Opinion
No. C 01-01365 WHA
June 29, 2001
ORDER REMANDING CASE TO SAN FRANCISCO SUPERIOR COURT; VACATING HEARING, AND CLOSING FILE INTRODUCTION
All defendants jointly removed this case, originally filed in the San Francisco Superior Court, based on diversity of citizenship pursuant to 28 U.S.C. § 1332 and 1441. Plaintiff seeks to remand this case on the ground that two of the defendants improperly pled their principal place of business by stating "no principal place of business" rather than their last principal place of business. This case, therefore, presents the jurisdictional question of the citizenship of an inactive corporation. The Court concludes that Bay Area Foods, Inc. was a citizen of California and thus a citizen of the forum state at the time of commencement of suit and removal. Accordingly, the Court grants plaintiffs motion for remand because removal by defendants who were citizens of forum state violated 28 U.S.C. § 1441(b).
In this order, "inactive" corporation refers to a corporation that has ceased any revenue-generating activities.
The parties requested and the Court granted to postpone the hearing date to August 9, 2001. In the meantime, the Court has reviewed all the papers and has concluded that oral argument would be of no assistance and would simply add an unnecessary burden and expense on the parties. According, the hearing on August 9, 2001 is vacated.
STATEMENT
In January 1996, defendants Bay Area Holding, Inc. ("BAH") and its subsidiary Bay Area Foods, Inc. ("BAF") hired plaintiff Mark Sellers to serve as the Chief Executive Officer (Compl. ¶ 7). In 1998, Sellers assumed the additional duty as Chief Executive Officer of defendant Southwest Supermarkets LLC (Compl. ¶ 10). Defendant Kohlberg Co., LLC was involved in the employment transaction on both occasions (Compl. Exhs. A, B). BAH, BAF, and Southwest fired Sellers in February 1999 (Compl. ¶ 12).
It is unclear from the record the exact role of Kohlberg Co., LLC in these transactions.
While Sellers was working for BAH, BAF, and Southwest, BAF operated more than a dozen stores in California and had its offices in California (Compl. Exh. A; Opp. 2). Despite not having any offices or engaging in revenue-generative activity since April 1999, BAH and BAF had not been dissolved as of June 6, 2001 (Opp. 2; Harter Decl. ¶ 8). According to California Secretary of State's records, BAF retained its active status, i.e., all filings required by Secretary of State's offices and Franchise Tax Board are current and the corporation is not dissolved, suspended, surrendered, or forfeited (Lee Suppl. Decl. Exh. B). BAF's president also had a business address in California and was listed as agent for service of process as of June 2001 (Lee Suppl. Decl. Exhs A, B; Harter Decl. 2).
On February 13, 2001, Sellers filed complaint in the present action to recover amounts allegedly owed to him by defendants. On April 6, 2001, defendants filed their notice of removal based on diversity jurisdiction noting that both BAF and BAH were Delaware corporations and had "no principal place of business" (Notice of Removal ¶ 4). On May 7, 2001, Sellers filed a timely motion for remand on the ground that defendants failed to meet their burden of establishing diversity jurisdiction by failing to state BAF and BAH's principal place of business.
ANALYSIS
A defendant is entitled to remove a state court action to federal court on the basis of diversity of citizenship if none of the defendants is a citizen of the forum state. 28 U.S.C. § 1441(b). For purposes of removal based on diversity jurisdiction, a corporation is deemed a citizen both of the state where it is incorporated and of the state where it has its principal place of business. 28 U.S.C. § 1332(c)(1); Breitman v. May Co. California, 37 F.3d 562, 564 (9th Cir. 1994). Diversity is determined as of the time the complaint was filed and at time the removal petition was filed. See 28 U.S.C. § 1332(a), 1441(a)-(b); Caterpillar Inc. v. Lewis, 519 U.S. 61, 68-69 (1996). The burden of proving jurisdiction is on the party asserting jurisdiction. Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). "Federal jurisdiction must be rejected if there is any doubt as to the right of removal." Ibid. The question raised by this motion for remand is whether BAF and BAH, two Delaware corporations that had conducted business only in California but had ceased those activities almost two years before the commencement of this action, remained California citizens under 28 U.S.C. § 1332(c)(1).
Plaintiff contends that an inactive corporation is the citizen of both the state of its incorporation and the location of the corporation's last place of business activity (Br. 3). Defendants argue, however, that an inactive corporation is a citizen of only its state of incorporation (Opp. 4-5). The Ninth Circuit has yet to take a position on this issue and there is a split of authority among the other circuit courts.
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The debate over an inactive corporation's principal place of business has revolved around the plain meaning of the statute, as well as Congress's intent in including the principal place of business clause. In part, 28 U.S.C. § 1332(c)(1) states that "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 . . ." (emphasis added). In adopting this language in 1958, Congress wanted to eliminate "the evil whereby a local institution, engaged in a local business and in many cases locally owned, is enabled to bring its litigation into the Federal courts simply because it has obtained a corporate charter from another State." S. Rep. No. 85-1830, at 5 (1958), reprinted in 1958 U.S.C.C.A.N. 3099, 3101-02; see Comtec, Inc. v. Nat'l Technical Schs., 711 F. Supp. 522, 523-24 (D. Ariz. 1989).
Courts have taken three different approaches to determining the principal place of business of an inactive corporation. The Second Circuit and two district courts in the Ninth Circuit have focused on the conjunction "and" as well as legislative intent to support their holdings that an inactive corporation is a citizen of where "it last transacted business". Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 141 (2nd Cir. 1991); see China Basin Properties, Ltd. v. Allendale Mut. Ins. Co., 818 F. Supp. 1301, 1303-05 (N.D. Cal. 1993) (Armstrong, J.); Comtec, 711 F. Supp. at 524-25 (Muecke, J.). These courts have reasoned that a different conclusion would allow an inactive corporation that may be still local in character to remove a case to the federal court in defiance of legislative intent. Passalacqua, 933 F.2d at 141; China Basin, 818 F. Supp. at 1304 n. 4; Comtec, 711 F. Supp. at 524. These courts, thus, have concluded that the "last business activity" approach best supports legislative intent to include a principal place of business in the determination of a corporation's citizenship.
The Third Circuit, on the other hand, has focused on the present tense verb "has" and has determined that an inactive corporation has no principal place of business. Accordingly, it has held that an inactive corporation was only a citizen of the state of its incorporation. Midlantic Nat'l Bank v. Hansen, 48 F.3d 693, 698 (3rd Cir. 1995). The Midlantic court has decided that "the benefits of certainty and clarity which [is obtained] from the `bright line' approach we adopt outweigh the potential for the harm identified by the Second Circuit," i.e., subversion of statutory intent. Ibid.
Finally, the Fourth and Fifth Circuits have reached a middle conclusion. Instead of taking a bright-line approach, these circuits have held that a corporation that had been inactive for "a substantial amount of time" was a citizen only where it had been incorporated. Athena Automotive, Inc. v. Digregorio, 166 F.3d 288, 292-93 (4th Cir. 1999) (holding that three years sufficed as substantial amount of time); Harris v. Black Clawson Co., 961 F.2d 547, 551 (5th Cir. 1992) (holding that five years sufficed as substantial amount of time). These courts have recognized that a corporation's business "does not usually end with the abruptness of closing its doors. Even when a corporation has ceased all operations and has become inactive, the continuing impact of its business in a given locale could linger on to an extent sufficient to give it a geographical identity there as its principal place of business." Athena, 166 F.3d at 291. Thus, they have decided that "substantial amount of time" would be determined on a case-by-case basis. Athena, 166 F.3d at 291-92; Harris, 961 F.2d at 551. If a corporation has not been inactive for a substantial amount of time, then the courts have concluded that the place of its last business activity would be relevant in determining its principal place of business. Athena, 166 F.3d at 291-92; Harris, 961 F.2d at 551.
Defendants argue that the "no principal place of business" approach is a better interpretation of Congress's language than the "last business activity" approach, while Sellers argues the converse. Both approaches, however, may yield results at odds with the statute and its purpose. The "no principal place of business" approach would allow a corporation that ceased activities the day before a suit was filed to remove the action to federal court despite its local character and unlikelihood of prejudice in local courts. The "last business activity" approach may 1) ignore the possibility of a corporation who has ceased activity for such a time that there exists no local influence and 2) lead to the "odd result that an inactive corporation may be held to have its principle place of business in a jurisdiction in which it would never have been held to have its principal place of business while it was active." Harris, 961 F.2d at 551. Consequently, these approaches that categorically conclude whether an inactive corporation has or has not a principal place of business may subvert the underlying purpose of 28 U.S.C. § 1332(c)(1).
The Midlantic court admitted that such subversion of Congress's intent may occur by following its bright-line approach of no principal place of business for inactive corporations. Midlantic, 48 F.3d at 698.
The Court finds the functional approach of the Fourth and Fifth Circuits more persuasive. These decisions give the greatest deference to the entire language of the statute as well as legislative intent. The functional approach may also avoid the odd consequence of the two formalistic approaches. By considering the residual impact of an inactive corporation's prior business activities upon the locality at time of suit, the functional approach prevents a corporation that just became inactive remove the suit to federal court on diversity jurisdiction. Yet, it allows removal for an inactive corporation with no local connections or with a past principal place of business somewhere other than the place of its last activity. Finally, the facts in the present case are more similar to the Fourth and Fifth Circuit cases, where the inactive corporations had ceased operations for three to five years prior to commencement of suit. For these reasons, the Court will apply the functional approach.
In contrast, the "last business activity" cases dealt with fact situations where the corporation was still in the process of liquidating assets and discharging employees and the suit commenced within nine months of the corporation's decision to cease business activities. See China Basin, 818 F. Supp. at 1302; Comtec, 711 F. Supp. at 522.
BAF's Principal Place of Business
BAF is a citizen of California because its local character has not been lost by the passage of time. A review of the facts indicate that BAF retained local connections despite ceasing operations in April 1999. Prior to that time, California was BAF's principal and active place of business. BAF operated more than a dozen stores in California and its headquarters and offices were located in California. Between the start of its inactivity and the commencement of this suit in February 2001, less than two years later, BAF had not been dissolved and was still a corporation in good standing in California. BAF, therefore, presumably renewed its registration with the Secretary of State between 1999 and 2001 to retain its active status. See Cal. Corp. Code 2101. Evidence of BAF's active status with Secretary of State, despite that it is an inactive corporation, may support the conclusion that California is still its principal place of business. See Passalacqua, 933 F.2d at 141. In addition, BAF's president had a business address in California, was listed as agent for service of process, and was served with the complaint herein California. The president also admitted that some books and records pertaining to the former activities of BAF remained in California, although substantially all of them had been transferred to New York (Harter Decl. ¶ 9). It appears, therefore, that BAF still has an extant connection with California.
It is unclear from the record when after April 1999 the transfer took place and what duties, if any, the president had after BAF closed its offices.
Under California law, even if a corporation ceases operations and is dissolved, the corporation still exists "for the purpose of winding up its affairs, prosecuting and defending actions." Cal. Corp. Code 2010. In construing the statute, a California court determined that evidence of a former license to operate in California supports California's interests in protecting its citizens from possible wrongful acts by foreign corporations in the process of withdrawing from the state. See N. American Asbestos Corp. v. Superior Court, 180 Cal.App.3d 902, 907, 225 Cal.Rptr. 877, 880-81 (1986). N. American Asbestos held that an Illinois corporation that had been dissolved for two years may be sued under California law for activities that occurred in California while it was licensed to transact business in California. 180 Cal.App.3d at 912, 225 Cal.Rptr. at 887. Thus, California law views inactive and dissolved corporations as having local impact for at least two years.
Under Delaware law, "[a]ll corporations, whether they expire by their own limitation or are otherwise dissolved, shall nevertheless be continued, for the term of 3 years from such expiration, . . . bodies corporate for the purpose of prosecuting and defending suits." 8 Del. Code Ann. 278. Since BAF obtained a license to operate in California and remained registered in California and Delaware, less than two years of inactivity is not sufficient enough of time for it to be removed from local interests. California, therefore, remains BAF's principal place of business and is a citizen thereof Because BAF is a citizen of the forum state, defendants may not remove this case and instead this case must be remanded to state court.
Since BAF's citizenship is dispositive of the case, the Court does not address whether BAH is also a citizen of California. Defendants also argue that it is unfair to subject out-of-state defendants to local courts when the local defendants cannot counteract the local prejudice. Since the Court determined that there has not been substantial amount of time for BAF to lose its local character, defendants' arguments are not persuasive.