USSC: Nerve Center Determines a Corporation's Principal Place of Business

Today, the United States Supreme Court determined that for purposes of diversity jurisdiction, a corporation's principal place of business is "the place where the corporation's high level officers direct, control, and coordinate the corporation's activities." The case is Hertz Corporation v. Friend.

Federal courts have jurisdiction to hear cases where there is diversity of citizenship between the parties (the plaintiff and defendant are citizens of different states) and the amount at issue exceeds $75,000. Since Congress first authorized federal courts to hear diversity of citizenship cases, courts have struggled with how to determine the citizenship of a corporation. In 1958, in an attempt to resolve this difficulty, lawmakers enacted a statute to explain that “[a] corporation was to ‘be deemed a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.’”

Although designed to clarify the citizenship of corporations, the term “principal place of business” “has proved more difficult to apply than its originators likely expected.” Courts have typically applied two tests in determining where a corporation has its principal place of business. The “nerve center test” focused on where a corporation makes its corporate decisions. Alternatively, the “business activities” test focused on “where a corporation’s actual business activities are located.” The Supreme Court decided to resolve this dispute because the disparate tests used to determine a corporation’s principal place of business have “failed to achieve a nationally uniform interpretation of federal law[.]”

The Supreme Court decided that the phrase principal place of business “is best read as referring to the place where a corporation’s officers direct, control, and coordinate a corporation’s activities.” In the Court’s opinion, the nerve center test was the appropriate test to use to determine a corporations’ citizenship because (1) it was supported by the language of the statute; (2) could be applied easily and predictably with a minimal expenditure of resources by parties and the courts; and (3) was consistent with the statute’s legislative history that emphasized ease of application.

Although this decision greatly simplifies the issue of a corporation’s citizenship, it does not mark the end of litigation over a corporation’s principal place of business. The party seeking to establish diversity jurisdiction still retains the burden of demonstrating that jurisdiction exists by competent evidence. The Supreme Court specifically rejected the notion that “the mere filing of a form like the Securities and Exchange Commission’s Form 10-K listing a corporation’s ‘principal executive offices’ would, without more, be sufficient proof to establish a corporation’s ‘nerve center.’”

Federal courts were encouraged to be vigilant against attempts at “jurisdictional manipulation.” If a court finds that “the alleged ‘nerve center’ is nothing more than a mail drop box, a bare office with a computer, or the location of an annual executive retreat – the courts should instead take as the ‘nerve center’ the place of actual direction, control, and coordination, in the absence of such manipulation.”

Taxpayers Lack Standing to Challenge Incentives

In Munger v. State of North Carolina, the Court of Appeals held that tax payers lacked standing to challenge economic incentives provided to Google under various provisions of the North Carolina Constitution.

(Disclosure: Womble Carlyle represented Google, Inc. and Madras Integration, LLC in this matter.)

In 2006, as part of an effort to convince Google to open an internet data center in Caldwell County, lawmakers "exempted internet data centers from certain sales and use taxes." Plaintiffs Michael Munger, Barbara Howe, and Mark Whitley Cares sued the state and various other parties seeking a declaration that the economic incentives provided to internet data centers violated the North Carolina Constitution. The Plaintiffs also sought an injunction prohibiting the State from "providing any incentives to the Google Defendants and recoup any incentive amounts that had already been provided to the Google Defendants."

In November 2008, Judge Paul C. Ridgeway of Wake County Superior Court entered an Order and Memorandum of Decision that dismissed all of plaintiffs' claims. Plaintiffs' claims under the "just and equitable" taxation, uniformity of taxation, and "law of the land" provisions of the North Carolina Constitution were dismissed due to lack of standing. Plaintiffs appealed the portion of the trial court's Order that determined they did not have standing to pursue the constitutional claims.

The Court's analysis opened with a review of the law governing taxpayer standing cases. Opinions from the Court of Appeals and the Supreme Court establish taxpayer standing for two types of actions:

(1) actions challenging the constitutional validity of a statute on the grounds that it allows public funds to be dispersed for reasons other than a “public purpose,” in which a taxpayer generally has standing, and (2) actions challenging the constitutional validity of a statute on the grounds that the statute discriminates among classes of persons, in which a taxpayer must show that he belongs to a class that receives prejudicial treatment.

Plaintiffs' arguments regarding standing were all related to the discrimination-based taxpayer standing. First, plaintiffs claims that because they were challenging tax exemptions, instead of a tax levy, they did not need to be among those eligible for the tax exemption in order to have standing. Second, they claim that they did not raise a "true discrimination claim" and therefore the case law regarding discrimination-based claims was inapplicable to this case. Finally, they argued that if the discrimination-based standing test was applied to them they satisfied the standing requirement "by virtue of their status as persons who pay the relevant taxes."

The plaintiffs first argument was based upon the North Carolina Supreme Court's decision in Goldston v. State where the Supreme Court held that taxpayers have standing to bring suit against government officials for alleged misuse or misappropriation of public funds. The plaintiffs argued that because a failure to collect taxes diminished the amount of money in the public coffers in the same manner as a misuse or misappropriation of funds, they should have standing to challenge the tax exemptions.

The Court of Appeals held that Goldston did not modify the doctrine of taxpayer standing in the manner plaintiffs suggested. In order to demonstrate standing, the plaintiffs would have to show that they were among the class of individuals prejudiced by the allegedly discriminatory statute. Therefore "the mere fact that Plaintiffs pay North Carolina income and sales and use taxes, without more, does not give them standing to challenge the sales and use tax exemptions afforded to eligible internet data centers."

Plaintiffs, relying on the Court of Appeals decision in In re Appeal of Barbour, next attempted to avoid the label of a discrimination-based claim by claiming that "[i]nstead of alleging 'that the qualifying criteria operate in a discriminatory manner,' Plaintiffs claim to 'have alleged that the creation of a special tax exemption - without regard to qualifying criteria - is unconstitutional.'" According to plaintiffs, the Barbour decision held "that the plaintiff in that case had standing for uniformity claims which were challenges to the existence of a tax exemption rather than those claims which challenged the discriminatory features of an exemption."

The Court of Appeals rejected this argument, saying that "we are unable to find any support for the distinction upon which Plaintiffs rely in this case." According to the Court, Barbour supported the traditional standing requirement that a plaintiff seeking to bring a challenge under the Uniformity of Taxation clause must be part of the class that is prejudiced by the challenged statute. The Court found that

At bottom, the crux of each of Plaintiffs’ claims is that eligible internet data centers have received more favorable tax treatment than Plaintiffs and other similarly-situated persons, which makes their claims quintessentially discrimination-based. As a result, we conclude that the trial court correctly concluded that Plaintiffs had to demonstrate that they “‘belong[ed] to the class which is prejudiced by the statute,’” Barbour, 112 N.C. App. at 373, 436 S.E.2d at 173, as a prerequisite for maintaining a constitutional challenge to the sales and use tax exemption for eligible internet data centers.

After holding that the plaintiffs would have to show that they were members of the class prejudiced by the challenged statutes, the Court went on to explain why plaintiffs could not meet this burden. The plaintiffs, again relying on Barbour, asserted that " 'a plaintiff must be in the class of taxpayers who pay the tax exempted by the challenged tax exemption' and 'need not be discriminated against by the criteria for exemption itself' in order to challenge an exemption from the sales and use tax.

The Court once again held that Barbour could not support the weight placed upon it by the plaintiffs. Barbour did not contain "any explicit distinction between challenges to the existence of an exemption and challenges to the 'qualifying criteria' associated with an exemption." Relying on its previous decision in Blinson v. State, the Court found that the fact that plaintiffs

pay sales and use tax, that the same sort of exemption available to eligible internet data centers is not available to them, and that the existence of the sales and use tax exemption for eligible internet data centers forces them to bear more of the burden of financing the activities of state government than would be the case in the absence of the exemption

was insufficient to establish standing.

It is unlikely that the Court of Appeals' decision will be the last word in this case.  The Supreme Court has shown a willingness to hear tax incentive cases in the past and it is likely that the plaintiffs will request that it review this case as well. 

COA Opinions

The Court of Appeals issued 20 opinions this morning.  More on these cases later.

Fourth Circuit Adopts Last Served Rule to Determine Time for Removal

Today, in a divided opinion, the Fourth Circuit Court of Appeals determined that in multi-defendant cases, each defendant has thirty days from the time they are served with the summons and complaint to file a notice of removal in federal court. The case is Barbour v. International Union.

Federal statutes provide that a party has thirty days from the date they are served with the summons and complaint to file a notice of removal. However, a dispute arose between the district courts in the Fourth Circuit over when this thirty day period begins to run in cases with multiple defendants who are not served simultaneously. Certain district courts applied the "first-served" rule. This rule begins the thirty day period for removal as soon as the first defendant isserved. Once the thirty day period for the first-served defendant to remove expired, all other defendants were precluded from removing. Other district courts applied the "last-served" rule which provides each defendant with thirty days to remove from the time they are served. Earlier served defendants have the option of joining the notice of removal or may move to remand the action to the state court.

The Fourth Circuit determined that the last-served rule was the more appropriate rule because the first-served rule gave rise to the potential for too many inequitable situations. In short, the first-served rule allows one defendant to waive the rights of another defendant without their consent and may require parties to appear in a case prior to being served in order to protect their right to removal. The majority indicated that any potential for prejudice against the plaintiff created by the last-served rule could be minimized "by serving the defendants as contemporaneously as possible[.]"

Judge Hamilton dissented from the portion of the majority's opinion that adopted the last-served rule. He criticized the majority for disregarding portions of the Fourth Circuit's opinion in McKinney v. Board of Trustees of Maryland Community College, 955 F.2d 924 (4th Cir. 1992), which he considered binding precedent on this issue.

This decision clears up this issue in the Fourth Circuit for the time being. If the Fourth Circuit's opinion is appealed, the Supreme Court may decide to hear it because, as the majority noted, there is a circuit split on the first-served/last-served issue.

COA: Testimony from Accident Reconstruction Expert Cannot Defeat Summary Judgment

In Blackwell v. Hatley, the Court of Appeals held that (1) for accidents occurring prior to December 1, 2006, an accident reconstruction expert cannot opine on the speed of a vehicle without observing the accident; and (2) a Town and its employees cannot be held liable for an accident that resulted from an alleged failure to maintain a state road.

On May 21, 2004, Josie Blackwell was driving her car down E. Round Street in Landis, North Carolina with her son. At the same time, Timothy Hatley was hauling a trailer in his pick-up truck on S. Main Street. After stopping at the intersection of E. Round Street and S. Main Street and checking traffic from both directions, Blackwell entered the intersection her car was struck by Hatley's pick-up truck.

Blackwell filed suit in in Rowan County Superior Court against Hatley, the Town of Landis, several employees of the Town of Landis, and a number of other entities. Blackwell alleged that Hatley was negligent in the maintenance and operation of his vehicle. The Town of Landis and its employees were alleged to have "negligently failed to enforce a town ordinance requiring property owners to keep vegetation trimmed, and negligently failed to establish the proper road design, speed limit, or traffic control devices on S. Main Street." On September 11, 2008, Judge Larry G. Ford entered summary judgment in favor of Hatley and the Landis defendants. Blackwell appealed.

The Court of Appeals' decision was focused, in large part, on what evidence a court should consider when deciding a motion for summary judgment. The Court recognized that "affidavits or other material offered which set forth facts which would not be admissible in evidence should not be considered when passing on the motion for summary judgment." Absent evidence to the contrary, the Court of Appeals will assume that a trial court presented with "both competent and incompetent evidence" disregarded the incompetent evidence and relied solely upon the competent evidence in reaching its decision.

With respect to the appeal of the Order granting summary judgment in favor of Hatley, the primary question was whether Blackwell's accident reconstruction expert "created a genuine issue of material fact regarding Hatley's speed." The Court of Appeals held that although Blackwell's expert disagreed with other testimony regarding Hatley's speed at the time of the accident, this disagreement was insufficient to create a genuine issue of material fact because the expert was not competent to testify regarding the speed of Hatley's vehicle.

The expert could not provide an expert opinion regarding Hatley's speed because, for accidents occurring before December 1, 2006, an expert wishing to opine on the speed of a vehicle must have actually witnessed the accident. Because Blackwell's expert's opinion about the speed of Hatley's pick-up truck was based upon mathematical calculations and not personal observation, it was not competent evidence and could not defeat summary judgment.

The Court of Appeals also affirmed the grant of summary judgment in favor of the Town of Landis and its employees because Blackwell failed to establish that they owed her a legal duty. The Court held that the S. Main Street was "a state highway under the control and authority of the North Carolina Department of Transportation." Therefore, the state, and not the Town of Landis, had the legal duty to maintain and regulate S. Main Street. Without establishing that the Town of Landis owed her a duty, Blackwell's negligence claims failed.

COA: Failure to Disclose Lack of Fire Insurance Does Not Void Guarantee

The Court of Appeals' decision in Community One Bank v. Bowen is a reminder that you should always do your due diligence before you agree to guarantee a loan.

In December 2006, Jerry Kellar agreed to guarantee a $93,257.09 loan from FB Bank, now Community One Bank, to William Bowen. Kellar's guarantee required that "in the event Bowen could not make the payments, Kellar agreed to purchase Bowen's real property and mobile home and take over the loan." The promissory note was due to be paid in full on June 15, 2007.

Unfortunately for Messrs Kellar and Bowen, on May 15, 2007, Bowen's property was severely damaged by a fire. The fire was particularly unfortunate for Mr. Kellar because the fire insurance policy covering Bowen's property lapsed in April 2004. After the fire, the value of Bowen's properly dropped from $96,640.00 to $20,000.

In July 2007, Community One Bank instituted suit in Gaston County seeking a declaratory judgment, a judicial sale of the real property securing the loan, and monetary judgments against Bowen and Kellar. Kellar answered and raised counterclaims of negligent misrepresentation, negligent concealment, and unfair and deceptive trade practices. In March, 2009, after entering a default judgment against Bowen, Judge Richard D. Boner granted Community One's Motion for Summary Judgment and denied Kellar's counterclaims.

On appeal, Kellar argued that the trial court erred in granting summary judgment for the Bank because (1) the bank should be equitably estopped from claiming damages against Kellar due to its knowledge of the lapse of the fire insurance policy before Kellar guaranteed the loan; and (2) Kellar's obligation under the guarantee is discharged to the extent the Bank impaired the value of Bowen's property.

The Court of Appeals held that Kellar failed to demonstrate that the Bank took any actions that would justify the application of the doctrine of equitable estoppel. The Court held that

Where the parties contracted for the provision which states Kellar’s liability
to plaintiff would not be affected by Kellar’s failure to “insure[] or enforce
any collateral security[,]” and Kellar assumed that fire insurance coverage was
in place but gave no indication that plaintiff promoted such an assumption,
plaintiff is not equitably estopped from claiming damages from Kellar.

The Court also held that Kellar could not rely on North Carolina General Statutes Section 23-3-605(e) to reduce the damages owed to the Bank. That section provides that if a party seeking to enforce a secured instrument has taken steps to impair the value of the interest in collateral securing the instrument, the debtor's obligation "is discharged to the extent of the impairment."

In his brief, Kellar argued that the Bank's knowledge of the lapsed fire insurance and its failure to inform Kellar of the lapse resulted in "increased risk under the Guarantee" and, therefore, Kellar's liability should be no more than the fair market value of the property after the fire. The Court rejected this position because the insurance coverage lapsed prior to the time Kellar entered into the contract with the Bank and because there was no indication that the plaintiff acted to void the fire insurance policy.

COA: Public Duty Doctrine and Governmental Immunity Do Not Protect City from Negligence Claims

Today the COA held that the neither public duty doctrine or governmental immunity could shield a city government from liability in a negligence case. The case is Beckles-Palomares v. Logan.

Plaintiff's son was hit and killed by Logan. Plaintiff sued Logan and defendant Moore for failing to trim vegetation on his property, which allegedly obscured Logan's view and contributed to the accident. Plaintiff also sued the city of Winston-Salem for negligence for allegedly violating various safety statutes and ordinances related to street maintenance and regulation of possible obstructions of drivers' vision and parking.

The COA found that Plaintiff's claims against the city were not barred by the public duty doctrine. The COA noted that North Carolina courts haven't expanded the public duty doctrine "to any local government agencies other than law enforcement departments when they are exercising their general duty to protect the public." Plaintiff had not asserted "law enforcement"-type claims against the city - i.e., claims based upon the City’s negligent failure to prevent the criminal acts of Logan or Moore or protect Plaintiff's son from them. Only one of Plaintiff's allegations, which dealt with Moore's failure to trim the vegetation on his property, implicated a negligent failure by the City to enforce its municipal code. Thus, the complaint did not allege a negligent failure on the part of a law enforcement agency, and the public duty doctrine did not apply to bar Plaintiff's claims.

The COA further held that N.C.G.S. § 160A-296, which requires municipalities to keep roads in safe condition and free from unnecessary obstructions, creates an exception to governmental immunity for the performance of a governmental function. Thus, the doctrine of governmental immunity did not apply to protect the City from an alleged negligent breach of its statutory duties. The COA concluded that neither the public duty doctrine nor governmental immunity barred plaintiff’s claims and there were genuine issues of material fact regarding its alleged negligence.

COA Opinions

The Court of Appeals issued 25 opinions today. More on these cases later.