Tuesday, February 23, 2010, 1:14 PM

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.”

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