Corporate Citizenship

A corporation is not a citizen of any State, though the law treats it for jurisdictional purposes as if it were.¹ The domicile test that fits individuals has nothing to measure here, since a corporation has no residence to examine and no intention to form. Section 1332(c)(1) substitutes two facts that courts can verify without asking about anyone's state of mind: a corporation is deemed a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business.²

That definition changes the arithmetic of the complete-diversity comparison. An individual contributes one State to the caption, because a person has one domicile; a corporation can contribute several. Each State of incorporation counts, and the principal-place-of-business State counts besides. Because the Strawbridge rule fails a case whenever any State appears on both sides of the caption, the court tests every one of the corporation's States against every opposing party, and an adversary who is a citizen of any one of them defeats complete diversity.³

The two anchors capture different ties. The charter names the State that created the company, which may be a State where the company has no office and no employee. The principal place of business names the place where the company actually operates. Counting both makes a corporation local wherever it is rooted, and Congress added the second anchor for that reason, as the history below shows.

The subsection's general rule speaks only of corporations, so an unincorporated business does not take its citizenship from it; the next section of this chapter covers the rule that governs those entities. This section proceeds in three steps: the dual citizenship rule itself, the Supreme Court's test for locating the principal place of business, and the exception that § 1332(c)(1) makes for liability insurers sued directly by an injured person.⁴

Dual Citizenship Rule

Section 1332(c)(1) tells a court which citizenships to count for a corporate party. A corporation is a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business.⁵ The definition governs removal under § 1441 as well as original jurisdiction under § 1332, so the same list applies whether a corporation is sued in federal court at the outset or tries to move a state-court case there.⁶ The wording of the two anchors carries part of the rule. The statute reaches every State of incorporation but only the State of the principal place of business, and courts read that singular to mean that a corporation has one principal place of business and no more.⁷ Most corporations therefore hold two citizenships, one by charter and one by principal place of business, and a company incorporated in several States holds more.

Both anchors count at once, so the court tests each of the corporation's States against every opposing party, and a citizen of either State defeats diversity.⁸ Neither side may choose the more convenient citizenship. A company incorporated in France with its principal place of business in New York City is a citizen of both France and New York, and a court must count both in assessing diversity.⁹ The same company therefore cannot be sued under § 1332 by a New York citizen, and a plaintiff who fits a case into a pattern by ignoring one of the corporation's two citizenships has misread the statute.

The statute says deemed because a corporation is not itself a citizen of any State, and that has a consequence for pleading. A complaint should not allege that a corporate party is a citizen of a State. It should allege the State where the corporation was incorporated and the State where it has its principal place of business.¹⁰

Corporations did not always carry two citizenships. Until 1958 they were held to be citizens only of the State of incorporation, regardless of where they conducted their daily business.¹¹ That rule invited manipulation. Through its choice of the State of incorporation, a corporation could open the federal courts' doors in a State where it conducted nearly all its business by filing incorporation papers elsewhere.¹² By 1928 the rule was so firm that, in Black and White Taxicab & Transfer Co. v. Brown and Yellow Taxicab & Transfer Co., a company closely identified with one State could proceed in federal court there because it had filed its incorporation papers in another.¹³ The result cut against the purpose of diversity jurisdiction. A company that does nearly all its business in one State faces no genuine risk of out-of-state bias there, so nothing justified a federal forum, and that absence of justification persuaded Congress to act in 1958.¹⁴

Congress added the State of the principal place of business to the State of incorporation, so that the provision now treats the corporation as a citizen of both.¹⁵ The charter remains a real tie to the State that created the company, which is why the statute layers the new anchor on top of the old one. Silver Mining, incorporated in Delaware with its principal place of business in Nevada, shows the effect. It is now a citizen of both States, so diversity jurisdiction no longer exists over a case between it and a Nevada citizen.¹⁶ It may do a great deal of business in Wyoming, but it is a citizen of Nevada and not of Wyoming.¹⁷ Corporations are consequently harder to fit within diversity jurisdiction than individuals, because an adversary must differ from every State the corporation holds.¹⁸

The statute also reaches foreign states. A corporation is a citizen of every foreign state of incorporation and of the foreign state of its principal place of business, exactly as it is of any State that fills those roles.¹⁹ The French company headquartered in New York is thus both a French and a New York citizen, and a New York plaintiff cannot invoke diversity against it.²⁰ How a foreign citizen on the opposing side changes the analysis belongs to the later section on alienage jurisdiction.

One kind of corporation has no State of incorporation at all. A national bank obtains its charter from the federal government rather than from any State, so the first anchor has nothing to count, and in Wachovia Bank v. Schmidt the Supreme Court held that a national bank is a citizen only of the State in which it has its main office.²¹ Branches in other States add nothing, which makes the national bank one of the few corporate parties with a single State to compare.

The second anchor demands the same care. A corporation with enormous facilities in two States still has only one principal place of business, and the court must choose between them.²² The next subsection teaches the test that makes the choice.

The Nerve Center Test

The statute gives a corporation citizenship in “the State or foreign state where it has its principal place of business,” but it never says what makes one place the principal one.²⁴ The Supreme Court filled the gap in Hertz Corp. v. Friend. The principal place of business, the Court held, is the place where the corporation's officers direct, control, and coordinate its activities, which courts of appeals had long called its “nerve center” and which will normally be its headquarters.²⁵ The holding fixes only the second of the two anchors described in the last subsection. The corporation remains a citizen of every State where it is incorporated, and the nerve center adds one State to that list without displacing the charter State.

Hertz began as a wage-and-hour suit. In September 2007 two California citizens sued Hertz in a California state court for alleged violations of California's wage and hour laws, seeking relief for a potential class of California citizens. Hertz removed the case on the ground that the parties were citizens of different States, and the plaintiffs answered that Hertz was a California citizen like themselves, which would have defeated diversity.²⁶ Hertz supported removal with a declaration. California, with about 12% of the Nation's population, held 273 of Hertz's 1,606 car rental locations, about 2,300 of its 11,230 full-time employees, about $811 million of its $4.371 billion in annual revenue, and about 3.8 million of its approximately 21 million annual transactions. Hertz operated in 44 States, and its leadership and core executive and administrative functions sat at corporate headquarters in Park Ridge, New Jersey.²⁷

The district court accepted those facts and still held Hertz a California citizen, because Ninth Circuit precedent told it to measure a corporation's business activity State by State.²⁸ Under that precedent a State whose activity substantially predominated was the principal place of business, and only when no State stood out did a court turn to where executive and administrative functions were performed. California held a plurality of every relevant activity, so the court found diversity lacking and remanded, and the Ninth Circuit affirmed.²⁹ The result shows how little the activity test asked about who ran the company. Roughly one in six of Hertz's rental locations and about a fifth of its employees were in California, and a plurality that modest made Hertz a California citizen even though the court accepted that its leadership sat in New Jersey.

The circuits had divided over the question, and the Court granted review to resolve the division.³⁰ Before Hertz the courts of appeals followed three approaches:

the nerve center test, which looks to the locus of corporate decision-making authority and overall control;
the corporate activities, or “muscle,” test, which looks to where the corporation's production or service activities take place; and
the total activity test, a hybrid of the other two.³¹

The Court chose the first. It returned to, and expanded, the approach that Judge Weinfeld used and the Seventh Circuit applied, reading “principal place of business” to mean the place where the corporation's officers direct, control, and coordinate its activities.³² The nerve center will normally be the headquarters, provided the headquarters is the actual center of direction, control, and coordination and not simply an office where the corporation holds board meetings attended by directors and officers who have traveled there for the occasion.³³

Applied to Hertz, the unchallenged declaration suggested that the center of direction, control, and coordination and the corporate headquarters were one and the same, and that the place was New Jersey, not California.³⁴ The Court vacated and remanded so that the plaintiffs would have a fair opportunity to litigate in light of the new holding. If the declaration holds up, Hertz, which is incorporated in Delaware, is a citizen of Delaware and New Jersey and is diverse from California plaintiffs however large its California rental business is.³⁵

The Court gave three reasons for the test, and each one shows how it works. The statutory text comes first. The word “place” is singular, not plural, and the word “principal” asks the court to pick out the main, prominent, or leading place.³⁶ A single place within a State fits a headquarters. It does not fit an activity test, which totals a corporation's business in each State and asks whether one State's total is larger than the next. That inquiry measures the State rather than a place within it, and it leaves the Court asking why diversity jurisdiction should turn on a State's population, whether measured directly or proportionately.³⁷

Administrative simplicity is the second reason, and it carries special weight because the question is jurisdictional. Complex jurisdictional tests eat up time and money as the parties litigate, not the merits of their claims, but which court is the right one to decide them.³⁸ The nerve center test points courts in a single direction, toward the center of overall direction, control, and coordination, and spares them from weighing corporate functions, assets, or revenues that differ in kind from one another.³⁹

The drafting history is the third reason. The committee that proposed the 1958 language first considered making a corporation a citizen of any State from which it received more than half of its gross income. After that proposal drew criticism, the committee substituted “principal place of business,” a simpler and more practical formula with a precedent in the Bankruptcy Act.⁴⁰ A committee representative told the House Judiciary Committee that bankruptcy courts had generally treated the principal place of business as an actual rather than a theoretical or legal one, the place where business operations are coordinated, directed, and carried out. That place would ordinarily be where the officers carry on the day-to-day business, not necessarily a State in which a big corporation has a plant.⁴¹ The drafters therefore considered a revenue-based rule and chose one tied to where the business is really run.

The Court did not claim the test is perfect. In this era of telecommuting, some corporations divide their command and coordinating functions among officers who work at several locations and communicate over the Internet, and finding one center will be hard for them, although the question the court asks remains a single one about where overall direction sits.⁴² The Court also conceded that the test can cut against the reason for diversity jurisdiction. Suppose the bulk of a company's visible business takes place in New Jersey while its top officers direct that business from New York. The company, assuming it is not incorporated in New Jersey, is a New York citizen that can remove a New Jersey state-court case, where the public is arguably less likely to be prejudiced against it. It cannot remove a New York case, where the public presumably is.⁴³ The Court accepted that anomaly as the price of a clearer rule, since accepting occasionally counterintuitive results avoids overly complex jurisdictional administration.⁴⁴

Exam questions usually test the rule by setting a headquarters against a bigger operation elsewhere. An airline incorporated in Massachusetts with its corporate headquarters there, but with its main booking terminal, reservation center, and most of its employees in Arizona, is a citizen of Massachusetts alone, so an Arizona plaintiff who sues it is diverse; the concentration of assets, activities, and employees in Arizona does not make Arizona its principal place of business.⁴⁵ A trucking company that is a citizen of Michigan and Delaware through its headquarters and its incorporation does not become a Florida citizen by doing most of its business there.⁴⁶ Because the statute allows only one principal place of business, heavy operations in a second State, like Silver Mining's in Wyoming, add no second citizenship.⁴⁷

The test turns on facts about where officers work, so the party invoking federal jurisdiction must establish them. That party carries the burden of persuasion and must support challenged allegations with competent proof. The Court refused to treat a bare filing, such as a form listing the corporation's principal executive offices, as enough without more, because a rule that easy would permit jurisdictional manipulation and subvert a major reason for adding the principal-place-of-business language to the statute.⁴⁸ If the record shows that the claimed nerve center is a mail drop box, a bare office with a computer, or the site of an annual executive retreat, the court should take the place of actual direction, control, and coordination as the nerve center instead.⁴⁹

Hypothetical Illustration

A clothing wholesaler incorporated in Nevada describes its headquarters as a suite in Reno, where a clerk receives mail and the board gathers once a year. Its chief executive, chief financial officer, and purchasing directors work every day from an office in Salt Lake City, where they set prices, approve budgets, and direct the regional managers. A Utah citizen sues the wholesaler in a Utah state court, and the wholesaler removes the case, relying on the Reno address to claim that it is a citizen of Nevada alone. The court looks past the address to the place of actual direction, which is Salt Lake City. The wholesaler is therefore a citizen of Nevada and Utah, it shares a State with the plaintiff, and the case returns to state court. Had the same officers worked from the Reno suite and the board met there as a matter of routine, Reno would be the nerve center even though every store stood in Utah, and the wholesaler would be diverse from a Utah plaintiff.

The test reads off function, so an address chosen with litigation in mind carries no weight when the officers run the business from somewhere else.

Exam Analysis Steps

Because the test asks where a corporation is run rather than where it is busiest, apply it in a fixed order that keeps the natural instinct out of the analysis:

List every State and foreign state in which the corporation is incorporated, since each counts as a citizenship whatever the nerve center turns out to be.
Identify the place where the corporation's high-level officers direct, control, and coordinate its activities, starting with the location of its headquarters.
Confirm that the headquarters is the actual center of direction rather than a site for occasional board meetings, a mail drop, a bare office with a computer, or the place of an annual executive retreat. If it is not, use the place where the direction really occurs.
Set aside where the corporation has the most stores, employees, revenue, or customers, because activity in a State does not make that State the principal place of business.
Add the State found in step three to the States from step one, compare that list with the citizenship of every opposing party, and remember that the party invoking jurisdiction must be able to prove these facts with competent evidence.

The fourth step is where most errors occur, because the natural instinct is to count where the company does the most business, and the Court rejected exactly that approach. A single opposing party who is a citizen of any State on the final list in step five defeats complete diversity, so the nerve center matters only when it changes that list.

Insurers in Direct Actions

One sentence of § 1332(c)(1) both defines corporate citizenship and carves an exception out of it. In any direct action against the insurer of a policy or contract of liability insurance, whether the insurer is incorporated or unincorporated, to which the insured is not joined as a party-defendant, the insurer is deemed a citizen of three sets of places.⁵¹ A direct action is a suit in which the plaintiff sues the insurer itself on its obligation, rather than suing only the insured and looking to the insurer to pay the judgment. The three sets are every State and foreign state of which the insured is a citizen, every State and foreign state by which the insurer has been incorporated, and the State or foreign state where the insurer has its principal place of business.⁵² The second and third are the anchors every corporation already carries, so the exception adds a single item: the insurer keeps its own citizenships and borrows the insured's as well.

The function of the borrowed citizenship shows in the caption. In a direct action the insurer owes the plaintiff only because the insured is answerable to the plaintiff, yet a State that permits direct suits lets the plaintiff name the insurer alone. Without the exception, a plaintiff could leave out the insured and sue an insurer chartered and headquartered elsewhere, turning a dispute between co-citizens into a diverse case through the drafting of the complaint. With the exception, the insured's State appears on the defendants' side of the caption whether or not the plaintiff names the insured, so the jurisdictional result no longer depends on that choice.

The exception applies only when two conditions hold together: the action is a direct action against the insurer, and the insured is not joined as a defendant. A student who adds the insured's State to every insurer's list whenever an insurer appears in a caption has skipped both conditions. An exam stem will usually supply the pedestrian's State, the driver's State, and the insurer's charter and headquarters, and the first question to ask is whether the driver is a party.

Joining the insured switches the exception off, because the statutory condition that the insured not be a party-defendant no longer holds.

The two scenes reach the same jurisdictional result by different routes. In the first, the borrowed citizenship supplies the overlap that the missing driver would otherwise have supplied. In the second, the driver supplies it directly. That equivalence is the design of the exception, and a complete answer names which route applies.

The text also limits the exception from the other direction. It speaks of a direct action against the insurer, so a suit that the insurer itself brings falls outside its words.⁵³ In that setting the insurer is an ordinary corporation with the citizenships taught in the preceding subsections.