Turnamics, Inc. v. Advanced Envirotech Systems

• Decision Date: 26 May 1999
• Docket Number: No. CIV. 1:98CV274.,CIV. 1:98CV274.
• Citation: 54 F.Supp.2d 581
• Court: U.S. District Court — Western District of North Carolina
• Parties: TURNAMICS, INC.; Gregory Patrick Justus; Patricia Lynn Justus; Ronald Parker; Trudy Parker; Harvey Speigel; and Sterling Trust Company, a Texas Corporation and Trustee for IRA Account 34287 of Gregory Patrick Justus, as Trustee only, Plaintiffs, v. ADVANCED ENVIROTECH SYSTEMS, INC., a Texas Corporation; Cambridge Financial Corporation, Inc., a Texas Corporation; Matthew Fleeger; Michael Moorhead; Lonn Smallwood; Beverly Fleeger; and Bruce Rocket, Defendants.

54 F.Supp.2d 581

TURNAMICS, INC.; Gregory Patrick Justus; Patricia Lynn Justus; Ronald Parker; Trudy Parker; Harvey Speigel; and Sterling Trust Company, a Texas Corporation and Trustee for IRA Account 34287 of Gregory Patrick Justus, as Trustee only, Plaintiffs, v. ADVANCED ENVIROTECH SYSTEMS, INC., a Texas Corporation; Cambridge Financial Corporation, Inc., a Texas Corporation; Matthew Fleeger; Michael Moorhead; Lonn Smallwood; Beverly Fleeger; and Bruce Rocket, Defendants.

No. CIV. 1:98CV274.

United States District Court, W.D. North Carolina, Asheville Division.

May 26, 1999.

Albert L. Sneed, Jr., Asheville, NC, for plaintiffs.

Matthew P. McGuire, Ann Meredith Barton, T. Thomas Cottingham, III, Hunton & Williams, Raleigh, NC, Mikel J. Bowers, Capshaw, Weiland, Goss & Bowers, L.L.P., Dallas, TX, for defendants.

MEMORANDUM AND ORDER OF REMAND

THORNBURG, District Court J.

THIS MATTER is before the Court on the Plaintiffs' objections to the Memorandum and Recommendation of United States Magistrate Judge Max O. Cogburn, Jr. Pursuant to standing orders of designation and 28 U.S.C. § 636, the undersigned referred the Plaintiffs' motion to remand, the Defendants' motions to dismiss or, in the alternative, to transfer venue to the Magistrate Judge for a recommendation as to disposition. Plaintiffs timely filed objections to the Magistrate Judge's recommendation that the motion to remand be denied. Having conducted a de novo review of those portions of the Memorandum and Recommendation to which specific objections have been filed, the Court grants the Plaintiffs' motion to remand. 28 U.S.C. § 636(b).

In late November 1998, Plaintiffs brought suit in the General Court of Justice, Superior Court Division of Buncombe County, North Carolina, alleging violations of the North Carolina Securities Act, fraud and misrepresentation and negligent misrepresentation. At issue are representations made to induce the purchase of shares of Advanced Envirotech Systems, Inc., a corporation in the business of medical waste disposal. Defendants removed the action to federal court alleging diversity jurisdiction. Plaintiffs have moved to remand the case to state court, claiming a lack of diversity.

By statute, diversity jurisdiction exists in civil actions involving more than $75,000 between citizens of different states. 28 U.S.C. § 1332(a)(1). A corporation is deemed to be a citizen of the state in which it is incorporated and of the state where it has its principal place of business. 28 U.S.C. § 1332(c)(1). All of the Defendants are Texas residents. The Plaintiffs are residents of North and South Carolina with the exception of Sterling Trust Company (Sterling) which is a Texas corporation with no offices outside that state.

Despite the language of the diversity statute, "a federal court must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy." Navarro Sav. Ass'n v. Lee, 446 U.S. 458, 461, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980). Defendants claim Sterling is only a nominal party which holds the IRA account of Plaintiff Gregory Justus. Plaintiffs argue Sterling is a real party in interest because it must represent the interests of the beneficiaries named in the trust.

Plaintiffs accurately note that Internal Revenue Service regulations require Individual Retirement Accounts to be placed in trust with a fiduciary or bank. See, e.g., 26 C.F.R. § 1.408-2(e). And, here Sterling actually owns the stock issued from Advanced Envirotech Systems, Inc. The trust agreement with Sterling provides "that it is the individual's sole responsibility to manage the investment of this IRA; [] Sterling Trust has no responsibility to question any investment directions given by the individual regardless of the nature of the investment; [] Sterling Trust is in no way responsible for providing investment advice ...." Plaintiff's Exhibit A attached to Motion to Remand. However, if investment directions are not given, the Trustee is authorized to invest the contents of the IRA in a money market account. Id. Based on this wording, the Defendants maintain Sterling is not a real party in interest, citing Navarro, supra.

That case, however, is inapposite because it involved an unincorporated business trust, not a corporate trustee as here. The issue in Navarro was whether the individual trustees could invoke diversity jurisdiction based on their citizenship rather than that of the beneficiaries of the trust. The Supreme Court held that a trustee is a real party to the controversy when he possesses customary powers "to hold, manage and dispose of assets for the benefit of others." Navarro, 446 U.S. at 464, 100 S.Ct. 1779. If such is the case, the trustee's citizenship instead of that of the beneficiaries is used to determine diversity jurisdiction.

However, the Navarro Court noted its ruling would be inapplicable in the context of corporate parties. Id., at nn. 10, 11 ("When [persons suing by a corporate name] are said to be substantially the parties to the controversy, the court does not mean to liken it to the case of the trustee."). Ten years later, the Court noted the narrow holding in Navarro in Carden v. Arkoma Assoc., 494 U.S. 185, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990), stating, "[t]hat case [Navarro], however, did not involve the question whether a party that is an artificial entity other than a corporation can be considered a `citizen' of a State, but the quite separate question whether parties that were undoubted `citizens' [] were the real parties to the controversy." Id., at 191, 110 S.Ct. 1015. Thus, contrary to the Defendants' position, Navarro does not control this case which involves a corporate trustee.

As previously noted, the diversity statute provides that a corporation is a citizen of any state in which it is incorporated and of the state where it has its principal place of business. The parties here do not dispute that Sterling is a Texas corporation. Plaintiffs' Motion to Remand. Thus, for purposes of the statute Sterling is a Texas corporation, leaving the next issue of where it has its principal place of business. The parties also do not dispute that Sterling's principal place of business is in Waco, Texas, and that it has no offices located out of the state. Id. The Fourth Circuit uses two tests to determine the principal place of business of corporations: the "nerve center" and "place of operations" tests. Peterson v. Cooley, 142 F.3d 181, 184 (4th Cir.1998).

The place of operations test presumes the existence of physical operations by which a corporation's presence in different states can be measured. As a result, the test is applied when a company has multiple centers of manufacturing, purchasing, or sales. By contrast, a corporation engaged primarily in the ownership and management of investment assets such as debt or equities is not really geographically bound. Because such corporations can readily transfer and move their investment assets, a jurisdictional test focusing on the location of operations makes little sense. [Sterling] is essentially a passive investment vehicle. [Plaintiff Justus' used it to allow his IRA account] to acquire and own the [stock]. Accordingly, [Sterling] does not have any manufacturing plants, purchasing centers, or sales facilities — the normal indicia of a corporation's place of operations. [Sterling] owns only the...