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The meaning of the word “located” was at the heart of a Supreme Court argument last week that could affect a wide range of consumer litigation against national banks. The banking industry was asking the high court just where national banks are “citizens” for purposes of determining diversity jurisdiction in federal courts. Wachovia Bank v. Schmidt, No. 04-1186. More than 160 national banks operate interstate branches today. Under federal law, national banking associations, for diversity jurisdiction purposes, shall “be deemed citizens of the States in which they are respectively located.” 28 U.S.C. 1348. But the federal circuits have split in their interpretations of “located.” Three — the 5th, 7th and 9th U.S. circuit courts of appeals — have enhanced these banks’ ability to get federal court jurisdiction by holding that national banks are citizens only of the state in which they maintain their principal place of business or which is listed on their organizational certificates or articles of association. But the 4th Circuit in Wachoviatook a narrow view of federal jurisdiction by holding, 2-1, that national banks are “located” in, and thus citizens of, every state in which they maintain a branch. “The reason business likes to be in federal court is they are worried about home cooking,” said Professor Lissa Broome, director of the Center for Banking and Finance at the University of North Carolina School of Law. “Some states have reputations as being very favorable to plaintiffs, for example, Alabama and Texas. You do see some big verdicts coming out of state courts that you don’t normally see coming out of federal courts.” As a matter of policy, federal diversity jurisdiction exists because there is a presumed prejudice against out-of-state institutions, but that is not the case with national banks today, said Margot Saunders, of counsel to the National Consumer Law Center. “With national interstate banking, you have banks that really do have a solid foothold and presence in a state,” she explained. “They employ a lot of people and are seen as regular participants in the community. It’s unlikely there will be that prejudice in state court. “The reason banks want to get into federal court is because there’s a perceived preference for business in federal court,” she added. “Consumers want equally to be before a favorable forum.” PARSING WORDS Wachovia Bank is a national banking association with its main office and principal place of business in Charlotte, N.C. It operates interstate branch locations in 15 states and the District of Columbia. The high court dispute stems from a suit brought in 2003 in a South Carolina court of common pleas against Wachovia, Big Four accountant KPMG LLP and others for selling an allegedly fraudulent tax shelter to South Carolina resident Daniel Schmidt and others. Wachovia moved in federal court to compel arbitration, but the district court denied the arbitration petition. Wachovia appealed that denial to the 4th U.S. Circuit Court of Appeals. But the 4th Circuit, instead of ruling on the arbitration issue, decided there was no diversity jurisdiction under �1348. In the divided ruling, Judge J. Michael Luttig wrote that the “ordinary meaning of ‘located’ suggests that a national bank is ‘located’ wherever it has a physical presence.” He also noted that �1348 uses two different terms to refer to the presence of a banking association: “established,” to refer to a bank’s charter location, and “located,” to refer to the place where it has a physical presence. The panel also relied on a 1977 high court ruling that interpreted the word “located” in a prior version of the national bank venue statute to mean “branch locations.” Citizens & Southern National Bank v. Bougas, 434 U.S. 35. Luttig called the contrary reasoning by three other circuits “unpersuasive” and “amounting to little more than judicial assertion of a policy preference in favor of federal forums for national banking associations.” In the high court, Wachovia, which is represented by veteran high court litigator Andrew Frey of Chicago-based Mayer, Brown, Rowe & Maw, has drawn support in its argument for reversal from the solicitor general of the United States and the banking industry. Frey contends that when �1348 and its predecessors were enacted, corporations, including state-chartered banks, were treated as citizens of only a single state for diversity purposes. Today, corporations are considered citizens of no more than two states: the one in which they are incorporated and, if different, the one in which they maintain their principal place of business. Treating national banks differently, he said, imposes extraordinary restrictions on their access to the federal courts and runs directly counter to a more than century-old federal policy dictating that national banks not be disadvantaged vis-�-vis their state-chartered counterparts. “Competitive equality with state banks is an important consideration here,” said Frey. “National banks would like not to be the only entities that don’t have access to federal diversity jurisdiction.” Luttig, according to Frey, relied on a historical error in his analysis. Luttig believed that Congress had modified the national bank statute before 1948 to permit interstate banking, Frey said. When Congress re-enacted the term “located” in the 1948 version of �1348, Luttig reasoned that Congress must have contemplated interstate branch locations. But, Frey said, the ban on interstate branching was not lifted until 1994. The re-enactment of “located” in 1948, he contends, reaffirmed the understanding at the time that national banks are located in only a single state for diversity purposes. “We have a situation where Congress didn’t pay a lot of attention [to this issue] because the answer was always the same — there was only one location for jurisdiction, for determining citizenship,” said Frey. His opponent’s reliance on Bougasis “insubstantial,” added Frey, because the statute and subject matter were different — venue not diversity jurisdiction. “Even Bougasdoesn’t carry the day against the incongruity of result, the history of equal treatment of national banks and state banks, and the constant reaffirmation of this principle,” he said. Wachovia is “definitely located” in South Carolina, said Schmidt’s high court counsel, James R. Gilreath of The Gilreath Law Firm in Greenville, S.C. “They don’t like being in state court but I don’t think it’s fair for them to come here, use all of our resources and then be able to take us to the court of their choice,” said Gilreath. “The banking industry says they’ve got all these branches and say they could never get into federal court under the 4th Circuit’s reasoning. Well, so what? There’s just a proliferation of all of them. They can’t go everywhere and still have the benefit of federal court.” The high court case is a statutory interpretation battle but “a very simple one, from my standpoint,” he added. “I think it’s pretty clear what ['located'] means. I always thought the word ‘located’ was a fairly simple word. We all learned it at an early age in elementary school. But we’ve now got five to six briefs that have twisted and turned it and contorted it every way and sideways.” Under the first principle of statutory interpretation, Gilreath argues, the plain meaning of the word is examined and the plain meaning of “located” is “anywhere a national bank has a physical presence, such as in a branch banking office.” He also contends that under the rule of construction that different words in the same statute are intended to have different meanings, the statute’s use of “established” in its first part means where a national bank is designated in its organizational certificate, and “located” refers to the banks’ physical presence. And he notes that Congress in 1958 used very different language from that in �1348 to describe diversity jurisdiction over corporations, which suggests that Congress intended a different meaning for national banks. The federal policy favoring equality of competition between national and state banks does not require that a national bank’s citizenship be limited to one state, said Gilreath. It advances fairness in business competition not equality of court procedures, he argued. Gilreath has no amicus support. “It’s me against the whole banking industry; that’s OK.” But he notes that a large number of federal district courts had agreed with the 4th Circuit’s approach prior to rulings by the 7th, 5th and 9th circuits. “Judge Luttig read the statute strictly,” said Gilreath. “He said Congress may agree with the banks, but it’s not up to his court to change it.” AT STAKE If the 4th Circuit is correct, then a likely or possible result is that national banks will press Congress to change �1348 or eliminate it, said Broome of the University of North Carolina School of Law. “You could argue we don’t need it anymore and it doesn’t make sense in this interstate branching and banking environment,” she said. “You also could say why should banks be treated differently from other corporations under Section 1332? I’m not sure there is a good argument for that.” Besides the “home cooking” issue, national banks also may see in this case another looming issue, Broome said: the enforceability of contractual waivers of classwide arbitrations. “A borrower agrees to arbitration in the contract and further agrees not to seek arbitration of a class of borrowers similar to him,” she explained. “It’s my understanding the federal courts have one view of the enforceability of those waivers and some state courts have a different view. It may be the federal court view is viewed as more bank-friendly.” Two weeks ago, the House Financial Services Committee voted out H.R. 3505, a bill that, among other things, would provide that for diversity jurisdiction purposes, national banks and federally chartered thrifts are citizens only in the states in which they have their main office. The provision is opposed by a host of consumer organizations, which claim that it will hurt consumers, clog the federal courts and make them the collection mills for banking institutions. A practical example of potential harm to consumers is in home foreclosures, said Saunders of the National Consumer Law Center. In many states, the only way the consumer can stop a foreclosure based on an underlying problem with the loan is to seek an injunction in state court, she said. If the bank is allowed to remove the action to federal court, it becomes more complicated, more expensive and burdensome for already hard-strapped consumers. “What we’ve got now is huge corporations saying quite successfully in federal court that they don’t have to follow state law, only a few federal laws, most of which were passed on the premise there are underlying state laws dealing with transactions between individuals and these banks,” Saunders said. “It’s a huge shift of power. When is enough ever enough?”
A SPLIT IN CIRCUITS The federal circuits have split in their interpretations of “located” for the purposes of determining diversity jurisdiction. The 5th, 7th and 9th circuits have held that national banks are citizens only of the state in which they maintain their principal place of business or which is listed on their organizational certificates or articles of association. The 4th Circuit held that national banks are “located” in, and thus a citizen of, every state in which they maintain a branch.

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