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National Banks and Diversity Jurisdiction: Is Wells Fargo ''Located'' in California or Only South Dakota?

Tuesday, January 3, 2012

Yamuna Bhaskaran | Bloomberg Law Federal courts throughout the country are struggling to interpret 28 U.S.C. § 1348,1 which governs their jurisdiction over national banking associations. The question is whether, for purposes of diversity jurisdiction, a national bank is "located" only in the state in which its main office, as specified in its articles of association, is found, or whether it is also located in the state in which its principal place of business is found. The issue generally arises in the context of attempts to either remove cases to federal court from state court, or to remand cases to state court from federal court. While the issue may seem academic at first blush because, in most instances, a national bank's main office is the same as its principal place of business, the practical implications have revealed themselves in sharp fashion with respect to Wells Fargo, N.A., a branch of the banking conglomerate famous for its California roots. Recent court opinions have held that even though its principal place of business is in California, Wells Fargo is instead a citizen of South Dakota, the location of its "main office," for purposes of diversity jurisdiction. Not all courts concur; some have held that Wells Fargo is citizen of California as well as South Dakota. The rift among the federal circuit courts is growing rapidly, with the Eighth Circuit recently issuing an opinion that conflicted with precedent from the Fifth and Ninth Circuits. Even federal courts within California cannot agree on Wells Fargo's citizenship. Wells Fargo is hardly the only bank that has been subject of these increasing disagreements among federal courts. This article will explore the underlying legal issues and the implications for practitioners.

1863: The "National Association" Is Born

Denoted by the abbreviation "N.A." which stands for "national association," national banks were first authorized by Congress in 1863.2 These banks were chartered and regulated by the federal government through the Office of the Comptroller of the Currency (OCC)3 rather than by state governments and were automatically subject to suit in federal court on the basis of federal question jurisdiction. Eventually, there was a shift to exercising jurisdiction over national banks based on diversity rather than federal question, and in 1887, Congress provided that for purposes of litigation, they were to "be deemed citizens of the States in which they are respectively located."4 This language survived two amendments to the statute, most recently in 1948, and is presently embodied in 28 U.S.C. § 1348, which states, "[a]ll 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."5

Redefining "Located" as "Main Office"

Over time, federal courts developed two competing interpretations of "located" for purposes of Section 1348: was a national bank "located" in the state in which its main office was located, or was it "located" in every state in which it had a branch. In 2006, the U.S. Supreme Court answered that question in its landmark opinion, Wachovia Bank, N.A. v. Schmidt (Wachovia).6 After examining the legislative history of Section 1348, the Court held that a national bank "is a citizen of the State in which its main office, as set forth in its articles of association, is located." It reasoned that finding that "a national bank is additionally a citizen of every State in which it has established a branch" would "drastically curtail" a national bank's access to federal courts "in comparison to the access afforded state banks and other state-incorporated entities. Congress, we are satisfied, created no such anomaly."

"Principal Place of Business"

Corporations are subject to federal diversity jurisdiction based on a different statutory standard than national banks. Under 28 U.S.C. § 1332(c)(1), "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business."7 (Emphasis added.) The phrase "principal place of business" was first used in 28 U.S.C. § 1332(c)(1) in 1958, 10 years after Section 1348 was last amended. In Hertz Corp. v. Friend, the Supreme Court held that a corporation's principal place of business, is best read as referring to the place where a corporation's officers direct, control, and coordinate the corporation's activities. It is the place that Courts of Appeals have called the corporation's "nerve center." And in practice it should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination, i.e., the "nerve center," and not simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion).8 The question raised in some courts is whether a national bank should be treated like a corporation for diversity jurisdiction and be deemed a citizen of the state of its principal place of business in addition to its main office.

— Reading Tea Leaves: Footnote 9 in Wachovia

Although Wachovia addressed the dispute between a main office and branch offices, it did not address the question of whether the bank's principal place of business could also be used. Indeed, in one footnote, the Court acknowledged the possibility of using the principal place of business, but declined to decide the issue because it was "not presented by the parties or necessary to [the] decision."9 Despite the Court's decision not to address the issue, it nevertheless offered a cryptic interpretation of the statute in footnote 9 of its decision in Wachovia. The footnote, which courts have cited in support of both sides of the argument, states, [t]o achieve complete parity with state banks and other state-incorporated entities, a national banking association would have to be deemed a citizen of both the State of its main office and the State of its principal place of business. Congress has prescribed that a corporation "shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business." 28 U.S.C. § 1332(c)(1) (emphasis added). The counterpart provision for national banking associations, § 1348, however, does not refer to "principal place of business"; it simply deems such associations "citizens of the States in which they are respectively located." The absence of a "principal place of business" reference in § 1348 may be of scant practical significance for, in almost every case, as in this one, the location of a national bank's main office and of its principal place of business coincide.10 Wells Fargo is one of a handful of banks that finds "practical significance" in the debate. An increasing number of courts now face the very issue that the Wachovia court declined to address: whether "located" is limited to "main office" or also includes "principal place of business."

— The Rising Tide in Favor of Principal Place of Business

If footnote 9 is taken at face value, it implies that "complete parity" between national banks is achievable by simply using the principal place of business standard in addition to the main office. Indeed, as the Fifth Circuit observed in rejecting the use of branch offices for determining citizenship, "[s]ince a state bank, under 28 U.S.C. § 1332(c)(1), may be a citizen of no more than two states—the state where its principal place of business is located and its state of incorporation—maintaining jurisdictional parity between a national and state bank requires that the national bank have no more than two possible states of citizenship."11 At least three federal circuit courts have supported the use of principal place of business. In 1943, decades before the Wachovia opinion was issued, the Ninth Circuit held in American Surety Co. v. Bank of California that under Section 1348's predecessor, national banks were also citizens of the state of their principal place of business.12 In 2001, the Seventh Circuit, in Firstar Bank, N.A. v. Faul, held that the principal place of business could also be used.13 Because Firstar was never directly overruled, other courts have relied on it in using the principal place of business standard.14 The Fifth Circuit also adopted the test in 2004.15 District courts are increasingly burdened by the debate, as most circuit courts have not issued opinions on the issue. With the rise in home foreclosures in recent years, district courts in California are perhaps most burdened, as many have held that Wells Fargo was a citizen of California,16 thereby defeating diversity jurisdiction. Relying in part on the reasoning in California cases, a federal court in Oklahoma recently reached a similar conclusion in the absence of guidance from the Tenth Circuit.17

— "Principal Place of Business" Did Not Exist When 1348 Was Amended

In a case in which Wells Fargo was a party, the Eighth Circuit recently rejected the principal place of business standard.18 The court's strongest argument involved the timing of the statute's last amendment in 1948 and the first use of "principal place of business" in 1958. Congress could have amended Section 1348 in 1958 to include the term "principal place of business" at the same time it amended Section 1332 in order to preserve jurisdictional parity, but elected not to. The court declined to "import a jurisdictional concept into § 1348 that was unknown at the time of its adoption," and therefore held that a "national bank is a citizen only of the state in which its main office is located." As further support, the court cited to statements made by counsel for the OCC before the U.S. Supreme Court, in which the OCC, which chartered national banks, rejected a bank's "principal place of business" as a basis for citizenship. The Eighth Circuit is hardly alone. Indeed, district courts in the Ninth Circuit have disregarded the Ninth Circuit's holding in American Surety and rejected principal place of business.19 Federal courts in West Virginia,20 Minnesota,21 and Wisconsin22 have similarly restricted Section 1348 to "main office."

Implications for Practitioners

Depending on the jurisdiction and its position on whether a national bank is a citizen of the state of its principal place of business, the consequences for practitioners can be serendipitous or disastrous. Cases addressing the issue have involved mortgage foreclosures, breach of contract, confirmation of arbitration awards, and consumer protection, among others. Because of the lack of precedential opinions in many jurisdictions and because of conflict even within jurisdictions such as the Ninth Circuit, it is virtually impossible to predict what position a court will take on the issue. But what if, like Wells Fargo, the bank has been subject to both interpretations by different courts? In one Eighth Circuit case, a party argued that the bank should be collaterally estopped from denying its California citizenship based on a remand order from a district court in the Ninth Circuit. 23 Under the collateral estoppel doctrine, or issue preclusion, "an issue of law or fact actually litigated and decided by a court of competent jurisdiction in a prior action may not be relitigated in a subsequent suit between the parties or their privies."24 The attempt was rejected by the Eighth Circuit, however, because the remand order was nonappealable and lacked preclusive effect. 25 By contrast, the Eighth Circuit opinion itself was in the context of an appeal from the confirmation of an arbitration award, and is of precedential value for the argument that Wells Fargo is not a citizen of California. Considering the increasing number of cases addressing the issue, particularly those involving foreclosures, more and more federal courts will likely join the fray. But with the majority of opinions involving nonprecedential remand orders, it could be many years before there is a settled interpretation of Section 1348. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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