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Federal Bar Update: Diversity test for corporations now settled

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For diversity jurisdiction purposes, one area of uncertainty for many years has been how to determine the citizenship of a corporation. Four different standards had evolved among the Circuits, with the 7th Circuit embracing the so-called "nerve-center" approach. Wisconsin Knife Works v. National Metal Crafters, 781 F. 2d 1280, 1282 (7th Cir. 1986). The Supreme Court finally resolved the split among the Circuits in late February in Hertz Corp. v. Friend.

The dispute centered on the language of 28 U.S.C. § 1332(c)(1), which provides that for diversity purposes "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business." Courts had differed on how to determine the principal place of business.

In Hertz, the Supreme Court adopted the 7th Circuit's nerve-center test. The court explained: "In an effort to find a single, more uniform interpretation of the statutory phrase, we have reviewed the Courts of Appeals' divergent and increasingly complex interpretations. Having done so, we now return to, and expand, Judge Weinfeld's approach, as applied in the Seventh Circuit."

The court continued, "We conclude 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. It is the place that Courts of Appeals have called the corporation's 'nerve center.'"

The court described how this test should operate in practice, writing, "And in practice it should normally be the place where the corporation maintains its headquarters - provided that the headquarters is the actual center of direction, control, and coordination, i.e., the "nerve center," and not simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion)."

With the test now settled, there should be fewer disputes over this aspect of diversity jurisdiction. And, fortunately for 7th Circuit practitioners, the standard will remain the same.

7th Circuit Conference - The 7th Circuit Judicial Conference will be May 2-4 in Chicago. This is an excellent program with great opportunities to interact with the federal bench and bar. To register, see www.7thcircuitbar.org.


John Maley is a partner with Barnes & Thornburg in Indianapolis where he practices nationally in litigation, employment, and appellate matters. The opinions expressed in this column are those of the author.

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