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SALOMON ENGLANDER Y CIA, LTDA v. ISRAEL DISCOUNT B

July 30, 1980

SALOMON ENGLANDER Y CIA, LTDA, Plaintiff, against ISRAEL DISCOUNT BANK, LIMITED, Defendant and Third-Party Plaintiff, against SUZ-ETTE FASHIONS, INC., Third-Party Defendant.


The opinion of the court was delivered by: CARTER

Plaintiff, a Chilean corporation whose principal place of business is Santiago, Chile, brings this action against Israel Discount Bank ("IDB"), an Israeli corporation, for claims arising from a letter of credit issued by defendant for plaintiff's benefit, upon application of third-party defendant Suz-ette Fashions, Inc. ("Suz-ette"), a New York corporation. Suz-ette, in turn has asserted claims against plaintiff arising from the underlying contract between them.

Defendant has moved to dismiss the complaint for lack of subject matter jurisdiction, on the ground that there is no diversity jurisdiction between plaintiff and defendant who are both alien corporations.

Plaintiff, opposing the motion, claims that diversity jurisdiction exists under 28 U.S.C. § 1332(a)(2) *fn1" which permits district courts to entertain suits between an alien and a citizen of a state of the United States. Plaintiff argues that IDB should be deemed a citizen of New York for the purposes of diversity jurisdiction because either its principal place of business worldwide or its principal place of business within the United States is New York. Defendant, while contending that § 1332(c) is wholly inapplicable to alien corporations, concedes that its principal place of business within the United States is in New York, but maintains that its principal place of business worldwide is in Israel.

 To prove that defendant's main place of business worldwide is in New York, plaintiff seeks extensive discovery into the number and dollar volume of IDB transactions in Israel, New York, and various other locations. In response, defendant has sought a protective order claiming that such discovery is both irrelevant and unduly burdensome.

 The resolution of the motion to dismiss turns on the applicability of 28 U.S.C. § 1332(c) to alien corporations a question that has long troubled the lower courts in this circuit.

 It is well-settled that the presence of aliens on both sides of a controversy will defeat diversity jurisdiction. See e.g., Merchants' Cotton Press and Storage Co. v. Ins. Co. of North America, 151 U.S. 368, 385-86, 14 S. Ct. 367, 372-73, 38 L. Ed. 195 (1894); IIT v. Vencap, Ltd., 519 F.2d 1001, 1015 (2d Cir. 1975); Hercules Inc. v. Dynamic Export Corp., 71 F.R.D. 101, 106 (S.D.N.Y.1976) (Cannella, J.).

 Prior to 1958, both domestic and alien corporations were considered to be citizens solely of the states of their incorporation. See Hercules Inc. v. Dynamic Export Corp., supra, 71 F.R.D. at 106. In 1958, however, 28 U.S.C. § 1332 was amended, adding § 1332(c) which created dual citizenship for domestic corporations for purposes of diversity jurisdiction by deeming a corporation 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 express purpose of the dual citizenship principle was to limit the number of cases coming to the federal courts in diversity. The amendment was designed to eliminate the evil of an essentially local business, by means of incorporation elsewhere, avoiding trial in the courts of the state where it conducts its principal business. S.Rep.No. 1830, 85th Cong., 2d Sess. 4 (1958); U.S.Code Cong. & Admin.News 1958, pp. 3099, 3101-02; R. G. Barry Corp. v. Mushroom Makers, Inc., 612 F.2d 651, 654 (2d Cir. 1979). The reasoning behind the amendment was that the protection from possible local prejudice provided to out-of-staters by diversity jurisdiction is not needed by a corporation whose principal place of business is in the forum state.

 It was perhaps inevitable that the question whether § 1332(c) applied to alien corporations would someday arise. The leading case holding that it does not is Eisenberg v. Commercial Union Assurance Co., 189 F. Supp. 500 (S.D.N.Y.1960) (Dimock, J.). Eisenberg based its conclusion on statutory construction, finding that Congress had used a capital S when referring to states of the Union, and a lower case § when referring to foreign states. Thus, the court held that unless a corporation is incorporated in a domestic state, it would not fall within either half of § 1332(c). Just as it could not be deemed a citizen of the State by which it has been incorporated, so it could not be deemed a citizen of the State where it has its principal place of business. Id. at 502.

 Many lower court decisions in this circuit have followed Eisenberg, holding that § 1332(c) does not apply to aliens and applying the traditional rule that for diversity purposes alien corporations are to be deemed citizens only of the foreign state of their incorporation. E. g., Union Marine General Ins. Co. v. American Export Lines, Inc., 274 F. Supp. 123, 125 n.1 (S.D.N.Y.1966) (Cooper, J.); Tsakonites v. Transpacific Carriers Corp., 246 F. Supp. 634, 641 (S.D.N.Y.1965) (Cooper, J.), aff'd, 368 F.2d 426 (2d Cir.), cert. denied, 386 U.S. 1007, 87 S. Ct. 1348, 18 L. Ed. 2d 434 (1967); Chemical Transp. Corp. v. Metropolitan Petroleum Corp., 246 F. Supp. 563 (S.D.N.Y.1964) (Cooper, J.); Mazzella v. Pan Oceana A/S Panama, 232 F. Supp. 29, 31 n.1 (S.D.N.Y.1964) (Bonsal, J.); See Hercules Inc. v. Dynamic Export Corp., supra.

 Dicta in Eisenberg opinion had indicated that if § 1332(c) did apply to alien corporations, it could be applied fairly only to corporations whose principal place of business worldwide was in a state of the United States, for such a corporation could, perhaps, be deemed to have adopted that state as its actual residence and would not be subject to prejudice against outsiders there. Eisenberg v. Commercial Union Assurance Co., supra, 189 F. Supp. at 502.

 This suggestion was followed in Southeast Guaranty Trust Co. v. Rodman & Renshaw, Inc., 358 F. Supp. 1001, 1005-07 (N.D.Ill.1973), the leading case holding that § 1332(c) should apply to alien corporations that have a principal place of business in a United States state.

 The Southeast court reasoned that just as a domestic corporation whose main business place is in the forum state should not be able to invoke federal jurisdiction merely by being incorporated in a sister state, so an alien corporation whose operations are located within a state should be deemed a state citizen despite foreign incorporation. This analysis, the court reasoned, would effectuate the Congressional purpose of eliminating diversity except where it is truly needed to protect an outsider from local prejudice. Id. at 1007. The court rejected Eisenberg's statutory construction, seeing "no ground for concluding that because the first half of (§ 1332(c)) does not apply to foreign corporations, that the second half should have no application to them," if they have their principal place of business in the United States. Id.

 Several courts in this district have followed the Southeast analysis. See Oppenheimer Reinsurance Co. v. Alexander & Alexander, Inc., 79 Civ. 2151 (S.D.N.Y. December 27, 1979) (Pierce, J.); Arab International Bank & Trust Co. v. National Westminster Bank Ltd., 463 F. Supp. 1145, 1147 (S.D.N.Y.1979) (Sand, J.); Bergen Shipping Co. v. Japan Marine Services, Ltd., 386 F. Supp. 430, 431-34 ...


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