United States: National Banks Beware: Your Branches May Carry Greater Risk Than You Realize

Last Updated: January 28 2005
Article by Lyle D. Washowich

A recent Circuit split between the United States Courts of Appeals for the Fourth and Fifth Circuits has created uncertainty in litigation which arises from the branch offices of national banks. The federal courts of appeal now stand divided over whether a case based solely on state-law claims involving a national bank’s branch offices may be removed to federal court when diversity jurisdiction otherwise exists in the case. According to the Fourth Circuit in Wachovia Bank, National Association v. Schmidt III, et al., 2004 WL 2423812 (4th Cir. 2004), a national bank is a citizen of every state in which it maintains a branch for the purpose of federal diversity jurisdiction. By contrast, the Fifth Circuit in Horton v. Bank One, N.A., 387 F.3d 426 (5th Cir. 2004) recently held that a national bank is not a citizen of every state where it maintains a branch for purpose of federal diversity jurisdiction. The immediate result is that a suit brought against a branch office of a national bank may be removed to federal court in the Fourth Circuit, if diversity jurisdiction otherwise exists, but may not be so removed in the Fifth Circuit.

The long-term impact could carry serious consequences for national banks. In litigation of state-law claims, the strategic option of removing an action to federal court serves as a weapon to diluting those claims. The federal forum tends to offer greater scrutiny in the application of law to fact and generally less bias toward a "home town" plaintiff. Of course, these perceived benefits exist in both a real and imagined way. Not only may the value of a case diminish if litigated in federal court, but also plaintiff counsel’s perception of the case’s worth will likely vary depending upon the forum maintaining jurisdiction. Although this generalization does not necessarily hold true in every case, removal of state-law claims to federal court is generally desired when possible. Additionally, if the precedent and legal principles applying to national banks and their branches is increasingly decided among state courts, that could work to chip away at the important role federal courts play in establishing a uniform set of applicable rules.

In Horton, 387 F.3d at 429, the court adopted the rationale laid out in the Seventh Circuit’s decision in Firstar Bank, N.A. v. Faul, 253 F.3d 982, (7th Cir. 2001). There, for the purposes of 28 U.S.C. § 1348, a national bank is "located" in and a citizen of the state only of its principal place of business and the state listed in its organization certificate. The statute reads in pertinent part:

The district courts shall have original jurisdiction of any civil action commenced by the United States, or by direction of any officer thereof, against any national banking association, any civil action to wind up the affairs of any such association, and any action by a banking association established in the district for which the court is held, under chapter 2 of Title 12, to enjoin the Comptroller of the Currency, or any receiver acting under his direction, as provided by such chapter.

All national banking associations shall, for the purposes of all other actions by or against them, be deemed citizens of the States in which they are respectively located. [emphasis added]

Looking to the legislative history of 28 U.S.C. § 1348, the Horton court followed Firstar’s lead by pointing to the jurisdictional provisions of the 1882, 1887, and 1948 jurisdictional Acts governing national banks. These Acts preceded 28 U.S.C. § 1348. The Acts promoted a policy of "jurisdictional parity" for national banks vis-à-vis state banks and corporations. Under such a policy, national banks were presumed to have the same access to the federal courts as corporations and state banks. Citing to the principles of 28 U.S.C. § 1332(c)(1), where a state bank may be a citizen of no more than two states (the state of its principal place of business and incorporation), Horton interpreted 28 U.S.C. § 1348 to assure jurisdictional parity—meaning that a national bank may have no more than two possible states of citizenship.

To the contrary, in Wachovia Bank, the court recognized but failed to adopt the concept of jurisdictional parity. Instead, the Fourth Circuit concluded that a national bank is "located" where it operates branch offices and, thus, should to be held accountable for any state-law claims filed against those branches in the state courts where the branch is located. Interpreting the same jurisdictional statute as the Fifth Circuit, 28 U.S.C. § 1348, the court relied upon "three traditional tools of statutory interpretation in combination" to determine that "located" should be construed to render banking associations citizens of the states in which they operate branch offices: (1) the ordinary meaning of the term "located"; (2) the use of "located" in juxtaposition with the term "established" in 28 U.S.C. § 1348; and (3) the Supreme Court’s construction of "located" in a parallel venue statute in Citizens and Southern National Bank v. Bougas, 434 U.S. 35, 98 S.Ct. 88, 54 L.Ed.2d 218 (1977).

First, the Fourth Circuit reasoned that it is "indisputable" that a national bank becomes "physically present" in a state when it operates a branch office there. 2004 WL 2423812, *2. Citing to the Webster’s and Oxford dictionaries and other common understandings of the term "located," the court concluded that the common meaning of "located so naturally includes branch offices" that it is puzzling how the dissent could conclude otherwise. Id. at *2-3, citing World Trade Center Properties, LLC v. Hartford Fire Ins. Co., 345 F.3d 154, 161 (2d Cir. 2003) (a unanimous court held that section 1348 must include branch offices, without any further analysis on the issue).

Second, the court embraced the principle of statutory interpretation that different words cited in the same statute must be given separate, distinct meanings whenever possible. 2423812, *4. The court reasoned that "established" and "located" could be given distinct meanings in the context of the national bank jurisdictional statute. With "established," the court determined that it is more logical to refer to a bank’s charter location. With "located," it seems more logical to consider all of the places where a national bank maintains a physical existence. Id. Once again using the common meaning of these terms, the court deduced that this interpretation is most sensible since the ordinary definition of "located" usually refers to physical presence in general terms while "established" usually means an "original and permanent," more specific location. Finally, the court held that if Congress wanted to specifically exclude branch offices from its definition of "located," it easily could have done so or may do so by legislation. Id. at *7.

Third, the court invoked Bougas where the United States Supreme Court, in interpreting the federal venue statute, held that the word "located" included branch locations. Since the venue statute was enacted and in effect when 28 U.S.C. §1348 was adopted (1948), and since the venue statute employed both "established" and "located" when referring to the presence of national banks, the interpretation of the venue statute should be given great deference when defining the meaning of 28 U.S.C. §1348. Id. at *8. According to the court, statutes which are in pari materia—or relating to the same subject area—should be construed in a consistent manner. Since the term "located" was interpreted with common meaning of "physical presence" in Bougas, the court saw no grounds for straying from the same interpretation in this context. Id. at *8–10.

Again, the implications of this split could be staggering. Precedent and the legal principles applying to national banks, and their branches, may become increasingly decided in state courts. In the alternative, national banks may increasingly receive inconsistent, contradictory decisions between state and federal courts, depending upon the Circuit in which a matter is filed. The impact of the split is three-fold: (1) it removes a strategic option in defending a matter in the Circuits which adopt the Wachovia Bank rationale; (2) the value of cases involving state-law claims may well be increased; and (3) the way policy is made affecting national banks could shift in an important way.

At a minimum, national banks and their branches should be aware of this (potentially) greater risk for the likelihood of harm. If such state-law claims are filed, those prepared for the consequences will be one step ahead of the ever-changing curve.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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