E-Alert Case Updates

Fourth Circuit Reverses District Court’s Decision on Principal Place of Business based on Supreme Court’s Ruling in Hertz Corp. v. Friend

Central West Virginia Energy Company, Inc., et al. v. Mountain State Carbon, LLC, et al.
No.: 10-1486 (4th Cir. 2011)
by Eric M. Leppo, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In this recently issued opinion from the U.S. Court of Appeals for the Fourth Circuit, the Court held that there was complete diversity between the parties and that diversity of citizenship jurisdiction existed, reversing the decision of the U.S. District Court for West Virginia.

Plaintiffs, Central West Virginia Energy Company and A.T. Massey Coal Company, filed suit in federal district court against multiple defendants including Mountain State Carbon, LLC and Severstal Wheeling, Inc. alleging breach of their coal supply contract. The Defendants filed a Motion to Dismiss Plaintiffs’ Complaint based on a lack of federal jurisdiction. Specifically, they disputed that diversity of citizenship existed, arguing that Plaintiff Central West Virginia Energy and Defendant Severstal Wheeling were both West Virginian companies.

Federal District Courts have original jurisdiction over all civil actions between citizens of different states where the amount in controversy exceeds $75,000, exclusive of interest and costs. 28 U.S.C. § 1332(a)(1). It is well-regarded that diversity of citizenship jurisdiction requires complete diversity amongst the parties—that is—that no plaintiff is a citizen of the same State as any defendant. Corporations are deemed to be citizens of their State of incorporation as well as the State where they have their principal place of business. 28 U.S.C. § 1332(c)(1).

The Court first noted that the Fourth Circuit has previously used two tests in determining a corporation’s principal place of business. The first test, called the "nerve center test," sought to identify the home office from which the corporation’s officers direct, control, and coordinate the corporation’s activities. The second test, called the "place of operations test," put its emphasis on the location where the bulk of corporate activity occurred. Fourth Circuit courts were to evaluate cases and determine the appropriate test to be used based on case-specific facts.

However, the Supreme Court’s recently issued opinion in Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010), clarified the application of the phrase ‘principal place of business.’ It held that this phrase should always refer to “the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities.” Hertz at 1186. The Fourth Circuit noted the Supreme Court desired to adopt a simpler, unified test for determining principal place of business in the diversity of citizenship context. The Court’s holding was essentially an adoption of the “nerve center test.”

Severstal Wheeling, Inc. has its daily management and business operations almost exclusively in the state of West Virginia. On this basis, it contended—and the Federal District Court agreed—that it was a citizen of West Virginia. However, there were also uncontested facts reflecting that seven (7) of the eight (8) corporate officers of Severstal, including its CEO, CFO, COO, and General Counsel maintain their offices and perform their work in Dearborn, Michigan. It is these officers who control the corporation and set policy for the company.

The Fourth Circuit held that in light of the Supreme Court’s decision in Hertz, directing use of the nerve center test, the decision on principal place of business was clear cut. They rejected Severstal’s argument that its association with and operation in West Virginia made that State its principal place of business. The Court noted that consideration of such factors would simply undercut the Supreme Court’s desire to have a simpler test that can be uniformly applied.