Comtec, Inc. v. National Technical Schools

• Decision Date: 11 April 1989
• Docket Number: No. CIV 88-1867 PHX CAM.,CIV 88-1867 PHX CAM.
• Citation: 711 F. Supp. 522
• Parties: COMTEC, INC., et al., Plaintiffs, v. NATIONAL TECHNICAL SCHOOLS, et al., Defendants.
• Court: U.S. District Court — District of Arizona

711 F. Supp. 522

COMTEC, INC., et al., Plaintiffs, v. NATIONAL TECHNICAL SCHOOLS, et al., Defendants.

No. CIV 88-1867 PHX CAM.

United States District Court, D. Arizona.

April 11, 1989.

M.E. Rake, Jr., O'Connor Cavanagh Anderson Westover Killingsworth & Beshears, Phoenix, Ariz., for plaintiffs and counter-defendants.

Gary L. Stuart, John A. Micheaels, Jennings, Strouss & Salmon, Phoenix, Ariz., for defendants and counter-claimant.

ORDER

MUECKE, District Judge.

Defendant United Education and Software removed this case to federal court on the basis of diversity jurisdiction. Plaintiff Comtec, Inc. (Comtec) moves to remand this case to state court, arguing that even though its business activity has ceased, its principal place of business is California.

BACKGROUND

Comtec is a Nevada corporation. In the complaint, Comtec stated that its principal place of business is in California. When Comtec was actively engaging in business, California accounted for fifty percent of its business. Comtec had four offices in California, one of which controlled payroll and accounts receivable; paid corporate bills; performed the computer operation for the entire corporation; and employed the largest number of workers. As of February, 1988, however, Comtec ceased its business activity and began "winding up old business." All Comtec offices were closed as early as September, 1988 and, at the latest, by November 1, 1988. The Carlsbad, California office was the last office closed. Although Comtec still owns some accounts receivable, it has not had any employees or owned any tangible assets anywhere since September, 1988.

The other plaintiffs, Bernard Robbins and Herbert Leber, are residents of Arizona. Defendant National Technical Schools is a Delaware corporation with its principal place of business in California. Defendant United Education and Software is a California corporation with its principal place of business in California.

Defendants removed this action on November 14, 1988. Comtec timely filed this motion to remand.

ANALYSIS

When an action is removed on the basis of diversity jurisdiction, the requisite diversity must exist at the time of removal. See Miller v. Grgurich, 763 F.2d 372, 373 (9th Cir.1985) (Kennedy, J.). Generally, the Court can examine the notice of removal and the complaint to determine whether the requisite diversity exists. See Powers v. Chesapeake & Ohio Ry., 169 U.S. 92, 101, 18 S.Ct. 264, 267, 42 L.Ed. 673 (1898) (court should examine the notice of removal to determine if diversity exists); Miller, 763 F.2d at 373 (court should examine notice of removal and complaint). The burden of establishing jurisdiction is upon the party seeking removal. See Emrich v. Touche Ross & Co., 846 F.2d 1190, 1195 (9th Cir. 1988). The removal statute is to be strictly construed against removal jurisdiction. See id.

Under 28 U.S.C. § 1332(c), a corporation is a citizen of the state of its incorporation and the state where it has its principal place of business. The issue here is whether Comtec has a principal place of business and, if so, where that principal place of business should be. The resolution of this issue requires an analysis of the legislative history of § 1332(c) and the cases cited by the parties.

A. Legislative History

Over ninety years ago, the Supreme Court held that for purposes of diversity of citizenship, a corporation is a citizen of the state in which it is incorporated. See St. Louis and S.F. Ry. Co. v. James, 161 U.S. 545, 562, 16 S.Ct. 621, 627, 40 L.Ed. 802 (1896); see also Louisville, Cincinnati & Charleston R.R. Co. v. Letson, 43 U.S. (2 How.) 497, 555, 11 L.Ed. 353 (1844) (holding that a corporation created by a state is an artificial person inhabiting that state). In the 1950's, Congress became concerned with the ease with which corporations removed cases to federal court based solely on their place of incorporation. See Jurisdiction of Federal Courts Concerning Diversity of Citizenship: Hearings on H.R. 2516 and H.R. 4497 Before Subcomm. No. 3 of the House Comm. on the Judiciary, 85th Cong., 1st Sess. 8 (1957) (statement of Rep. Ashley) (hereinafter Hearings on H.R. 2515 and 4497); 104 Cong.Rec. 12683-85 (1958). Congress acknowledged the fact that the state of incorporation is often chosen for tax purposes. See S.Rep. No. 1830, 85th Cong., 2d Sess., reprinted in 1958 U.S.Code Cong. & Ad.News 3099, 3102. The debate on the floor of the House, the discussions in congressional committees, and the statements made to the Judicial Conference of the United States, all centered around the perceived evil of allowing an essentially local corporation to remove a case to federal court simply because the corporate charter was obtained in another state. See S.Rep. No. 1830, reprinted in 1958 U.S.Code Cong. & Ad.News, at 3101-02; 104 Cong.Rec. 12683, 12685 (1958) (statement of Rep. Celler); Hearings on H.R. 2515 and 4497, at 8 (statement of Rep. Ashley); Report of Committee on Jurisdiction and Venue, reprinted in 1958 U.S.Code Cong. & Ad. News 3114, 3120. To remedy this problem, Congress amended 28 U.S.C. § 1332(c) in 1958.

In amending § 1332(c), Congress rejected a proposal that a corporation would be a citizen of every state in which it is doing business and a proposal that a corporation would be a citizen of a state in which it receives more than one half of its gross income.¹See 13B C. Wright, A. Miller & E. Cooper Federal Practice and Procedure § 3624, at 604 (2d ed. 1984) (hereinafter Wright & Miller); see also Hearings on H.R. 2515 and 4497, at 36 (statement of Judge Maris²) (the Judicial Conference rejected the fifty percent test because its application would be difficult and would require evidence); Report of Committee on Jurisdiction and Venue of the Judicial Conference of the United States, reprinted in 1958 U.S.Code Cong. & Ad.News, 3114, 3119-20 (discussing why it is not advisable to make corporations citizens of the states in which they do business and the merits of the one half of gross income standard). Congress amended § 1332(c) to make a corporation a citizen of both its state of incorporation and its principal place of business. The statute contains the implicit assumption that all corporations have a principal place of business. See Inland Rubber Corp. v. Triple A Tire Serv., Inc., 220 F.Supp. 490, 494 (S.D.N.Y.1963).

B. Judicial Interpretations of § 1332(c)

The Court has found only a few cases dealing with factual situations similar to the one here. The cases that the Court found, or that the parties have cited, are split as to the resolution of this matter.

Defendants urge this Court to adopt a line of cases that holds that when a corporation has ceased business activity, diversity jurisdiction is determined only by reference to the state of incorporation. See Gavin v. Read Corp., 356 F.Supp. 483, 486 (E.D.Pa.1973). While it may be refreshing for courts to acknowledge the fact that a corporation in the process of winding down does not truly have a principal place of business,³ see Sanders Co. Plumbing and Heating, Inc. v. B.B. Anderson Constr. Co., Inc., 660 F.Supp. 752, 756 (D.Kan. 1987), such a conclusion is inconsistent with the language of § 1332(c), the clear intent of Congress, and earlier bankruptcy cases interpreting the phrase "principal place of business."

Section 1332(c) states that corporate diversity is based on both the place of incorporation and principal place of business. By using the conjunction "and," Congress intended for all of the requirements of the statute to be fulfilled. See S.Rep. No. 1830, reprinted in 1958 U.S.Code Cong. & Ad.News, at 3102 ("corporation shall be regarded not only as a citizen of the State of its incorporation, but also as a citizen of the State in which it maintains its principal place of business"); 104 Cong.Rec. at 12684 (statement of Rep. Cellar) (statute requires that both standards be satisfied); see also New Hampshire Auto. Dealers Ass'n v. General Motors Corp., 620 F.Supp. 1150, 1157-58 (D.N.H.1985) (use of conjunction "and" requires all elements to be present); 1A N. Singer, Sutherland Statutory Construction § 21.14 (Sands 4th ed. 1985) (same). The conclusion that a defunct corporation has no principal place of business disregards one element that is a prerequisite to diversity jurisdiction.

The conclusion that a defunct corporation has no principal place of business also conflicts with the intent of Congress. Under such a rule, a defunct corporation, no matter how local in character, could remove a case to federal court based on its state of incorporation. See Puerto Rico Maritime Shipping Auth. v. Star Lines, Ltd., No. 78 Civ 602 (WCC) (S.D.N.Y. Nov. 22, 1979) (cited in Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 608 F.Supp. 1261, 1263 (S.D.N.Y.1985)). The clear intent of Congress in enacting the 1958 amendment was to prohibit such maneuvers. See S.Rep. No. 1830, reprinted in 1958 U.S.Code Cong. & Ad.News, at 3101-02; 104 Cong.Rec. 12683, 12685 (1958) (statement of Rep. Celler); Hearings on H.R. 2515 and 4497, at 8 (statement of Rep. Ashley); Report of Committee on Jurisdiction and Venue, reprinted in 1958 U.S. Code Cong. & Ad.News 3114, 3120.

In Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 608 F.Supp. 1261 (S.D.N.Y.1985), the district court held that the principal place of business of a corporation that is inactive at the beginning of a lawsuit is the state of the corporation's last business activity. 608 F.Supp. at 1263. Passalacqua is a more recent pronouncement of a rule announced by the Second Circuit over forty years ago.

In Fada of New York, Inc. v. Organization Serv. Co., 125 F.2d 120 (2d Cir.1942) (per curiam), the Second Circuit rejected the argument of the bankrupt that the district court lacked jurisdiction because New York was not a place of business at least six months preceding the filing of the bankruptcy petition. Because New York had been a...