The “Nerve Center” of a Newly Formed Corporation

The “Nerve Center” of a Newly Formed Corporation

      An LLC, for purposes of federal diversity jurisdiction (28 U.S.C. § 1332) has the citizenship of each of its members. Where a member is a business corporation, the LLC will be attributed with both the corporation’s jurisdiction of organization and that in which it maintains its principal place of business, determined under the US Supreme Court’s “nerve center” test. What is the jurisdiction of incorporation is a straightforward question of positive law. For a corporation that has a significant operating history, determining where is the “nerve center,” the place at which the executive decisions are made, can be determined from that history. A recent case, however, faced the question of what would be the nerve center of a corporation that was newly organized. 3123 SMB LLC v. Horn, No. 16-55304, 2018 WL 445479 (9^th Cir. Jan. 17, 2018).

      In this instance, a California LLC had been operating for some period of time. Embroiled in litigation, and shortly before filing a lawsuit against the LLC’s former attorney, the ownership of the LLC was restructured. As restructured, the sole member in the LLC was a business corporation incorporated in Missouri. In turn, its directors and officers were domiciled in California. The new corporation’s organizational documents provided that the annual meeting of the Board of Directors would be held in Missouri.

      The challenge before the court was whether the nerve center of the corporation would be Missouri, as set forth in the organizational documents, or California.

      The court would ultimately determine that the statement in the organizational documents that the principal executive activities would be discharged in Missouri would be given effect. The outcome of that determination was that the LLC was a citizen of Missouri with the capacity to bring its malpractice suit against its California attorney in federal court.