Patmon v. Hobbs - Round Two

Patmon v. Hobbs – Round Two

      The Patmon v. Hobbs dispute, it involving a breach of the duty of loyalty by the managing member of an LLC in appropriating for his own benefit a business opportunity and company assets, has again returned to the Kentucky Court of Appeals.  Patmon v. Hobbs, 2014 WL 97464 (Ky. App. Jan. 10, 2014).

      Briefly, Hobbs was the managing member of American Leasing and Management, LLC, a company in which Patmon was as well a member (Hobbs 51%, Patmon 44% and other 5%).  The primary business of the LLC was the build and lease of various retail establishments.  On the alleged basis that the LLC was not able to perform on and thereby exploit certain existing contracts, Hobbs unilaterally transferred them to another LLC in which he was a member.  Patmon brought suit to challenge Hobbs’ breach of duty.  By a circuitous (and flawed) path, the Court of Appeals determined that Hobbs violated his fiduciary duties (a normatively correct conclusion) in unilaterally assigning to the second LLC the build and lease agreements.   See Patmon v. Hobbs, 280 S.W.3d 589 (Ky. App. 2009).  That first decision was reviewed in Rutledge & Geu, The Analytic Protocol for the Duty of Loyalty Under the Prototype LLC Act, 63 Ark. L. Rev. 473 (2010).  Here is a LINK to that article. 

      The case was then remanded to the trial court for the consideration of what damages were owed by Hobbs. 

      In a ruling dated September 6, 2012, the trial court ordered Hobbs to remit to Patmon $37,400, that being 44% of the proceeds from the sale of his portion of the LLC to which the contracts were transferred. 

Patmon submitted damages request based on the total contract price of the contracts at issue, but Patmon is only entitled to the percentage of profit she would have received if the contracts were executed by American Leasing instead of American Development.  After the projects were complete, Hobbs sold his interest to a third party for $115,000 minus $25,000 for attorney fees.  Hobbs made a total profit of $85,000 on the projects in question.  Since, Patmon owns 44% of American Leasing, the Court finds that her damages are 44% of $85,000, or $37,400.  Accordingly, the Court sets Patmon’s damages for Hobb’s common-law breach of fiduciary duty and failure to follow statutory guidelines of KRS § 275.170 at $37,400.

      This second trip to the Court of Appeals then followed. 

      Ultimately, this ruling of the Court of Appeals is dicta.  The order from which Patmon appealed was not final and therefore the Court of Appeals lack jurisdiction to hear the appeal.  On that basis it was dismissed.  Still, the Court of Appeals was at pains to discuss what should be the proper measure of damages in the suit.  Hence, while it may ultimately be dicta, it is compelling dicta.  As to those points:

The Duty of Loyalty

            The Court of Appeals recited that in the prior decision:

[w]e noted the existence of a common law duty of loyalty owed to members of a limited liability company as well as the existence of statutory duty set forth in KRS 275.170, that requires a member to “account to and hold as trustee for a [LLC] any profit or benefit derived from transaction involving the use of a [LLC’s] property by that member or manager without [adequate] consent.”  2014 WL 97464, *1 (the [adequate] being added by the Court of Appeals).

      The “owed to members of the LLC” is curious in that later in the decision the Court noted that a member’s duty of loyalty is owed to the company.  2014 WL 97464, *2, note 7.  It is the latter statement that is correct.  The LLC Act is clear – the duty of loyalty is owed to the LLC – that is what the statute says.  See KRS § 275.170(2) (“account to the [LLC] and hold for it”); see also Ballard v. 1400 Willow Council of Co-Owners, Inc. __ S.W.3d __, ___; 2013 WL 6134150, *10 (Ky. 2013) (directors owe their duties “to the corporation.”, citing KRS § 273.215).

      From there the Court of Appeals:

Reversed and remanded with instructions for the trial court to determine whether American Leasing was able to take advantage of the opportunity diverted by Hobbs, which is a prerequisite to recovery.

The Business Opportunity Doctrine and the Capacity to Perform

      As to the requirement that Patmon demonstrate that the LLC had the wherewithal to perform on the build-to-lease agreements there are a pair of failings, namely the allocation of the burden and the assumption that one exists.

      As to requiring Patmon to show that the LLC could have performed on the contract, this relieves the fiduciary of the obligation of showing that they satisfied his or her obligations.  Hobbs unilaterally and for no consideration assigned an LLC asset to the company he controlled.  Those facts are uncontested.  Any burden should be exclusively upon Hobbs to demonstrate the propriety of his actions.  Yes, Kentucky’s Business Corporation Act places the burden on the plaintiff to show the director violated his or her duties; KRS § 271B.8-300(6), but that is a rule that reverses the burden as traditionally imposed.  The LLC Act has no such reversal of the burden.

      As to the question of the LLC’s capacity to perform, Hobbs, who controlled the LLC, should not be permitted to raise inability to perform as a defense.  Second, even if the LLC could not perform, it does not follow that the transferred contracts were without value.  For example, the LLC could have sold the right to build out the stores, thereby realizing value.

      While the capacity to perform may be an element of whether or not there was an opportunity as to a corporation (see, e.g., Urban J. Alexander v. Trinkle, 224 S.W.2d 923 (Ky. 1943)), that reasoning is inapplicable in LLCs and was never applicable to the LLC out of which arose this suit.  At to the second point, American Leasing and Management, LLC, the company owned by Patmon and Hobbs, had signed the contract that was subsequently transferred.  This was not a business opportunity floating in the breeze but rather an asset in hand.  As to the former point, LLCs are statutory constructs that are strangers to the common law.  As recently observed by the Supreme Court in Pannell v. Shannon:

In fact, “limited liability companies are creatures of statute,” controlled by Kentucky Revised Statutes (KRS) Chapter 275,” Turner v. Andrew, 413 S.W.3d 272, 275 (Ky. 2013) (quoting Spurlock v. Begley, 308 S.W.3d 657, 659 (Ky.2010)), not primarily by the common law. To the extent that common law doctrines could arguably govern limited liability companies, the Kentucky Limited Liability Company Act “is in derogation of common law,” KRS 275.003(1), and the traditional rule of statutory construction that “require[s] strict construction of statutes which are in derogation of common law shall not apply to its provisions.” Id. Thus, to the extent the statutes conflict with common law, the common law is displaced.

This Court must therefore first look at the controlling statutory law. The obvious place to start, then, is the source of limited liability in the LLC context, KRS 275.150.  Pannell v. Shannon, __ S.W.3d __, 2014 WL 1101472, *7 (Ky. 2014).

      The application of the business opportunity doctrine cases to LLCs based upon their supposed similarity to corporations and with it the “ability to perform” defense to expropriation was inappropriate ab initio. 

      Further, it must be recognized that KRS § 275.170, in direct response to the first Patmon v. Hobbs decision, has been amended.  Initially, KRS § 275.170(2) has been defined as the exclusive formula of the duty of loyalty applicable in an LLC with respect to the actions of the members or managers (“The duty of loyalty applicable to each member and manager shall be….”).   Second, with respect to any suggestion that the utilization of a company opportunity or asset may be approved ex ante on the basis that the transaction was “fair,” the LLC Act has been amended to preclude that argument (“That a transaction was fair to the [LLC] shall not constitute a defense to the failure to request and receive the required consent of the disinterested managers or members.”).  See also Rutledge, The 2012 Amendments to Kentucky’s Business Entity Statutes, 101 Ky. Law J. Online 1 (p. 13-14) (2012).  Hobbs should never have been permitted to assert, and prospectively nobody may assert, “the LLC could not perform, therefore the contract had no value, and therefor I took nothing from the LLC, and certainly that is fair.”

The Measure of Damages

      The Court of Appeals criticized the trial court for its method of calculating damages.  For example, Hobbs sold his interest in the company to which the build-to-suit contracts were transferred for $115,000.  After certain reductions for assumed third-party expenses, Hobbs was awarded 44% of the net proceeds.  As identified by the Court of Appeals, this was incorrect.  Rather, Hobbs is obligated to hold all of the benefit of the transferred assets in trust for the LLC.   KRS § 275.170(2) says exactly that. 

    

      By way of example, if Hobbs transferred the build-to-suit contracts to an LLC in which he was a 40% owner, and the transferee LLC realized $100,000 on the asset, Hobbs’ liability back to the original LLC is not $40,000 but rather $100,000.  Remember that when the embezzler steals $100,000 but then donates $60,000 to the church, the embezzler’s liability is not reduced to $40,000.  Rather, the embezzler is liable for the full amount taken.  On the other side of the coin, if the embezzler invests the $100,000 and it grows to $120,000, the entire $120,000 is owed to the employer – the embezzler cannot claim the gain on the misappropriated funds.

      Further, upon dissolution, Hobbs’ sharing ratio in any net proceeds of the company will need to be adjusted in order to account for his misconduct.  Ultimately, that needs to be accomplished as part of the LLC’s dissolution as the settling of accounts is not a separate matter therefrom.  2014 WL 97464, *2.

Massachusetts Further Adds to the Mess of Inter-Shareholder Fiduciary Duties

Massachusetts Further Adds to the Mess of Inter-Shareholder Fiduciary Duties

      Massachusetts has long been infamous amongst those who practice business entity law for a string of cases holding, inter alia, that the shareholders of a business corporation, amongst themselves, owed to one another the same fiduciary duties that are owed amongst partners in a general partnership.  Those cases include Rodd v. Donahue Electrotype Co. and Wilkes v. Springdale Nursing Home.  A March decision of the Massachusetts Supreme Court has continued this string of cases and in so doing demonstrated the underlying fallacy of these supposed duties.  Selmark Associates, Inc. v. Erlich, 5 N.E.3d 923 (Mass. 2014).

      The underlying facts of the case are rather involved, but they do not ultimate impinge upon the Court’s analysis.  Essentially, Erlich was a shareholder in a close corporation and as well an employee thereof.  In his employment role, he served as a sales representative, and was the second most productive, in terms of commissions, salesman for the company.  The only person more successful was the other shareholder.  After working together for a number of years, without prior notice, the majority shareholder advised Erlich that his service as an employee was terminated effective immediately.  Suit was brought for breach of fiduciary duty and other claims.  Meanwhile, the minority shareholder, Erlich, went to work for a competitor of his former employer, a corporation in which he remained a shareholder.  Working for that new employer, Erlich solicited customers of his former employer, and was successful in convincing at least one to move their account.  The former employer then filed a counterclaim against Erlich for breach of his fiduciary duties owed to the corporation.

      The case would ultimately be tried by a jury, its decision being appealed to the Massachusetts Supreme Court.

      As to Erlich’s claims for breach of fiduciary duty in his termination from employment, the jury’s verdict in Erlich’s favor upheld.  Erlich had been terminated “without warning on reasonable explanation” and there was “no evidence of poor performance,” or “of an inability to get along with others.”  5 N.E.2d at 935.  Ultimately, “Erlich has demonstrated that [the defendant] could have sought less harmful alternatives before resorting to termination.”  Id.

      Still, the victory was not entirely for Ehrlich.  He remained a shareholder in his former employer, and in that capacity owed it fiduciary duties.  In going to work for a competitor and soliciting customers to move to the competitor Ehrlich was working against the interest of his former employer.  Ergo, Erlich violated his fiduciary duties.  Ehrlich argued against this analytic path, asserting that:

because he was fired [ ] and essentially “frozen out” [of this former employer], he had the right to compete with [his former employer] without committing a breach of his fiduciary duties to the company.  5 N.E.3d at 943.

In rejecting this argument the Massachusetts Supreme Court wrote:

Our cases are clear that shareholders in close corporations owe fiduciary duties not only to one another, but to the corporation as well.  At issue here is whether those fiduciary duties to the corporation continue once a shareholder has been “frozen out,” or wrongfully terminated, by that corporation….

Allowing a party who has suffered harm within a close corporation to seek retribution by disregarding its own duties has no basis in our laws and would undermine fundamental and long-standing fiduciary principles that are essential to corporate governance…. We see no reason to take such a drastic step. “If shareholders take it upon themselves to retaliate any time they believe they have been frozen out, disputes in close corporations will only increase. Rather, if unable to resolve matters amicably, aggrieved parties should take their claims to court and seek judicial resolution.”  5 N.E.3d at 943-44 (citations omitted).

This is Why I’m Glad to be in the Commonwealth of Kentucky and Not the Commonwealth of Massachusetts

            This case demonstrates the utter silliness of imposing upon shareholders fiduciary duties owed among themselves.  Here we have an individual, Ehrlich, who was otherwise an at-will employee of his employer.  However, simply because he was a shareholder the terms of his employment were morphed into employment that could be terminated only upon notice and for cause.  At the same time the corporation became the beneficiary, inter alia, of a non-compete/non-solicitation agreement binding the shareholder.

Fortunately, Kentucky has not adopted fiduciary duties among shareholders.  See Rutledge, Shareholders Are Not Fiduciaries – A Positive and Normative Analysis of Kentucky Law, 51 Louisville Law Review 535 (2012-13).  Here is a LINK to that article.  See also More Evidence that Kentucky Law Does Not Recognize Fiduciary Duties Among Shareholders (March 20, 2013) – LINK.

Where Does Kentucky Stand on Piercing LLCs?

Where Does Kentucky Stand on Piercing LLCs?

 

In Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012), the Kentucky Supreme Court updated the law on when the corporate veil may be pierced.  Left unresolved was the question of whether and how the veil of a limited liability company (LLC) may be pierced.

 

While the Kentucky Court of Appeals has applied veil piercing to LLCs, the Kentucky Supreme Court has for now (maybe?) reserved judgment as to whether and how LLCs may be pierced.  Specifically, in Pannell v. Shannon,  __ S.W.3d __, 2014 WL 1101472, *14 fn. 15 (Ky. 2014), the Court wrote:

 

This, of course, assumes the doctrine of veil piercing even applies to limited liability companies under Kentucky law. While several decisions have assumed that it does, see Stettenbenz v. Butch's Rod Shop, LLC, 2012–CA–001405–MR, 2013 WL 4779862 (Ky.App. Sept. 6, 2013) (unpublished), the question appears to have been raised in only one case, Howell Contractors, Inc. v. Berling, 383 S.W.3d 465, 466 (Ky.App.2012), which ultimately avoided the question by applying Ohio law, which does allow veil piercing of LLCs. There are, of course, strong arguments for why LLC veil piercing should not be allowed, see generally Stephen M. Bainbridge, Abolishing LLC Veil Piercing, 2005 U. Ill. L.Rev. 77 (2005), even when corporate veil piercing is viable in the jurisdiction, see Thomas E. Rutledge & Lady E. Booth, The Limited Liability Company Act: Understanding Kentucky's New Organizational Option, 83 Ky. L.J. 1, 17 n. 73 (1995) (“An issue to be considered is the degree to which the common law doctrine of piercing the corporate veil should apply to LLCs. While the use of the LLC's liability shield should not be permitted to protect wrongdoers, the application of the law that has developed in this area is questionable.”).

Other Court of Appeals decisions involving the piercing of an LLC include Mountain Paving and Construction, LLC v. Workman, No. 2012-CA-001822-MR, 2014 WL 272463 (Ky. App. Jan. 24, 2014) (Not to be Published) (veil of LLC pierced in order to hold one member liable on LLC debt) and Rednour Properties, LLC v. Spangler Roof Services, LLC No. 2009-CA-001159-MR, 2011 WL 2535330 (Ky. App. June 10, 2011, modified July 8, 2011) (LLC pierced on basis including that it was a single member LLC and was set up for tax purposes and to achieve limited liability).  Subsequent to the Rednour decision the LLC Act as well as the business corporation act were amended to make express that being a SMLLC or single shareholder corporation are not basis for piercing.  Ky. Rev. Stat. Ann. § 271B.6-220(3) (“That a corporation has a single shareholder is not a basis for setting aside the rule recited in subsection (2) of this section.”), id. § 275.150(1) (“That a limited liability company has a single member or a single manager is not a basis for setting aside the rule otherwise recited in this subsection.”). See also Rutledge, The 2012 Amendments to Kentucky’s Business Entity Statutes, 101 Kentucky Law Journal Online 1, 3-4 (2012).

 

            Further, the Supreme Court has recognized that LLCs are statutory constructs that are strangers to the common law. 

 

In fact, “limited liability companies are creatures of statute,” controlled by Kentucky Revised Statutes (KRS) Chapter 275,” not primarily by the common law. To the extent that common law doctrines could arguably govern limited liability companies, the Kentucky Limited Liability Company Act “is in derogation of common law,” KRS 275.003(1), and the traditional rule of statutory construction that “require[s] strict construction of statutes which are in derogation of common law shall not apply to its provisions.” Id. Thus, to the extent the statutes conflict with common law, the common law is displaced.

This Court must therefore first look at the controlling statutory law. The obvious place to start, then, is the source of limited liability in the LLC context, KRS 275.150.  Pannell v. Shannon, supra at *7 (citations omitted).

, thereby distancing LLCs from the roots of piercing jurisprudence.  But see Ky. Rev. Stat. Ann. § 275.003(1) (“Unless displaced by particular provisions of this chapter, the principles of law and equity shall supplement this chapter.”).

 

            Unfortunately, the apparent categorical reservation of the question of piercing the LLC veil set forth in Pannell v. Shannon stands in contradiction to another recent decision of the Supreme Court.  In Turner v. Andrew, the Court wrote:

 

The doctrine [of veil piercing] can also apply to limited liability companies.  413 S.W.3d 272, 277 (Ky. 2013). 

The Turner decision was written by Justice Abramson, and this language is consistent with an unpublished trial court ruling written by now Justice Abramson when she was on the Circuit Court, she then stating:

While it is true that the foregoing represents the law with respect to the liability of corporate officers and shareholders, equity and fairness required that those same theories of liability [piercing and personal responsibility for personally committed torts] should extend to managers and member of limited liability companies as well.  Fabing v. E Concepts, LLC, Jeff. Cir. Ct. (Div. 3) No. 01-CI-06835, Order Granting Plaintiff’s Motion for Partial Summary Judgment entered June 9, 2003 (emphasis in original).

It remains to be seen whether the acceptance of LLC veil piercing (Turner v. Andrew) or the reservation of the question (Pannell v. Shannon) will be determined to be controlling.

LLCs Are Not Partnerships

LLCs Are Not Partnerships

      A recent slip opinion from New York provides further authority for the proposition that LLCs are just that, and they are not a species of either the corporation or, as is specifically referenced in this opinion, a partnership.  Born to Build, LLC v. Saleh, 2014 N.Y. slip. op. 50594 (U) (Sup. Ct. Nassau County, Feb. 28, 2014).

      The subject dispute involved the rights of a purported purchaser of an interest in an LLC at a courthouse step sale.  In response to efforts by the purchaser to allege rights vis-à-vis the LLC based upon partnership law, the Court wrote:

The plaintiff’s reliance upon comparisons to the Partnership Law to justify a levy in sale of a membership interest in a limited liability company is unavailing as limited liability companies do not fall within the ambit of the Partnership Law and the existence and character of partnerships and limited liability companies are statutorily dissimilar.  (citation omitted).

Expert Testimony as to Parameters of Fiduciary Obligations is Necessary

Expert Testimony as to Parameters of Fiduciary Obligations is Necessary

     In a recent decision, the Court of Appeals upheld the directed verdict granted the defendant where the plaintiff failed to submit expert testimony as to the obligations of the alleged fiduciary.  Davidson v. King, 2014 WL 1680461 (Ky. App. April 25, 2014) (Not to be Published).

     Davidson, who was experiencing financial difficulties, consulted with King who had been designated as a “Crown Financial Budget Advisor.”  He advised Davidson to do a sale-lease back of her house (most recently appraised for $121,000 and fully paid for) for $25,000 subject to a buy-back option for $26,000.  King was to be the purchaser/lessor.  The proposed deed was done.  Davidson would fall behind on her lease payments and other obligations, and King initiated eviction proceedings.  Davidson’s counter-suit made a variety of allegations against King including breach of fiduciary duty.

       At the close of Davidson’s case, the trial court granted King a directed verdict on her claim for breach of fiduciary duty.  Her claims for breach of contract and fraud, as well as King’s claim for breach of contract, would go to the jury.

     Responding to a motion for a new trial, Davidson argued the directed verdict as to breach of fiduciary duty was in error.  This assertion was rejected “because Davidson had failed to offer expert testimony on the applicable standard of care. The trial court specifically found neither exception mentioned in Jarboe v. Harting, 397 S.W.2d 775, 778 (Ky. App. 1965), applied because the duty of care owed by a budget counselor to a client is specialized and not generally known by the public.”  2014 WL 1680461, *2.

     This appeal followed.  Upholding the trial court, the Court of Appeals wrote:

We agree with the trial court’s exercise of its discretion. Green v. Owensboro Medical Health System, Inc., 231 S.W.3d 781, 783 (Ky. App. 2007) (“Whether expert testimony is required in a given case is squarely within the trial court’s discretion.”). An expert was required to explain why the relationship between Davidson and King went beyond a mere subjective trust or normal contractual business relationship.  2014 WL 1680461, *4-5.

A Partnership is a Party to the Partnership Agreement

A Partnership is a Party to the Partnership Agreement

      A recent decision out of Texas has examined whether a partnership, as distinct from each of the individual partners, is a party to the partnership agreement, finding the answer to be “yes.”  Elkjer v. Scheef & Stone, L.L.P., 2014 WL 1255844 (N.D. Tex. March 27, 2014).

      Kimberly Elkjer was a partner in Scheef & Stone, L.L.P., a law firm, it being organized under Texas law.  She brought claims of gender discrimination under Texas and federal law against the firm.  On the basis of federal question jurisdiction the firm removed the case to federal court, and then the firm sought to stay the case and an order compelling arbitration as provided in the partnership agreement.  Elkjer contested the arbitrability of her claims on several grounds including that the partnership is not a party to the partnership agreement and is therefore not a party to the arbitration clauses therein; hence there was no agreement to arbitrate.

      Disposing of her argument, the Court wrote:

The Court recognizes that Defendant is not a signatory to the Partnership Agreement, but the Court does not find this fatal. This Partnership Agreement is a master agreement of sorts that created an ongoing relationship between the Partners but also between the Partners and the Partnership. The Partnership Agreement addresses much more than just her relationship with the other Partners. It governs the very existence and operation of the limited liability partnership that is Defendant, as well as the terms and conditions of Plaintiff's employment with Defendant. Section 152.002(a) of the Texas Business Organization Code states, “[e]xcept as provided by Subsection (b), a partnership agreement governs the relations of the partners and between the partners and the partnership.” TEX. BUS. ORG. CODE § 152.002(a) (West 2012) (emphasis added). None of the exceptions set forth in subsection (b) apply to this Partnership Agreement, and Plaintiff makes no argument to that effect. The Court reads this statutory language to encompass the partnership, here Defendant, as a party to the Partnership Agreement. The Court could find no statutory requirement that Defendant must sign the Partnership Agreement in order for Section 152.002(a) to apply, and Plaintiff did not provide any such citation. 2014 WL 1255844, *4.

      The Court would determine that Elkjer’s claims were otherwise arbitrable (e.g., there is nothing about a claim under Title VII that precludes its resolution by arbitration).

      There should be no dispute under Kentucky law that the partnership is itself a party to the partnership agreement.  The Kentucky Revised Uniform Partnership Act (2006) provides that “relations among the partners and between the partners and the partnership are governed by the partnership agreement.”  KRS § 362.1-103(1).  Obviously this language is equivalent to that relied upon by the Elkjer court.  Further, the partnership act permits the partnership to seek a partner’s expulsion based upon the partner’s breach of the partnership agreement.  KRS § 362.1-601(5).  It would be most curious if the partnership could bring an action based upon violation of an agreement to which it is not a party.

Diversity Jurisdiction and National Banks

Diversity Jurisdiction and National Banks

      The availability of access to the federal court based upon diversity jurisdiction is in many respects form dependent.  For example, a corporation is deemed to be a citizen of up to two jurisdictions, namely that in which it is incorporated and that in which it maintains its principal place of business.  28 U.S.C. § 1362.  Conversely, partnerships, limited partnerships and LLCs each have the citizenship of the each of its members with that of natural persons being based upon domicile.  National banks, which are chartered not by a state but by the Comptroller of the Currency, have their own diversity jurisdiction statute, 28 U.S.C. § 1348, which provides that a national bank is deemed a citizen of the states in which it is “located.”  In a recent decision, the 9^th Circuit Court of Appeals considered the question of interpreting where a national bank is “located.”  Rouse v. Wachovia Mortgage, FSB, No. 12-55278, 2014 WL 1243869 (9^th Cir. Mar. 27, 2014).

      The underlying lawsuit involved the plaintiff’s claims in connection with a home loan and deed of trust issued by Wachovia Mortgage, that being a division of Wells Fargo.  The suit was originally filed in state court, and the bank removed it to federal court on the basis of both diversity jurisdiction and a federal question.  After the plaintiffs dropped their claims based upon federal law, the suit was remanded by the district court on the basis that diversity jurisdiction was lacking, that determination being premised upon the fact that California was the principal place of business of Wells Fargo.

      The 9^th Circuit would reverse that determination.

      Parsing the statute, as well as changes made and not made over the years to analogous statutes addressing that diversity jurisdiction of state chartered banks (28 U.S.C. § 1332), the 9^th Circuit would hold that a national bank is “located,” for purposes of 28 U.S.C. § 1348, at the place designating in its articles of association as its principal place of business.  On that basis, in that Wells Fargo’s principal location was identified in its articles as being in South Dakota, diversity jurisdiction existed.

      It bears noting that there is a circuit split as to this issue, with at least two circuits holding that a national bank can be “located” in two or more states while others, including the Sixth, holding that national banks are citizens of the state in which they maintain their “main office,” a/k/a principal place of business.