Supreme Court Rules On ‚ÄúPrincipal Place of Business‚ÄĚ Definition

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The U.S. Supreme Court recently found in favor of the Hertz Corporation in a case that tackled the definition of a corporation's "principal place of business."

Ruling on Hertz Corp. v. Friend et al., the high court sought to resolve different interpretations of the term and in the unanimous opinion, written by Justice Stephen Breyer, the court found that a corporation's "principal place of business" refers to "the place where the corporation's high level officers direct, control and coordinate the corporation's activities." Breyer went on to note that lower courts had referred to this place as the corporation's "nerve center," which the court believed would be found at a corporation's headquarters.

As previously covered in NACM's eNews, the original case was brought as a class action suit by Melinda Friend and John Nhieu in California state court. Hertz sought to have the case remanded to Federal court, claiming that because it and Friend et al. were citizens of different states, the higher court possessed diversity-of-citizenship jurisdiction. The original plaintiffs however claimed Hertz was a California citizen, an assertion that the district court agreed with, and was affirmed by the Ninth Circuit upon appeal by Hertz.

The Supreme Court overruled, stating that the "nerve center" test provides a more consistent and easily applicable rule for courts to rely on than a frequently used general business activities test, whose results are scattershot at best.

"The application of a more general business activities test has led some courts, as in the present case, to look, not at a particular place within a State, but incorrectly at the State itself, measuring the total amount of business activities that the corporation conducts there and determining whether they are significantly larger than in the next-ranking State," said Breyer. "Administrative simplicity is a major virtue in a jurisdictional statute. A ‚Äėnerve center' approach... is simple to apply comparatively speaking."

In addition to Hertz itself, the ruling was cheered by the Chamber of Commerce, the Business Roundtable and the American Trucking Association. It remains to be seen whether the "nerve center" test will be used in situations other than class action lawsuits, most notably in bankruptcy filings, where debtors have often bent the definition of "principal place of business" to "venue shop" their case to different courts in different states, often to the detriment of unsecured creditors.

Breyer made no mention of bankruptcy in the opinion, and noted that the court's ruling will hardly be the last word on the subject. "While there may be no perfect test that satisfies all administrative and purposive criteria, and there will be hard cases under the ‚Äėnerve center' test adopted today," he said, "this test is relatively easier to apply and does not require courts to weigh corporate functions, assets or revenues different in kind, one from another."

Jacob Barron, NACM staff writer


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