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MASH ENTERPRISES INC. v. PROLEASE ATLANTIC CORPORATION

March 13, 2002

MASH ENTERPRISES, INC. F/K/A HUMAN RESOURCE OPTIONS, INC. AND PROFESSIONAL LEASING CONCEPTS, INC., PLAINTIFFS,
V.
PROLEASE ATLANTIC CORPORATION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Robert F. Kelly, Sr., U.S. District Judge.

MEMORANDUM

Presently pending before this Court is Defendants' Motion to Dismiss Plaintiffs' Complaint for Lack of Subject Matter Jurisdiction pursuant to Federal Rules of Civil Procedure 12(b)(1) and Plaintiffs' Response.*fn1 For the following reasons, Defendants' Motion will be denied.

I. FACTUAL BACKGROUND

This action arises out of the purchase of substantially all of the assets of Human Resource Options, Inc. ("HRO"), the predecessor in interest of Plaintiff MASH Enterprises, Inc. ("MASH"), by Defendant Prolease Atlantic Corporation ("Prolease Atlantic"), in or about May, 2000. As a result of this purchase, Plaintiffs are suing Defendants on ten separate state law counts including, but not limited to, breach of contract, fraud and civil conspiracy.*fn2 (Am. Compl.). The Amended Complaint alleges that the Court has subject matter jurisdiction over this action under the diversity jurisdiction statute, 28 U.S.C. § 1332(a)(1), because the amount in controversy exceeds $75,000 and the adverse parties are diverse. (Id., ¶ 11). There is no other basis for federal jurisdiction. For purposes of this motion, the Court feels it unnecessary to delve into the extensive procedural history of this action, however, the Court finds it is instructive to explain the general structure and business activity of the parties.

MASH, formerly known as HRO, and Prolease Atlantic are Professional Employer Organizations ("PEO"). In general, "[a] PEO provides to its client companies a range of human resource functions including[,] but not limited to[:] payroll, payroll tax administration, 401(k) and pension administration, benefits (including[,] but not limited to[,] health, dental, life, disability, etc.), unemployment insurance administration and workers compensation insurance." (Id., ¶ 14). A PEO enters into a contract with its client companies ("client contract") under which the PEO assumes substantial employer rights, responsibilities and risk and establishes and maintains a co-employer relationship with the client companies' workers ("external employees"). (Id., ¶ 15). That is, external employees, who were originally the employees of the client company, contractually become "co-employees" of the PEO and the client company. (Pls.' Reply Defs.' Mot. to Dismiss, at 6). These external employees are then "leased back" to the original employer and continue to conduct the business of the client company. (Id.). The PEO is the "co-employer" for the sole purpose of providing its human resource services to the external employees on behalf of the client company. (Id.). Thus, as a result of the nature of its business, a PEO has two types of employees: (1) external employees, the co-employees of the PEO and client company and (2) internal employees, the PEO's own employees who actually conduct and operate the business of the PEO.

II. DISCUSSION

Under Federal Rule of Civil Procedure 12(b)(1), Defendants challenge the subject matter jurisdiction of this Court over Plaintiffs' Amended Complaint. A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) may advance either a facial or factual challenge to subject matter jurisdiction. Fin. Software Sys., Inc. v. First Nat'l Bank, 84 F. Supp.2d 594, 596 (E.D.Pa. 1999) (citing Mortensen v. First Fed. Sav. and Loan Assoc., 549 F.2d 884, 891 (3d Cir. 1977)). A facial challenge to subject matter jurisdiction protests the existence of jurisdiction based on the face of the complaint, whereas, a factual challenge to the existence of subject matter jurisdiction is based in fact. Id. Whatever type of challenge may be asserted, it is the Plaintiff who bears the burden of proving that the pertinent jurisdictional requirements are satisfied. Dev. Fin. Corp. v. Alpha Housing & Health Care, Inc., 54 F.3d 156, 158 (3d Cir. 1995) (citation omitted). As for the determination of whether subject matter jurisdiction exists, it must be based on the facts in the record of the case. The Mennen Co. v. Atl. Mut. Ins. Co., 147 F.3d 287, 294 (3d Cir. 1998) (stating "subject matter jurisdiction depends upon facts of record, and when any question arises as to the existence of jurisdiction a federal court is obligated to make an independent determination of those facts.").

A. Facial Challenge to Subject Matter Jurisdiction

In the present case, Defendants assert both a facial and factual challenge to subject matter jurisdiction. See Defs.' Mot. to Dismiss. First, Defendants argue that Plaintiffs' Amended Complaint is fatally flawed on its face. Id. at 6-11. Defendants' facial challenge centers on the contention that Plaintiffs' Amended Complaint fails to properly allege the requisite facts to confer subject matter jurisdiction. Id. Specifically, Defendants argue that Plaintiffs improperly plead that Defendant, Prolease Atlantic, a Delaware corporation, maintains a principal place of business in the State of Maryland, instead of properly pleading that Prolease Atlantic maintains its principal place of business in the State of Maryland. Id. (emphasis added). In their Reply to Defendants' Motion to Dismiss, Plaintiffs have conceded that their Amended Complaint improperly alleges the requisite facts to confer subject matter jurisdiction. (Pls.' Reply Defs.' Mot. to Dismiss, at 1-2). As a result, Plaintiffs have stated that they intend to file a Second Amended Complaint which will properly plead the factual allegations indicating the complete diversity of citizenship of the parties to the action. (Id. at 2). Since Defendants' facial challenge to the existence of subject matter jurisdiction has been conceded to, and will be subsequently cured, by the Plaintiffs, the Court will now exclusively deal with Defendants' factual challenge to the existence this Court's subject matter jurisdiction over this action.

B. Factual Challenge to Subject Matter Jurisdiction

Defendants' factual challenge to the existence of subject matter jurisdiction centers on the contention that there is not complete diversity among all of the parties to the action. See Defs.' Mot. to Dismiss. Under 28 U.S.C. § 1332, diversity jurisdiction is properly invoked in cases where there is complete diversity of citizenship between plaintiffs and defendants and where the amount in controversy exceeds $75,000. 28 U.S.C. § 1332. In order "to satisfy the jurisdictional requirements of 28 U.S.C. § 1332(a)(1), the federal diversity statute, diversity must be complete; that is, no plaintiff can be a citizen of the same state as any of the defendants."*fn3 Midlantic Nat. Bank v. Hansen, 48 F.3d 693, 696 (3d Cir. 1995) (citing Carden v. Arkoma Assocs., 494 U.S. 185, 187 (1992); Quaker State Dyeing & Finishing Co. v. ITT Terryphone Corp., 461 F.2d 1140, 1142 (3d Cir. 1972)); see also Dev. Fin. Corp., 54 F.3d at 158 (stating "[i]t is axiomatic that the federal judiciary's diversity jurisdiction depends on complete diversity between all plaintiffs and all defendants."). Thus, "jurisdiction is lacking if any plaintiff and any defendant are citizens of the same state." The Mennen Co., 147 F.3d at 290 (citation omitted). Regarding diversity jurisdiction involving parties that are corporations, as is the case here, "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."*fn4 28 U.S.C. § 1332(c)(1). Thus, in order to determine whether diversity exists between the parties in this case, the Court must examine the parties' respective citizenship at the time the complaint was filed.

Defendants' Motion to Dismiss focuses on the citizenship of two parties, in particular, Plaintiff MASH and Defendant Prolease Atlantic. (Defs.' Mot. to Dismiss, at 2). There is no dispute that, at the time that the complaint was filed, Plaintiff MASH was a citizen of the Commonwealth of Pennsylvania.*fn5 However, there is a dispute regarding Prolease Atlantic's citizenship as determined by the location of its principal place of business.*fn6 In their Amended Complaint, Plaintiffs allege that Prolease Atlantic's principal place of business is located at 7361 Calhoun Place, Rockville, Maryland, which confers diversity jurisdiction because it imports that Prolease Atlantic is a citizen of Maryland. (Am. Compl., ¶ 3). In their Motion to Dismiss, Defendants conversely argue that Prolease Atlantic maintains its principal place of business in Pennsylvania, which destroys diversity jurisdiction because then both Plaintiff, MASH, and Defendant, Prolease Atlantic, would be citizens of Pennsylvania. (Defs.' Mot. to Dismiss). Thus, Defendants' argument regarding lack of diversity is premised upon the assertion that Prolease Atlantic is a citizen of the State of Pennsylvania based on its principal place of business being located in Pennsylvania. (Id.). Consequently, it follows that the determination of Prolease Atlantic's principal place of business is of pivotal significance. As a result, the issue in this case is whether Prolease Atlantic's principal place of business, at the time of the commencement of the action, was located in Maryland, which allows this Court subject matter jurisdiction based on complete diversity, or Pennsylvania, which prohibits this Court from presiding over the action because diversity would not be complete.

1. Determination of A Corporation's Principal Place of Business

In this Circuit, the determination of a corporation's principal place of business for purposes of 28 U.S.C. § 1332 is governed by a "center of corporate activities" test. The Mennen Co., 147 F.3d at 291 (citing Kelly v. U.S. Steel Corp., 284 F.2d 850, 854 (3d Cir. 1960)). The "center of corporate activities" test is an operational approach which requires courts to ascertain the state where the corporation has its "headquarters of day-to-day corporate activity and management." Id. (citing Kelly, 284 F.2d at 854) (citations omitted). Thus, the "center of corporate activities" test focuses on the center of the corporation's production or service activities in order to determine a corporation's principal place of business, unlike the "nerve center" test, which focuses on the location where corporate policy decisions are made. Id. at 291-94. Accordingly, under the "center of corporate activities" test, a key factor in determining a corporation's principal place of business is the location of the center of corporate activity and management or day-to-day activities. Kelly, 284 F.2d at 854 (stating "it is the activities rather than the occasional meeting of policy-making directors which indicate the principal place of business."). Other less significant, but relevant, secondary factors to be considered include: (1) the location of the physical plants and the like; (2) the ...


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