3123 Smb LLC v. Steven Horn
880 F.3d 461
9th Cir.2018Background
- 3123 SMB LLC (Missouri LLC) owned a Santa Monica, CA property and sued former attorney Steven Horn (CA citizen) for legal malpractice after dismissal of related state litigation. 3123 SMB’s sole member was Washington LLC (controlled by Anthony Kling).
- Mary and Anthony Kling (both CA residents) created Lincoln One Corporation in Missouri about one month before 3123 SMB filed this suit; Lincoln One then became 3123 SMB’s sole member.
- Lincoln One is a holding company with no employees or operations besides directing 3123 SMB at annual board meetings; its registered agent and corporate records are in Clayton, Missouri. At the time suit was filed Lincoln One had done nothing but incorporate and had not yet held a board meeting.
- The district court dismissed for lack of diversity, finding Lincoln One’s principal place of business (nerve center) was California and therefore diversity was absent.
- The Ninth Circuit majority reversed conditionally, concluding that a newly formed holding company’s principal place of business is the place where it holds (or has designated to hold) board meetings—here, Missouri—unless evidence shows direction occurs elsewhere or there was jurisdictional manipulation or an alter-ego relationship.
- The case was remanded for the district court to decide in the first instance whether Lincoln One and 3123 SMB are alter egos or whether Lincoln One’s formation constituted jurisdictional manipulation that would change citizenship analysis.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Principal place of business for a minimally active holding company | Nerve center is where the corporation’s board meetings are held / registered office (Missouri) | Nerve center is where officers actually direct/control (California, where officers live and asset is located) | Majority: For a newly formed, passive holding company, use location of board meetings (or designated meeting place) as nerve center absent contrary evidence; reversed dismissal. |
| Effect of no activities between incorporation and filing | Designated meeting site (even if meeting not yet occurred) can establish nerve center | Only actual direction at time of filing counts; absence of activity means nerve center is where officers are located | Majority: Scheduled/anticipated board-meeting location can establish nerve center if record shows meetings will be held there and no direction occurs elsewhere. |
| Alter-ego and jurisdictional manipulation concerns | Incorporation in MO and ties to MO legitimate; same officers alone do not prove alter-ego | Formation timed to manufacture diversity; transfer of membership to new MO corporation suggests manipulation | Majority: Remand for district court to consider alter-ego or manipulation; if shown, treat true place of direction as nerve center. |
| Burden and timing of proof for jurisdiction | Plaintiff may show jurisdictional facts by submitted materials and testimony | Defendant relies on presumption against federal jurisdiction and contemporaneous control evidence | Court: Plaintiff met initial showing that suffices to avoid dismissal; credibility and disputed facts left to district court on remand. |
Key Cases Cited
- Hertz Corp. v. Friend, 559 U.S. 77 (2010) (defines corporation’s principal place of business as the single “nerve center” where high-level officers direct, control, and coordinate activities)
- Johnson v. SmithKline Beecham Corp., 724 F.3d 337 (3d Cir. 2013) (holding company nerve center analysis looks to board meeting location for passive holding companies)
- Taber Partners I v. Merit Builders, Inc., 987 F.2d 57 (1st Cir. 1993) (focus principal-place inquiry on the corporation’s own activities, not those of its subsidiaries)
- Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567 (2004) (jurisdiction depends on the state of things at the time the action is brought)