The Edge Act Confers Federal Jurisdiction According To US District Court For The Southern District Of New York

Keywords: Edge Act, Dexia, RMBS certificates

A recent opinion from the Southern District of New York provides a reminder that the Edge Act (12 U.S.C. § 632) permits federally chartered banks to remove many cases to federal court. In Dexia SA/NV v. Bear Stearns, Judge Rakoff held that the Edge Act established federal jurisdiction over a case involving residential mortgage-backed securities (RMBS) because a handful of the underlying mortgage loans were on property located in the Virgin Islands. While Judge Rakoff's decision adds further weight to an expansive interpretation of the Edge Act, it should be noted that the Second Circuit Court of Appeals has not yet provided clear guidance on these issues.

The Edge Act was passed after World War I to facilitate cross-border business by American banks. One provision of the law confers federal jurisdiction over all suits "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." As interpreted by courts in the Southern District, the Edge Act creates federal jurisdiction when "(1) the case is civil in nature, (2) one of the parties is a corporation organized under the laws of the United States (i.e., a national bank), and (3) the suit arises out of transactions involving international banking or international financial operations (including territorial banking)."1

The recent Dexia case involved claims relating to the plaintiffs' purchases of RMBS certificates sponsored by a wholly owned subsidiary of JPMorgan Chase & Co. Plaintiffs commenced suit in New York state court, and JPMorgan removed the case, asserting federal jurisdiction based on the Edge Act. Plaintiffs moved to remand, attacking federal jurisdiction on two grounds. First, they asserted that the entity that engaged in the international banking transactions was not JPMorgan, but rather a wholly owned subsidiary that is not a national bank. Second, plaintiffs alleged that their claims were based on fraudulent marketing of RMBS offerings to US investors in the United States, and not on the mortgage loans, some of which were in the Virgin Islands.

The court, in denying the motion to remand, found that the statutory phrase "arising out of ... international or foreign banking," should be read broadly, consistent with the purposes of the Edge Act to "protect federally...