Jurisdiction of US Federal Courts over US Corporations Controlled from Foreign Countries

Francisco A. Laguna

Today’s blog is inspired by a case we worked on in Puerto Rico last year. Counsel for US corporations whose directors live abroad and control the corporation from abroad may find it instructive.

In 2014, TransLegal assisted clients involved in litigation in the Dominican Republic and Puerto Rico. Our clients, two corporations – one Dominican and the other Puerto Rican – were sued in federal district court in Puerto Rico, on allegations of breach of contract.

Map of Caribbean Showing Puerto Rico and the Dominican Republic

Map of Caribbean Showing Puerto Rico and the Dominican Republic

The plaintiffs were three corporations: one with US citizenship; one with Brazilian citizenship; and one with Mexican citizenship.

The plaintiffs invoked the US District Court’s diversity jurisdiction because there were subjects or citizens of foreign states named as additional parties (28 U.S.C. §1332(a)(3)). For diversity to be complete to allow the federal court to hear the case, there had to be US citizens on both sides of the lawsuit: one of the plaintiffs had to be a US entity; and, similarly, one of the defendants had to be a US entity. 

On its face, diversity was complete because one of the plaintiffs was a US corporation, and similarly, one of the defendants was a US corporation. However, the Puerto Rican (US) defendant was effectively controlled and directed by its two directors and officers, both of whom were citizens of the Dominican Republic and resided in the Dominican Republic. Based on control from a foreign country, we moved to dismiss the case on the grounds that the Puerto Rican defendant was, in fact, a Dominican citizen, not a US citizen for corporate control purposes. As such, diversity was not complete, and the court lacked jurisdiction to hear the case.

The US District Court agreed and dismissed the case. 

Until 2010, a corporation’s citizenship was determined using a test that looked at the corporation’s activities in the jurisdiction. At that point, the US Supreme Court rejected the activities analysis and ruled that a corporation’s citizenship was determined by applying a “nerve center” test that examines the location from where the entity is directed, controlled and coordinated (Hertz Corp. v. Friend, 559 U.S. 77, 93 (2010)). Typically, a corporation’s principal place of business or headquarters determines its citizenship under the nerve center test, but not always.

Jose V. Toledo Federal Building and US District Court, San Juan, Puerto Rico Photo Credit: Osvaldo Ocasio via Wikimedia Commons

Jose V. Toledo Federal Building and US District Court, San Juan, Puerto Rico
Photo Credit: Osvaldo Ocasio via Wikimedia Commons

Because the plaintiffs invoked the diversity jurisdiction of the court, they had the burden of proving that diversity existed.

In our case, the plaintiffs argued that TransLegal’s Puerto Rican client was incorporated in Puerto Rico, filed taxes in Puerto Rico, maintained offices, warehouses and employees in Puerto Rico, and serviced clients in Puerto Rico. They noted that the corporation’s bylaws stated that the client’s principal place of business was Puerto Rico and that all government filings, including registrations with the island’s corporation commission and tax entities, used a Puerto Rico address. In addition, counsel asserted that the Dominican officers and directors of the corporation traveled to Puerto Rico regularly to meet with representatives of the plaintiffs, to coordinate staff, for training sessions, to meet with clients and to meet with company auditors and bankers.

We argued that the directors and officers used modern, electronic means of communication to control, direct and coordinate the Puerto Rican defendant remotely from the Dominican Republic. We provided the directors’ passports to show entries into Puerto Rico for short amounts of time as well as a cadre of emails sent while the directors were in the Dominican Republic that instructed staff in Puerto Rico and that relayed corporate decisions to staff. We further provided deposition testimony of the directors and Puerto Rican staff indicating that the decisions the directors and officers made during their time on the island were related to daily operations; they were not strategic or planning.

The court ruled that the defendants had provided competent evidence that the Puerto Rican defendant was controlled from a foreign country and that the plaintiffs had not met their burden of proving that diversity jurisdiction existed. On that basis, the court dismissed the case.

Clemente Ruiz Nazario Courthouse, San Juan, Puerto Rico Photo Credit: Jxu10 via Wikimedia Commons

Clemente Ruiz Nazario Courthouse, San Juan, Puerto Rico
Photo Credit: Jxu10 via Wikimedia Commons

In making its ruling, the court emphasized that the nerve center test looks at corporate control: a company’s headquarters is located at the actual center of direction, control and coordination. Daily operations had to be distinguished from such control. While the Puerto Rican defendant’s daily operations were located on the island, it was clear that control over the defendant rested in the Dominican Republic.

The court’s ruling is instructive and affects every US entity that is effectively controlled from abroad. That foreign control may make it difficult to sue the entity in the US federal courts on the basis of diversity jurisdiction unless there is a second defendant in the case that is clearly a US citizen.

TransLegal provides litigation consulting services throughout our network. Please call us with any questions.

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