Bright-Line Rule Adopted for Citizenship of Defunct Corporation
By Joseph Callanan, Litigation News Associate Editor – June 28, 2012

Further widening a circuit split, ripples extending from the U.S. Supreme Court’s 2010 decision on diversity jurisdiction now reach the issue of citizenship of defunct corporations. The U.S. Court of Appeals for the Eleventh Circuit adopted the rationale of Hertz Corp. v. Friend [PDF] that “simple jurisdictional tests are preferable even if application of the rule occasionally cuts against the basic rationale of” diversity jurisdiction under 28 U.S.C. §1332.

In Holston Investments Inc. B.V.I. v. LanLogistics, Corp., the court held that “a dissolved corporation has no principal place of business” when considering diversity jurisdiction. In doing so, the court of appeals affirmed the decision of the U.S. District Court for the Southern District of Florida denying post-judgment relief on the issue of the “the citizenship of a dissolved corporation for purposes of diversity jurisdiction.”  

By statute, a corporation is a citizen for the purposes of diversity of any state where it is incorporated or where it has its principal place of business. To determine the “principal place of business” of a defunct corporation, however, the Holston court weighed three different rules adopted by various circuits. Eventually, it chose to the follow the minority rule and the rationale of the Supreme Court’s Hertz decision.

Right of First Refusal Leads to Litigation
Holston alleged that LanLogistics breached a right of first refusal when LanLogistics sold a subsidiary to a third party. Holston sued in the Florida federal court.

Holston is a Florida citizen, while LanLogistics was a Delaware corporation with a principal place of business in Miami. By the time Holston filed suit, however, LanLogistics had dissolved, and Florida had withdrawn the company’s ability to conduct business in that state.

LanLogistics defended the case for two years. The district court entered summary judgment in Holston’s favor, after which LanLogistics challenged the decision on the basis that the court lacked subject matter jurisdiction. Specifically, it contended that LanLogistics’ long closed Miami headquarters made both Holston and LanLogistics Florida citizens for diversity purposes.

The issue of citizenship of a defunct corporation was a question of first impression for the Eleventh Circuit. After reviewing the other circuits’ decisions, the court considered three standards. The Holston court considered the “jurisdictional tests in the various circuits and the guidance of the Supreme Court in Hertz” and applied the Third Circuit standard that a dissolved corporation has no principal place of business and is a citizen only of the incorporation state.

The bright-line rule provides clarity and, as a practical matter, affords a greater chance of remaining in federal court. “A party looking to sue a dissolved corporation that has withdrawn all business ties to the state in question should be entitled, for clarity’s and fairness’s sakes, to rely on that withdrawal of citizenship,” says Elizabeth T. Timkovich, Charlotte, N.C., cochair of the ABA Section of Litigation’s Commercial and Business Litigation Committee.

Circuits Use Different Tests for Citizenship of Defunct Corporations
The Hertz decision applied to an active corporation. As such, while instructive, its “nerve center test” is largely (if not wholly) inapplicable to a dissolved corporation. The entity has ceased operations, so there is no nerve center. As such, the appeals court analyzed the approaches other circuits take to determining citizenship of defunct legal entities.

The Second Circuit [PDF] applies a stringent standard considering both the place the corporation last transacted business and the state of incorporation. According to the Eleventh Circuit, this makes it more difficult for a dissolved corporation to be a diverse party. To allow dissolved corporations “to avoid inquiry into where they were last active would give them a benefit Congress never planned for them,” the Second Circuit wrote.

The next circuit to consider the issue was the Fifth Circuit [PDF]. Here, the court, in trying to determine citizenship, applies a hybrid “total activity” test considering multiple factors such as the center of corporation’s production or service activities and the place ultimately directing and controlling the corporation.

The Fifth Circuit rejected Second Circuit precedent, finding that “the place of an inactive corporation’s last business activity is relevant” but not “always determinative.” The Fourth Circuit [PDF] later followed the Fifth Circuit.

The Third Circuit [PDF] then held that a dissolved or inactive corporation is a citizen only of its incorporation state. It considers “the actual business activities of the corporation to be determinative of the corporation’s principal place of business,” and, thus, that a defunct corporation has no principal place of business.

The Third Circuit approach makes the most sense to Timkovich. “To endow it [a defunct legal entity] with nominal, ongoing citizenship in the state in which it once—but no longer—transacted business would be a legal fiction,” she says.

Eleventh Circuit Follows Minority Rule and Hertz to Create Simple Rule
Holston applies the Third Circuit standard while also expanding upon Hertz, in which the U.S. Supreme Court held that a corporation’s principal place of business is its “nerve center.” In Hertz, California citizens sought a state class action against Hertz, the car rental company.

Hertz removed the case to federal court based on diversity, contending that Hertz’s principal place of business was its New Jersey headquarters. The district court rejected Hertz’s argument after applying the circuit’s “business realities” test.

The district court found that since a plurality of Hertz’s business took place in California, the location of a corporate headquarters alone is insufficient to determine the corporation’s citizenship. The district court remanded to state court, and the Ninth Circuit affirmed using a business realities test.

A unanimous Supreme Court disagreed, rejecting the business realities test in favor of the “nerve center” test. A corporation’s principal place of business refers to its nerve center, or “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities,” according to the Court. The nerve center will “normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination . . . and not simply an office where the corporation holds its board meetings.”

The Eleventh Circuit was guided by the Supreme Court’s attempt to clarify the question in Hertz. It wrote, “this bright-line rule may open federal courts to an occasional corporation with a lingering local presence, but undeserved access to a fair forum is a small price to pay for the clarity and predictability that a bright-line rule provides. Moreover, in our opinion, the Third Circuit rule aligns most closely with the Supreme Court’s analysis in Hertz.”

The court sought “administrative simplicity,” says Timkovich. While perhaps imperfect in the eyes of some, the clarity these cases provide “for litigants and courts can save a lot of time and money spent arguing over jurisdiction, instead of focusing on the merits of a case,” she adds.

Holston May Follow Hertz to SCOTUS
Holston highlights the current split among circuits on this question, and emphasizes how the other circuits diverge from Hertz. “I will be surprised if the Supreme Court does not pick up this thrown-down gauntlet in the not-too-distant future,” concludes Timkovich.

Both parties sought rehearing. On June 1, the court denied Holston’s request for panel rehearing. When this story was submitted, LanLogistics’ petition for rehearing en banc remained under advisement, tolling the time in which to file a petition for a writ of certiorari with the Supreme Court.

Keywords: Holston Investments, Hertz v. Friend, federal diversity jurisdiction, principal place of business, citizenship, dissolved corporation

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