Page 10 Fall 2017
SideBAR
All litigators know the general rule that a corporation is
deemed a citizen of both its state of incorporation and the state in
which the corporation has its principal place of business.
1
Where
a plaintiff and a defendant are citizens of different states and the
amount in controversy exceeds $75,000, a federal district court
can exercise subject-matter jurisdiction over the case because
there is complete diversity of citizenship between the parties.
2
But
what happens when either the plaintiff or defendant corporation
is defunct, inactive, or dissolved? The U.S. Supreme Court has
yet to resolve a decades-long split of authority among the Circuit
Courts of Appeals on this issue.
All states have enacted laws that allow for a dissolved
corporation, limited liability company, etc., to exist for a certain
amount of time (varying from state to state) following dissolution
for purposes of engaging in all activities necessary to wind up
the business and to sue or be sued. Thus, without question, an
inactive or dissolved corporation remains a citizen of its state
of incorporation for the statutory period prescribed in that
state’s law. But what happens to its principal-place-of-business
citizenship is an issue that has not been resolved by the courts.
Both the Third and Eleventh Circuits have adopted a bright-
line rule that an inactive or dissolved corporation has no principal-
place-of-business citizenship and remains a citizen of its state of
incorporation only.
3
In Midlantic National Bank v. Hansen, the
Third Circuit defined inactive corporation as “a corporation
conducting no business activities.”
4
In holding that an inactive
corporation has no principal place of business, Midlantic relied on
the now-rejected “corporate activities” test, noting that because
an inactive corporation does not engage in corporate activities,
it cannot have a principal place of business.
5
Thus, an inactive
corporation could only be a citizen of its state of incorporation.
After Midlantic was decided, however, the Supreme Court
resolved a split among the Circuit Courts of Appeals regarding the
test to be applied in determining a corporation’s principal place of
business. In Hertz Corp. v. Friend, the Court held that a corporation’s
principal place of business is where its “nerve center” is located—
that is, “where the corporation’s high-level officers direct, control,
and coordinate the corporation’s activities.”
6
Notwithstanding that
Midlantic was based on the “corporate activities” test that Hertz
expressly rejected for determining principal place of business,
the Eleventh Circuit adopted Midlantic’s holding, extending it
to a dissolved corporation. In Holston Investments Inc. B.V.I.
v. LanLogistics Corp., the Eleventh Circuit held that a dissolved
corporation is a citizen of its state of incorporation only.
7
Although
the Delaware corporation had at all times maintained its corporate
headquarters in Florida, it had dissolved in Delaware in December
2007, and the Florida Secretary of State had processed and filed
documents withdrawing the corporation’s authority to transact
business in Florida in January 2008; the plaintiff sued the dissolved
corporation four months later.
8
Although at the time the lawsuit
was filed, the dissolved corporation was still winding down its
affairs, the Eleventh Circuit held that the defendant had no principal
place of business and was a citizen of its state of incorporation only,
opting for the bright-line rule set forth in Midlantic:
Considering the jurisdictional tests in the various circuits
and the guidance of the Supreme Court in Hertz, we join the
Third Circuit in holding a dissolved corporation has no prin-
cipal place of business. This bright-line rule may open federal
courts to an occasional corporation with a lingering local pres-
ence, but undeserved access to a fair forum is a small price to
pay for the clarity and predictability that a bright-line rule pro-
vides. Moreover, in our opinion, the Third Circuit rule aligns
most closely with the Supreme Court’s analysis in Hertz.
9
The Second Circuit Court of Appeals, on the other hand, has
rejected this reasoning and held that an inactive or dissolved
corporation must also have a principal place of business for
determining citizenship. In Wm. Passalacqua Builders Inc. v.
Resnick Developers S. Inc., the Second Circuit held that an inactive
corporation must have a principal place of business for purposes
of diversity jurisdiction, which it determined is the place in
which the corporation last transacted business.
10
This holding
was reiterated by the Second Circuit in Pinnacle Consultants Ltd.
v. Leucadia National Corp., in which the court noted that the
diversity statute was designed to preclude any argument that an
inactive corporation has no principal place of business.
11
Rather,
an inactive corporation must be a citizen of both its state of
incorporation and its principal place of business, which will be the
state where it last transacted business.
12
The Fifth and Fourth Circuit Courts of Appeals have adopted
a somewhat middle-ground approach, adopting a “facts and
circumstances” test to determine whether an inactive or dissolved
corporation has a principal place of business. In Harris v. Black
Clawson Co., the Fifth Circuit noted 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.”
13
Rather, “as a matter of law, where 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.”
14
Because the defendant
had been completely inactive in Louisiana for a substantial
period of time—over five years—before suit was filed, the court
determined that Louisiana was not the corporation’s principal
place of business and thus complete diversity existed.
15
The Fifth
Circuit avoided ruling on whether an inactive corporation must
have a principal place of business.
16
The Fourth Circuit held in Athena Auto. Inc. v. DiGregorio that a
dissolved corporation can have a principal place of business, expressly
rejecting the Third Circuit’s approach because it overlooked the
reality that “[a] corporation’s business does not usually end with
the abruptness of closing its doors” and that even an inactive
corporation can have a “continuing impact” in an area sufficient to
preserve its local identity.
17
Adopting a test similar to that in Harris,
the Fourth Circuit held that the inactive corporation did not have
a principal place of business in Maryland as it had been inactive in
that state for three years before suit was filed.
18
The Fourth Circuit
did not need to decide whether the inactive corporation actually had
a principal place of business but noted that, if it had to make such a
finding, it would apply the nerve-center test.
19
Without expressly ruling whether an inactive or dissolved
corporation must have a principal place of business, the Tenth
Circuit in Coffey v. Freeport McMoran Copper & Gold affirmed a
district court’s finding that a defendant’s business activities were
substantial enough to constitute “transacting business” and thus
established principal-place-of-business citizenship.
20
In that case,
Beware the Dissolved Corporation: Issues
Affecting Diversity Jurisdiction
Rebecca M. Plasencia
Fall 2017 Page 11
SideBAR
the defendant corporation had been acquired by another company
but had engaged in environmental remediation activities in
response to legal claims from its prior operations.
21
The Tenth
Circuit—also applying the now-rejected “total activities” test for
determining principal place of business—affirmed the district
court’s ruling that the remediation activity sufficed to establish
Oklahoma as the defendant’s principal place of business.
22
Similarly, the D.C. Circuit Court of Appeals, while not expressly
addressing the issue, has acknowledged the possibility that an
inactive or dissolved corporation can have a principal place of
business. The D.C. Circuit in Ripalda v. American Operations Corp.
held that a corporation continues in existence after dissolution if
the state of incorporation allows its continued existence to sue or be
sued.
23
The circuit court left open the question of whether a dissolved
corporation must have a principal place of business, noting only that
the dissolved corporation had formally withdrawn from Virginia
more than a year before suit was filed and thus—absent any contrary
evidence in the record—the court could “presume” that “if it still had
any principal place of business it was not in Virginia.”
24
The conflicting circuit court opinions have generated much
confusion among the district courts about whether an inactive
or dissolved corporation must have a principal place of business
and, if so, how to determine that place. This issue is particularly
problematic where a corporation has withdrawn its certificate
of authority to transact business in a state but is still conducting
necessary activities to wind down its business and still exists under
the applicable state statute for purposes of suing or being sued.
While the law is in flux, some guidance with respect to
dissolved corporations can be gleaned from the Supreme Court’s
decision in Hertz and from the diversity statute itself. In holding
that a corporation’s principal place of business is “where the
corporation’s high level officers direct, control, and coordinate
the corporation’s activities” (i.e., the “nerve center”), the Supreme
Court did not distinguish between active or dissolved corporations
or focus on the types of activities being conducted to determine
a corporation’s principal place of business.
25
Instead, Hertz
expressly recognized the reality that corporations exist in various
forms to conduct many different kinds of activities and adopted
the nerve-center test to accommodate this reality:
Perhaps because corporations come in many different
forms, involve many different kinds of business activities,
and locate offices and plants for different reasons in differ-
ent ways in different regions, a general ‘business activities’
approach has proved unusually difficult to apply.
26
It is not the type of business that is being conducted that
determines a corporation’s principal-place-of-business citizen-
ship; rather, it is the “place of actual direction, control, and
coordination” that is dispositive.
27
Following this reasoning, it
should not matter whether a corporation is engaged in active
business practices, such as sales or marketing, as opposed to
business activities necessary for winding down a corporation’s
affairs. Instead, it should only matter where the “place of actual
direction, control, and coordination” of those activities is located
(whether winding-down business activities or otherwise).
The plain language of the diversity statute further supports the
theory that a dissolved corporation should have a principal place
of business for diversity purposes. As the statute makes clear, a
corporation is deemed to have dual citizenship and is a citizen of both
its state of incorporation and its principal place of business.
28
The
statute makes no distinction between active, inactive, or dissolved
corporations. Nor should it. A dissolved corporation does not lose
its character as a corporate body after dissolution. Indeed, every
state extends the life of a corporation after dissolution for a definite
time so that the corporation can prosecute and defend lawsuits
and otherwise settle its affairs. Section 1332(c)(1)’s requirement
for dual citizenship takes into account the reality that corporations
exist after dissolution. Thus, the statute requires a determination,
for every corporation, of a principal place of business, which is the
place of actual direction and control under Hertz. The fact that the
corporation has dissolved and is winding up its affairs does not
mean it has no place of direction and control and thus no principal
place of business. Rather, because the corporation exists and can
sue or be sued, it must have a principal place of business—a nerve
center—from which, at a minimum, any litigation is directed.
Until the Supreme Court resolves the conflict among the Circuit
Courts of Appeals, however, litigators must be conscious of the
problems that can arise when seeking (or attempting to avoid)
federal court subject-matter jurisdiction under the diversity statute
where one of the parties is an inactive or dissolved corporation. SB
Rebecca M. Plasencia is a partner in
Holland & Knight’s Appellate and Litigation
Practice Groups. Her practice areas include
appeals, complex commercial litigation,
product liability, immigration law and
creditor’s rights. Based in Miami, Plasencia
can be reached at (305) 789-7695 or rebecca.
Endnotes
1
28 U.S.C. § 1332(c)(1).
2
28 U.S.C. § 1332(a)(1).
3
48 F.3d 693 (3d Cir. 1995).
4
Id. at 696.
5
Id.
6
559 U.S. 77, 80-81 (2010).
7
677 F.3d 1068, 1071 (11th Cir. 2012).
8
Id. at 1070 n.1.
9
Id.
10
933 F.2d 131, 141 (2d Cir. 1991).
11
101 F.3d 900, 907 (2d Cir. 1996).
12
Id.
13
961 F.2d 547, 551 (5th Cir. 1992).
14
Id.
15
Id.
16
Id. at 551 n.12.
17
166 F.3d 288, 291 (4th Cir. 1999).
18
Id. at 291-92.
19
Id. at 292.
20
581 F.3d 1240, 1245–46 (10th Cir. 2009).
21
Id. at 1246.
22
Id.
23
977 F.2d 1464, 1468 (D.C. Cir. 1992).
24
Id. at 1469.
25
559 U.S. at 90-91.
26
Id.
27
Id. at 97.
28
28 U.S.C. § 1332(c)(1).
