on December 16, 1994. Corcoran resigned as Chairman of the Board on or about March 16, 1995. He resigned from his position on the Special Committee and as Chief Executive Officer on March 29, 1995. He remains a director of the Board.
Engelman was the President and Chief Operating Officer of the Company from late December 1994 or early January 1995 until April 25, 1995 when he was dismissed by the Board. Engelman remains a director of the Board. He and Corcoran were on the Special Committee of the Board. Engelman was removed from that Committee on April 25, 1995. Corcoran resigned from the Committee on March 29, 1995. That Committee is now made up of Sonnerberg and Gerrity.
The management of EXTL is in a state of flux.
The current EXTL employees/Board members who have offices in Nanuet include Schuck, John J. Gitlin, Esq. ("Gitlin"), EXTL's in-house counsel, Dr. Harold Reisner ("Reisner"), who is responsible for shareholder relations, and two secretaries. Gerrity visits the office several times each week to conduct business.
All meetings of the Board of Directors have been held in New York and all shareholders meetings have been in New York, including the one currently scheduled for June 30 which is scheduled to be in New York.
Outside general counsel for the Corporation, Ziegler, Ziegler & Altman and counsel to the Special Committee, Richard Emery, P.C. are located in New York.
A March 16, 1995 letter from Schuck to Broadgate Consultants, a New York-based public relations firm, notified Broadgate that all press releases were to be cleared by Ziegler, Ziegler & Altman and counsel to the Special Committee before dissemination.
Because of the control contest, and the reshuffling of management that has resulted, the management of the company has passed to the Board of Directors.
The Principal Place of Business of the Corporation for Diversity Purposes is New York
It is well established that diversity jurisdiction requires complete diversity between the parties opposed in interest. Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L. Ed. 435 (1806); Wright and Miller, § 3605.
For the purposes of establishing diversity under 28 U.S.C. § 1332(c), "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and the State where it has its principal place of business."
Plaintiffs contend that the principal place of business is now in Denver. In the Third Action, the principal place of business of EXTL was described in the complaint as New York. The issue of principal place of business has not been litigated to date in any of these related actions. Subject matter jurisdiction in the prior actions was based on federal question jurisdiction. 28 U.S.C. § 1331. EXTL contends that its principal place of business is and has, since the filing of the first action, been Nanuet, New York. Whether federal diversity jurisdiction exists is determined by examining the citizenship at the time the action is commenced. Wright and Miller § 3607. In this case, the relevant date is May 16, 1995.
Whether the principal place of business is in Colorado (Denver) or in New York (Nanuet) determines whether this Court has jurisdiction to hear this complaint since Miller is a New York resident.
The Court of Appeals has recognized two different tests for determining the principal place of business of a corporation. The choice of tests depends on the structure and nature of the corporation.
Where a corporation is engaged in far-flung and varied activities which are carried on in different states, its principal place of business is the nerve center from which it radiates out to its constituent parts and from which its officers direct, control and coordinate all activities without regard to locale, in the furtherance of the corporate objective. Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862, 865 (S.D.N.Y. 1959).
Where corporations are centralized, however, courts seek to determine the location from which the corporation has its most extensive contacts, or greatest impact on, the general public. R.G. Barry v. Mushroom Makers, Inc., 612 F.2d 651, 655 (2d Cir. 1979). Inland Rubber Corp. v. Triple A Tire Service Inc., 220 F. Supp. 490 (S.D.N.Y. 1963), held that in causes where there are only a few places of business, the locus of corporate operations is more important than the locus of overall policy direction. The test for such centralized corporations has also been called the "place of operations" or "locus of operations" test. See Center for Radio Information, Inc. v. Herbst, 876 F. Supp. 523, 525 (1995).
In R.G. Barry Corp. v. Mushroom Makers, Inc., 612 F.2d 651 (2d Cir.1979), the Second Circuit discussed both Scot's "nerve center" test and Inland Rubber's "locus of operations" test, distinguishing between their applications:
Where corporate operations are spread across numerous states, courts have tended to emphasize those factors that identify the place where overall policy originates.... When, however, corporate operations are centralized, courts have tended to deemphasize the concentration on the corporate "nerve center" and to focus instead upon the state in which a corporation has its most extensive contacts with, or greatest impact on, the general public.
Id., at 655.
As the Circuit analyzed the cases, the corporation at issue in Scot had decentralized operations, whereas the corporation at stake in Inland Rubber had centralized operations. The Court of Appeals briefly described the facts in Scot, highlighting that Underwood Corporation (the defendant seeking removal from New York State Court on grounds of alleged Connecticut citizenship) had its largest production plant, greatest number of employees, and principal assets in Connecticut, its highest sales volume in California, and its executive offices -- the source of major policy decisions affecting every aspect of operations -- in New York. On those facts, the court found that New York, as the corporate "nerve center", was the corporation's principal place of business.
In its description of the facts in Inland Rubber, the Court of Appeals emphasized that Inland Rubber Corporation, a sales subsidiary of a manufacturing firm based in Ohio, was found to be a citizen of New York because it conducted its principal operations there -- it had most of its employees and two thirds of its sales there, and its New York office prepared the company's financial statements, and formulated credit and advertising policies -- despite the company's Ohio charter and headquarters.
In R.G. Barry, the Court held that the facts established an example of a corporation with centralized operations and therefore applied the "locus of operations" test. The court described the facts before it as follows:
Mushroom Makers, Incorporated was one of many affiliates of Stevens Sportswear, a holding company with its headquarters in Mississippi. The court termed Mushroom Makers a "selling corporation" whose principal function consisted of designing and marketing women's clothing. Ninety-five to ninety-nine percent of Mushroom Makers' sales occurred in New York, and Mushroom Makers' president and sole full-time employee worked through a New York office, the only separate office of the company and the only address listed in catalogues and advertisements. Mushroom Makers' production, packing, and shipping took place in Mississippi, although employees of another affiliate performed this work. All other administrative and managerial corporate services were provided in Mississippi through contracts with Steven Sportswear affiliates. The court found that Mushroom Makers was a New York citizen, since New York was the community in which it had most contact with the public.
EXTL is a company with operations around the world. Based on its expansive nature, the fact that 70% of the Corporation's income comes from transactions that occur and are for the most part processed outside of the United States, the "nerve center" test is the more appropriate test. Analyzing the factors in this case under the "nerve center test", New York is the principal place of business.
The Committee has failed to show that the control of the company sits in Denver. While it is true that the latest SEC filings listed its "principal executive offices" in Denver, Colorado, this is only one factor to be considered. See Uniroyal v. Heller, 65 F.R.D. 83, 87 (S.D.N.Y. 1974) citing Kelly v. U.S. Steel Corp., 284 F.2d 850 (3d Cir. 1960). (designating one state as the site of a company's executive office on SEC filings "although significant, such designation is not dispositive of the issue.").
It is also undisputed that substantial US-based operations are run out of Denver. These include the fact that Telecall, a EXTL subsidiary is based in the Denver offices. The Vice-President of EXTL, Alan Mandel ("Mandel"), maintains his office in the EXTL office in Denver. The entire financial department of EXTL is based in Denver. The salaries to all EXTL employees are paid by a Denver entity. Most of the day-to-day operations are conducted out of Denver. These functions include marketing and sales; customer services; and customer billing. Finally, in the last two months press releases have been released from Denver, including one on May 23, 1995 announcing that its annual meeting will be on June 30 in New York.
All the operations in Denver represent, however, a small fraction of the Company's global business. EXTL estimates that Denver-based operations account for 30% of the Company's business. Were the only two locations of business, the Denver and the New York offices, there would be little question but that the main operations are in Denver where a bulk of the work of the Company is done.
In a "nerve center" analysis, these operational aspects of a company are not determinative. See In re Joint Eastern and Southern Districts Asbestos Litigation, 1990 WL 129194 at *4 (S.D.N.Y. 1990). Instead, the Court should look to where corporate decisions are made and from where corporate policy flows. Id.. The nerve center is the place "from which its officers direct, control land coordinate all activities." Scot, 170 F. Supp. at 865. Plaintiffs have not submitted sufficient evidence to prove that EXTL's corporate decisions are made in Denver. In fact, what little direction exists for the Corporation at this time, appears to emanate from the Board. The Board, through its Chair, Gerrity, is based in New York.
Other facts presented by Counsel for EXTL and Gerrity include that: the Chairman of the Board and the Chair of the Special Committee of two, is based in New York; the Executive Vice President, responsible for a significant portion of EXTL's revenues and many of the agreements entered into by EXTL with the foreign PTTs is located in Nanuet; all meetings of the Board of Directors have been held in New York; all shareholders meetings have been in New York, including the one currently scheduled for June 30; outside general counsel and counsel to the Special committee are located in New York; all corporate records are located in New York; all press releases were prepared by EXTL's New York based consultants, reviewed by executive officers in Nanuet and by outside counsel and counsel for the Special Committee; the shareholder liaison, Reisner, has his office in Nanuet.
Gerrity described the functions of the Denver operation as "back room operations." He asserts that he makes all corporate decisions from Nanuet. The plaintiffs have failed to prove any significant management decisions made by personnel in Denver.
Concluding that EXTL's principal place of business is in New York is consistent with the holding in High Ridge Park Assoc. V. NYCOM Information Serv. Inc., 821 F. Supp. 835 (D. Conn. 1993), involving a defendant with striking similarities to EXTL. In that case NYCOM, the defendant, was an operator and provider of long distance telephone services with a limited number of employees, a holding company for a related corporation that provided telephone services. NYCOM had 240 employees, all of whom were in Florida. The senior officers and directors of the company, however, were located in Connecticut. The High Ridge Court held that Connecticut was the principal place of business because:
the Stamford [Connecticut] office was responsible for running the daily operations of NYCOM, as well as formulating the overall business strategy. The Stamford office was responsible for press releases, management decisions, hiring personnel, legal and regulatory work, answering shareholder and investor inquiries and requests, and overseeing [the subsidiaries] operations. Furthermore, NYCOM held Board and shareholder meetings in Stamford.
Id., at 837.
The same factors, considered in this case, point to New York and not Denver as the principal place of business.
It appears that the major direction and control of this Corporation at this time involves managing the control contest that has preoccupied these parties and this Court for much of the last eight months. The direction for this management function is also centered in New York, the somewhat impaired nerve-center of EXTL.
Plaintiff has failed to establish Denver as EXTL's principal place of business. The motion is therefore granted and this action is dismissed. Submit judgment on notice.
It is so ordered.
New York, N. Y.
May 31, 1995
ROBERT W. SWEET