Wednesday, February 17, 2016

Justice Scalia's Final Mark on Corporate Law May Be One of Form over Substance

Justice Scalia’s sudden passing has generated a tidal wave of media and academic attention on the future of the Supreme Court.   As a corporate law scholar, I have to admit to a tinge of jealousy to be seemingly outside of this controversy, the hand wringing, and the political equivalent of Dungeons and Dragons that has ensued as people examine the various maneuverers available to our elected politicians and those vying-to be elected.

My solution? I searched for pending corporate cases hanging in the balance of the new, and indeterminate, vacancy on the Supreme Court.  I wanted to know if there were any cases pending  that would likely be decided differently in a post-Scalia court, or at least hang in a 4-4 split and thus uphold the lower court ruling.  There isn’t a big juicy corporate law case pending, or at least one that I readily identified.

Not to be deterred, however, there is a case worth highlighting. Americold Realty Trust v. ConAgra Foods, Inc., was argued on January 19th before the Supreme Court (transcript available here).  The issue before the Supreme Court in Americold was how to establish the citizenship of a real estate trust for purposes of diversity citizenship.  Is the trust's citizenship dependent upon the citizenship of the controlling trustees (as argued by Americold)?  Or is it dependent upon the citizenship of the trust beneficiaries (argued by ConAgra Foods), or some combination? Locating citizenship with trustees narrows the potential states and ensures diversity citizenship whereas citizenship with the beneficiaries, of which there are thousands, implicates most states and thus frustrates federal jurisdiction.

At the heart of the oral argument was the 1990 ruling Carden v. Arkoma Associates, which established a bright line between the citizenship of corporations (located in the state of incorporation) and the citizenship of all other artificial business entities (located in the states of the beneficial owners of the business). 

In Carden, the Supreme Court wrote:

In 1958 it revised the rule established in Letson, providing that a corporation shall be deemed a citizen not only of its State of incorporation but also "of the State where it has its principal place of business." 28 U.S.C. 1332(c). No provision was made for the treatment of artificial entities other than corporations, although the existence of many new, post-Letson forms of commercial enterprises, including at least the sort of joint stock company ..., the sort of limited partnership association ..., and the sort of Massachusetts business trust ... We have long since decided that, having established special treatment for corporations, we will leave the rest to Congress; we adhere to that decision. 

Drawing on the Carden precedent, the question became whether the REIT as issue in Americold was organized as a traditional corporation or not. 

Ronald Mann writing for the SCOTUS Blog summarized Justice Scalia’s role in oral argument on this issue with the following:

Justice Antonin Scalia early on asked, “[w]ho owns these assets under Maryland law? Is it . . . this new corporation-type entity? That’s the entity that can sue.” That conclusion led him to dismiss out of hand Americold’s contention that the citizenship of the trust managers should be decisive: “[T]he trustees are sort of in the position of managers, just as though you hired a CEO.”

Scalia's skepticism about the REIT functioning like a corporation was shared by the other Justices despite the fact that modern REITs, in many ways, resemble corporations more so than other unincorporated business entities.  REITs have dispersed and diffused shareholders, often with shares traded on public exchanges.  This position was articulated by an amicus brief filed by National Association of Real Estate Investment Trusts (NAREIT).  The Justices however signaled a truly formalistic approach asking if the entity was indeed formed as a corporation (not did it function as one or was it capitalized as one). Only if so would the state of incorporation rule prevail.

A Justice Scalia-influenced Supreme Court's last word on corporate jurisprudence may very likely be one of pure form over substance.  Merely asking which entity form was used without looking at the distinguishing features of a corporation and the justifications for why corporations were treated differently beginning in 1958 produces a corporate law legacy of flimsy jurisprudence. Failing to take into account the market realities and relying upon strict categorical distinctions without reference to function would create a bright line, but not necessarily a bright result.

-Anne Tucker

http://lawprofessors.typepad.com/business_law/2016/02/justice-scalias-final-mark-on-corporate-law-form-over-substance.html

Anne Tucker, Business Associations, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, LLCs | Permalink

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