SW Legal studies in Business

State Citizenship of Multi-State Business May Rely on Nerve Center Test
Description

Appeals court held that, for purposes of jurisdiction, the citizenship of a business usually depends on its principal place of business. When the business has locations in many states, it is possible it is not a citizen of the state in which it does the most business volume. Rather the court looks to the nerve center of business operations to determine its home state.

Topic Business Organization
Key Words

Principal Place of Business; Nerve Center Test; Class Action

C A S E   S U M M A R Y
Facts

Davis, on behalf of himself and a putative class of similarly situated California consumers, sued HSBC Bank Nevada and Best Buy Stores in court in California, claiming that defendants defrauded California customers by offering credit cards without adequately disclosing the annual fee customers would be charged for use of the card. Defendants removed the action to federal court based on the Class Action Fairness Act (CAFA). Davis moved to remand the action to state court, invoking the local controversy exception in CAFA. Under that exception, there is no federal jurisdiction if most of the class members are citizens of the state in which the action was filed, and at least one defendant is a citizen of the state in which the action is filed. The district court granted the motion to remand the case to state court and defendants appealed, contending the case should be in federal court.

Decision

Reversed and remanded. HSBC Bank Nevada is clearly a citizen of Nevada. The only question is whether Best Buy has its principal place of business in California. If not, then it is not a citizen of California and the local controversy rule does not apply and federal jurisdiction exists. Best Buy Company is headquartered in Minnesota. Best Buy Stores, L.P., is located in Virginia. A limited partnership or a corporation is a citizen of: 1) the state under whose laws it is organized or incorporated and 2) the state of its principal place of business. The principal place of business is the state containing “a substantial predominance of corporate operations.” Best Buy has more stores, employees and sales in California than in any other state. However, this does not mean that a substantial predominance of its activities are in California. Like many companies, it is spread out in many states, so the “nerve center approach” is used, otherwise California would be the home state to many businesses. Just because Best Buy has more sales in California than in any other state does not make it a citizen of California under the nerve center test.

Citation Davis v. HSBC Bank Nevada, 557 F.3d 1026 (9th Cir., 2009).

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