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Federal Jurisdiction — Principal Place of Business of an Inactive Corporation — Circuit Split

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Snyder v. Advanced Academics, Inc., 2015 U.S. Dist. LEXIS 44014 (W.D. Okla. April 3, 2015):

A. Circuit Split: Principal Place of Business of an Inactive Corporation

There is a split among the circuits on the issue of how to determine the PPB of a "dissolved" or "inactive" corporation for purposes of § 1332.1  The Third and Eleventh Circuits maintain the bright-line rule that an inactive corporation has no principal place of business; it is a citizen only of its state of incorporation. Holston Invs., Inc. B.V.I. v. LanLogistics Corp., 677 F.3d 1068, 1071 (11th Cir. 2012); Midlantic Nat'l Bank v. Hansen, 48 F.3d 693, 696 (3d Cir. 1995). In contrast, the Second Circuit holds that an inactive corporation is a citizen of its state of incorporation and its last principal place of business. Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 141 (2d Cir. 1991).

The Fifth Circuit takes a middle-ground position. It maintains that "while the place of an inactive corporation's last business activity is relevant to determine its principal place of business, it is not dispositive." Harris v. Black Clawson Co., 961 F.2d 547, 551 (5th Cir. 1992). In that circuit, when "a corporation has been inactive in a state for a substantial period of time, ... that state is not the corporation's principal place of business." Id. "The question of substantiality must be decided [*4]  on a case-by-case basis." Id. at 551 n.10.

The Fourth Circuit focuses on the nature of the corporation's activities at the time the action was commenced to determine whether that activity "was sufficient to make it a citizen of the state of such activity." Athena Auto., Inc. v. DiGregorio, 166 F.3d 288, 291 (4th Cir. 1999). That court reasons, "[e]ven when a corporation has ceased all operations and has become inactive, the continuing impact of its business in a given locale could linger on to an extent sufficient to give it a geographical identity there as its principal place of business. Indeed, a corporation's winding up of its business affairs may well constitute a significant activity and consume a considerable period of time." Id.

In Coffey v. Freeport McMoran Copper & Gold, 581 F.3d 1240, 1245-46 (10th Circuit 2009), the Tenth Circuit upheld the district court's holding that the business activities of one of the defendants was substantial enough to constitute "transacting business" for purposes of § 1332. In that case, the defendant corporation had been acquired by another company prior to filing, and since then, had engaged in environmental remediation activities in response to legal claims from its prior operations.  Id. at 1246. The district court concluded that this clean-up activity, conducted in Oklahoma, "suffices to establish Oklahoma as BZC's [*5]  principal place of business." Id.  Because Coffey was decided prior to Hertz, the court applied the "total activity of the company" test in its PPB analysis, instead of the nerve center test. Id. But this case is still instructive, like the pre-Hertz cases from other circuits outlined above. Coffey directs courts to first consider the activities of the corporation at the time of filing to determine if those activities are sufficient to constitute "transacting business" for purposes of § 1332, even if there was a substantial change in the corporation's ownership prior to filing. If the court finds that the corporation was "transacting business" at the time of filing, it should then find the "nerve center" of those activities, as directed by Hertz. If not, if the corporation was truly "inactive," then Coffey does not provide an answer.

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New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

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