In Central West Virginia Energy Co., Inc. v. Mountain State Carbon, LLC, Case No. 10-1486, 2011 U.S. App. LEXIS 7557 (4th Cir. Apr. 13, 2011), the Fourth Circuit Court of Appeals clarified how to determine a corporation’s “principal place of business” for purposes of diversity jurisdiction.

Plaintiff, a coal corporation, brought suit in federal court against Defendants, a limited liability company and its member companies, alleging wrongful refusal to accept coal deliveries in breach of an agreement. Defendants filed a motion to dismiss the complaint due to a lack of complete diversity of the parties. Defendants argued that one of the member parties, Severstal Wheeling, had its “principal place of business in West Virginia, the Plaintiff’s home state; thus, Defendants argued, complete diversity did not exist. Siding with Defendants, the District Court concluded that Severstal Wheeling’s “principal place of business” was indeed West Virginia because that is where its day-to-day operations were all handled and dismissed the complaint.

The Fourth Circuit Court of Appeals reversed. Looking at precedent, the Fourth Circuit noted that, in the past, it has employed two different tests to determine a corporation’s “principal place of business” Under the “nerve center” test, the home office of the corporation from which officers coordinate the corporation’s activities is the “principal place of business.” Athena Auto, Inc. v. DiGregorio, 166 F.3d 288, 290 (4th Cir. 1999). Under the “place of operations” test, the “principal place of business” is where the bulk of the corporation’s activities occurs. Id. Prior to this decision, the Fourth Circuit had declined to adopt one test at the exclusion of the other. Id.

The Supreme Court of the United States, however, recently held that that, for purposes of diversity jurisdiction, a corporation’s principal place of business is always determined by the “nerve center” test. Hertz Corp. v. Friend, 130 S. Ct. 1181, 1186 (2010). Here, the Fourth Circuit concluded that the District Court misapplied the “nerve center” test when it dismissed the claim for lack of diversity jurisdiction.

In its decision, the Fourth Circuit observed that seven of Severstal Wheeling’s eight corporate officers maintained their offices in Michigan rather than West Virginia. Moreover, Severstal Wheeling conceded that its officers in Michigan were responsible for a great amount of oversight and decision-making. Although Severstal Wheeling’s day-to-day operations, such as “purchasing, sales, transportation, engineering, human resources, and accounting/financial functions,” all occurred in West Virginia, the Court found these activities irrelevant to the “nerve center” test.

Applying Hertz, the Court concluded that Michigan, rather than West Virginia, was Severstal Wheeling’s “principal place of business” because Michigan was where the corporation’s high level officers directed, controlled, and coordinated the corporation’s activities.