3123 Smb LLC v. Steven Horn , 880 F.3d 461 ( 2018 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
3123 SMB LLC, individually, and as No. 16-55304
assignee,
Plaintiff-Appellant, D.C. No.
2:14-cv-08115-
v. DSF-FFM
STEVEN HORN,
Defendant-Appellee. OPINION
Appeal from the United States District Court
for the Central District of California
Dale S. Fischer, District Judge, Presiding
Argued and Submitted November 15, 2017
Pasadena, California
Filed January 17, 2018
Before: Jacqueline H. Nguyen and Andrew D. Hurwitz,
Circuit Judges, and Steven Paul Logan, * District Judge.
Opinion by Judge Nguyen;
Dissent by Judge Hurwitz
*
The Honorable Steven Paul Logan, United States District Judge
for the District of Arizona, sitting by designation.
2 3123 SMB V. HORN
SUMMARY **
Diversity Jurisdiction
The panel reversed the district court’s dismissal for lack
of subject matter jurisdiction, and remanded for the district
court to consider whether there was jurisdictional
manipulation or an alter ego relationship between Lincoln
One Corporation and 3123 SMB LLC for purposes of
establishing diversity citizenship and jurisdiction.
Under 28 U.S.C. § 1332(c)(1), for purposes of
determining diversity jurisdiction, a corporation is deemed
to be a citizen of the State where it was incorporated and the
State where it has its principal place of business. The
Supreme Court, using a nerve center test, defined “principal
place of business” as “the place where the corporation’s high
level officers direct, control, and coordinate the
corporation’s activities.” Hertz Corp. v. Friend, 559 U.S.
77, 80 (2010).
Lincoln One, a holding company, was formed less than
one month before this lawsuit was filed, and its only act
during those few weeks was to incorporate in Missouri.
The panel held that what little business Lincoln One
conducted was done in Missouri; and Lincoln One and its
wholly-owned subsidiary, 3123 SMB, were putative citizens
of that state alone. The panel concluded that because
defendant Steven Horn was a California citizen, there
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
3123 SMB V. HORN 3
appeared to be complete diversity between the parties. The
panel further concluded, however, that there was evidence
that 3123 SMB and Lincoln One were treated as alter egos,
and that Lincoln One’s owners manipulated the ownership
structure of the real property at the center of this lawsuit in
order to manufacture diversity, and these were issues that the
district court did not consider. The panel, therefore,
conditionally reversed the district court’s jurisdictional
dismissal and remanded so that the district court could
consider in the first instance whether the entities were alter
egos or whether there was jurisdictional manipulation that
would warrant treating 3123 SMB as a California citizen.
Concerning the question of how to classify the
citizenship of a holding company such as Lincoln One, the
panel concluded that a recently-formed holding company’s
principal place of business is the place where it has its board
meetings, regardless of whether such meetings have already
occurred, unless evidence shows that the corporation is
directed from elsewhere.
Judge Hurwitz dissented, and would affirm the district
court’s dismissal based on its finding that Lincoln One’s
nerve center at the time the suit was filed was in California,
where its shareholders and directors resided, and where the
only corporate asset – as apartment complex – was located.
4 3123 SMB V. HORN
COUNSEL
David C. Knieriem (argued), Law Offices of David C.
Knieriem, Clayton, Missouri, for Plaintiff-Appellant.
John Terence Lupton (argued) and George M. Lindahl,
Lindahl Beck LLP, Los Angeles, California, for Defendant-
Appellee.
OPINION
NGUYEN, Circuit Judge:
For purposes of determining diversity jurisdiction, “a
corporation shall be deemed to be a citizen of every State . . .
by which it has been incorporated and of the State . . . where
it has its principal place of business.” 28 U.S.C.
§ 1332(c)(1). While a corporation’s state of incorporation
can be determined with ease, its principal place of business
often proves elusive. To simplify the jurisdictional inquiry,
the Supreme Court has defined “principal place of business”
to mean “the place where the corporation’s high level
officers direct, control, and coordinate the corporation’s
activities.” Hertz Corp. v. Friend, 559 U.S. 77, 80 (2010).
This “nerve center” is “typically . . . found at a corporation’s
headquarters.” Id. at 81.
But what of a corporation that has few, if any, activities?
That’s the case for a holding company, which does little
other than passively own other companies and supervise
their management. The corporation at issue here—Lincoln
One Corporation—was formed less than a month before this
lawsuit was filed, and its only act during those few weeks
was to incorporate. Determining Lincoln One’s principal
3123 SMB V. HORN 5
place of business is an existentialist exercise, yet one on
which its entitlement to litigate in federal court depends.
We conclude, based on the slim record before us, that
what little business Lincoln One conducted was done in
Missouri—its state of incorporation—making both Lincoln
One and its wholly-owned subsidiary, plaintiff 3123 SMB
LLC, putative citizens of that state alone. Because defendant
Steven Horn is a California citizen, there appears to be
complete diversity between the parties.
There is evidence, however, that 3123 SMB and Lincoln
One were treated as alter egos, and that Lincoln One’s
owners manipulated the ownership structure of the real
property at the center of this lawsuit in order to manufacture
diversity—issues that the district court didn’t consider. We
therefore conditionally reverse the district court’s
jurisdictional dismissal and remand so that it may consider
in the first instance whether these entities were alter egos or
there was jurisdictional manipulation that would warrant
treating 3123 SMB as a California citizen.
I.
This lawsuit, which involves a claim of legal
malpractice, is part of a larger dispute regarding real
property indirectly controlled by Anthony Kling and his
mother, Mary Kling. The property is a building located at
3115–3125 Santa Monica Boulevard in Santa Monica,
California. 1
1
Anthony Kling denied that 3123 SMB was named after the Santa
Monica property, testifying at his deposition that it was “just a made up
name.”
6 3123 SMB V. HORN
In 2008, the Klings and various entities associated with
their family sued several defendants in Los Angeles County
Superior Court, claiming that a construction project next to
the Santa Monica property caused subsidence damage due to
inadequate methods of construction. See Kling v. Gabai
Constr., No. B235367, 2012 WL 5458924, at *1 (Cal. Ct.
App. Nov. 9, 2012) (unpublished). The Kling parties, which
eventually included 3123 SMB, subsequently hired Horn to
represent them. 2 Horn is a resident of California.
The attorney-client relationship soured when the state
court lawsuit was dismissed. According to 3123 SMB’s
amended complaint in the instant case, Horn proffered
27 exhibits for a “long cause binder” that allegedly “were
incomplete, inadequate, and did not allow the case to be
properly prepared for trial.” 3123 SMB terminated Horn in
October 2013. Its new counsel “attempted to augment and
repair” the exhibit list that Horn had prepared. The state
court refused to allow it and, finding the exhibit list
inadequate, dismissed the case for failure to be brought to
trial within five years. See Cal. Civ. Proc. Code § 583.310.
In July 2011, before Horn’s representation in the state
court litigation ended, 3123 SMB was organized and
registered as a limited liability company with the Missouri
Secretary of State. At the time, its sole member was another
limited liability company, Washington LLC, which in turn
was controlled entirely by Anthony Kling. 3123 SMB
gained ownership of the Santa Monica property and the
litigation rights in a 2012 transfer. It became a party to the
2
Although the record does not disclose when this occurred,
3123 SMB alleges in parallel state court litigation that it was on or about
March 14, 2011. Complaint at 4, 3123 SMB LLC v. Horn, No.
BC682318 (L.A. Cty. Super. Ct. filed Nov. 3, 2017).
3123 SMB V. HORN 7
state court litigation in May 2013. See Kling v. Hassid, No.
B261391, 2016 WL 538238, at *1 n.1 (Cal. Ct. App. Feb.
10, 2016) (unpublished).
3123 SMB’s sole activity is to manage the Santa Monica
property. Because the building is uninhabitable, 3123 SMB
has little business to transact other than litigation related to
the property damage. Its listed place of business is the
Clayton, Missouri office of its litigation attorney, David
Knieriem. Anthony and Mary Kling are the only persons
authorized to act on behalf of 3123 SMB. It has no officers,
directors, or employees.
The Klings reside in California but claim to have
longstanding connections to Missouri. Mary Kling is from
St. Louis, and the Klings still have family there. Anthony
Kling goes to St. Louis “all the time”—usually a couple of
times each year, but it “[d]epends on how the Cardinals are
doing.” He has operated “multiple” unnamed businesses in
Clayton, Missouri, where he has unspecified real and
intellectual property interests. He “regularly interact[s] with
businesses [and] government entities, in . . . Missouri.”
However, Anthony Kling has lived in Los Angeles his entire
life other than to attend school in New York, and Mary Kling
has resided in Los Angeles since at least the late 1990s.
In September 2014, nearly a year after Horn’s
representation ended, 3 Mary Kling incorporated Lincoln
One. The corporation’s Missouri-based agent and corporate
attorney, Alex Kanter, filed the articles of incorporation with
3
California has a one-year statute of limitations for legal
malpractice claims. See Cal. Civ. Proc. Code § 340.6(a); Lee v. Hanley,
354 P.3d 334, 337 (Cal. 2015).
8 3123 SMB V. HORN
the Missouri Secretary of State, listing his office in Clayton
as Mary Kling’s address. 4 Lincoln One acquired the single
membership in 3123 SMB from Washington LLC. The
following month, 3123 SMB filed this suit against Horn for
legal malpractice.
Mary Kling is Lincoln One’s president and secretary.
Initially, she was the sole board member. Subsequently,
Anthony Kling joined the board. He owns 75% of the
corporation’s shares, and Mary Kling owns the rest.
According to Anthony Kling, Lincoln One’s board
meetings take place annually in Clayton, although none had
been held at the time of the lawsuit. Subsequently, Lincoln
One held a board meeting in October 2015. Anthony Kling
attended in person, and Mary Kling attended telephonically
due to health issues. Lincoln One’s corporate records are
kept in Missouri at its attorneys’ office.
Lincoln One’s sole business, which it conducts at board
meetings, “is to provide direction to 3123 SMB, LLC.”
Currently, this direction is to prosecute the lawsuits
concerning the damage to the Santa Monica property.
Lincoln One does not conduct business anywhere else.
At the time of this lawsuit, Lincoln One had no
“fundamental daily real estate business operations.” It did
not directly own or manage any real estate. Its fundamental
business operation was to hold a meeting each year in
Clayton to approve the following year’s directors and
4
In Missouri, as in many other jurisdictions, a corporation’s
existence begins when its articles of incorporation are filed with the
secretary of state. See Mo. Rev. Stat. § 351.075; Model Bus. Corp. Act
§ 2.03 (Am. Bar. Ass’n 2016).
3123 SMB V. HORN 9
officers and any modification to the bylaws or issuance of
common stock.
The district court dismissed this action for lack of subject
matter jurisdiction, concluding that California was Lincoln
One’s principal place of business under Hertz.
II.
Our jurisdiction arises under 28 U.S.C. § 1291. We
review the district court’s factual findings for clear error.
Co-Efficient Energy Sys. v. CSL Indus., Inc., 812 F.2d 556,
557 (9th Cir. 1987) (citing Bruce v. United States, 759 F.2d
755, 758 (9th Cir. 1985)). “The ultimate legal conclusion
that the underlying facts are insufficient to establish diversity
jurisdiction is subject to de novo review.” Id.III.
A.
For purposes of diversity jurisdiction, a limited liability
company “is a citizen of every state of which its
owners/members are citizens.” Johnson v. Columbia Props.
Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006).
Therefore, Lincoln One’s citizenship determines whether
Horn and 3123 SMB are diverse. If Lincoln One’s principal
place of business is in California, then both sides of this
dispute are citizens of the same state and the district court
correctly dismissed the matter.
Under the “nerve center” test, a corporation’s principal
place of business “should normally be the place where the
corporation maintains its headquarters—provided that the
headquarters is the actual center of direction, control, and
coordination . . . and not simply an office where the
10 3123 SMB V. HORN
corporation holds its board meetings (for example, attended
by directors and officers who have traveled there for the
occasion).” Hertz, 559 U.S. at 93. A holding company,
however, is not “normal.” It engages in little activity, so
there is little to direct, control, or coordinate. Its purpose—
holding interest in other companies, see 6A William Meade
Fletcher, Cyclopedia of the Law of Corporations § 2821
(2017)—is passive.
Only one circuit has grappled with Hertz’s application to
a holding company. In Johnson v. SmithKline Beecham
Corp., the Third Circuit considered a corporation with “quite
limited” activities, “consist[ing] primarily of owning its
interest in [a limited liability company], holding intra-
company accounts, issuing and receiving dividends, and
paying taxes.” 724 F.3d 337, 342, 353 (3d Cir. 2013). The
three-member board of directors held quarterly and special
board meetings in Wilmington, Delaware, the holding
company’s state of incorporation, with some members
appearing telephonically. Id. at 342. The board alone was
authorized to manage the company’s activities, id. at 343,
although there was a dispute “about the extent of the actual
decision-making that occur[ed] at the meetings,” id. at 342.
Other than the board meetings, the company’s presence in
Wilmington was “minimal.” Id. It sublet a 10’ x 10’ office
there to house its books and records, and the office was
“rarely visited.” Id. at 343.
Johnson concluded that the holding company was a
citizen solely of Delaware because its nerve center was in
Wilmington, where the board meetings took place. Id. at
356. Acknowledging the Supreme Court’s dictum that a
corporation’s nerve center is “normally . . . not simply an
office where the corporation holds its board meetings,”
3123 SMB V. HORN 11
Hertz, 559 U.S. at 93, the Third Circuit explained why it’s
inapplicable to holding companies:
[T]he kind of board meetings denigrated in
Hertz were being considered in the context of
a case involving a sprawling operating
company, with extensive activities carried
out by 11,230 employees at facilities in
44 states. For a holding company . . . ,
relatively short, quarterly board meetings
may well be all that is required to direct and
control the company’s limited work. . . .
[T]he board generally conducts three tasks at
each meeting: (1) it approves or corrects the
minutes from the previous meeting, (2) it
reviews the company’s financial statements
with [an] accountant . . . , and (3) it addresses
any other business required to come before
the meeting, such as authorizing agents to
sign documents, making changes to the
officers, paying a dividend, or, occasionally,
restructuring the company’s holdings.
Generally, such business is straightforward
and takes little time, yet it constitutes [the
holding company’s] primary activity:
managing its assets. The location of board
meetings is therefore a more significant
jurisdictional fact here than it was in Hertz,
and the meetings’ brevity does not
necessarily reflect an absence of substantive
decision-making.
Johnson, 724 F.3d at 354 (citation and internal quotation
marks omitted). The court cited “numerous post-Hertz
[district court] cases that have determined the principal place
12 3123 SMB V. HORN
of business of a holding company by looking to the location
in which its officers or directors meet to make high-level
management decisions.” Id. n.19.
The First Circuit applied a similar analysis in the pre-
Hertz case of Taber Partners, I v. Merit Builders, Inc.,
987 F.2d 57 (1st Cir. 1993). Two holding companies, both
incorporated in New York, formed a partnership to acquire
and operate a hotel in Puerto Rico. Id. at 59. Each
corporation’s “sole function” was “to hold or administer its
respective interest in [the partnership].” Id. at 60. They
maintained corporate records and financial accounts in New
York. Id. at 59. They made all policy decisions there as
well, including the decision to invest in the partnership, the
election of corporate officers, and the selection of
accountants. Id. at 60. The day-to-day management of the
partnership was delegated to an executive and assistant
director. Id. at 59–60.
The district court concluded that both corporations had a
principal place of business in Puerto Rico because they
“were formed to act as owners of the [hotel]” and devoted
“almost all of their corporate activity to administer their
assets in the partnership.” Id. at 60. The First Circuit
reversed. It explained that “in determining a corporation’s
principal place of business, a district court’s inquiry must
focus solely on the business activities of the corporation
whose principal place of business is at issue.” Id. at 62–63.
The partnership—not the corporations—managed the
hotel’s operations. Because the corporations’ “sole
corporate ‘activities’ . . . consist[ed] of holding or
administering their assets in [the partnership],” their
principal place of business was in New York. Id. at 63.
B.
3123 SMB V. HORN 13
The holding company in this case, Lincoln One, is even
less active than those in Johnson and Taber Partners.
Because diversity jurisdiction “depends upon the state of
things at the time of the action brought,” Grupo Dataflux v.
Atlas Glob. Grp., L.P., 541 U.S. 567, 570 (2004) (quoting
Mollan v. Torrance, 22 U.S. (9 Wheat.) 537, 539 (1824)),
we must determine Lincoln One’s principal place of business
as of its 25th day of existence. In that brief time, the only
business that Lincoln One conducted was to incorporate.
In the somewhat analogous context of a company that is
winding down, two circuits have held that a dissolved
corporation has no principal place of business for diversity
purposes, and is therefore a citizen only of its state of
incorporation. See Holston Invs., Inc. B.V.I. v. LanLogistics
Corp., 677 F.3d 1068, 1071 (11th Cir. 2012) (concluding
that such a rule “aligns most closely with the Supreme
Court’s analysis in Hertz”); Midlantic Nat’l Bank v. Hansen,
48 F.3d 693, 698 (3d Cir. 1995) (rejecting, pre-Hertz, “the
notion that implicit in the statute’s terms is the requirement
that all corporations be deemed to have a principal place of
business”). But see Wm. Passalacqua Builders, Inc. v.
Resnick Developers S., Inc., 933 F.2d 131, 141 (2d Cir.
1991) (requiring inquiry into inactive corporation’s last
principal place of business).
We have not decided whether an inactive corporation
must have a principal place of business. In Co-Efficient
Energy, we found “a certain perverse logic” in the
proposition that “an inactive corporation . . . is only a citizen
of the state of its incorporation.” 812 F.2d at 558. But we
didn’t need to resolve the issue because we concluded that
the corporation in question was indeed active. Id. The
corporation’s director and sole shareholder “made business
decisions, including the decision to contract with [the
14 3123 SMB V. HORN
defendant] and file this action.” Id. The location where
these decisions were made was deemed to be the
corporation’s principal place of business. Id.; see also
MacGinnitie v. Hobbs Grp., LLC, 420 F.3d 1234, 1240 (11th
Cir. 2005) (concluding that the holding company was “not
an ‘inactive’ corporation in the sense in which other circuits
have used that term”).
Here, in contrast, Lincoln One did not engage in any
activity during its first 25 days. This lawsuit was filed by
3123 SMB, not Lincoln One. In concluding that California
was Lincoln One’s principal place of business, the district
court appears to have conflated 3123 SMB’s management of
its lawsuit, which the court reasonably assumed would be
directed from California, where the Klings reside, with
Lincoln One’s management of 3123 SMB at its annual
meetings, which had not yet occurred and would take place
in Missouri. Lincoln One’s first board meeting was not held
until a year after 3123 SMB filed this lawsuit.
Johnson rejected the idea that a holding company’s nerve
center is where the subsidiary limited liability company’s
management is based, because that “ignores the well-
established rule that a parent corporation maintains separate
citizenship from a subsidiary unless it has exerted such an
overwhelming level of control over the subsidiary that the
two companies do not retain separate corporate identities.”
Id. at 351; accord Taber Partners, 987 F.2d at 62–63; cf.
Pyramid Sec. Ltd. v. IB Resolution, Inc., 924 F.2d 1114,
1120 (D.C. Cir. 1991) (refusing to impute subsidiary’s
citizenship to its parent even where the parent is the “alter
ego” of the subsidiary and “the parent corporation is being
sued solely for the acts of its completely controlled
subsidiary”). We adhere to this rule as well. See Danjaq,
S.A. v. Pathe Commc’ns Corp., 979 F.2d 772, 775 (9th Cir.
3123 SMB V. HORN 15
1992) (“[T]he citizenship of a parent is distinct from its
subsidiary where . . . there is no evidence of an alter ego
relationship.”).
The district court may have believed that an alter ego
relationship exists between Lincoln One and 3123 SMB.
The two entities are managed by the same two individuals
utilizing the same attorneys, with no one else involved. But
Anthony Kling provided unimpeached deposition testimony
and sworn declaration statements that Lincoln One’s only
business is to provide general direction to 3123 SMB—at the
moment, to continue prosecuting the property-related
lawsuits—and that this direction is given exclusively at
board meetings in Clayton, Missouri. To reach the
conclusion that Lincoln One and 3123 SMB are alter egos,
the court would need to reject this evidence, which it can’t
do without explicitly finding Anthony Kling incredible. See
Data Disc, Inc. v. Sys. Tech. Assocs., Inc., 557 F.2d 1280,
1285 (9th Cir. 1977) (“[I]f a plaintiff’s proof is limited to
written materials, it is necessary only for these materials to
demonstrate facts which support a finding of jurisdiction in
order to avoid a motion to dismiss. . . . If the pleadings and
other submitted materials raise issues of credibility or
disputed questions of fact with regard to jurisdiction, the
district court has the discretion to take evidence at a
preliminary hearing in order to resolve the contested issues.”
(citations omitted)).
The district court found it “completely implausible” that
Lincoln One had “not taken any actions other than the single
board meeting.” We disagree. It’s entirely plausible that
Lincoln One, which doesn’t do much at all, did nothing for
25 days. Its sole directive is to provide general direction to
3123 SMB, and at that time 3123 SMB had little business to
transact other than litigation related to the Santa Monica
16 3123 SMB V. HORN
property. Moreover, the district court’s reference to the
single board meeting in the context of Lincoln One’s
“implausible” inactivity suggests that it was examining a
time frame well beyond the 25 days. If so, it erred by
“consider[ing] facts that arose after the complaint was filed
in federal court.” In re Digimarc Corp. Derivative Litig.,
549 F.3d 1223, 1236 (9th Cir. 2008). There may be valid
reasons to doubt Anthony Kling’s testimony, 5 but its
substance—that Lincoln One’s activity was limited to board
meetings in Missouri—isn’t one of them.
C.
The question remains how to classify the citizenship of a
holding company such as Lincoln One that has engaged in
no activity other than incorporation. We conclude that a
recently-formed holding company’s principal place of
business is the place where it has its board meetings,
regardless of whether such meetings have already occurred,
unless evidence shows that the corporation is directed from
elsewhere.
The district court noted that Lincoln One’s sole officer,
Mary Kling, resided in California, and it found “no evidence
that any of the operations of Lincoln One are directed,
controlled, or coordinated from Missouri or anywhere else
other than California.” This was so, the court explained,
because Lincoln One’s single board meeting in Missouri
“occurred well after this case was filed.” The court’s
reasoning assumes both that a holding company’s principal
place of business is by default in the state where its officers
5
It’s not within our province to make credibility findings, see, e.g.,
Cruz v. City of Anaheim, 765 F.3d 1076, 1080 (9th Cir. 2014), so we
express no opinion on Anthony Kling’s credibility.
3123 SMB V. HORN 17
live and that its principal place of business can change over
time as the company holds a sufficient number of board
meetings at its true nerve center. Neither of these
assumptions withstands scrutiny.
The assumption that a holding company’s principal place
of business is in the state where its officers reside is
problematic for several reasons. To begin with, this
approach looks to the state as a whole rather than the specific
place within the state from which the officer presumably
directs the company’s activity. The Supreme Court has
cautioned that a corporation’s principal place of business “is
a place within a State. It is not the State itself.” 6 Hertz,
559 U.S. at 93. Corporations aren’t usually directed from
their managers’ homes. Here, there’s no evidence that Mary
Kling directed activity from her home as opposed to some
other location in her home state.
In addition, “[a] corporation’s ‘nerve center’ . . . is a
single place.” Id. (emphasis added). While that presents less
of a problem in the instant case—Mary Kling was Lincoln
One’s only officer and director at the time—holding
companies often have more than one decision-maker living
in more than one state. How is a district court to choose
among them? The dissent doesn’t say, and its rule would be
unworkable.
More generally, the connection between the state where
a holding company conducts its business, on the one hand,
and the states where its officers and directors reside, on the
other, is tenuous. Corporations based in metropolitan areas
6
The dissent overlooks this distinction in proposing a rule that a
holding company’s principal place of business is the state in which one
of the directors or managers resides.
18 3123 SMB V. HORN
spanning multiple states, such as New York, Chicago, or
Kansas City, frequently have officers residing in a
neighboring state. Many holding companies incorporate and
hold board meetings in sparsely populated states like
Delaware and Nevada, while their board members reside
elsewhere. In Johnson, for example, the holding company
had its board meetings in Delaware, while four of its six
officers and directors were based in other jurisdictions—two
in Pennsylvania and two in the United Kingdom. See 724
F.3d at 342–43 & n.9.
Equally problematic is the assumption that a
corporation’s principal place of business can shift over time
without any change to the corporation’s structure or
operation. Such an approach “invites greater litigation and
can lead to strange results.” Hertz, 559 U.S. at 94. Although
here the corporate subsidiary is the plaintiff, in many cases
it will be the defendant and, as such, unable to choose the
lawsuit’s timing. In those cases, the district court’s subject
matter jurisdiction would turn on happenstance. If the
holding company or its subsidiary were sued before there
were sufficient board meetings to establish a principal place
of business, the residence of one or more officers or directors
would determine its citizenship.
Prior to Hertz, when determining a corporation’s
principal place of business, the circuits applied multiple
overlapping tests that often lacked precision. See id. at 91–
92 (describing the “growing complexity” in this area of the
law). The Supreme Court chose the nerve center test over
the various competing tests in large part due to its
“administrative simplicity.” Id. at 94. Complex
jurisdictional tests waste resources by encouraging
gamesmanship and costly appeals while discouraging
litigation of a dispute’s merits. Id. Simple jurisdictional
3123 SMB V. HORN 19
rules, in contrast, benefit both courts and litigants. Courts,
which have an independent obligation to ensure that subject-
matter jurisdiction exists, “can readily assure themselves of
their power to hear a case.” Id. (citing Arbaugh v. Y&H
Corp., 546 U.S. 500, 514 (2006)). Straightforward
jurisdictional rules also offer greater predictability for
corporations making business and investment decisions and
for plaintiffs deciding whether to sue in state or federal court.
Id. at 94–95.
A rule that forces courts to pick a nerve center from the
potentially several states where corporate decision-makers
reside and to determine whether there have been enough
board meetings to establish a different nerve center would be
difficult to administer and generate unnecessary litigation on
collateral issues. In contrast, a rule presuming that from
inception a holding company directs its business from the
place where it holds board meetings is easy to apply. See
Johnson, 724 F.3d at 355 (“Even while cautioning courts to
identify a corporation’s actual center of direction and
control, Hertz ‘place[d] primary weight upon the need for
judicial administration of a jurisdictional statute to remain as
simple as possible.’” (quoting Hertz, 559 U.S. at 80)). And
the latter rule rests on sound assumptions.
Missouri, like many states, allows a corporation to
specify in its bylaws the location of annual meetings and, if
none is designated, provides that the meetings by default will
be held at the corporation’s registered office. See Mo. Rev.
Stat. § 351.225(1); Mod. Bus. Corp. Act § 7.01(b) (Am. Bar.
Ass’n 2016) (providing that corporation’s “principal office”
as designated in its annual report is location of annual
meetings if not otherwise specified); see also, e.g., Cal.
Corp. Code § 600(a); N.Y. Bus. Corp. Law § 602(a). Here,
Lincoln One’s registered office is in Clayton, Missouri.
20 3123 SMB V. HORN
There’s no evidence that its bylaws prescribe that the annual
meetings be held elsewhere, and Anthony Kling proffered
uncontradicted testimony that they are in fact held in
Clayton. Given the expectation that, absent evidence to the
contrary, a corporation holds its annual meetings at its
registered office, such meetings need not actually take place
in order to establish the corporation’s principal place of
business there. 7
D.
At the same time, courts must be alert to the possibility
of jurisdictional manipulation. 8 See Hertz, 559 U.S. at 97.
There is evidence in the record here from which such an
inference could be made. Lincoln One was incorporated
7
The dissent would hold otherwise because “[t]he inquiry focuses
on the location of the corporate nerve center when the suit is filed, not
on future, hypothetical actions.” Dissent at 25. If a holding company’s
board meets once per year in December, what difference does it make if
the board has already met when the company is sued in January? Either
way, no business will be conducted over the next 11 months and, as the
dissent points out, the shareholders can easily change the meeting place
during that time. Nor are we relying on “formalism.” Dissent at 25
Anthony Kling testified that Lincoln One’s board meets in Clayton, and
the corporate documents merely provide additional evidence of that.
8
The dissent’s criticism in this regard is essentially a critique of
Hertz, which directs courts to take remedial action “if the record reveals
attempts at manipulation.” 559 U.S. at 97. Moreover, this criticism is
unfounded unless one assumes—as we do not—that the use of holding
companies to manufacture diversity jurisdiction is widespread. Finally,
the dissent’s proposed rule would not reduce jurisdictional litigation.
Rather, it would encourage such litigation whenever recently-formed
holding companies are involved—even corporations formed for
legitimate purposes whose directors genuinely intend to hold meetings
outside their home states.
3123 SMB V. HORN 21
roughly one month before this suit was filed, near the end of
the statute of limitations. Prior to that time, 3123 SMB was
a California citizen, 9 precluding diversity jurisdiction.
Lincoln One’s incorporation and acquisition of 3123 SMB
rendered the parties nominally diverse just in time to file this
lawsuit in federal court. Subsequently, 3123 SMB brought
separate claims arising from the same conduct—Horn’s
alleged professional mistakes—in parallel state court
litigation.
However, the record also contains evidence suggesting
that Lincoln One incorporated in Missouri for legitimate
reasons. The Klings have deep ties to the state, and their
attorneys reside there. And there’s nothing inherently
problematic about a holding company and its subsidiary
having the same officers. See 6A Fletcher, supra, § 2821
(citing Haskell v. McClintic-Marshall Co., 289 F. 405, 413
(9th Cir. 1923)). On remand, the district court may consider
whether there has been jurisdictional manipulation. If so, it
should “take as the ‘nerve center’ the place of actual
direction, control, and coordination, in the absence of such
manipulation.” Hertz, 559 U.S. at 97.
IV.
Anthony Kling testified that Lincoln One holds its board
meetings in Clayton, Missouri. Whether that’s true is a
matter of credibility to be determined by the district court.
The fact that Lincoln One had not yet held a board meeting
9
Before Lincoln One assumed control, 3123 SMB’s sole member
was Washington LLC, which was controlled entirely by Anthony Kling,
a California citizen. See Johnson, 437 F.3d at 899.
22 3123 SMB V. HORN
does not in and of itself have jurisdictional significance if the
meeting’s location had already been determined.
Because 3123 SMB presented evidence that Lincoln
One’s minimal activity was directed from board meetings in
Missouri, that state appears to be the corporation’s principal
place of business. Therefore, we reverse the district court’s
jurisdictional dismissal. Our reversal is conditional. On
remand, the district court is free to consider whether there is
jurisdictional manipulation or an alter ego relationship
between Lincoln One and 3123 SMB.
REVERSED and REMANDED.
HURWITZ, Circuit Judge, dissenting:
The Court today holds that a corporation’s principal
place of business was located in a state in which the company
had done absolutely no business at the time this lawsuit was
filed. Although identifying the principal place of business
of a holding company is not always an easy task, the “nerve
center” cannot be in a state where the corporate EEG is flat.
The district court correctly found that Lincoln One’s nerve
center at the time this suit was filed was in California, where
its shareholders and directors resided, and where the only
corporate asset—an apartment complex—was located. I
therefore respectfully dissent.
I.
I start, as does the majority, with the basics. For
purposes of diversity jurisdiction, a corporation is a citizen
both of its state of incorporation and the state “where it has
its principal place of business.” 28 U.S.C. § 1332(c)(1). A
3123 SMB V. HORN 23
party invoking federal jurisdiction bears the burden of
establishing it. See Kokkonen v. Guardian Life Ins. Co. of
Am., 511 U.S. 375, 377 (1994) (“It is to be presumed that a
cause lies outside [our] limited jurisdiction, and the burden
of establishing the contrary rests upon the party asserting
jurisdiction.”) (citations omitted).
It is undisputed that Lincoln One was incorporated in
Missouri. But, that is only half the battle. It is also plaintiff’s
burden to establish the location of the corporation’s principal
place of business, or its “nerve center.” See Hertz Corp. v.
Friend, 559 U.S. 77, 92–93 (2010).
Plaintiff failed to meet that burden. Rather, the district
court found that Lincoln One’s principal place of business
was in California, a factual determination we review for
clear error. See Co-Efficient Energy Sys. v. CSL Indus., Inc.,
812 F.2d 556, 557 (9th Cir. 1987). That finding was not
clearly erroneous. Plaintiff conceded that there had been no
corporate activity in Missouri between the day Lincoln One
was incorporated and the filing of this suit. The district court
found that Mary Kling, Lincoln One’s sole officer, is a
California resident who had not travelled to Missouri during
that period, and found implausible plaintiff’s assertion that
the corporation had undertaken no actions anywhere in the
critical time frame. And, because “the jurisdiction of the
court depends upon the state of things at the time of the
action brought,” Grupo Dataflux v. Atlas Glob. Grp.,
541 U.S. 567, 570 (2004) (quoting Mollan v. Torrance,
22 U.S. (9 Wheat.) 537, 539 (1824)), we cannot consider
later activity, such as the board meeting held by Lincoln One
in Missouri.
Indeed, even adopting the majority’s premise that
Lincoln One was completely inactive during the relevant
period, the district court’s dismissal must be affirmed. A
24 3123 SMB V. HORN
corporation’s principal place of business is “the place where
a corporation’s officers direct, control, and coordinate the
corporation’s activities.” Hertz, 559 U.S. at 92–93. Plaintiff
presented absolutely no evidence that any such direction,
control or coordination occurred in Missouri. Indeed, the
only evidence on this issue was that Lincoln One’s sole
officer was a California citizen who did nothing in Missouri
between the date of incorporation and the filing of this suit.
II.
The majority relies heavily on Johnson v. SmithKline
Beecham Corp. for the proposition that the nerve center of a
holding company is where its board meetings are supposed
to take place. 724 F.3d 337 (3d Cir. 2013). But in Johnson,
the holding company actually held quarterly board meetings
in Delaware before the suit was filed. Id. at 353–54. Thus,
Johnson does not stand for the proposition that the state of
incorporation is presumptively the principal place of
business of a holding company even if no activity has
occurred there. Rather, it faithfully applies Hertz by
identifying the location in which the corporate “officers or
directors meet to make high-level management decisions.”
Id. at 354 n.19.
The majority’s reliance on Taber Partners, I v. Merit
Builders, Inc., 987 F.2d 57 (1st Cir. 1993), is similarly
misplaced. In Taber, during five years before the filing of
the lawsuit, a “‘control-group’ of twelve individuals”
maintained the holding company’s “corporate records and
financial accounts” in New York. Id. at 60. There is no
evidence here that Lincoln One’s sole officer did anything at
all in Missouri before the suit was filed.
The majority also relies on Missouri law, which allows a
corporation to specify where its annual meetings will be
3123 SMB V. HORN 25
held, and Lincoln One’s articles of incorporation, which
specify that those meetings will occur in Clayton, Missouri.
Mo. Rev. Stat. § 351.225(1). But the Supreme Court
rejected this the type of formalism in Hertz. See 559 U.S. at
97 (“[W]e reject . . . that the mere filing of a form like the
Securities and Exchange Commission’s Form 10–K listing a
corporation’s ‘principal executive offices’ would, without
more, be sufficient proof to establish a corporation’s ‘nerve
center.’”). The inquiry focuses on the location of the
corporate nerve center when the suit is filed, not on future,
hypothetical actions. Indeed, under Missouri law,
shareholders can by simple agreement change the specified
location of the annual meetings, see Mo. Rev. Stat.
§ 351.225, 290, so the provision in the articles of
incorporation did not assure that the meetings would take
place in Clayton.
III.
Today’s decision gives rise to the very dangers of
jurisdictional manipulation that Hertz eschews. Under the
majority’s approach, a newly formed corporation is entitled,
in the absence of other activity, to a presumption that its state
of incorporation is also its principal place of business. But,
the “nerve center” of a corporation may shift over time.
Thus, Lincoln One, having established diversity simply by
virtue of its state of incorporation, can hereafter safely
conduct its business entirely in California but still invoke the
limited jurisdiction of an Article III court.
I respectfully dissent.