Model citizenship: the Supreme Court redefines principal place of business.

• Author: Stanwood, Thomas G.

"The most important omission on the part of the drafters of the [Judiciary Act of 1789] ... an omission which had most grave results and which necessitated decisions tantamount to judicial legislation by the Supreme Court-was the neglect to make any provision regarding jurisdiction as to corporations." (1)

1. INTRODUCTION

   In the 2010 Supreme Court decision of Hertz Corp. v. Friend, (2) the Court definitively interpreted the language of 28 U.S.C. [section] 1332, establishing binding precedent for determining corporate citizenship for the purposes of federal diversity jurisdiction. (3) while [section] 1332 clearly specified that a corporation is a citizen of its state of incorporation, the second aspect of the corporate citizenship test, its "principal place of business," remained ambiguous, thereby precipitating the need for judicial clarification. The Court had not previously considered the statute, leaving the circuits to formulate their own interpretations. Prior to Hertz, there were no fewer than four variations in application of the language in [section] 1332 to determine a corporation's citizenship. (4) Specifically, the Seventh Circuit created the "nerve center test," deeming a corporation's principal place of business to be where most of the corporation's decisions are made. (5) The Ninth Circuit developed a "place of operations test" that identified the state where most of a corporation's business activities occurred as its principal place of business. (6) The Third Circuit applied a "center of corporate activities test," holding the state where the majority of a business's activities took place as the location of corporate citizenship. (7) Further complicating the matter, the Fifth, Sixth, Eight, Tenth, and Eleventh Circuits each applied a "totality of the circumstances test" that evaluated all aspects of the corporation to determine a corporation's principal place of business. (8) This inconsistency as to the mechanics of deciding corporate citizenship was the result of the Supreme Court's failure to definitively interpret the language of [section] 1332-the critical statute for determining a corporation's principal place of business-in spite of several high profile circuit cases. (9) By hearing Hertz, the Court finally accepted the invitation to conclusively declare the proper interpretation of [section] 1332. In Hertz, relying on a careful reading of the language of [section] 1332, the Court adopted the nerve center test, reasoning that it best accords with the legislative intent of the statute. (10)

   This Note will explore the evolution of diversity jurisdiction as it relates to corporations and the state of the law after Hertz. Part II.A discusses the constitutional origins of diversity jurisdiction, and Part II.B details the progression of the case law thereafter. Part II.C outlines various statutory modifications to diversity jurisdiction, while Part II.D presents the four-way circuit split prior to Hertz. Finally, Part II.E summarizes the Hertz opinion itself. With this historical background in place, Part III analyzes the decision in Hertz in light of the legislative history of diversity jurisdiction, its constitutional conception, and the administrative concerns of today's federal court system.

2. HISTORY

   1. Constitutional Origins

      At the time of the Constitutional Convention, each of the states had their own long-tenured and fully functioning court systems. (11) In considering the need for a federal judiciary, the framers sought not to supplant these state courts, but rather to augment them with a system equipped to handle certain unique situations likely to arise within the newly formed union. (12) To this end, the framers of the Constitution provided that Congress may ordain and establish federal courts as it deemed necessary. (13) Furthermore, this constitutional grant of power outlined the various subject matters appropriate for such courts. (14) Conspicuous among the available subject matter authorizations was the provision that Congress could designate the federal courts to hear controversies between citizens of different states. (15)

      Passed by the nation's first Congress, the Judiciary Act of 1789 (Judiciary Act) established the federal judiciary and gave jurisdiction to the new federal courts concurrent with the state courts in:

      all suits of a civil nature at common law or in equity, where the matter in dispute exceeds, exclusive of costs, the sum or value of five hundred dollars, and ... the suit is between a citizen of the State where the suit is brought, and a citizen of another State. (16) Today, Congress's statutory grant giving effect to this authority is found in [section] 1332 of the United States Code. (17)

      It is widely accepted that the purpose of diversity jurisdiction and its immediate congressional implementation was to address the fear that state courts would be prejudiced against out-of-state litigants when those individuals were opposed by an in-stater. (18) Nonetheless, there remain competing views as to the motivation behind its inclusion in the Judiciary Act. (19) Indeed, even prior to passing the Judiciary Act, many favored some manner of diversity jurisdiction to alleviate concerns that the individual states' legislatures might become too active, a notion not strictly concerned with litigation against out-of-staters. (20) Regardless, it is clear that one early effect of diversity jurisdiction, intended or otherwise, was to foster the development of interstate commerce within a burgeoning union of localized and self-interested state governments through the stability of a federal tribunal. (21)

      Interestingly, although it has remained a major point of contention in procedural law since its inception, diversity jurisdiction has the somewhat curious distinction of being rather lethargically defended by those who proffered it. (22) Notably, at the Virginia Convention, James Madison commented: "I will not say [diversity jurisdiction] is a matter of much importance." (23) Similarly, John Marshall remarked: "Were I to contend that this was necessary in all cases and that the government without it would be defective, I should not use my own judgment." (24) Even so, the concept survived repeated attacks by the Anti-Federalists and was included in the final version of the Judiciary Act, which remains in effect today. (25)

   2. Evolution of Diversity Jurisdiction Through Case Law

      The Supreme Court initially rejected the idea that a corporation was a citizen eligible to invoke diversity jurisdiction. (26) Chief Justice John Marshall declared in no uncertain terms that an "invisible, intangible, and artificial being, that mere legal entity, a corporation aggregate, is certainly not a citizen; and, consequently, cannot sue or be sued in the courts of the United States." (27) This attitude was apparently consistent with the intent of the drafters of the Judiciary Act, who do not seem to have considered the citizenship of corporations. (28) Likewise, the Constitution itself is silent on the issue of corporate citizenship. (29) Nevertheless, in 1844, the Court turned abruptly in Louisville, Cincinnati, & Charleston Railroad Co. v. Letson (30) when it held that a corporation was an entity apart from its shareholders and was indeed a citizen that could invoke or be subject to diversity jurisdiction in the federal courts. (31) Considering the complete lack of precedent and a legislative history devoid of any reference to corporate diversity, this turn marked the beginning of a series of decisions considered by many to embody unwarranted judicial activism. (32) In stark contrast to its previous position, the Court, in an opinion delivered by Justice James Wayne, declared that because a corporation is a distinct entity permitted to conduct business in a given state, it should be considered a person, "although an artificial person, [and] an inhabitant of the same state ... capable of being treated as a citizen of that state, as much as a natural person." (33)

      Nine years later, the Court decided Marshall v. Baltimore & Ohio Railroad Co., (34) setting forth a holding that refined previous decisions and would endure for more than 100 years. (35) In Marshall, the Court held that persons acting on behalf of a corporation or within the scope of a corporation's business may be considered a resident of the corporation's state of incorporation, and that such persons are subject to suit in that state as well. (36) The Court reasoned that by its nature as a pure legal entity, a corporation exists only by force of law; therefore, a corporation must necessarily "dwell in the place of its creation"--that is, the state of its incorporation. (37) This effectively determined a corporation's citizenship not by explicitly deeming the corporation a citizen in and of itself, but rather by relying upon the fictional presumption that all shareholders, as parties to the corporation, were citizens of the state of incorporation. (38) The consequence of this decision, in effect, made corporations citizens only of the state where they were incorporated. (39) With the rise of the chancery in Delaware and the expansion of interstate commerce, it became increasingly common for corporations to conduct substantial business in states other than where they were incorporated. (40) It is essentially this evolution in business that has brought about much of the difficulty surrounding diversity jurisdiction. (41)

      In cases where jurisdiction is based on diversity of citizenship, federal courts are thrust into a position where they must decide matters involving state law-a complex problem that continues to evolve today. (42) The Supreme Court's 1842 decision in Swift v. Tyson (43) held that federal courts hearing cases based on diversity jurisdiction were not bound by the states' common law. (44) The rule in Swift only required that the federal courts apply state statutory law, thereby permitting the development of a...