Where is a Corporation’s “Nerve Center” for Purposes of Diversity Jurisdiction?

In CostCommand, LLC v. WH Administrators, Inc. , 820 F.3d 19 (D.C. Cir. 2016), the United States Court of Appeals for the District of Columbia Circuit applied the “nerve center” test to determine where a corporation’s principal place of business is located for diversity jurisdiction purposes. In applying the test, the court affirmed the decision of the district court, which dismissed the case because it lacked subject matter jurisdiction based on a lack of diversity.

Ronald Vance and Brendan Turner founded CostCommand, LLC (“CostCommand”), which hired PRS Software Solutions (“PRS”), a subsidiary of Video Equipment Rentals (“VER”), to perform certain services. Both PRS and VER were California companies. CostCommaned struggled to secure customers and sought funding from PRS and VER to help turn the company around. At about the time that CostCommand obtained funding from PRS and VER, Turner resigned from CostCommand. Unbeknownst to Vance, Turner was developing his own company, WH Administrators (“WHA”). CostCommand sued Turner, WHA, PRS, and VER in the United States District Court for the District of Columbia alleging that the defendants engaged in various wrongful acts to destroy CostCommand. The district court dismissed the case for lack of subject matter jurisdiction because it determined that complete diversity was lacking among the parties.

CostCommand was a citizen of Maryland based on the fact that it was a limited liability company and its sole member, Vance, was a citizen of Maryland. PRS and VER were California citizens because they were California corporations with their principal places of business located in California. Turner was a citizen of the District of Columbia. WHA was a citizen of Texas as a Texas corporation, but the parties disputed the location of WHA’s principal place of business, which also determined the company’s citizenship for diversity jurisdiction purposes. If WHA’s principal place of business was located in Maryland, there would not be complete diversity (and, thus, the federal court would lack subject matter jurisdiction) because the plaintiff, CostCommand, also was a citizen of Maryland. If, on the other hand, WHA’s principal place of business was located in Texas, there would be complete diversity and the federal court would have jurisdiction over the claim. After various preliminary motions, the district court ordered limited discovery to focus on the issue of jurisdiction. The limited discovery included Turner’s deposition and some document discovery.

CostCommand argued that WHA’s principal place of business was located in Texas. To support its position, CostCommand relied on the fact that (1) WHA listed a Houston, Texas address on various corporate documents, regulatory filings, and contracts with customers and vendors, (2) Bob Ring, one of CostCommand’s founders and initial funders, was located in Houston, (3) Andy Ring, Bob Ring’s son, managed accounts payable and receivables from Texas, along with an accountant who also was located in Texas, and (4) CostCommand paid its taxes from its Houston office and maintained its primary bank account in Houston.

The defendants argued that WHA’s principal place of business was located in Maryland. To support their position, the defendants relied on the fact that (1) Turner, who worked out of WHA’s Bethesda, Maryland office, had full operational control over the company, including spending company funds without seeking approval from other company directors, (2) the other company directors (there were two) needed Turner’s approval before spending company funds, (3) Turner managed the company’s operations, including product development and client issues, and (4) when Turner disagreed with the company’s directors, he ultimately did what he thought was best for the company.

The district court concluded that WHA’s principal place of business was located in Maryland and, thus, dismissed the case. CostCommand appealed.

The D.C. Circuit affirmed the decision of the district court, finding the district court’s conclusion that WHA’s principal place of business was located in Maryland was correct. In reaching this conclusion, the D.C. Circuit applied the standard the United States Supreme Court established in 2010 in Hertz Corp. v. Friend , 559 U.S. 77 (2010):

[T]h[e] “principal place of business” is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. It is the place that Courts of Appeals have called the corporation’s “nerve center.” And in practice it should normally be the place where the corporation maintains its headquarters – provided that the headquarters is the actual center of director, control, and coordination, i.e. , the “nerve center,” and not simply an office where the corporation holds its board meetings.

Applying this test, the D.C. Circuit thought it was “clear that WHA maintained its principal place of business in Maryland.” To this end, the court found that Turner “exercised virtually complete control over the company” from his office in Bethesda, Maryland. According to Turner’s and Bob Ring’s testimony, Turner operated the business as he saw fit, including exercising authority to spend company funds without seeking anyone else’s approval, even when other directors disagreed with his preferred course of action. According to the court, “this is more than enough [under Hertz ] to establish a principal place of business, and thus citizenship for diversity purposes, in Maryland.” Although CostCommand noted that “Houston is where WHA told [s]tate authorities, customers, vendors and its landlord it could be found, [and] it was where in-person, strategic meetings were conducted, . . . tax filings were made, . . . corporate records [we]re kept, . . . its primary counsel, accountants and bank account [we]re located,” and its corporate charter identified as the company’s headquarters, the court explained that other than the location of in-person strategic meetings, these factors “have little to do with ‘where the corporation’s high level officers direct, control, and coordinate the corporation’s activities.’” CostCommand also argued that Bob Ring’s office was in Houston, he and his son exercised control over the corporation by managing its finances, and Bob Ring and Turner met in Houston occasionally. The court, however, noted that most of Bob Ring’s interactions with Turner occurred over the phone, the meetings in Houston between Bob Ring and Turner were incidental to visits Turner made to meet with clients, and most of their conversations “were more in the nature of Turner seeking advice than of collective decision making about the company’s direction.” Plus, the evidence of activities in Houston did not overcome the fact that “Turner retained practically complete authority” over the company.

The court’s decision in CostCommand is significant from a strategic standpoint when companies want to try to litigate in federal court based on diversity jurisdiction. Each company should carefully consider where its “nerve center” is located and understand where controlling decisions are actually made. This may not always be so clear cut factually, however, and, if federal court jurisdiction is a significant enough interest to the party, it should be prepared to engage in discovery focused on this particular issue.

If you have any questions regarding this post, please contact Stephen B. Stern at sstern@hwlaw.com or (410) 260-6585.

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