Federal Diversity Jurisdiction Over Inactive Corporation

Federal diversity jurisdiction when case involves an inactive corporation? The circuits are split.

Recently, in Holston Investments Inc. B.V.I. v. LanLogistics, Corp. [PDF here], the Eleventh Circuit Court adopted the simple diversity jurisdictional test that a dissolved corporation has no principal place of business, and is solely a citizen of the incorporation state. The Eleventh Circuit said the reason for their adoption of this bright line rules is because of the preference stated by the Supreme Court for making jurisdictional rules in Hertz Corp. v. Friend [PDF here]. Hertz adopted a new jurisdictional test for where a corporation has its principle place of business, and in doing so, said “simple jurisdictional tests are preferable even if application of the rule occasionally cuts against the basic rationale of diversity jurisdiction under 28 U.S.C.”

The circuits are split on this question of how to determine federal diversity jurisdiction when the corporation is inactive. There are now three different rules, with several circuits still to weigh in on the question.

  1. The Third Circuit, like the Eleventh Circuit in the Holston case, holds that a dissolved or inactive corporation is a citizen only of its incorporation state.
  2. Second Circuit applies a standard considering both the place the corporation last transacted business and the state of incorporation.
  3. The Fourth and Fifth Circuits apply a “total activity” test considering multiple factors such as the corporation’s past production or service activities and the place ultimately directing and controlling whatever remains of the corporation.

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