, the citizenship of the beneficiaries is relevant; if a trustee is the plaintiff, the inquiry focuses on the trustee's authority. A trustee with customary powers is not deemed a "sham," and their citizenship is controlling. While this rule may appear overly technical, it aligns with Supreme Court interpretations and promotes predictability and uniformity in jurisdictional decisions. In cases with numerous beneficiaries, only one beneficiary's citizenship from the same state as the opposing party suffices for jurisdiction, reinforcing the trustee's role as a representative party in trust-related litigation.
The Court has determined that the citizenship of the trustee will be considered when the action is brought in the trustee's name, and the citizenship of the beneficiaries will be considered when the action is brought in the trust's name. The primary question is identifying the plaintiff in the case against Nomura. The First Amended Complaint identifies the plaintiff as "Nomura Asset Acceptance Corporation Alternative Loan Trust, Series 2007-1," represented by HSBC Bank USA, N.A. acting solely in its capacity as trustee. While the complaint suggests the trust is the plaintiff, the phrase "by and through" raises ambiguity regarding HSBC's role. However, the Court concludes that the trust is the actual plaintiff, necessitating an examination of its beneficiaries' citizenship. One beneficiary, AIG, is a Delaware corporation with its principal place of business in New York, making both AIG and the Trust citizens of New York. Consequently, diversity jurisdiction is defeated, and the Court lacks subject matter jurisdiction. The Defendant's motion to dismiss for lack of jurisdiction is granted, resulting in dismissal without prejudice. The Clerk of Court is instructed to close the relevant docket entry. The opinion references prior cases that address the complexities of identifying the correct plaintiff and the implications for diversity jurisdiction, affirming that both trustees and beneficiaries' citizenship must be considered, but clarifying that this specific action does not require a deeper exploration of those issues.
