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