Kozel v. Kozel, 2016 WL 4163562 (M.D. Fla. August 4, 2016)

offshore_trustsVast sums of wealth are held in family trusts — and the size of these trusts is only getting bigger (see here). Not surprisingly, these same trusts often get dragged into contested divorce proceedings, especially if one side accuses the other of using the trust to hide assets. This kind of litigation is tricky enough when all the players are domestic (see here). Now add the confoundingly complex jurisdictional issues that get triggered when it’s an offshore trust, and you have the makings of a trust litigator’s perfect storm. Case in point: the Kozel divorce.

Kozel v. Kozel:

Ashley Kozel, the former wife of controversial oil millionaire Todd Kozel, received a nine-figure divorce settlement in the couple’s 2012 Florida divorce. A subsequent judgment resulted in her Florida divorce judge awarding her another $34 million in damages. Mr. Kozel says he doesn’t have the money to pay. Ms. Kozel isn’t buying it, and she’s prosecuting multiple fraudulent-transfer actions to claw back assets she claims her ex’ is either hiding or lavishing on his new wife (see here). One of the targets of this litigation is an offshore trust known as the “Gokana Trust”. To say this trust has been on the receiving end of decidedly unfavorable rulings in the Florida divorce litigation is putting it mildly (see here).

Apparently hoping a change of venue might improve its fortunes in court, the Gokana Trust (along with several other defendants targeted by Ms. Kozel’s claw-back actions) tried to get the fraudulent-transfer claims pending against it transferred to federal court on diversity-jurisdiction grounds. This is the aspect of the linked-to order that should be especially interesting to trusts and estates lawyers.

Since the U.S. Supreme Court’s 2006 decision in the Marshall case, most observers agree litigating inheritance cases in federal court on diversity-jurisdiction grounds has never been easier (see here). But does that view apply to trust litigation too? Maybe not.

Trusts and diversity jurisdiction:

Diversity jurisdiction is the primary avenue for getting trust cases heard in a US federal court. In order for diversity jurisdiction to apply, complete diversity is required, in other words none of the plaintiffs can be from the same state as any of the defendants. If you have one plaintiff and one defendant and they’re both individuals, figuring out if they’re from different jurisdictions is easy.

But what if one of the parties is some kind of entity? It’s still relatively simple if you’re talking about a corporation. A corporation is treated as a citizen of the state in which it is incorporated and the state in which its principal place of business is located. Again, the focus is on only one party.

On the other hand, figuring out a party’s citizenship gets way more complicated if you have to look through the entity shell and identify the citizenship of each of its owners, which is what you have to do with partnerships and LLCs. A partnership or LLC is considered to have the citizenship of all of its constituent partners/members. If even one LLC member or partner shares citizenship with any opposing party, you don’t qualify for diversity jurisdiction. Bottom line, it’s much tougher to get into federal court under this rule.

So what rule applies to trusts? Depends. If the trustee’s playing offense, then the simpler corporate rule applies. If the trustee’s playing defense, then the tougher look-through rule applies, which means that if even one of the trust’s beneficiaries is a Florida citizen there’s no diversity jurisdiction; the case stays in state court. The Gokana Trust is playing defense in this case, so the look-through rule applies. Here’s why:

Defendant lists the name of Gokana Trust’s sole trustee which is insufficient to establish diversity. The Eleventh Circuit recently held that a trustee constitutes the real party in interest and can “sue in [its] own right, without regard to the citizenship of the trust beneficiaries.” Wells Fargo Bank, N.A. v. Mitchell’s Park, LLC, 615 Fed.Appx. 561, 563 (11th Cir. 2015)(citing Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 100 S.Ct. 1779, 1783–84, 64 L.Ed.2d 425 (1980) . . .

In Wells Fargo Bank and Navarro, the trustee was the Plaintiff bringing the action, and the court had to decide whether the trustee was the real party in interest that could bring the claim on behalf of the trust. In contrast, when cases involved trusts as removing defendants, the Eleventh Circuit has held that the trust’s citizenship was determined by the citizenship of all of its members. See e.g. Carden v. Arkoma Assoc., 494 U.S. 185, 195 (1990); Riley v. Merrill Lynch, Pierce, Fenner, & Smith, Inc., 292 F.3d 1334, 1339 (11th Cir. 2002), abrogated on other grounds by Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 89 (2006) . . . See also . . . First Mut. Grp., LP v. Melton, No. 6:14-CV-1758-ORL-41, 2015 WL 892369, at *4 (M.D. Fla. Mar. 2, 2015) (reviewing Carden, Navarro, and Riley and noting that the requirement to name all of the beneficiaries of the trust has a narrow exception: where the trustee is a plaintiff, bringing the action as the real party in interest.)

The Supreme Court recently noted that the “confusion regarding the citizenship of a trust is understandable and widely shared[,]” and clarified that the Navarro rule coexists with the rule that “when an artificial entity is sued in its name, it takes the citizenship of each of its members.” Americold Realty Trust, 136 S. Ct. at 1016.

To the extent that identifying the trustee’s citizenship is sufficient, in this case it is a “limited company.” As an unincorporated entity, Defendant must have listed all of its members, and the citizenship of those members, which she failed to do. Therefore, the Court concludes that Defendant has not sufficiently alleged Gokana Trust’s citizenship.[FN3] See Azzo v. Jetro Rest. Depot, LLC, 2011 WL 1357557, at *2 n. 2 (M.D. Fla. Apr. 11, 2011) (in pleading the citizenships of the members, “each member’s citizenship must [also] be properly alleged, be it an individual, corporation, LLC, or other entity”).

[FN3] To the extent that Defendant argues that a business trust is subject to different rules than other kinds of trusts for diversity purposes, the Court is not persuaded that Defendant has demonstrated sufficient cause to distinguish them in this case. See Emerald Investors Trust v. Gaunt Parsippany Partners, 492 F. 3d 192, 202 n. 14 (3rd Cir. 2007) (expressing “unwillingness to distinguish between business trusts and express trusts for citizenship purposes.”).

Lesson learned?

When the US Supreme Court tells you a rule’s confusing and this confusion is “understandable and widely shared,” you know you’re in for a hard day at the office. So how’s this all supposed to work in real life? It’s a two-step process for offshore trusts.

Step one: figure out if all of the trust-related parties can be sued in Florida by applying our special-purpose long arm statute for trust cases (see here). Step two: once it’s clear your case belongs in a Florida courtroom, you need to figure out if it should play out in federal or state court. And to do that you’ll need to work through the diversity jurisdiction rules applied to the Gokana Trust in this case. Simple right? Like I said, think perfect storm.