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From Banking and Finance Law Daily, December 4, 2013

National bank was citizen of states of incorporation and of principal place of business

By Richard A. Roth, J.D.

For purposes of a federal court’s diversity of citizenship jurisdiction, a national bank is a citizen of both the state where it is incorporated and the state where its principal place of business is located, according to a U.S. district court judge for the Northern District of California. Dual state citizenship offers national banks rights comparable to those afforded to state banks, which is the guiding principal of Supreme Court precedent, the judge said. As a result, the judge concluded he did not have jurisdiction over a suit brought only under state laws (Vargas v. Wells Fargo Bank, N.A., Nov. 30, 2013, Tigar, U.S. District Judge).

The consumers who brought the suit filed originally in the California state court, claiming that Wells Fargo Bank violated California laws against racial discrimination when handling their request for a mortgage loan modification. The bank removed the suit to federal district court, asserting federal diversity jurisdiction—according to the bank, it was a citizen of South Dakota, where it was incorporated, while the consumers were citizens of California. However, the district court judge raised the jurisdiction issue when he noted that Wells Fargo’s principal place of business was California.

Corporate citizenship. A corporation generally is a citizen of the state in which it is incorporated and also of the state where it has its principal place of business (28 U.S.C. §1332(c)). While that rule provides dual citizenship for state banks, it does not have the same effect for national banks because they are not incorporated by any state, the judge pointed out. National banks are chartered by the Office of the Comptroller of the Currency.

Instead, federal law says that national banks are “citizens of the States in which they are respectively located” (28 U.S.C. §1348). “Located” is not defined, leading to uncertainty about national bank state citizenship.

As a result, federal courts arrived at two competing interpretations of national bank citizenship, the judge said:

  • A national bank is located in the state where its main office is found and also the state of its principal place of business (for example, the Seventh Circuit’s decision in Firstar Bank, N.A. v. Faul (2001));

  • A national bank is located in every state where it has a branch (for example, the Fourth Circuit’s decision in Wachovia Bank v. Schmidt (2004).

Attempting to support its diversity of citizenship argument, Wells Fargo argued a different position. According to the bank, a national bank was a citizen only of the state where it was incorporated, the judge said.

Dual citizenship. The judge found guidance in the opinion of the Supreme Court when it reversed the Fourth Circuit’s Schmidt decision. In Wachovia Bank v. Schmidt (566 U.S. 303, 2006), the Supreme Court rejected the position that a national bank was located in, and thus a citizen of, every state where it maintained a branch. The Court said instead that a national bank was a citizen of the state where its main office was located according to its articles of incorporation. However, according to the judge, the Court did not address whether the bank also was a citizen of the state that was its principal place of business. In other words, the question of whether national banks, like state banks and other corporations, had dual state citizenship, remained undecided.

Examining the Supreme Court’s Schmidt decision, the judge said that the Court was concerned with creating jurisdictional parity between state and national banks. Accomplishing this goal required that both state and national banks have dual state citizenship.

Home Owners Loan Act. After the Supreme Court decided Schmidt, the Home Owners Loan Act was amended to specify a citizenship rule for federal savings associations. Under the amendment, a federal thrift is a citizen only of the state where its main office is located; it cannot have dual state citizenship (12 U.S.C. §1464(x)). Wells Fargo argued that this amendment was intended to create jurisdictional parity between national banks and federal thrifts, based on Congress’s understanding that national banks did not have dual state citizenship.

The judge rejected the bank’s argument.

Noting first that it was dangerous to infer legislative intent from a subsequent Congress’s actions, the judge added that the citizenship statutes for banks and thrifts are quite different. The statute for thrifts does not use the concept “located,” he said. Congress could have amended the bank law at the same time to make the two statutes consistent, but did not do so.

The legislative history was not very informative either, the judge said.

The case is No. 12-cv-02008-JST.

Attorneys: Ephraim Okechukwu Obi (Law Offices of Ephraim O. Obi) for Juan Manuel Vargas. Elizabeth Christine Hehir (Anglin Flewelling Rasmussen Campbell & Trytten LLP) for Wells Fargo Bank N.A.

Companies: Cal-Western Reconveyance Corp.; Wells Fargo Bank N.A.

MainStory: TopStory BankingOperations

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