On January 17, 2018, on an issue of first impression, the US Court of Appeals for the Ninth Circuit held in 3123 SMB LLC v. Horn that, for purposes of diversity jurisdiction, a recently-formed holding company's principal place of business is the place where it will hold its board meetings, regardless of whether any meetings have yet to occur, unless evidence shows the corporation is directed from somewhere else ( (Jan. 19, 2018)).
In 2011, Anthony Kling and Mary Kling organized 3123 SMB as a limited liability company (LLC) registered with the Missouri Secretary of State. In 2012, the Klings transferred their ownership of a vacant parcel in Santa Monica, California to 3123 SMB. Only the Klings were authorized to act on the LLC's behalf.
In September 2014, Mary Kling organized Lincoln One LLC as a new holding company with its address in Clayton, Missouri. Lincoln One then acquired 3123's sole membership. Shortly thereafter, 3123 sued Horn in the US District Court for the Central District of California for legal malpractice stemming from a prior state court lawsuit concerning damage to the Santa Monica property. Horn was a resident of California, and therefore, diversity jurisdiction was the basis for bringing the action in federal court. Anthony Kling testified, and the LLC's filings showed, that Lincoln One planned to hold meetings in Clayton, MO to approve directors, but it had not held any meetings before the case was filed.
Horn moved to dismiss for lack of subject matter jurisdiction and the district court agreed, holding that the principal place of business of Lincoln One, 3123 SMB's holding company, was California. The court reasoned that Mary Kling, Lincoln One's only officer, was a resident of California, and the court found no evidence that Lincoln One's activities were directed, controlled, or coordinated from Missouri. The district court dismissed and 3123 SMB appealed.
On appeal, the Ninth Circuit noted that under the "nerve center" test established by the Supreme Court in Hertz Corp. v. Friend, a corporation's principal place of business should normally be its headquarters, as long as the corporation actually directs, controls, and coordinates its business from its headquarters (559 US 77, 80 (2010)). The Ninth Circuit had yet to apply the Hertz "nerve center" test to a holding company, which exists only to hold interests in other companies, and often has very little business to direct, control, or coordinate. Here, Lincoln One had not conducted any business prior to filing the federal court action.
The Ninth Circuit reasoned that a rule presuming that a holding company directs its business from its officers' residences would potentially make a court choose from several states. Also, a corporation's nerve center is a single place within a state, not an entire state, potentially requiring a court to choose a single nerve center among each of the decision-makers' respective residences. Therefore, the Ninth Circuit held that a holding company's principal place of business is presumptively where it holds or will hold board meetings, subject to contrary evidence.
Finding that Lincoln One's principal place of business was presumptively Missouri, the Ninth Circuit conditionally reversed the district court and remanded, noting that on remand the district court was free to consider whether there was jurisdictional manipulation or an alter ego relationship between Lincoln One and 3123 SMB.
