Protostorm, Inc. v. Mound Cotton Wollan & Greenglass LLP

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

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PROTOSTORM, INC.,

Plaintiff,

MEMORANDUM & ORDER

- against - 18-CV-2107 (PKC) (JO)

FOLEY & LARDNER LLP and JONATHAN E.

MOSKIN,

Defendants.

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PAMELA K. CHEN, United States District Judge:

Plaintiff Protostorm, Inc. brings this diversity action against Defendants Foley & Lardner

LLP and Jonathan E. Moskin1 alleging claims of legal malpractice. The sole basis for federal

jurisdiction alleged in the complaint is diversity of citizenship. (Complaint, Dkt. 1, ¶ 2.) The

parties do not dispute that Defendants are citizens of New York. (Id. ¶¶ 29, 32; Defendants’ Brief

in Support (“Defs.’ Br.”), Dkt. 23-29, at 1.) Defendants, however, dispute Plaintiff’s assertion that

it is a citizen of Delaware. (See, e.g, Defs.’ Br., Dkt. 23-29, at 2–3.) Pending before the Court is

Defendants’ motion to dismiss for lack of subject matter jurisdiction. For the reasons set forth

below, the Court grants Defendants’ motion and dismisses the action for lack of subject matter

jurisdiction.

1 Plaintiff originally named 36 Defendants. (Complaint, Dkt. 1, at 1.) On July 15, 2019,

Plaintiff voluntarily dismissed its claims pursuant to Fed. R. Civ. P. 41(a)(1)(A)(i) against all

Defendants except Foley & Lardner LLP and Jonathan E. Moskin. (Notice of Voluntary

Dismissal, Dkt. 36.)

BACKGROUND2

Protostorm was created in 2000 as a Delaware limited liability company. (Declaration of

Peter Faulisi (“Faulisi Decl.”), Dkt. 27, ¶ 2.) Protostorm’s only asset was “[t]he Invention” that

“encompass[ed], among other things, an on-line computer game and related software that included

a method of targeting advertising to the content of email communications.” (Id.) Protostorm

retained a Virginia law firm (“Virginia Firm”), specializing in patent work, to prepare and file

patent applications for the Invention. (Id. ¶ 3.) However, in February 2006, Protostorm learned

that the Virginia Firm had failed to “properly prosecute the patent such that Protostorm’s patent

was unenforceable in the United States.” (Id. ¶ 4.) In February 2008, Protostorm retained

Defendants to bring a legal malpractice action against the Virginia Firm. (Id. ¶ 5.) Though

Protostorm obtained a judgment against the Virginia Firm (Plaintiff Exhibit (“Pl.’s Ex.”) 1, Dkt.

25-1; see also Pl.’s Ex. 2, Dkt. 25-2, at 3), the judgment is unenforceable because the individual

attorneys employed by the Virginia Firm were not held jointly and severally liable (Pl.’s Ex. 2,

Dkt. 25-2, at 6 (noting that Protostorm “waived this issue [of joint and several liability] through

statements made by Protostorm’s counsel at trial”)).3 Plaintiff brought the instant action asserting

2 On a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), the

Court “must accept as true all material factual allegations in the complaint, but [it is] not to draw

inferences from the complaint favorable to Plaintiff[].” J.S. ex rel. N.S. v. Attica Cent. Sch., 386

F.3d 107, 110 (2d Cir. 2004).

3 Plaintiff has been unable to fully collect on its judgment because the Virginia Firm

dissolved shortly after the trial. (Complaint, Dkt. 1, ¶¶ 101–02.)

that Defendants committed legal malpractice by waiving this issue. (See Complaint, Dkt. 1, ¶¶

106–15.)

Protostorm has not been involved in any active business since 2008, when it initiated its

first malpractice action against the Virginia Firm. (Faulisi Decl., Dkt. 27, ¶ 5; Transcript of Alan

Rummelsburg Deposition (“Rummelsburg Tr.”), Dkt. 23-3, at 149:4–6 (“[T]he bottom line is that

Protostorm is nothing but a shell at this point.”); see also id. at 22:4–11 (noting that Protostorm

has not been in business since 2008).) However, in 2016, Peter Faulisi4 (“Faulisi”), the President

and a shareholder of Protostorm, began developing a waffle manufacturing business by working

with a friend, William Greico (“Greico”), who had previously owned a waffle production company

under the name “Mrs. Huber Waffles” that operated out of Long Island. (Faulisi Decl., Dkt. 27,

¶¶ 1, 7–8; Rummelsburg Tr., Dkt. 23-3, at 71:16–18.) Faulisi entered into an oral agreement with

Greico, giving Faulisi access to Greico’s waffle formula in exchange for 25% of the net sales. (Id.

¶ 9.) Since obtaining the waffle formula, Faulisi has worked with various waffle manufacturers

and test kitchens to improve the formula “to eliminate the problem of the waffles sticking to the

oven plates.” (Id. ¶ 10; see also id. ¶¶ 11–13.) Some of these waffle manufacturers were located

in Delaware. (Id. ¶ 11.) In 2017, once Faulisi had successfully reformulated the waffle recipe, he

began discussing the waffle business with Alan Rummelsburg5 (“Rummelsburg”). (Id. ¶ 14.)

Rummelsburg is the Vice President and another shareholder of Protostorm. (Declaration of Alan

Rummelsburg (“Rummelsburg Decl.”), Dkt. 26, ¶ 1.) Rummelsburg and Faulisi decided to operate

the waffle business through Protostorm. (Faulisi Decl., Dkt. 27, ¶ 14; Rummelsburg Decl., Dkt.

4 Faulisi is a citizen of New York. (Transcript of Peter Faulisi Deposition (“Faulisi Tr.”),

Dkt. 23-6, at 7:23–8:2.)

5 Rummelsburg is a citizen of Connecticut. (Rummelsburg Tr., Dkt. 23-3, at 3:12–15.)

26, ¶ 4.) This would allow Faulisi, who owed Protostorm money for past loans, to repay the

company as well as potentially generate income that could be used to pay the loans Protostorm

had taken to pay the attorneys’ fees from Protostorm’s malpractice lawsuit against the Virginia

Firm and to provide a return to Protostorm’s other investors. (Faulisi Decl., Dkt. 27, ¶ 14.)

Rummelsburg began preparing a business plan that Protostorm could use to obtain

financing from venture capitalists to support this fledging waffle business. (Rummelsburg Decl.,

Dkt. 26, ¶ 6.) This business plan is still in draft form because Rummelsburg has had to dedicate

all of his time to another business venture he shares with Faulisi. (Id.; Rummelsburg Tr., Dkt. 23-

3, at 75:18–22 (“[W]e cannot focus the attention right now with the [venture capitalists] to get this

deal consummated because we’re up to our eyeballs right now with this ViaClean deal.”).)

Rummelsburg also spoke with his personal accountant, Ben Maini (“Maini”), about the plans for

turning Protostorm into a waffle manufacturing business. (Rummelsburg Decl., Dkt. 26, ¶¶ 7–8

(stating that Maini “advised” Rummelsburg “that a corporate entity may be a better investment

vehicle for venture capitalists”). But see Transcript of Ben Maini Deposition, Dkt. 23-16, at ECF6

33:15–19.)7 Rummelsburg and Faulisi decided to both incorporate Protostorm and keep it in

Delaware because that “would be where the waffles are going to be manufactured and someone

6 Citations to “ECF” refer to the pagination generated by the Court’s CM/ECF docketing

system and not the document’s internal pagination.

7 There is significant disagreement between the parties as to whether Maini advised

Plaintiff that switching to a corporate form was a wise business decision. (Compare Plaintiff’s

Brief in Opposition (“Pl.’s Opp. Br.”), Dkt. 28, at 4 (“Mr. Maini advised Mr. Rummelsburg that a

corporate entity was potentially a better investment vehicle for venture capitalists . . . .”), with

Defs.’ Br., Dkt. 23-29, at 8 (noting that Maini testified that “he had not recommended that

Protostorm LLC change its corporate form and was not involved in the conversion process”).) The

Court need not resolve this factual dispute in order to reach its decision.

will be needed to be on site for quality control.” (Rummelsburg Decl., Dkt. 26, ¶ 10; Faulisi Decl.,

Dkt. 27, ¶¶ 16, 18.)

Faulisi thereafter entered into a lease agreement with Regus Management Group. (Faulisi

Decl., Dkt. 27, ¶ 19.) At first, the lease was for a virtual office (id.; see also Defendant’s Exhibit

(“Defs.’ Ex.”) D, Dkt. 24-1), but on March 2, 2018, Faulisi upgraded the lease to a physical office

in Wilmington, Delaware (Faulisi Decl., Dkt. 27, ¶ 19; Defs.’ Ex. C, Dkt. 24). The office sits

empty, as Protostorm currently does not employ anyone. (See Rummelsburg Tr., Dkt. 23-3, at

99:9–15.) Furthermore, though Faulisi has been to Delaware “many times since 2016” (Faulisi

Decl., Dkt. 27, ¶ 21), Rummelsburg has never been to the Delaware office and no meetings

between Faulisi and Rummelsburg have ever taken place there (see Rummelsburg Tr., Dkt. 23-3,

at 95:8–11 (stating that he has never made any trips to Delaware in connection with the waffle

business); 104:15–21 (stating that no meetings have or are scheduled to take place at the Delaware

office)). Instead, when Rummelsburg and Faulisi do meet in person, they mostly do so at the Long

Island offices of Health Savers, another company that Rummelsburg and Faulisi work with.

(Rummelsburg Tr., Dkt. 23-3, at 37:24–38:16 (testifying that in the past year, he has met with

Faulisi over 100 times “[m]ostly at the Health Savers offices”); id. at 126:13–20; see also Faulisi

Tr., Dkt. 23-6, at 10:14–24 (noting that he is involved with Health Savers and that he meets with

Rummelsburg “once in a while”).)

On March 27, 2018, Faulisi retained Harvard Business Services, located in Delaware, to

file the incorporation documentation for Protostorm with the Delaware Secretary of State and to

act as Protostorm’s registered agent in Delaware. (Faulisi Decl., Dkt. 27, ¶ 17; see also Defs.’ Ex.

L, Dkt. 23-13; Defs. Ex. M, Dkt. 23-14.) Around the same time, Faulisi opened a bank account

for Protostorm, Inc. at a PNC Bank near the office in Wilmington, Delaware. (Faulisi Decl., Dkt.

27, ¶ 20; see also Defs. Ex. N, Dkt. 24-7.) Faulisi only deposited $500 because “there are currently

no expenses to pay out of that account nor any income to deposit.” (Faulisi Decl., Dkt. 27, ¶ 20.)

Although Protostorm “is ready to begin manufacturing waffles” (id. ¶ 22), it is unable to begin

active production because it has “not obtained the necessary funds to pay for the production,

storage and transportation of the waffles” (id.). As a result, Protostorm has not entered into a

written contract with American Waffle, its likely manufacturer (id.; Rummelsburg Tr., Dkt. 23-3,

at 100:14–16) or with a warehouse (Rummelsburg Tr., Dkt. 23-3, at 100:10–13).

Protostorm initiated the instant action on April 9, 2018. (Dkt. 1.) On June 26, 2018, the

Court granted Defendants leave to file a motion to dismiss under Federal Rules of Civil Procedure

12(b)(1) and 12(b)(6), after the parties conducted limited pre-motion discovery on the jurisdiction

issue. (See June 26, 2018 Order.) Defendants’ motion to dismiss was fully briefed on November

30, 2018. (Dkts. 23–29.)8

On June 26, 2019, Plaintiff filed a letter motion requesting leave to file a motion to stay

the arbitration that had been initiated by Defendants over their request for attorneys’ fees for

Protostorm’s first malpractice lawsuit. (Dkt. 33.) In response, Defendants filed a letter motion

requesting leave to file a motion to stay the instant proceedings so that the parties could proceed

to arbitration on the attorneys’ fees dispute. (Dkt. 34.) The Court construed the parties’ letters as

their respective motions and ordered further briefing while noting that it would not resolve the stay

motions until it issued a decision on the pending motion to dismiss. (See July 10, 2019 Order.)

Parties’ respective stay motions were fully briefed on July 31, 2019. (Dkts. 37–39.)

8 The Court deferred briefing on Defendants’ 12(b)(6) motion until after the Court

determined whether it had subject matter jurisdiction. (See July 11, 2018 Order.)

LEGAL STANDARD

“A case is properly dismissed for lack of subject matter jurisdiction under [Federal Rule of

Civil Procedure] 12(b)(1) when the district court lacks the statutory or constitutional power to

adjudicate it.” Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000). The standard for

reviewing a 12(b)(1) motion to dismiss “is essentially identical to the 12(b)(6) standard,” Allstate

Ins. Co. v. Elzanaty, 916 F. Supp. 2d 273, 286 (E.D.N.Y. 2013), except that “[a] plaintiff asserting

subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it

exists,” Makarova, 201 F.3d at 113. Furthermore, “jurisdiction must be shown affirmatively, and

that showing is not made by drawing from the pleadings inferences favorable to the party asserting

it.” APWU v. Potter, 343 F.3d 619, 623 (2d Cir. 2003) (internal quotations, alterations, and citation

omitted). In adjudicating a motion to dismiss for lack of subject matter jurisdiction, the court may

consider matters outside the pleadings. Makarova, 201 F.3d at 113.

DISCUSSION

“It is axiomatic that federal courts are courts of limited jurisdiction and may not decide

cases over which they lack subject matter jurisdiction.” Lyndonville Sav. Bank & Tr. Co. v.

Lussier, 211 F.3d 697, 700 (2d Cir. 2000). “The basic statutory grants of federal court subject

matter jurisdiction are contained in 28 U.S.C. §§ 1331 and 1332. Section 1331 provides for

federal-question jurisdiction, § 1332 for diversity of citizenship jurisdiction.” Ynoa v. Google,

Inc., No. 14-CV-0015 (PKC) (JO), 2014 WL 1237304, at *2 (E.D.N.Y. Mar. 24, 2014) (internal

quotations, brackets, and citations omitted).

Here, Plaintiff invokes diversity jurisdiction (Complaint, Dkt. 1, ¶ 2), which “‘require[s]

complete diversity between all plaintiffs and all defendants.’” Taldone v. Barbash, No. 14-CV-

2147 (SJF) (AKT), 2014 WL 1800794, at *5 (E.D.N.Y. May 5, 2014) (quoting Lincoln Property

Co. v. Roche, 546 U.S. 81, 89 (2005)); see also 28 U.S.C. § 1332(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 . . . citizens of different States . .

. .”). “[T]he jurisdiction of the court depends upon the state of things at the time of the action

brought.” Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567, 570 (2004) (internal quotation

marks and citation omitted). “For purposes of establishing diversity jurisdiction, a corporation is

deemed a citizen of the state where it has it[s] princip[al] place of business and of the state where

it is incorporated.” Hershfeld v. JM Woodworth Risk Retention Grp., Inc., No. 16-CV-6369

(BMC), 2017 WL 1628886, at *3 (E.D.N.Y. May 1, 2017); see also 28 U.S.C. § 1332(c).

Plaintiff asserts that complete diversity exists because, at the time of filing, “Protostorm

was a Delaware corporation with its principal place of business in Wilmington, Delaware.” (Pl.’s

Opp. Br., Dkt. 28, at 8.) Defendants disagree. They argue that Plaintiff’s last-minute change in

corporate form, from a limited liability company to a corporation, was an improper attempt to

manufacture diversity jurisdiction9 in violation of 28 U.S.C. § 1359. (Defs.’ Br., Dkt. 23-29, at

12–17.) In the alternative, they also challenge Plaintiff’s assertion that, as a corporation, its

principal place of business is in Delaware. (Id. at 17–20.) Because the Court finds that

9 The change in Protostorm’s corporate form affects the diversity analysis because, as a

limited liability company, the citizenship of its owners would be considered, and both Faulisi’s

New York citizenship and Rummelsburg’s Connecticut citizenship would defeat diversity

jurisdiction. Crowhurst v. Szczucki, No. 16-CV-182 (JGK), 2017 WL 519262, at *2 (S.D.N.Y.

Feb. 8, 2017) (“A limited liability corporation has the citizenship of each of its members for the

purposes of diversity jurisdiction.”) (citing Handelsman v. Bedford Vill. Assocs. Ltd. P’ship, 213

F.3d 48, 51–52 (2d Cir. 2000)).

Defendants’ second ground provides a sufficient basis to dismiss the complaint, it does not address

Defendants’ first ground.10

I. Lack of Diversity Jurisdiction: Plaintiff Has Not Shown that Delaware is Its Principal

Place of Business

Accepting that Plaintiff is a corporation for the purpose of determining whether diversity

jurisdiction exists, Plaintiff’s citizenship is determined by its place of incorporation and its

principal place of business.11 Hershfeld, 2017 WL 1628886, at *3. A corporation’s “principal

10 The Court relies on the second ground because of the uncertainty in this Circuit on the

applicability of 28 U.S.C. § 1359—on which Defendants’ first argument depends—to the facts of

this case. Although Section 1359 explicitly provides that, “‘[a] district court shall not have

jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly

or collusively made or joined to invoke the jurisdiction of such court[,]’” Syrup Assocs., Inc. v.

Coastal Dev. Mass., LLC, No. 18-CV-8133 (JPO), 2019 WL 2121878, at *3 (S.D.N.Y. May 15,

2019) (quoting 28 U.S.C. § 1359), and although the Second Circuit broadly “construes [S]ection

1359 . . . to bar any agreement whose primary aim is to concoct federal diversity jurisdiction[,]”

Airlines Reporting Corp. v. S & N Travel, Inc., 58 F.3d 857, 862 (2d Cir. 1995) (internal quotations

and citation omitted), the Circuit has not decided whether Section 1359 is applicable where a party

has purportedly manufactured diversity through a change in its corporate form. See Castillo

Grand, LLC v. Sheraton Operating Corp., 719 F.3d 120, 125 (2d Cir. 2013) (noting that whether

a party that allegedly manufactured diversity jurisdiction by altering the membership of its limited

liability company had “violated Section 1359 is not entirely clear”). Despite indications in this

Circuit favoring Section 1359’s application to the instant case, see, e.g., Syrup Assocs., Inc., 2019

WL 2121878 at *3–4, the Court chooses to rely on the independently sufficient second ground

urged by Defendants to dismiss this matter for lack of subject matter jurisdiction.

11 Plaintiff asserts that it is a “passive” company. (Pl.’s Br., Dkt. 28, at 20.) The Court

finds that Plaintiff has engaged in enough business transactions, including entering into a verbal

agreement with Greico for his waffle manufacturing business in exchange for a share of the net

sales (Faulisi Decl., Dkt. 27, ¶ 9), reformulating the waffle recipe (id. ¶¶ 10–13), and

communicating with potential manufacturers and warehouses (Rummelsburg Tr., Dkt. 23-3, at

177:5–6; Faulisi Tr., Dkt. 23-6, at 27:17–21) to be considered an active corporation. See AL Sols.,

Inc. v. Jamegy, Inc., 576 F. Supp. 2d 620, 624 (S.D.N.Y. 2008) (“For a corporation to be active, it

must engage in business transactions that go towards the furtherance of its business purpose.”);

Peters v. Timespan Commc’ns, Inc., No. 97-CIV-8750 (DC), 1999 WL 135231, at *5 (S.D.N.Y.

Mar. 12, 1999) (holding that a corporation is active, even though it has not engaged in business

transactions toward its original business purpose, when it continued to engage in business

transactions towards a new purpose); see also Bonnie & Co. Fashions v. Bankers Tr. Co., 18 F.

Supp. 2d 297, 303 n.6 (S.D.N.Y. 1998) (“The Second Circuit has never specifically addressed the

issue of what constitutes a business transaction for an inactive corporation. However, this Court

place of business” is “where a corporation’s officers direct, control, and coordinate the

corporation’s activities.” Hertz Corp. v. Friend, 559 U.S. 77, 92–93 (2010); see id. at 93 (noting

that a corporation’s principal place of business is also known as its “nerve center”). “[I]n

practice[,] [the nerve center] 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.; see also id. 96 (noting that the nerve center test “points courts in a single

direction, toward the center of overall direction, control, and coordination”). “Although the nerve

center test is neither as clear-cut nor as simple to determine as the Supreme Court evidently

intended, nonetheless, as subsequent courts have recognized, the test focuses on where a

corporation’s ‘high-level’ decisions are made, not where day-to-day activities are managed.” St.

Paul Fire & Marine Ins. Co. v. Scopia Windmill Fund, LP, 87 F. Supp. 3d 603, 605 (S.D.N.Y.

2015); see also 3123 SMB LLC v. Horn, 880 F.3d 461, 466 (9th Cir. 2018) (“[N]umerous post-

Hertz [district court] cases . . . have determined [that] the principal place of business of a holding

company by looking to the location in which its officers or directors meet to make high-level

management decisions.”) (internal quotations and citation omitted).

Plaintiff argues that it is a citizen of Delaware both because it is incorporated there and its

headquarters are located there. (Pl.’s Opp. Br., Dkt. 28, at 8.)12 However, a corporation’s

reads footnote five in Pinnacle Consultants[, 101 F.3d 900, 907 n.5 (2d Cir. 1996)] to imply that

a business transaction for an inactive corporation is one that goes toward the furtherance of the

corporation.”). However, as discussed infra n.15, the Court’s conclusion regarding the existence

of diversity jurisdiction would not change if it treated Plaintiff as an inactive corporation.

12 Plaintiff asserts that since “diversity jurisdiction depends upon the state of things at the

time the action is commenced[,] . . . Protostorm’s principal place of business must be determined

as of the 13th day of its existence.” (Pl.’s Opp. Br., Dkt. 28, at 20 (citing 3123 SMB LLC v. Horn,

880 F.3d 461 (9th Cir. 2018)).) While it is true that the existence of diversity jurisdiction is

determined based on the “state of things” at the time the lawsuit was initiated, that does not mean

that the Court should ignore the fact that Protostorm existed before the filing of this lawsuit. In

headquarters are not automatically determinative of, or synonymous with, its nerve center. See

Hertz Corp., 559 U.S. at 97 (noting that if “the alleged ‘nerve center’ is nothing more than a mail

drop box, a bare office with a computer, or the location of an annual executive retreat—the courts

should instead take as the ‘nerve center’ the place of actual direction, control, and coordination, in

the absence of such manipulation.”).

Here, the record does not support equating Plaintiff’s purported headquarters with its nerve

center. Plaintiff admits that the office currently sits empty (Rummelsburg Tr., Dkt. 23-3, at 99:9–

15), and that no meetings have taken place there (id. at 104:15–21). Furthermore, all of the “high-

level” decisions relating to Plaintiff have taken place in New York. (See id. at 71:16–18 (noting

that Greico’s waffle business is located in New York); id. at 95:8–11 (noting that Rummelsburg

has never been to Delaware for the waffle business); id. at 37:24–38:16 (noting that Rummelsburg

and Faulisi meet at the Health Savers office in Long Island to discuss business relating to

Protostorm).) Furthermore, Faulisi, a New York citizen, who has taken the lead on developing the

waffle business, has engaged in at least some of this development in New York. (Faulisi Tr., Dkt.

23-6, at 18:5–11 (testifying that he has had waffles shipped to his home in New York).) The fact

that Plaintiff has conducted some tests of Protostorm’s waffle recipe in Delaware and plans to

Horn, the case Plaintiff relies on, the Ninth Circuit had to determine a corporation’s “principal

place of business as of its 25th day of existence” because the relevant corporation was a newly

formed entity. Id. at 467. Unlike Plaintiff, there was no antecedent company that had converted

to a new corporate form. Indeed, here, Plaintiff argues that “no new entity was created to

commence this lawsuit.” (Pl.’s Opp. Br., Dkt. 28, at 10 (stating that, pursuant to Delaware law, a

“converted corporation shall be deemed the same entity as the converted entity”) (citing 8 Del. C.

§ 265(f)).) Plaintiff cites no case law for the proposition that the Court may not consider the

activities of an already-existing company before it converted into a corporation when determining

that company’s principal place of business. Therefore, in resolving this issue, the Court considers

the actions that Protostorm undertook as a limited liability company, prior to the filing of this

lawsuit, in deciding where Plaintiff’s principal place of business is.

manufacture its waffles in Delaware (Rummelsburg Tr., Dkt. 23-3, at 79:5–10; Faulisi Decl., Dkt.

27, ¶¶ 19, 21–22) is insufficient to establish, by a preponderance of the evidence, that Protostorm’s

principal place of business was in Delaware when it initiated this action, or even now. See Hertz

Corp., 559 U.S. at 96 (noting that the “nerve center” test could lead to unexpected results, like

finding that a nerve center was located in New York even though “the bulk of a company’s

business activities visible to the public take place in New Jersey); see also ACI Worldwide Corp.

v. Tracfone Wireless, Inc., No. 16-CV-981, 2017 WL 3228138, at *2 (D. Del. July 31, 2017)

(noting that “a corporation could have all of its operations, manufacturing, sales, research and

development and the majority of its senior management in a state that is not its principal place of

business”); see also Makarova, 201 F.3d at 113(“A plaintiff asserting subject matter jurisdiction

has the burden of proving by a preponderance of the evidence that it exists[.]”); Grupo Dataflux,

541 U.S. at 570 (“[T]he jurisdiction of the court depends upon the state of things at the time of the

action brought.”). Rummelsburg and Faulisi both admit that though they have plans for Protostorm

to be based in Delaware in the future, that has not happened yet. Rummelsburg, for example, in

response to a question asking where Protostorm’s principal place of business is, testified that

“[r]ight now[,] . . . [i]t’s between my house [in Connecticut], and—well it’s my house because

we’re not operating out of Delaware yet. If we were an operating business, obviously it would be

Delaware, but right now, it’s still my house.” (Rummelsburg Tr., Dkt. 23-3, at 98:17–99:2;13 see

13 The Court notes that Rummelsburg submitted an errata sheet with his deposition that

changed this answer. (See Errata Sheet to Rummelsburg Deposition, Dkt. 23-3, at ECF 224 (noting

that Rummelsburg’s original statement was a “misstatement” and changing the record to say that

Protostorm’s principal place of business is “Delaware because the waffles will be manufactured in

Delaware and a presence is needed to oversee the manufacture of the waffles”).) “Rule 30(e) of

the Federal Rules of Civil Procedure permits a deponent to make changes to the form or substance

of [his] deposition testimony.” Thompson v. Workmen’s Circle Multicare Ctr., No. 11-CV-6885

(DAB) (HBP), 2015 WL 4591907, at *6 (S.D.N.Y. June 9, 2015) (citing, inter alia, Podell v.

Citicorp Diners Club, Inc., 112 F.3d 98, 103 (2d Cir.1997)). “Courts in the Second Circuit

also Faulisi Tr., Dkt. 23-6, at 49:24–50:4 (“Because that’s where the principal place of business

is, in Delaware, so coming out of—working out of Delaware and that’s where we’re going to be,

so I set up a bank account.”) (emphasis added).) Therefore, though it is possible that Plaintiff’s

principal place of business might one day be located in Delaware, that was not the case when

Plaintiff initiated this action. See Grupo Dataflux, 541 U.S. at 570 (“[T]he jurisdiction of the court

depends upon the state of things at the time of the action brought.”).

Rather, even though Rummelsburg testified that Protostorm’s principal place of business

is in Connecticut, where his home is located (Rummelsburg Tr., Dkt. 23-3, at 98:17–99:2; id. at

4:12–13 (Rummelsburg’s address in Connecticut)), the Court finds that Protostorm’s principal

place of business is in New York. As discussed, all of the “high-level” decisions relating to

Protostorm, both before and after its incorporation, have taken place in New York, including

Faulisi’s discussion with Greico about his waffle-making business and Faulisi’s and

Rummelsburg’s discussions about developing the waffle business within Protostorm. (See

Rummelsburg Tr., Dkt. 23-3, at 71:16–18 (noting that Greico’s waffle business is located in New

construe Rule 30(e) broadly, permitting any changes to the deposition to be considered as part of

the record, even where they contradict the original answers.” Samad Bros., Inc. v. Bokara Rug

Co., No. 09-CV-5843 (JFK) (KNF), 2012 WL 43613, at *8 (S.D.N.Y. Jan. 9, 2012). However,

“[b]oth the original testimony and the errata become part of the record, [and] at the summary

judgment stage, a district court is ‘on firm ground’ if it does not credit an errata sheet that reflects

a party’s attempt to ‘retrieve the situation by scratching out and recanting his original testimony

. . . .’” Barnes v. Ross, No. 12-CV-1916 (PKC), 2014 WL 1329128, at *11 (S.D.N.Y. Apr. 3,

2014) (quoting Podell, 112 F.3d at 103); see also Podell, 112 F.3d at 103 (recognizing that

“because any out-of-court statement by a party is an admission, a deponent’s original answer

should be admitted into evidence even when he amends his deposition testimony—with the

deponent of course free to introduce the amended answer and explain the reasons for the change.”)

(internal quotations, alternations, and citations omitted). The Court finds that Rummelsburg’s

original statement is more consistent with the evidence as a whole and therefore affords it greater

weight. However, the Court notes that it would reach the same conclusion regarding Plaintiff’s

nerve center even if it only relied on Rummelsburg’s amended statement because the statement

still implies that the waffle business is not yet operating in Delaware.

York); id. at 37:24–38:16 (noting that Rummelsburg and Faulisi meet at the Health Savers office

in Long Island to discuss business relating to Protostorm).) Although Plaintiff has conducted some

tests of Protostorm’s waffle recipe in Delaware, no actual production or other activity relating to

the waffle manufacturing business has yet occurred there. (Rummelsburg Tr., Dkt. 23-3, at 98:17–

99:2 (“Right now[,] . . . [the principal place of business is] . . . my house [in Connecticut] because

we’re not operating out of Delaware yet.”); Faulisi Tr., Dkt. 23-6, at 49:24–50:4 (explaining that

he set up a bank account in Delaware because “that’s where we’re going to be”) (emphasis added).)

The finding that Protostorm’s principal place of business is New York destroys diversity, as

Defendants are both citizens of New York. (Complaint, Dkt. 1, at ¶¶ 29, 32; Defs.’ Br., Dkt. 23-

29, at 1.)14

The outcome is the same when the Court takes into consideration Plaintiff’s relative lack

of business activity. Protostorm argues that it “has little activity occurring at the present time given

its lack of funding to develop a waffle business. Given its current state, it is more akin to a holding

company that is more passive in nature and its footprint should be measured against the scope of

its activities.” (Pl.’s Br., Dkt. 28, at 20.) However, even judged under this standard, Plaintiff’s

principal place of business would still be New York. A holding company “engages in little activity,

so there is little to direct, control, or coordinate. Its purpose—holding interest in other

companies—is passive.”15 Horn, 880 F.3d at 465; see also Hershfeld, 2017 WL 1628886, at *3

14 In addition, even if Protostorm’s principal place of business was located in Connecticut

(where Rummelsburg’s home is located), diversity jurisdiction would still not exist, as at least one

of the now-dismissed Defendants was a citizen of Connecticut (Complaint, Dkt. 1, ¶ 17). See

Grupo Dataflux, 541 U.S. at 570 (diversity jurisdiction is determined at the time of filing).

15 The Court notes that given Plaintiff’s assertion that it is a “passive” corporation, a more

appropriate analogy may be to an inactive corporation. See Hershfeld, 2017 WL 1628886, at *5

(noting that a company that has delegated its day-to-day operations to another company is more

like “an inactive company [that] is no longer doing business except to wind down its pre-existing

business” rather than a holding company); see also Bonnie & Co. Fashions v. Bankers Tr. Co., 18

(noting that while a holding company does not “conduct[] daily business” but rather its “daily

operations [are] conducted by another, separate company[,] [h]igh-level corporate decisions are

made by the holding company”). A holding company’s principal place of business is still

determined by where its decisions are made because “the salient question [is] where the company’s

policies originate.” Hershfeld, 2017 WL 1628886, at *4 (quoting Utopia Studios, Ltd. v. Earth

Tech, Inc., 607 F. Supp. 2d 443, 445 (E.D.N.Y. 2009)); id. (noting that the nerve center of a

purported shell company was where the board of directors met) (citing S & T Oil Equip. & Mach.,

Ltd. v. Juridica Invs. Ltd., No. 11-CV-542, 2011 WL 1565996, at *3 (S.D. Tex. Apr. 25, 2011));

see also Horn, 880 F.3d at 468 (holding that “a recently-formed holding company’s principal place

of business is the place where it has its board meetings, regardless of whether such meetings have

already occurred, unless evidence shows that the corporation is directed from elsewhere”). As

described supra, though Protostorm’s manufacturing preparation activities may have mainly taken

place in Delaware, the decision-making that drove or supported those activities, such as the

decision to pursue a waffle-making business, to place that business inside of Protostorm, and to

F. Supp. 2d 297, 303 (S.D.N.Y. 1998) (noting that a business is not active when it does not attempt

to negotiate or enter into any contracts, generate income, or employ paid personnel); Cott Corp. v.

Star, No. 12-CV-1004S, 2013 WL 5701856, at *6–7 (W.D.N.Y. Oct. 18, 2013) (finding that a

business was active when “[i]t paid salaries and medical and dental insurance premiums for two

employees, it maintained an active bank account, it incurred large telephone bills to China where

its parent corporation is located and most importantly, from October 2000 through January 2002

it borrowed over $200,000”). “[W]hen a corporation has ceased business activity, its principal

place of business is determined by the place in which it last transacted business.” SEG Vanguard

Gen. Corp. v. Ji, 195 F. Supp. 2d 564, 567 (S.D.N.Y. 2002); see also Wm. Passalacqua Builders,

Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 141 (2d Cir. 1991). Protostorm’s past

principal place of business was either in New York or Connecticut. (Plaintiff’s Rule 11 letter, Dkt.

23-24, at 3 (noting that Protostorm’s prior principal places of business were Connecticut and New

York).) Therefore, even if Plaintiff was considered an inactive business, the Court’s conclusion

regarding Plaintiff’s citizenship would not change.

incorporate Protostorm in Delaware, were all made in New York. (Rummelsburg Tr., Dkt. 23-3,

at 37:24–38:16; 104:15–21; 126:13–20; see also Faulisi Tr., Dkt. 23-6, at 10:14–24.)

Accordingly, Protostorm’s principal place of business is New York. Complete diversity

between the parties does not exist and the Court lacks subject matter jurisdiction to hear this action.

Therefore, it must dismiss the case.

II. Motions to Stay

Parties have also filed competing motions to stay. (Dkts. 33 (Plaintiff’s motion to stay

arbitration), 35 (Defendants’ motion to stay proceedings).) Because the Court lacks subject-matter

jurisdiction, the Court cannot address these motions. See Tornheim v. Kohn, No. 00-CV-5084

(SJ), 2002 WL 482534, at *2 (E.D.N.Y. Mar. 26, 2002) (“The court should consider a 12(b)(1)

motion before ruling on other motions to dismiss, since the dismissal of an action for lack of subject

matter jurisdiction will render all other defenses and motions moot.”) (citing United States ex rel

Kreindler & Kreindler v. United Technologies Corp., 985 F.2d 1148, 1155–56 (2d Cir.1993)).

Therefore, these motions are denied as moot.

CONCLUSION

For the reasons stated above, the Court finds that it does not have subject matter jurisdiction

over this case. Accordingly, the Court grants Defendants’ motion and dismisses this action. The

parties’ respective motions to stay are denied as moot. The Clerk of Court is respectfully directed

to enter judgment and close this case accordingly.

SO ORDERED.

/s/ Pamela K. Chen

Pamela K. Chen

United States District Judge

Dated: August 29, 2019

Brooklyn, New York