Federal Lawsuit Dismissed Where Plaintiffs Engaged in Jurisdictional Manipulation

Federal Lawsuit Dismissed Where Plaintiffs Engaged in Jurisdictional Manipulation

Trépanier Tajima LLP successfully obtained two dismissals of a lawsuit against its defendant client (a California resident) by attacking the diversity subject matter jurisdiction of the federal court system over the issues raised by the plaintiff entities in the complaint. 

Understanding jurisdictional manipulation necessitates a general overview of federal jurisdiction.

“Federal courts have diversity jurisdiction over all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between–(1) citizens of different States; (2) citizens of a State and citizens or subjects of a foreign state . . . ; (3) citizens of different States and in which citizens or subjects of a foreign state are additional parties.” Gateway Network Connections, Ltd. Liab. Co. v. Matulich, No. 1:22-cv-00024, 2022 U.S. Dist. LEXIS 241387, at *2–3 (D. Guam Dec. 16, 2022) (GNC I) citing 28 USC § 1332(a). 

“[A] corporation is a citizen of the state of incorporation and the state where its principal place of business is located. In contrast, LLCs are citizens of every state of which its owners/members are citizens. Where an LLC is a member of another LLC, the citizenship of the ‘sub-member’ LLC is likewise defined by the citizenships of its own members.”
Gateway Network Connections, Ltd. Liab. Co. v. Matulich, No. 1:22-cv-00024, 2022 U.S. Dist. LEXIS 241387, at *3 (D. Guam Dec. 16, 2022) (GNC I) (various punctuation and citations omitted).

There are two ways to challenge jurisdiction in a Rule 12(b), Federal Rules of Civil Procedure, motion to dismiss: (1) a facial challenge based solely upon the allegations in the complaint; and (2) a factual challenge based upon evidence submitted by the parties. Safe Air For Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004). The burden of proof for establishing diversity jurisdiction is upon the party asserting it. 

The first motion to dismiss involved a facial challenge to the complaint. A complaint generally assumes that all facts alleged therein are true for purposes of evaluating subject matter jurisdiction. 

The Court first determined that it did not have jurisdiction over the complaint under the Declaratory Judgment Act, 28 U.S.C. §§ 2201–02. Citing Luttrell v. United States, 644 F.2d 1274, 1275 (9th Cir. 1980), the Court reasoned that the Declaratory Judgment Act does not in and of itself confer subject matter jurisdiction. In Gateway Network Connections, Ltd. Liab. Co. v. Matulich, No. 1:22-cv-00024, 2022 U.S. Dist. LEXIS 241387, at *5 (D. Guam Dec. 16, 2022) (GNC I), the Court dismissed the case with leave to refile. The Court reasoned that the complaint did not sufficiently allege the plaintiff limited liability company and its parent corporations’ citizenship. Without a proper allegation of a principal place of business, place of incorporation, and citizenships of LLC members, the Court cannot determine whether there is complete diversity of citizenship between the parties. 

The plaintiffs then filed an amended complaint to cure the defects. Trépanier Tajima LLP filed a second motion to dismiss the amended complaint on jurisdictional grounds. As to the facial challenge, the Court found that the plaintiffs cured the defective allegations of the complaint. “Plaintiffs have adequately plead diversity jurisdiction for ACE by pleading the location of ACE’s board meetings for each corporation.”
Gateway Network Connections, Ltd. Liab. Co. v. Matulich, No. 1:22-cv-00024, 2023 U.S. Dist. LEXIS 177390, at *11–12 (D. Guam Sep. 29, 2023) (GNC II).

However, as to the factual challenge, the Court relied upon the United States Supreme Court ruling in Hertz Corp. v. Friend, 559 U.S. 77, 80 (2010). Hertz held that a corporation’s principal place of business, for purposes of evaluating diversity jurisdiction, is “where a corporation’s officers and directors, control, and coordinate the corporation’s activities.” Id. at 92–93. This place is called the corporation’s “nerve center.” Practically, the “nerve center” should be where the corporation is headquartered. That said, the headquarters must be “the actual center of direction, control, and coordination . . . and not simply an office where the corporation holds its board meetings.” Id. at 93. 

Hertz recognized that “in this era of telecommuting, some corporations may divide their command and coordinating functions among officers who work at several different locations, perhaps commuting over the Internet.” Id. at 96. The “nerve center” test, however, offers a “sensible test” that “points courts in a single direction, toward the overall direction, control, and coordination.” Id

Hertz also recognized that there is a potential for “jurisdictional manipulation” where, for example, the “alleged ‘nerve center’ is nothing more than a mail drop box, a bare office with a computer, or the location of an annual executive retreat.” If jurisdictional manipulation is apparent, then the court should find that the “nerve center” is “the place of actual direction, control, and coordination, in the absence of such manipulation.” Id. at 97.

Thus, Trépanier Tajima LLP proved that a parent corporation plaintiff in Gateway Network Connections, Ltd. Liab. Co. v. Matulich, No. 1:22-cv-00024, 2023 U.S. Dist. LEXIS 177390, at *15 (D. Guam Sep. 29, 2023) (GNC II) changed the nominal location of its remote virtual board meetings mere months before filing suit. This location change ostensibly moved the nerve center of the plaintiffs to a state that would render the parties completely diverse. However, the former pre-dispute location of the board meetings in California was in the same state as the defendant’s residence, thereby defeating diversity jurisdiction. The Court found concerns over jurisdictional manipulation and determined that the corporate plaintiff’s nerve center for purposes of this litigation was in California.

Gateway Network Connections, Ltd. Liab. Co. v. Matulich, No. 1:22-cv-00024, 2023 U.S. Dist. LEXIS 177390, at *15 (D. Guam Sep. 29, 2023) (GNC II) explained:

Plaintiffs only provide evidence of ACE meetings noticed for Connecticut (for what appears to be the first time) mere months before they filed this instant action. The parties’ relationships have clearly soured as demonstrated by the 2021 failed attempt to remove Matulich and the numerous lawsuits between the parties. For these reasons, there appears to be jurisdictional manipulation. Plaintiffs have not provided evidence to the contrary; therefore, the Court looks to the parties’ citizenships prior to the hostility—the time period of 2019 to 2020.

Because the defendant resided in California, no subject matter diversity jurisdiction existed. The Court dismissed the suit from federal court.