Foreign Plaintiff v. Foreign Defendant Destroys Diversity even if the Plaintiff’s Principal Place of Business is in Texas

The Fifth Circuit Court of Appeals started the new year with a quick civil procedure lesson, ruling yesterday in Vantage Drilling Company v. Hsin-Chi Su that lawsuits of foreign corporations with a principal place of business in Texas against foreign defendants belong in state, not federal, courts. This ruling is in line with the Second, Sixth, and Ninth Circuit Courts of Appeals, all of whom have previously held that a plaintiff’s incorporation abroad destroys diversity jurisdiction in a lawsuit against a foreign defendant, even if the plaintiff’s principal place of business is in the United States.

Plaintiff Vantage Drilling Company is an offshore drilling contractor that provides drilling units, related equipment, and work crews to major oil and natural gas companies around the world. It is incorporated in the Cayman Islands, with a principal place of business in Houston, Texas. Defendant Su, who served on Vantage’s board of directors, is a Taiwanese citizen.

After Vantage sued Su in a Texas state court for breach of fiduciary duty, fraud, and number of other business torts, Su timely removed the case to federal district court on the basis of diversity jurisdiction pursuant to 28 U.S.C. §1332(a), which states that:

(a) The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between

(1) citizens of different States;

(2) citizens of a State and citizens or subjects of a foreign state, except that the district courts shall not have original jurisdiction under this subsection of an action between citizens of a State and citizens or subjects of a foreign state who are lawfully admitted for permanent residence in the United States and are domiciled in the same State;

(3) citizens of different States and in which citizens or subjects of a foreign state are additional parties; and

(4) a foreign state, defined in §1603(a) of this title, as plaintiff and citizens of a State or of different States.

Vantage moved for remand arguing that its Cayman Island’s incorporation and Su’s Taiwanese citizenship destroyed diversity jurisdiction because there were aliens present on both sides of the litigation. The district court denied the motion to remand and reasoned that although Vantage had dual citizenship in the United States and Cayman Islands, it was “fully Texan” because it had no employees or operations in the Cayman Islands and its headquarters and primary operations were in Texas, where it “hire[d]local workers, [bought]local supplies, rent[ed] local buildings, donate[d] to local charities, and serve[d] local customers.” Su, on the other hand, in the district court’s opinion, was a “fully foreign party.” Analogizing to human citizens for whom “[r]emoval is proper if the dual national’s dominant nationality is American irrespective of [his/her] other affiliations,” the district court held that Vantage could not “rely[] on its foreign charter to avoid a national court despite the predominant reality of its existence.” Vantage filed an interlocutory appeal, resulting in a reversal of the district court by the Fifth Circuit.

The Court of Appeals explained that pursuant to 28 U.S.C. §1332(c)(1), a corporation is deemed a citizen of “every State and foreign state” in which it is incorporated and the “State or foreign state” where it has its principal place of business. Thus, undeniably, Vantage is a citizen of the Cayman Islands, where it is incorporated. Since Su is also a foreign citizen, the complete diversity is lacking and “there can be no diversity jurisdiction.”

Importantly, the Fifth Circuit rejected Su’s argument that the presence of bias in a state forum against a fully foreign defendant is a factor to be considered in the diversity analysis. Thus, the fact that Vantage had substantial business dealings in Texas, while Su did not, did not justify a finding of a diversity jurisdiction where both parties were foreign.

PRACTICAL IMPLICATIONS: Sometimes, incorporating a company or a subsidiary in a foreign jurisdiction makes business sense from the standpoint of taxation or corporate governance. However, a company that follows that route should keep in mind that should a dispute arise with a foreign party, the company might be forced to give up federal forum and all the advantages that come with it and litigate the case in a state court, especially if the case involves  only state law claims. In this case, as a plaintiff, Vantage preferred to be in state court, but this might not always be the case.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.