The U.S. Court of Appeals for the Second Circuit has ruled that a little-known international banking law does not allow Bank of America to remove a lawsuit filed by American International Group over mortgage-backed securities from state to federal court, though it left open the possibility that BofA could remove the case on other grounds.

Judge Pierre Leval (See Profile), writing for a unanimous panel that included Judges Rosemary Pooler (See Profile) and Debra Ann Livingston (See Profile), ruled on April 19 in AIG v. Bank of America, 12-1640, that the federal Edge Act of 1919 does not allow BofA to remove the case from Manhattan Supreme Court, where AIG originally filed it.

The ruling overturned an October 2011 ruling by then-Southern District Judge Barbara Jones, who denied BofA’s motion to remand the case.

The circuit remanded to the district court and said that BofA is still free to argue that the case should stay in federal court because it is related to bankruptcy proceedings. The matter will go before Judge Lewis Kaplan (See Profile), who took over the case after Jones retired at the end of last year.

AIG sued BofA and affiliated companies in Manhattan Supreme Court in 2011 for more than $10 billion, alleging BofA made misrepresentations about residential mortgage-backed securities in which AIG invested. Claims related to BofA’s subsidiary Countrywide Financial Corp. were later split off and transferred to a multidistrict litigation in California.

BofA removed the state case to the Southern District, claiming it could do so under the Edge Act, which allows the creation of federally chartered banking companies that are not subject to state banking regulations. The law was intended to promote competition with foreign banks.

An amendment to the law includes language that federal courts shall have jurisdiction over suits arising from "transactions involving international or foreign banking, or banking in a dependency or insular possession of the United States."

BofA argued that the amendment allowed it to remove the suit because a small number of the mortgages that serve as collateral for the securities at issue were issued in Puerto Rico, Guam, the U.S. Virgin Islands and the Northern Mariana Islands.

But the panel ruled that, read in the context of the Edge Act, the language applies only to offshore transactions conducted by federally chartered corporations under the Edge Act. Leval acknowledged that the law is grammatically unclear, but said the legislative intent was enough to determine its meaning.

In order to be removed to federal court, he wrote, "the suit must have a federally chartered corporation as a party, and the suit must arise out of an offshore banking or financial transaction of that federally chartered corporation."

Because the offshore mortgage loans were not made by Edge Act corporations, the suit is not removable under the act, Leval said.

Kathleen Sullivan, a partner at Quinn Emanuel Urqhart & Sullivan, represents AIG.

Fred Rowley, a partner with Munger, Tolles & Olson represents BofA.

"AIG is pleased that the Second Circuit found no merit to Bank of America’s tactical effort based on the Edge Act to remove AIG’s claims from AIG’s chosen jurisdiction in state court to federal court," said AIG spokesman Jon Diat.

"This is a narrow procedural ruling that has no bearing on the merits of the case," said Bank of America spokesman Lawrence Grayson.

In addition to the suits against BofA in New York and California, AIG is pursuing an action against a special investment vehicle created by the Federal Reserve Bank of New York, Maiden Lane II, seeking a declaratory judgment that AIG did not give away its rights to sue over mortgage-backed securities as part of its federal bailout package. That case, which is also before Kaplan, has been stayed.