18 March 2013
A recent opinion from the Southern District of New York provides a reminder that the Edge Act (12 U.S.C. § 632) permits federally chartered banks to remove many cases to federal court. In Dexia SA/NV v. Bear Stearns, Judge Rakoff held that the Edge Act established federal jurisdiction over a case involving residential mortgage-backed securities (RMBS) because a handful of the underlying mortgage loans were on property located in the Virgin Islands. While Judge Rakoff’s decision adds further weight to an expansive interpretation of the Edge Act, it should be noted that the Second Circuit Court of Appeals has not yet provided clear guidance on these issues.
The Edge Act was passed after World War I to facilitate cross-border business by American banks. One provision of the law confers federal jurisdiction over all suits “to which any corporation organized under the laws of the United States shall be a party, arising out of transactions involving international or foreign banking, or banking in a dependency or insular possession of the United States.” As interpreted by courts in the Southern District, the Edge Act creates federal jurisdiction when “(1) the case is civil in nature, (2) one of the parties is a corporation organized under the laws of the United States (i.e., a national bank), and (3) the suit arises out of transactions involving international banking or international financial operations (including territorial banking).”1
The recent Dexia case involved claims relating to the plaintiffs’ purchases of RMBS certificates sponsored by a wholly owned subsidiary of JPMorgan Chase & Co. Plaintiffs commenced suit in New York state court, and JPMorgan removed the case, asserting federal jurisdiction based on the Edge Act. Plaintiffs moved to remand, attacking federal jurisdiction on two grounds. First, they asserted that the entity that engaged in the international banking transactions was not JPMorgan, but rather a wholly owned subsidiary that is not a national bank. Second, plaintiffs alleged that their claims were based on fraudulent marketing of RMBS offerings to US investors in the United States, and not on the mortgage loans, some of which were in the Virgin Islands.
The court, in denying the motion to remand, found that the statutory phrase “arising out of … international or foreign banking,” should be read broadly, consistent with the purposes of the Edge Act to “protect federally chartered banks engaged in international banking from variations in state law and the local prejudices of state and insular courts.” The court found it irrelevant that JPMorgan had not originated the mortgages in the Virgin Islands, writing that the Edge Act “does not require a perfect match between the particular entity involved in the territorial transaction and the party against whom the claim is brought.” Because JPMorgan was potentially liable on the international banking transactions, the Edge Act applied.
The court also rejected the characterization of the claims as arising out of domestic securities transactions. Citing the complaint, the court found that the conformity of the mortgage loans with stated underwriting standards was critical to the claims. Thus, the court found that the mortgage loans were sufficiently important that the case could be said to have “arisen out of” the underlying lending transactions. Additional Southern District authority provides that “a suit satisfies the jurisdictional requisites of [the Edge Act] if any part of it arises out of transactions involving international or foreign banking or banking in a dependency or insular possession.” (emphasis added).
We caution that other recent Southern District courts have found international aspects of some cases to be too peripheral to support federal jurisdiction. In Allstate Insurance Co., et al. v. Citimortgage, Inc., et al., Judge Sullivan granted a motion to remand under similar facts, because the national bank could not have been liable in connection with the only securitization that involved mortgage loans in Puerto Rico. The court held that “a nationally chartered bank must have potential liability on claims arising out of transactions involving international or foreign banking, or banking in a dependency or insular possession of the United States, in order to support jurisdiction under the Edge Act.” The court declined to apply the Edge Act just because a federally chartered bank and unrelated foreign transactions happened to be in the same case.
While Allstate is not inconsistent with the reasoning in Dexia, it does illustrate the rule that removal statutes in general are narrowly construed; the Edge Act, therefore, does require at least some connection between the international aspects of the transaction and potential liability for a national bank. Other Southern District cases have required only a direct nexus between the bank (or its affiliate) and the international banking activity, rather than potential liability of the national bank.
Despite some variance in its application, the Edge Act is a valuable tool for national banks that are sued in state court. As illustrated in Dexia, defendants should be thorough in investigating whether the claims at issue “arise out of” any foreign banking transactions—even where the foreign transactions are a small part of the case.
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1 Am. Int’l Grp., Inc. v. Bank of Am. Corp., 820 F. Supp. 2d 555, 556 (S.D.N.Y. 2011).