Business Associations - Paul A. Quiros and Lynn S. Scott

• Publication year: 2010

Business Associations

by Paul A. Quiros* and Lynn S. Scott**

I. Introduction

This Article surveys noteworthy cases in the areas of corporate, limited liability company, partnership, and agency law decided between June 1, 2009 and May 31, 2010¹ by the Georgia Supreme Court, the Georgia Court of Appeals, the United States Court of Appeals for the Eleventh Circuit, and the United States district courts located in Georgia. In addition to surveying decisions by Georgia courts and federal courts located in Georgia, this Article discusses an important decision by the Supreme Court of the United States.

II. CORPORATIONS

A. Supreme Court of the United States Addresses Corporate Citizenship

In Hertz v. Friend,² the Supreme Court held that the nerve center test is the proper test to use in determining a corporation's principal place

* Partner in the firm of King & Spalding LLP, Atlanta, Georgia. Furman University (B.A., cum laude, 1979); Mercer University, Walter F. George School of Law (J.D., 1982). Member, Mercer Law Review (1980-1982); Lead Articles II Editor (1981-1982). Member, State Bar of Georgia.

** Partner in the firm of Arnall Golden Gregory LLP, Atlanta, Georgia. University of Georgia (B.S., 1971); Mercer University, Walter F. George School of Law (J.D., magna cum laude, 1988). Member, Mercer Law Review (1986-1988); Research Editor (1987-1988). Member, State Bar of Georgia.

The Authors would like to recognize the important contributions of Nick Phillips (Mercer University, Walter F. George School of Law, J.D. candidate, 2012) in the preparation of this Article.

1. For an analysis of cases decided during the prior survey period, see Paul A. Quiros et al., Business Associations, Annual Survey of Georgia Law, 61 MERCER L. REV. 45 (2009).

2. 130 S. Ct. 1181 (2010).

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of business for diversity jurisdiction purposes, thereby resolving a split among the circuit courts.³ The United States Constitution provides that Congress may authorize federal courts to exercise diversity jurisdiction, allowing federal courts to assert jurisdiction over citizens of different states.⁴ Accordingly, Congress enacted 28 U.S.C. § 1332,⁵ which establishes federal jurisdiction in cases between citizens of different states.⁶ In determining if there is diversity of citizenship between the parties, giving rise to federal jurisdiction, the citizenship of each party must be determined.⁷ For persons, citizenship is determined by the state in which the person is domiciled.⁸ For corporations, citizenship is determined by the state in which a corporation is incorporated and the state where the corporation has its principal place of business.⁹ Interpretation of the term "principal place of business" was left to the courts because § 1332 itself did not provide a definition.¹⁰ As a result, courts developed two main tests for determining a corporation's principal place of business: the "nerve center test" and the "business activities

test."¹¹

Under the nerve center test, a corporation's principal place ofbusiness is the state "where [the] corporation's officers direct, control, and

3. Id. at 1192.

4. U.S. CONST. art. III, § 2. The rationale for allowing federal courts to have jurisdiction based solely on diversity is so that out-of-state parties do not suffer local prejudice during the judicial process. Hertz, 130 S. Ct. at 1188.

5. Act of June 25, 1948, ch. 646, 62 Stat. 930 (codified as amended at 28 U.S.C. § 1332 (2006)).

6. 28 U.S.C. § 1332(a)(1) (2006).

7. Mas v. Perry, 489 F.2d 1396, 1398-99 (5th Cir. 1974).

8. Id. at 1399.

9. 28 U.S.C. § 1332(c)(1). The initial approach taken by the Supreme Court was that a corporation was a citizen of the state in which it was incorporated. See Louisville, Cincinnati, & Charleston R.R. Co. v. Letson, 43 U.S. 497, 558 (1844) (holding a corporation is a citizen of the state of its incorporation); Marshall v. Baltimore & Ohio R.R. Co., 57 U.S. 314, 325 (1853) (reaffirming Letson). However, many corporations were abusing this approach. See Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518, 524 (1928) (holding a corporation's motives in reincorporating were not a factor in determining diversity jurisdiction). In response to this fraud and abuse, Congress codified § 1332(c)(1), which established a corporation would also be a citizen of the state where it has its principal place of business. Act of July 25, 1958, Pub.

L. No. 85-554, § 2, 72 Stat. 415 (codified at 28 U.S.C. § 1332(c)(1)).

10. See 28 U.S.C. § 1332.

11. See Hertz, 130 S. Ct. at 1191-94. A third test, sometimes referred to as the total activities test, developed as a result of courts combining aspects of both the nerve center and business activities tests. See Gafford v. Gen. Elec. Co., 997 F.2d 150, 162 (6th Cir.

1993).

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coordinate the corporation's activities."¹² In contrast, the business activities test evaluates a number of different factors to determine if a corporation's business activities in one state "substantially predomi-nate[]" over the business activities in other states.¹³ These factors include "the location of employees, tangible property, production activities, sources of income, and where sales take place."¹⁴ Prior to Hertz, the circuit courts had split on which test to use to determine a corporation's principal place of business.¹⁵ The question presented in Hertz was which one of these tests is the proper one to apply.¹⁶

In Hertz two California citizens sued the Hertz Corporation (Hertz) in California state court for violating California's hour and wage laws. Hertz filed a notice of removal, claiming that because Hertz was diverse from the plaintiffs, the federal courts were available to it. Hertz supported this claim by submitting a declaration listing its principal place of business as New Jersey, the state where Hertz maintained its corporate offices.¹⁷ The United States District Court for the Northern District of California held Hertz's principal place of business to be California based on the amount of business Hertz did in California. The United States Court of Appeals for the Ninth Circuit affirmed the district court's decision.¹⁸

In light of the circuit split, the Supreme Court granted certiorari "[i]n an effort to find a single, more uniform interpretation of the . . . phrase" "principal place of business."¹⁹ The Supreme Court reviewed the different approaches and ultimately held that a corporation's principal

12. Hertz, 130 S. Ct. at 1192.

13. Tosco Corp. v. Cmtys. for a Better Env't, 236 F.3d 495, 500 (9th Cir. 2001). This test does not require a state to have a majority of the corporation's business activities in order to be considered its principal place of business. Id. Rather, the business activities in a particular state must be significantly more than in any other state. Id.

14. Id. at 500 (emphasis added).

15. Compare id. (applying business activities test and noting the nerve center test is only used in the event there is no one state that substantially predominates), Diaz-Rodriguez v. Pep Boys Corp., 410 F.3d 56, 61 (1st Cir. 2005) (applying business activities

test), and Amoco Rocmount Co. v. Anschutz Corp., 7 F.3d 909, 915 (10th Cir. 1993)

(applying business activities test), with Wis. Knife Works v. Nat'l Metal Crafters, 781 F.2d 1280, 1282 (7th Cir. 1986) (applying nerve center test), and Scot Typewriter Co. v.

Underwood Corp., 170 F. Supp. 862, 865 (S.D.N.Y. 1959) (applying nerve center test).

16. Hertz, 130 S. Ct. at 1185-86.

17. Id. at 1186. The declaration stated Hertz did business in 44 states and that California "accounted for 273 of Hertz's 1,606 car rental locations; about 2,300 of its 11,230 full-time employees; about $811 million of its $4.371 billion in annual revenue; and about 3.8 million of its approximately 21 million annual transactions, i.e., rentals." Id.

18. Id. at 1186-87.

19. Id. at 1192.

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place of business should be determined using the nerve center test.²⁰ The Supreme Court concluded that "'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."²¹ The Supreme Court offered three main reasons to support its holding: 1) statutory language, 2) simplicity and predictability, and 3) legislative history.²² First, the phrase "principal place of business" requires that a court select the one "'main, prominent' . . . place . . . within a [s]tate [but] not the [s]tate itself."²³ Under the business activities test, courts were looking to the state rather than the corporation's place of business within the state.²⁴ Second, complex tests such as the business activities test only complicate a case and waste a litigant's time and money when trying to determine if a particular court has jurisdiction.²⁵ However, the nerve center test offers a predictable way for the parties to make decisions.²⁶ Finally, judicial history suggests Congress enacted the statute to provide simplicity and practicality.²⁷

The Supreme Court noted that there is "no perfect test that satisfies all administrative and purposive criteria."²⁸ For example, the Hertz nerve center test may present difficulties in situations where a corporation divides its overall command and control throughout different offices in different states.²⁹ However, the test still requires courts to look "in a single direction, towards the center of overall direction, control, and coordination."³⁰ The Supreme Court reversed the Ninth Circuit and held diversity jurisdiction existed between the California citizens and Hertz because under the nerve center test, Hertz's principal place of business was New Jersey, not California.³¹

The main implication of the Supreme Court's decision in Hertz is that corporations may now be more confident that the federal courts will be available when filing a notice of removal based on diversity...