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August 04, 2016 Top Story

Officer's Residence Decides Corporate Citizenship

Circuit court applies Supreme Court's nerve center test for principal place of business

Candice A. Garcia-Rodrigo

A corporation's principal place of business for diversity jurisdiction purposes is determined by the key controlling officer's residence, not the location of the company's main office, according to the U.S. Court of Appeals for the District of Columbia Circuit. CostCommand, LLC v. WH Administrators, Inc. In so deciding, the court adopted the nerve center test that the U.S. Supreme Court pronounced in Hertz Corp v. Friend. ABA Section of Litigation leaders point to new burdens placed upon attorneys in determining a company's principal place of business.

No Diversity Jurisdiction

A Maryland plaintiff filed suit against WH Administrators (WHA) and other corporate and individual defendants. The plaintiff asserted that WHA's principal place of business was in Texas, where the company had its corporate address and primary bank account. In addition, the company's decision-making officers lived in Texas. Initially, WHA admitted in its answer that Texas was its principal place of business and therefore citizenship. However, after another defendant filed a motion to dismiss objecting to diversity jurisdiction because WHA allegedly had its principal place of business in Maryland, WHA agreed and acknowledged that its admission regarding Texas was an error.

After the parties conducted jurisdictional discovery, the district court granted the objecting defendant's motion to dismiss for lack of diversity jurisdiction. The court found that, under the Supreme Court's nerve center test, WHA's principal place of business was in Maryland. One of the founding officers lived in that state. The most significant fact, however, was that the founding officer had complete control over the corporation, including the ability to override decisions of the other two officers. The court of appeals affirmed the district court's ruling, stating that the Hertz decision "gave clear guidance for determining the location of a corporation's principal place of business"; that is, where the corporation has its nerve center.

Nerve Center Test

In Hertz, the Supreme Court defined the phrase "principal place of business" to mean the location where "the corporation's high level officers direct, control, and coordinate the corporation's activities." The Court noted that this is often referred to as a company's nerve center. The state of incorporation is no longer the key to deciding a corporation's citizenship. Moreover, a nerve center is "not simply an office where the corporation holds its board meetings."

Hertz resolved a split in the circuit courts that were applying different tests to resolve the issue of a corporation's citizenship. Under the nerve center test, lower courts are pointed "in a single direction, towards the center of overall direction, control, and coordination." The goal of the nerve center test, according to the Supreme Court, was to ensure that "courts do not have to try to weigh corporate functions, assets, or revenues different in kind, one from the other."

The Supreme Court recognized that there may be challenges in applying the nerve center test but stated that the rule should simplify the process of determining a corporation's principal place of business for diversity jurisdiction purposes.

Fact-Intensive Inquiry

Even though Section of Litigation leaders agree that the court correctly applied the nerve center test, they are concerned about the residence of one person determining a company's principal place of business. "Generally the court correctly applied the nerve center test," affirms Kenneth M. Klemm, New Orleans, LA, cochair of the Section's Pretrial Practice & Discovery Committee. "It appeared this corporation had substantial activities in Texas, but the court really focused on the one person making decisions," Klemm notes.

In light of this case, Section leaders warn plaintiffs to take care before declaring a company's principal place of business. Locating a principal place of business "requires a fact-intensive inquiry and some discovery," cautions Tracy A. DiFillippo, Las Vegas, NV, editor of the Content Subcommittee of the Section's Pretrial Practice & Discovery Committee. "If there is any doubt as to the corporation's citizenship, the plaintiff must do as much investigation as he or she can before filing suit rather than assuming where the corporation lists its headquarters is the principal place of business," DiFillippo adds.

Looking at this case from the defendant's perspective, "corporations must be consistent with where the principal place of business is located," advises Jeffrey D. Gardner, Phoenix, AZ, cochair of the Section's Trial Practice Committee. "The corporations should be consistent in portraying such a location to the public, clients, and the like." After this case, "corporations potentially may block jurisdiction by claiming there is one key decision maker in a location that defeats diversity jurisdiction," asserts Gardner.

Not So Simple

"The Supreme Court thought the nerve center test would make it easier to decide a corporation's citizenship, but it did not," remarks DiFillippo. "As seen in this case, the court went through various levels to determine the citizenship of the corporation," DiFillippo continues.

"In our current technology and business environment where companies can appear to have a very broad presence, Hertz was meant to simplify the process of determining a corporation's principal place of business," Gardner agrees. "The D.C. Circuit certainly reaffirmed Hertz's nerve center test in concluding there was no diversity of jurisdiction, but there did not appear to be as much overwhelming evidence in support of that conclusion as the D.C. court suggests," he concludes.

 Candice A. Garcia-Rodrigo is a contributing editor Litigation News.

Keywords: corporation, diversity jurisdiction, nerve center, place of business

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