Brunini Law

Community Banks

Low Rent and Ramen Noodles?

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Like all of us, the older I get, the more I understand the genetics lessons I learned in high school biology. As a kid, I would sit at the dinner table every night and listen to my father tell his same favorite stories over and over again, laughing harder each time he told them. I have had similar experiences as an adult sitting around a board room table with him. However, now that I sit at the head of the dinner table every night, I catch myself laughing hysterically at my favorite stories about childhood, or college, or the first year of marriage, or my kids first few months, or any other period endearing to me, while my kids stare at me with a look that implies that the story is not really any more funny than the last time I told it.

One of my classic go to stories is about me and my wife’s family finances the first year of marriage. I was twenty-one when we married and had just graduated from Mississippi State with a Bachelor’s Degree in Accountancy two weeks before. I had plans to begin working on a Master’s of Professional Accountancy Degree at State the week after our wedding so I could achieve the hours I needed to sit for the CPA exam and ultimately join PricewaterhouseCoopers in Memphis, where I had accepted a job pending these requirements the semester before. My wife was about to start her senior year at Mississippi University for Women, and we cut our honeymoon in Jamaica a couple of days short (still the dumbest mistake I have ever made) so that we could hurry back before we missed too many days of summer school in pursuit of our ultimate educational goals.

That year and a half until we both ultimately graduated (at this point in the story my wife usually likes to remind me that I could not let this second graduation be enough and that she ultimately had to support me through three more years of law school before I decided to finally earn a living), we lived off of a small stipend I received as a graduate assistant at State, a humble paycheck my wife pulled in from a job on campus at the W, and I’m sure the occasional parental gift. My punchline to this story, which changes very little each time I tell it, is that “I promise we had more money then than we do now!”

The good thing about this story is that I often find a different audience to hear it each time so that it doesn’t get stale to anyone else except for my wife. Another good thing about it is that it always generates a laugh because whomever I tell it to often relates to it very well. As a matter of fact, I told it to a banking friend last week who agreed wholeheartedly that financial times seem much easier earlier in marriage than they do in mid-life. Why is that? It certainly is not because of income levels because my wife and I would have been lucky to earn $20,000 that first year. I never actually state the reason for this paradox, but I never have to because everyone knows why it is true. We were financially more secure early in married life because of the bottom part of our family income statement and not the top. As long as we scraped up enough cash to pay rent, the electric bill, and the occasional grocery bill, we could blow the rest however we chose. Things such as house maintenance, car payments (we still drove cars paid off by our parents as high school graduation gifts), tuition, retirement savings, kids’ clothes, baseball registration fees, etc., were too far in the distance to concern us.

Community banks are striving incredibly hard these days to increase the top line of their income statement, especially considering the way margins have compressed since the Great Recession. However, what if the same dynamic we all experienced as young married couples or young people in general also applied to community banks? What if the ultimate differentiator between higher earning community banks and lower earning community banks over the last five years was most related to their ability to control expenses instead of their ability to generate revenue?

We discussed in the previous articles how the Uniform Bank Performance Report (“UBPR”) data since 2010 indicates that smaller community banks have not necessary performed that much worse than their larger peers with regards to earnings, and as a matter of fact in many cases they performed better. We have also illustrated that the largest differentiator in bank earnings over that period of time seemed to be the location of the bank (i.e., urban v. rural) instead of the size of the bank, and that urban banks appeared to be at a disadvantage to rural banks when you consider their average ROE and ROA over the last five years. In the last article, we identified problem assets and loan provisions as part of the reason for that dynamic; however, a deeper look into the UBPR data indicates that operating expenses were much more responsible for the drag on urban banks than anything else.

When you look at the average Overhead Burden for banks over the last five years (i.e., non-interest expense less non-interest income), metro banks carried 49 basis points more of overhead as a percentage of total assets than non-metro banks. This means that, all other things being equal over the last five years, metro banks would have had to generate 49 basis points more of yield on their total assets through net interest income or securities gains in order to average the same ROA non-metro banks earned considering their lower overhead burden. As we have already discussed before, though, that did not happen.

Chart 7: Average Metro “Overhead Burden” vs. Non-Metro “Overhead Burden”

 

Chart-7So why do metro banks spend more? Well, part of the reason may be tied to their large number of branch facilities which may be necessary to maintain market share in a larger market. According to that same data, banks in peer group categories with “more branches” had an average overhead burden to total assets of 2.79%, while banks in peer groups with fewer branches averaged a burden of 2.43%. Obviously, this would increase the costs related to occupancy and equipment, explaining why metro banks occupancy costs were higher than non-metro banks occupancy costs over that period (i.e., 0.44% average to total assets compared with 0.34% average to total assets) and banks with “more branches” carried higher occupancy costs as well (i.e., 0.45% compared to 0.33% for banks with “fewer branches”). Metro banks also averaged much higher “other expenses” (i.e., non-interest expenses excluding personnel and occupancy and equipment) than their non-metro counterparts (i.e., 1.28% on average to total assets relative to 0.97% for non-metro banks), and continuing with the theme that numbers of branches were the driver, banks with “more branches” averaged other expenses of 1.18% to total assets compared to an average of 1.07% for banks with “fewer branches.”

Possibly the most interesting differentiator appeared to be personnel expenses.   Metro Banks and banks with “more branches” both averaged 1.77% of personnel expenses to total assets over the last five years compared to non-metro banks and banks with fewer branches that both averaged 1.57%. However, contrary to the logical progression from the previous paragraph, this did not appear to be caused by the fact that metro banks had “more branches” and therefore more employees to staff additional offices. As a matter of fact, metro banks actually averaged slightly less assets per employee over the last five years (i.e., $3,910,000) than non-metro banks ($3,990,000), even though banks with “more branches” averaged much less assets per employee (I,e,$3,390,000) than banks with “fewer branches” (i.e., $4,510,000). Therefore, relative to assets, there was not much difference between the number of employees for metro banks and the number for rural banks, even though there was a big difference between banks with “more branches” relative to banks with “fewer branches”.

Then why are metro banks carrying so much more personnel expenses as a percentage of total assets than their rural counterparts? They are paying each person they employ more. On average over the last five years, metro banks paid each employee $64,850 while their non-metro counterparts paid $58,160 per employee. While that doesn’t sound like a big difference on its face, you multiply that $6,690 times fifty employees and you start to get to some real numbers.

Why are metro banks so generous? Well, if I had to guess, they are not paying it out of the goodness of their heart. Logic tells us that costs of living in metropolitan areas are higher, and that employees of banks in that area would demand a higher pay check to pay the bills, so maybe metro banks have to pay those larger paychecks just to compete for necessary staff in those areas. It is hard to prove this just by looking at UBPR data, so any such conclusion is just a guess. I know one thing, though. That first year of marriage sure would have been a lot harder in New York City than it was in Starkville, Mississippi.

“This Business Ain’t Hard, Son, You Just Can’t Make Bad Loans”

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In April, 2008, I personally needed a change of scenery. I was extremely lucky to be part of arguably the largest banking law practice in the state at that time, and I was equally fortunate to have arguably the state’s best known banking attorney as my mentor. However, the pressures and stresses of balancing the practice of law, billable hours, and my family, which was four months into our second child, was beginning to wear on me. As a result, I made a decision, maybe somewhat hastily, to leave the practice of law and join the bank back home that my family had been involved in for some time. At that point in my life, “Bankers’ Hours” was a dream that was hard to forget and impossible to pass up.

Shortly after I left the firm and joined the bank, an older banker whom I had worked with and have a tremendous amount of respect for called me to chastise me for not telling him that I was leaving the firm. This banker had been around the business for a long time and had seen a lot. He had the charisma of a Marlon Brando with the down home common sense of an Andy Griffith, even though it is safe to say he did not have the Hollywood looks of either. After properly reprimanding me, he turned the conversation to wishing me luck and giving me whatever nuggets of wisdom I could use in my newfound career. He ended the conversation with this statement that has stuck with me since that day: “This business ain’t hard, son, you just can’t make bad loans.” Ironically, five months later, all hell broke loose in banking and within our nation’s economy, and his words remained in the background of my psyche like a continuing subtitle that I used to interpret the chaos that was ensuing all around the banking industry.

In December of 2012, the Federal Deposit Insurance Corporation (“FDIC”) conducted its “Community Banking Study,” which was “a data-driven effort to identify and explore issues and questions about community banks.” It analyzed banking data over the period of time between 1984 and 2011 and tried to analyze trends and circumstances that were altering the banking landscape for community banks and which impacted the performance of community banks as they entered the “Great Recession.” Chapter 5 of that study was a comparative performance of community bank lending specialty groups, and it focused mostly on how community banks had shifted their lending strategies prior to the recession and what affect that strategic change had on their performance during the recession. I found the following points to be particularly interesting:

  • In 1984, retail loans represented over 61 percent of all loans at “community banks[1]”, compared with 35 percent of all loans at “noncommunity banks.” By the end of 2011, these ratios had basically flipped so that retail loans made up 36 percent of community bank loans and 54 percent of noncommunity bank loans;
  • Between 1984 and 2011, residential real estate loans fell from 47 percent of community bank total loans to 32 percent, while commercial real estate loans rose from 21 percent of loans to 42 percent;
  • Commercial Real Estate (“CRE”) specialists[2] experienced the most volatile earnings performance during the examined period, and their pretax ROA trailed the community bank average by more than one-third;
  • CRE specialists had a high frequency of failure during the period examined, failing at a rate that was more than two time as frequent as similarly situated community banks;
  • Between 1991 and 2007, the number of CRE specialists increased fivefold, going from less than 4 percent of all community banks in 1991 to almost 30 percent of community banks at their peak in 2007;
  • For the entire study period, community banks with Commercial and Development (“C&D”) loans, a subset of CRE loans, greater than 10 percent of their assets were 2.8 times more likely to fail than the average community bank, while those with C&D loans below 10 percent were less likely to fail than the average community bank;
  • CRE specialists were the worst performers over the entire study period, performing slightly better than the average for all community banks in good economic times, but performing significantly worse during periods of banking crises; and
  • CRE specialists were primarily headquartered in metro counties (80 percent), and 74 percent of community banks with at least 10 percent of assets in C&D loans were primarily located in metro areas.

When I was examining the UBPR data for the period of time that mostly followed the FDIC’s study period, my first hypothesis for explaining the earnings discrepancy between metropolitan and non-metropolitan banks was that it had to be related to these “bad” CRE and C&D loans cited in this study that the wise banker warned me about. It seemed quite logical to me that metropolitan banks would have much lower earnings, even during this “recovery” period, because they were still fighting loan provisions and non-accrual loans from CRE and C&D loans that were just more prevalent in their markets.

After testing this assumption, it did appear to hold up, at least partially. From the beginning of 2010 through the end of 2014, banks under $300 million in assets and in a metro area averaged loan provisions that were 0.28% of total assets compared to loan provisions that averaged 0.17% of total assets for similarly sized banks headquartered in non-metro areas. Likewise, the same metro banks had average non-accruals equal to 1.72% of total loans during that period, while their rural counterparts had a non-accrual percentage of 1.04%. There is no doubt that higher balances of “bad” loans are still holding metropolitan banks back. By the way, for what it is worth, banks larger than $300 million averaged provisions and nonaccruals that were higher than each of these averages, even though their average earnings were on par with the smaller, rural banks and much higher than the smaller, metropolitan banks.

However, when I considered that rural banks under $300 million in assets had earnings that basically doubled those of similarly sized metro banks from 2010 through 2014, this answer alone did not seem to be sufficient to answer the question entirely, and it wasn’t. The rest of the story became evident when I dug deeper in the bottom half of the income statement, and that will be the topic of my next article.

[1] The study developed a new research definition of a community bank that was partially tied to asset size (i.e., an indexed maximum asset value that began at $250 million in 1984 and increased to $1 billion in 2010), but also considered “criteria related to traditional lending and deposit gathering activi­ties and limited geographic scope.”

[2] In order to be considered a “specialists” for the purposes of this study, a bank had to hold loans of that type greater than 33 percent of total assets.

Small Community Banks in Rural Areas Still Make Money?

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“Wait a minute,” you say, “this can’t be right. Everything I have heard in banking for the past 20 years has told me my bank must get larger. We must abandon these old, rural markets for the greener pastures of America’s cities and suburbs, where loans and deposits flow like milk and honey.” Well, sit down, because the revelations discussed in my last post become even more dramatic. As mentioned in my earlier post, the UBPR divides the 12 Peer Groups covering banks under $300 million not only based upon size, but also based upon their “metropolitan” or “non-metropolitan” locations and their number of branches. By examining these 12 peer groups, I discovered that ”metropolitan bank” peer groups had average ROAs over the last 5 years (i.e., 0.44%) that collectively averaged approximately half those of “rural” peer groups (i.e., 0.87%), while having collective average ROEs (i.e., 3.50%) that were less than half of those recorded by their more rural cousins (i.e., 8.02%). Not only are rural banks more profitable than their metropolitan competitors, they have been running circles around them for the last five years. How do those same rural peer group averages compare to the averages for the “larger” peer groups 1, 2, and 3? Very favorably, thank you. The collective average ROE (i.e., 8.02%) for these rural peer groups (i.e., 5, 7, 9, 11, 13, and 15) was higher than the average ROE for each of the three larger peer groups (7.79%, 7.60%, and 7.59%, respectively), and the collective average ROA (i.e., 0.87%) for these rural peer groups was higher than all but one of the average ROAs of the three larger peer groups (0.88%, 0.79% and 0.80%, respectively). Therefore, maybe it’s not size that is the ultimate differentiator, but instead location. Contrary to everything I have believed and heard to this point, maybe it is a bank’s rural location that is its ace in the hole!

Chart 3: Average “Metropolitan” ROA vs. “Non-Metropolitan” ROA, 2010 – 2014

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Chart 4: Average “Metropolitan” ROE vs. “Non-Metropolitan” ROE, 2010 – 2014

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What is the one rumor that appears to be true? Well, that may be that brick and mortar are the albatross that everyone believes them now to be. Banks in the last 12 peer groups that have “more” branches (i.e., 4, 5, 8, 9, 12, and 13) had a collectively lower average ROA (i.e., 0.56% to 0.75%) than the peer groups with “fewer” branches, and their collective average ROE was lower as well (i.e., 5.20% compared to 6.33% for peer groups with ”fewer” branches).

Chart 5: Average “More Branches” ROA vs. “Fewer Branches” ROA, 2010 – 2014

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Chart 6: Average “More Branches” ROE vs. “Fewer Branches” ROE, 2010 – 2014

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Maybe I’m the only one surprised by these revelations. After all, the “User’s Guide for the Uniform Bank Performance Report – Technical Information” notices the following:

Consistent differences in peer group performance are apparent over time. For example, the average non-branch bank in a non-metropolitan area tends to have lower overhead, lower noninterest income, higher profitability and higher capital ratios than similar sized branch banks located in metropolitan areas.

Something tells me that not many people pick this up for bed time reading, though, so its truths may not be widely known. “Still,” you say, “how could it be that smaller, more rural banks turn a higher profit than larger, more metropolitan ones? That can’t be true since my bank is dedicating most of its resources to the nearby metropolitan area where all of its loan growth has occurred over the last five years.” I will elaborate further on what the UBPR data reveals as reasons for this irony in my next post, but to give you a hint, it is clearly related to the first metric listed in the “User’s Guide” quote above ( i.e., lower overhead). You may be generating a lot more loans and deposits from that metropolitan area and growing quickly as a result, but it also costs you a lot more money to do so. Maybe your father knew what he was telling you when he preached that a penny saved is always a penny earned.

Community Banks to America: “The Reports of My Death Were Greatly Exaggerated.”

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We all know the story and ultimate conclusion, right? Commercial banking is becoming more complex, regulations are multiplying exponentially each passing day, commercial activity and related loans are migrating more and more to metropolitan areas, so therefore small town, community banks are quickly becoming a thing of the past. They simply can’t keep up. Not only are they losing loans to banks in faster growing, more populated areas, but they also are struggling to hire sufficient staff to comply with regulation, much less chase loans. They just don’t have the economies of scale or markets to support the inevitable overhead explosion and attract the top talent to their slow growing, rural economies. Sadly, their days are numbered. Within a decade or two, rural community banks with assets less than $1 billion will go the way of the dinosaur, victims of that terrible meteor named Dodd-Frank.

This must be the truth, right? Everything we learned in macroeconomics demands it. Bigger banks have more economies of scale to support the rising fixed costs associated with commercial banking, and smaller banks will eventually tap out. Metropolitan banks have more access to capital, loans, and growing deposit bases and therefore have an inherent advantage over their rural cousin the country bank. As a former CFO and COO of a rural, community bank, I know I bought it hook, line, and sinker. Looking at growing overhead, shrinking loans, and aging management, I was convinced this storyline was the only possible one. Heck, it’s a big reason why I decided a future in community banking was not for me, opting instead to return to the much more stable world of practicing law (note the presence of my tongue which is firmly implanted in my cheek).

The problem is, five years after the end of the great recession, the bank statistics published in the Uniform Bank Performance Reports (“UBPR”) by the Federal Financial Institutions Examination Council (“FFIEC”) simply don’t support this idea that small town community banks are dead, or that they are even dying. As a matter of fact, there is some argument to the contrary, at least in certain contexts.

In reaching this conclusion, I examined the UPBR average peer group data from the last five years for each of the 15 major peer groups for insured commercial banks. I excluded the peer groups related to De Novo banks created in the last five years which had the potential to skew the analysis due to the unique challenges faced by De Novo institutions. These 15 different peer groups, which included 5,619 banks, are delineated as follows:

Peer Group 1: Insured commercial banks in excess of $3 billion
Peer Group 2: Insured commercial banks between $1 billion and $3 billion
Peer Group 3: Insured commercial banks between $300 million and $1 billion
Peer Group 4: Insured commercial banks having assets between $100 million and $300 million, with 3  or more full service banking offices and located in a metropolitan statistical area
Peer Group 5: Insured commercial banks having assets between $100 million and $300 million, with 3 or more full service banking offices and not located in a metropolitan statistical area
Peer Group 6: Insured commercial banks having assets between $100 million and $300 million, with 2 or fewer full service banking offices and located in a metropolitan statistical area
Peer Group 7: Insured commercial banks having assets between $100 million and $300 million, with 2 or fewer full service banking offices and not located in a metropolitan statistical area
Peer Group 8: Insured commercial banks having assets between $50 million and $100 million, with 3 or more full service banking offices and located in a metropolitan statistical area
Peer Group 9: Insured commercial banks having assets between $50 million and $100 million, with 3 or more full service banking offices and not located in a metropolitan statistical area
Peer Group 10: Insured commercial banks having assets between $50 million and $100 million, with 2 or fewer full service banking offices and located in a metropolitan statistical area
Peer Group 11: Insured commercial banks having assets between $50 million and $100 million, with 2 or fewer full service banking offices and not located in a metropolitan statistical area
Peer Group 12: Insured commercial banks having assets less than $50 million, with 2 or more full service banking offices and located in a metropolitan statistical area
Peer Group 13: Insured commercial banks having assets less than $50 million, with 2 or more full service banking offices and not located in a metropolitan statistical area
Peer Group 14: Insured commercial banks having assets less than $50 million, with 1 full service banking office and located in a metropolitan statistical area
Peer Group 15: Insured commercial banks having assets less than $50 million, with 1 full service banking office and not located in a metropolitan statistical area

As of December 31, 2014, the average number of banks per peer group was 374.6 banks. The largest peer group by far was Peer Group 3 (i.e., banks between $300 million and $1 billion), which included 1,254 banks. The smallest peer group was Peer Group 12 (i.e., banks less than $50 million located in a metropolitan area and having 2 or more full branches), which contained 63 banks. The median peer group was Peer Group 2 (i.e., banks between $1 billion and $3 billion) with 321 banks.

This UBPR data separates banks into peer groups that distinguish them not only on the basis of size, but also based upon the number of full service branches operated by a bank as well as whether the bank is located in a metropolitan or non-metropolitan area. For the purposes of clarification, it is important to note that a bank may be classified as a non-metropolitan bank and still have full service branches in a metropolitan area, and vice versa. For example, a $150 million commercial bank whose main office is in a non-metropolitan area but who also operates another full service branch in a metropolitan area is part of Peer Group 7, which includes banks between $100 million and $300 million of assets that have 2 or fewer branches and are not located in a metropolitan area. Therefore, it is the main office location of the bank that controls and not the location of its branches. For the purposes of the UBPR, a metropolitan area is one classified as a Metropolitan Statistical Area by the Office of Management and Budget.

I first stumbled upon the truths presented by the UBPR while I was analyzing the performance data of a client. With the same prejudices in mind that I stated in the opening two paragraphs, I decided to compare that bank’s data to statistics for banks in “larger” peer groups. What I discovered astonished me and interested me to the point that I decided to dig deeper. Not only did the bank’s statistics compare more favorable to the data of “larger” peer groups than it did to statistics of its own peer group, but the average numbers for the bank’s peer group 7, which is assigned to relatively smaller, rural banks, seemed to soar well above some of its larger, more metropolitan cousins.

Peer group 7, which, as mentioned above, is reserved for banks between $100 million and $300 million in assets that are located in a non-metropolitan area and have 2 or fewer branches, averaged the highest Return on Equity (“ROE”) (i.e., 10.47%) and Return on Assets (“ROA”) (i.e., 1.16%) of any peer group over the last five years. What about the next highest ROE and ROA? Well those belonged to “rural, community” banks as well. Peer Group 11 (i.e., $50 million to $100 million, 2 or fewer branches, and non-metropolitan area) boasted the next highest ROA of 0.99%, and Peer Group 5 (i.e., $100 million to $300 million, 3 or more branches, and non-metropolitan area) claimed second place in ROE with 9.12%. Third place in each category also belonged to Peer Groups 11 and 5, just in reverse with respect to the category. Peer Group 1, the peer group for the nation’s largest banks (i.e., more than $3 billion in assets), doesn’t show up on either list until you look down to fourth place, where it finished with an average ROE of 7.79% and an average ROA of 0.88% over the last five years. In my next post, we will start to examine what could be the explanation of this and what secrets it could reveal to you regarding operating a community bank in this challenging environment.

Chart-1

Chart-2

 

Diversity Jurisdiction Questions. Answered!

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** Note: This is part two of a two-part series.

  1. Case is filed in Mississippi federal court.  Texas plaintiff and Delaware plaintiff.  The four defendants are residents of Louisiana, Mississippi, Delaware, and California.  Is diversity jurisdiction present?

No.  There is a Delaware plaintiff and a Delaware defendant.  Complete diversity is not present. KeyBank Nat. Ass’n v. Perkins Rowe Associates, L.L.C., 539 Fed. Appx. 414, 416 (5th Cir. 2013) (“28 U.S.C. § 1332(a)(1) . . . requires complete diversity between all plaintiffs and all defendants.”) (quotingLincoln Prop. Co. v. Roche, 546 U.S. 81, 89 (2005)).

  1. Case is in Mississippi state court.  Mississippi plaintiff.   Alabama defendant and Mississippi defendant.  The Mississippi defendant settles and is dismissed.   Is the case removable?

Yes.  The “voluntary dismissal by a plaintiff of all defendants whose citizenship is not diverse from that of the plaintiff, through settlement or otherwise, renders the case removable by any remaining defendants whose citizenship is diverse.” Horton v. Scripto-Tokai Corp., 878 F. Supp. 902, 907 (S.D. Miss. 1995) (“So, plaintiff’s voluntary dismissal of Hawkins, the sole original non-diverse defendant, from this lawsuit transformed this case from one not proper for removal to one that met the removal prerequisite.”); see also Estate of Martineau v. ARCO Chemical Co., 203 F.3d 904, 911 (5th Cir. 2000)(holding that case was properly removed after settlement with non-diverse defendant and recognizing that “a case may be removed based on any voluntary act of the plaintiff that effectively eliminates the nondiverse defendant from the case”) (quoting Vasquez FDIC v. Abraham, 137 F.3d 264, 269 (5th Cir. 1998)).

The case must be removed within 30 days of the time the removing defendant receives a “motion, order or other paper.”  28 U.S.C. § 1446(b)(3).

  1. Case is filed in Mississippi state court.  The plaintiff and defendant are diverse.  The complaint seeks to quiet title in a $600,000 piece of property.  The complaint seeks “less than $75,000 in damages and specifically seeks $30,000 in damages and attorneys’ fees.”  Is the case removable?

Yes. “When the validity of a contract or a right to property is called into question in its entirety, the value of the property controls the amount in controversy.” Waller v. Prof’l Ins. Corp., 296 F.2d 545, 547–48 (5th Cir. 1961); see also Celestine v. TransWood, Inc., 467 Fed. Appx. 317, 319 (5th Cir. 2012) (recognizing that the “amount in controversy for jurisdictional purposes is determined by the amount of damages or the value of the property that is the subject of the action”) (citing Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333, 347 (1977)); see also Dillard Family Trust v. Chase Home Finance, LLC, 2011 WL 6747416, at *4 (N.D. Tex. 2011) (recognizing in a quiet title action that since the value of the property set by Dallas County was over $75,000 that the amount in controversy was satisfied); White v. BAC Home Loans Servicing, L.P., 2011 WL 3841952, at *2 (S.D. Tex. 2011) (same holding where Harris County placed a value for the property greater than $75,000).

A Complaint that states that the amount in controversy is less than $75,000 is not determinative of whether the amount in controversy threshold is in fact met.  Jackson v. Balboa Ins. Co., 590 F. Supp. 2d 825, 827-28 (S.D. Miss. 2008) (denying remand where amount in controversy was satisfied despite the allegation in plaintiff’s complaint that the “Complaint filed by the Plaintiff herein specifically states that he is not seeking monetary relief in excess of $75,000,” and finding that “[s]uch statements do not set forth a specific monetary demand.”) (citing Manguno v. Prudential Property and Cas. Ins. Co., 276 F.3d 720, 722-23 (5th Cir. 2002)).

  1. Case is filed in Mississippi state court.  Mississippi plaintiff.  A corporation (engaging in tire distribution) is the defendant.   The corporation has shareholders in Mississippi, Louisiana, and Alabama.  The state of incorporation is Louisiana.  The central office is in Louisiana, and the central office is where the executives work and the policy and financial decisions take place.  The tire distribution centers are in both Louisiana and Mississippi, but 80% of the tire distribution centers are in Mississippi.  The Secretary of State of Mississippi lists Jackson, Mississippi, as the principal office for the corporation.  Is the case removable?

Yes.  The corporation is a citizen of Louisiana because Louisiana is home to the corporation’s nerve center, and the corporation was incorporated in Louisiana. “A corporation may simultaneously be a citizen of two states, the place of incorporation and the state of its principal place of business.” Maxey v. Security-Connecticut Life Ins. Co., 2006 WL 1791151, at *2 (N.D. Miss. 2006) (citing 28 U.S.C. § 1332(c)(1)). The “nerve center” test controls the principal place of business.  Hertz Corp. v. Friend, ––– U.S. ––––, ––––, 130 S.Ct. 1181, 1192, 175 L.Ed.2d 1029 (2010) (adopting the “nerve center” test as the appropriate test for determining the principal place of business and rejecting the other tests used by numerous Circuits including the Fifth Circuit’s “total activities” test).

A corporation can have “one and only one principal place of business.”  J.A. Olson Co. v. City of Winona, Miss., 818 F.2d 401, 406 (5th Cir. 1987).  To determine the “nerve center,” one looks to “where a corporation’s officers direct, control, and coordinate the corporation’s activities.”  Hertz, 130 S.Ct. at 1192.  This location “should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination.” Id.

The fact that the corporation listed Mississippi as its principal office in corporate filings is relevant, but these filings are not outcome determinative since such filings “would create opportunities for jurisdictional manipulation” as the Supreme Court warned about such corporate filings in the Hertzdecision.  See also Teal Energy USA, Inc. v. GT, Inc., 369 F.3d 873 (5th Cir. 2004) (filings with IRS and Texas secretary of state stating the “principal place of business” were indicative of the principal place of business for diversity jurisdiction purposes, but these filings by themselves were not outcome determinative); N. California Power Agency v. AltaRock Energy, Inc., 2011 WL 2415748 (N.D. Cal. June 15, 2011) (remanding action to state court since defendant “produce[d] no evidence save a print-out from the California Secretary of State’s web site,” and defendant’s could produce no “other evidence,” then this [Secretary of State filing] has the hallmark of “jurisdictional manipulation” the Court warned of in Hertz.”); Guitar Holding Co. v. El Paso Natural Gas Co., 2010 WL 3338550 (W.D. Tex. Aug. 18, 2010) (rejecting argument that secretary of state filings constituted an admission by a party opponent since the declarations were made “for other purposes,” and although admissible as evidence, they “are amenable to rebuttal,” and “ the Supreme Court [in Hertz] has explicitly held that corporate form filings indicating a corporation’s principle office, without further explanation, are not dispositive regarding a corporation’s nerve center.”); Darrough v. LTI Trucking Services, Inc., 2012 WL 1149158 (S.D. Ill. Apr. 5, 2012) (same); etradeshow.com, Inc. v. Netopia Inc., 2004 WL 515552, at *1-2 (N.D. Tex. 2004) (“While a corporation’s statements made to a state’s secretary of state are not binding on the Court, they are relevant to its inquiry.”)

  1. Case is filed in Mississippi state court.  Louisiana plaintiff.  The five defendants are residents of Alabama, Tennessee, Arkansas, Mississippi, and Florida.  Is the case removable?

No.  The case is filed in Mississippi and there is a Mississippi defendant.  The forum defendant rule prevents removal.  A case “may not be removed if any of the parties in interest properly joined and served as defendant is a citizen of the State in which such action is brought.” 28 U.S.C. § 1441(b)(2).  “This exception is commonly referred to as the forum-defendant or in-state-defendant rule.”  McGee v. Willbros Const., US, LLC, 825 F. Supp. 2d 771, 775 (S.D. Miss. 2011) (citing In re 1994 Exxon Chemical Fire, 558 F.3d 378, 391 (5th Cir. 2009)).  “It is well-settled in this circuit that the forum-defendant rule concerns not whether the district court has subject matter jurisdiction over the controversy, rather it is a procedural limitation that prevents removal of an action that would otherwise be removable on the basis of diversity jurisdiction.” Id. “As such, whether defendants to a lawsuit are diverse, or are residents of the forum state, are two separate inquiries which are treated differently for purposes of remand.”  Id.

This is a procedural rule and not a jurisdictional rule.  As a result, if the plaintiff is agreeable to the removal (and agrees to not file a motion to remand) then the removal may be allowed. Chaves v. Exxon Mobil Corp., 2007 WL 911898, at*1 (D. Conn. 2007) (“we have held that, even if removal was statutorily improper, a party opposing removal must move to remand within the 30 day limitation or the objection will be forfeited (except for objections that implicate constitutional subject matter jurisdiction such as a lack of diversity or a federal question”) see also Williams v. AC Spark Plugs Div. of Gen. Motors Corp., 985 F.2d 783 (5th Cir.1993); Air–Shields, Inc. v. Fullam, 891 F.2d 63, 65–66 (3d Cir. 1989) (finding that district court’s sua sponte decision to remand on procedural grounds more than 30 days after the filing of the notice of removal exceeded the court’s authority).

6.  Case is in Mississippi state court.  Mississippi plaintiff.  Louisiana defendant and Mississippi defendant.  The Louisiana defendant files a motion to sever and the plaintiff opposes the motion to sever.  The state court grants the motion and severs the Mississippi defendant into a separate state court case.  Can the Louisiana defendant remove?

Yes. There is “the judicially-created ‘voluntary-involuntary’ rule whereby ‘an action nonremovable when commenced may become removable thereafter only by the voluntary act of the plaintiff.’”Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 532 (5th Cir. 2006); Weems v. Louis Dreyfus Corp.,380 F.2d 545, 547 (5th Cir. 1967).  However, when a diverse state court defendant is severed then this presents an exception to the voluntary-involuntary rule and the diverse defendant can remove the case. Crockett, 436 F.3d at 533 (5th Cir. 2006) (“removal on the basis of an unappealed severance, by a state court, of claims against improperly joined defendants is not subject to the voluntary-involuntary rule. Accordingly, removal jurisdiction existed in this case upon the severance of Crockett’s claims against the nondiverse in-state health care defendants.”)

  1. Case is in Mississippi state court.  Mississippi plaintiff.  An LLC is the defendant.  The state of “registration” or “incorporation” for the LLC is Mississippi.  The members of the LLC are residents of Louisiana.  The executive offices for the LLC are in Mississippi.  The primary place of business or principal place of business is in Louisiana.  Is the case removable?

Yes.  The citizenship of an LLC is determined by the citizenship of its members.  Harvey v. Grey Wolf Drilling Co., 542 F3d 1077, 1080-81 (5th Cir. 2008) (the authorities “overwhelmingly support the position that a LLC should not be treated as a corporation for purposes of diversity jurisdiction. Rather, the citizenship of a LLC is determined by the citizenship of all of its members. Under this approach, Grey Wolf is a citizen of Nevada and Texas (the residences of its members), not Louisiana (Grey Wolf’s state of organization, resulting in complete diversity.”)