In our April column, we discussed recent limits on the scope of diversity jurisdiction set by the U.S. District Court for the Southern District of New York. Since then, the U.S. Court of Appeals for the Second Circuit, followed closely by Southern District Judge Jed S. Rakoff, have announced limits on a more obscure form of subject matter jurisdiction arising under the Edge Act, 12 U.S.C. Section 632, which provides for original and removal jurisdiction in cases involving international banking transactions by federally chartered banks or their extraterritorial subsidiaries. In Dexia v. Bear Stearns,1 Rakoff, sua sponte, reversed his own earlier decision upholding Edge Act jurisdiction, after the Second Circuit called for a narrow reading of that statute's jurisdictional grant in its own recent decision in American International Group v. Bank of America.2

The Edge Act

The Edge Act dates to early in the 20th century but has recently taken on increasing prominence in post-financial crisis lawsuits involving residential mortgage-backed securities (RMBSs). Enacted in 1919 to put American banks doing business abroad on even footing with their offshore and foreign competitors, the Edge Act authorized the creation of federally chartered banking corporations to be regulated by the Federal Reserve instead of by local and state regulatory authorities. As part of the Glass-Steagall Act in 1933, Congress added Section 632 to the Edge Act—a provision intended to provide predictability and uniformity for corporations chartered under the Edge Act by conferring original and removal federal jurisdiction in certain cases involving Edge Act corporations. Specifically, Section 632 provides:

Notwithstanding any other provision of law, all suits of a civil nature at common law or in equity 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, or out of other international or foreign financial operations, either directly or through the agency, ownership, or control of branches or local institutions in dependencies or insular possessions of the United States or in foreign countries, shall be deemed to arise under the laws of the United States, and the district courts of the United States shall have original jurisdiction of all such suits; and any defendant in any such suit may, at any time before the trial thereof, remove such suits from a State court into the district court of the United States for the proper district by following the procedure for the removal of causes otherwise provided by law.3