Subject Matter Jurisdiction

Kelley Drye Client Advisory

In an era of growing international trade, the issue of when a federal court will exercise jurisdiction over a case involving foreign corporations with a principal place of business in the United States is of escalating importance. A definite answer to the subject matter jurisdiction questions which arise therefrom will alleviate uncertainty among litigants and their attorneys as to whether a case will be dismissed for lack of subject matter jurisdiction. One critical question is, can a foreign corporation, with a principal place of business in the United States, be considered only a citizen of the State in which that principal of business is located for diversity jurisdiction purposes, thus, in effect, eliminating the country of incorporation portion of corporate dual citizenship.

Kelley Drye recently obtained an answer to this question, and a positive outcome for our clients, from the District of New Jersey. On January 27, 2009 the Honorable Judge Harold A. Ackerman, after careful consideration of the statute’s language, history, and purpose,” found that an alien corporation with a principal place of business in the United States is a dual citizen for diversity jurisdiction purposes. As a result, diversity jurisdiction is lacking for a sole plaintiff, foreign corporation with a principal place of business in the United States. This is because such a plaintiff will fail to demonstrate that it satisfies diversity requirements for both corporate citizenship designations. Caribbean Telecom. Ltd. v. Guyana Tel. & Tel. Co. Ltd., 594 F.Supp.2d 522 (D.N.J. 2009).

In Caribbean Telecom, the plaintiff, a Guyanese corporation with a principal place of business in New Jersey, sued another Guyanese corporation with a principal place of business in Guyana and a Delaware corporation with a principal place of business in Massachusetts. Id. at 524.1 The plaintiff attempted to invoke jurisdiction under 28 U.S.C. § 1332(a)(3) by asserting that the case was between domestic parties of diverse citizenship with a foreign defendant that qualified as an additional” party. Id.

The Court was faced with two issues of first impression in the Circuit:

  1. the effect of 28 U.S.C. § 1332(c)(1) on the citizenship of alien corporations, and
  2. whether 28 U.S.C. § 1332(a)(3) granted jurisdiction where an alien corporation with a principal place of business in the United States was the sole plaintiff and sued an alien corporation and a domestic corporation of diverse citizenship.

Id. at 525.

An answer to the second inquiry depended on the Court’s determination of the first. Id. at 526. The Court began the analysis by examining the plain language of the statutory provisions. Id.

Citizenship of an Alien Corporation.

Section 1332(c)(1) states that a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business[.]“

The plaintiff contended that plain language of Section 1332(c)(1) addresses only the domestic citizenship (i.e. principal place of business), and not the alien one (i.e. incorporation in a foreign country), for foreign corporations. Id. at 526. In support of this contention, The plaintiff argued that by capitalizing the word State” in the statute, Congress intended to differentiate between a foreign state” and a State” of the United States, thereby eliminating any reference to foreign incorporation and resulting in a single domestic citizenship” for an alien corporation with a principal place of business within a State of the United States. Id. at 526-527. The Court rejected this argument as inconsistent with the legislative purpose of the diversity statute. Id.

The Court explained that according to the long-standing rule of corporate citizenship, established by Steamship Co. v. Tugman, 106 U.S. 118 (1882), an alien corporation is deemed to be a citizen of the foreign state in which it was incorporated. Id. at 527. Furthermore, the Court explained that in passing the corporate citizenship provision of the diversity statute, Congress codified the rule developed by Louisville, Cincinnati & Charleston R&R. Co. v. Letson, 43 U.S. (2 How.) 497 (1844), that corporations are capable of being treated as a citizen of [the State which created it], as much as a natural person.” Id. at 528. Because the Congress did not repeal Tugman when it codified Letson in Section 1332(c)(1), the statute cannot be now read to mean that an alien corporation with a principal place of business in the United States is a citizen of the United States only. Id. The Court observed, that reading the amendment as argued by the plaintiff, would create an unusual paradox” because domestic corporations cannot strategically incorporate in another State in order to litigate local disputes in federal court, but alien corporations may strategically relocate to a state in order to litigate foreign disputes in federal court.” Id. at 529. By concluding that the plaintiff’s reading of the statute in such manner supplants a century-old understanding of corporate citizenship” and expands diversity jurisdiction for alien corporations instead of narrowing it as intended by Congress, the Court rejected the plaintiff’s single citizenship” theory and held that “[i]f § 1332(c)(1) applies to alien corporations at all, it applies to them in the same manner that it applies to domestic corporations.” Id. at 530.

The Court then turned to the issue of whether resolving the first issue in such manner affected the Court’s jurisdiction under Section 1332(a)(3).

Diversity Requirements of Section 1332(a)(3).

Pursuant to Section 1332(a)(3), federal courts have original jurisdiction for claims exceeding $75,000 between citizens of different States and in which citizens or subjects of a foreign state are additional parties.” 28 U.S.C. § 1332(a)(3).

Relying on Dresser Industries v. Underwriters at Lloyd’s of London, 106 F.3d 494 (3d Cir. 1997), which abrogated the long standing complete diversity” requirement by allowing alien parties to appear as additional parties” on both sides of controversy, the plaintiff argued that the Court had jurisdiction over the case because it involves diverse citizens of the United States (i.e., a plaintiff having a principal place of business in the United States) and an additional alien party. Id. at 530. The Court disagreed. Id.

First, it distinguished Dresser from the present case as Dresser had more than one plaintiff, one being a U.S. citizen and another one – an alien.

Second, it held that a dual-citizen alien corporation must satisfy diversity requirement of §1332(a)(3) for both corporate citizenship designations. Id. The Court reasoned that because “[t]he federal diversity statute does not permit domestic corporations to select among their two jurisdictional citizenship in order to preserve or defeat diversity,” it sees no reason to treat alien corporations differently. Id. To permit so would result in giving a plaintiff a choice of picking and choosing among its citizenships in order to either defeat or preserve the citizenship as it sees fit. Id. (“[d]ual citizenship is neither a sword nor a shield; it is not a magic jurisdiction key that both opens and closes the door to federal court depending on who holds the key.”)

The Court found that the plaintiff failed to satisfy the diversity requirement of §1332(a)(3) based upon its foreign (Guyanese) citizenship and rejected the plaintiff’s invitation to extend jurisdiction to alien corporations with domestic principal place of business as running afoul of Congress’ explicit authorization. Id. at 531. Because of the plaintiff’s dual citizenship, the Court found that it lacked the subject matter jurisdiction and dismissed the case. Id.

1The fact that there were foreign corporations incorporated in the same country on both sides of the case did not defeat diversity jurisdiction, as the Third Circuit has held that the complete diversity rule does not apply to foreign citizens. Id. at 530.