The opinion of the court was delivered by: David A. Baker United States Magistrate Judge
REPORT AND RECOMMENDATION TO THE UNITED STATES DISTRICT COURT
This cause came on for consideration with oral argument*fn1
on the Court's review of the file, the testimony at the
evidentiary hearing, and review of the Complaint. In what is
essentially a dispute between and among members of the Board of
Directors and officers of the Freedom Environmental Services, Inc.,
three of the directors have filed suit, acting as the corporation,
against the chief executive officer, one of the putative directors,
the stock transfer company, and a stock promoter. They allege subject
matter jurisdiction in the Verified Complaint based on diversity of
28 U.S.C. § 1332, and federal question -- federal securities fraud,
28 U.S.C. § 1331 and 15 U.S.C. §78aa. Because the Court finds that it
lacks jurisdiction on either basis, it is respectfully RECOMMENDED
that the case be DISMISSED.
On May 2, 2012, three members of the Board of Directors*fn2
of Plaintiff Freedom Environmental Services, Inc. ("Freedom
Inc.*fn3 "), filed a Verified Complaint against
Freedom's Chief Executive Officer (Michael Borish) and others involved
in selling Freedom Inc.'s stock for two alleged counts of securities
fraud (Counts I and II) and state law claims of conversion, civil
theft, breach of fiduciary duties, civil conspiracy, injunctive,
equitable, and declaratory relief (Counts III to VIII).
Freedom Inc. is alleged to be a Delaware corporation with "its principal place of business in New Castle County, Delaware." Doc. 1-8 ¶ 1. Federal jurisdiction pursuant to 28 U.S.C. § 1332 exists only when there is complete diversity between the plaintiffs and the defendants and the amount in controversy requirement is met. See Owen Equip. and Recreation Co. v. Kroger, 427 U.S. 365, 98 S. Ct. 2396, 57 L. Ed. 2d 274 (1978). In order to achieve complete diversity no party plaintiff may be a citizen of the same state as any of the defendants. Owen Equipment, 437 U.S. at 373. For diversity purposes, a corporation is a citizen of (1) its state of incorporation; and (2) the state where it has its principal place of business. 28 U.S.C. § 1332(c)(1). Although a company may conduct business in multiple places, the Supreme Court has determined that "principal place of business" for a corporation is its nerve center: "the place where a corporation's officers direct, control, and coordinate the corporation's activities." Hertz Corp. v. Friend, __ U.S. __, 130 S.Ct. 1181, 1192- 93, 175 L.Ed.2d 1029 (2010) (establishing "nerve center" test as uniform approach for determining corporate citizenship).
Based on the testimony of Gary Goldstein at the evidentiary hearing, Freedom, Inc. is a "shell corporation" or a holding company that does not operate a separate business, but holds the assets of two subsidiary corporations, Brownies Waste Water Solutions, Inc., and Grease Retrieval, Inc., both of which operate in Florida. Freedom, Inc., the holding company for both, does not conduct any business in Delaware, its Board of Directors does not meet in Delaware, and the officers of Freedom, Inc. live and work in Florida. Under the test established by the Supreme Court in Hertz, Freedom, Inc. has its "nerve center" in Florida. Because Plaintiff Freedom, Inc. and Defendants Borish, Rowland, Barhonovich, and Berthiaume are Florida citizens, there is a lack of diversity between the parties. Therefore, subject matter jurisdiction cannot be based on diversity jurisdiction.
Freedom, Inc.'s alternative basis for jurisdiction, federal question based on federal securities fraud, 28 U.S.C. § 1331, is equally unavailing. Freedom, Inc. alleges two claims for securities fraud: violations of Section 10(b) of the Exchange Act (and Rule 10b-5) and Section 17(a) of the Securities Act. As the Eleventh ...