As any first-year law student could tell you, “Any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States . . . where such action is pending.” 28 U.S.C. § 1441(a). Generally, the removal statute is understood to mean that defendants can remove to federal court wherever there is diversity jurisdiction or the action includes claims arising from the Constitution or other federal laws. However, there is a lesser known avenue for removal that those in the banking and finance industry should familiarize themselves with: removal under the Edge Act. 12 U.S.C. § 611 et seq.
History and Evolution of the Edge Act
Following the conclusion of World War I, the United States took on an expanded role in the global economy. To facilitate cross-border transactions by U.S. national banks, Congress amended the Federal Reserve Act in 1919, adding section 25(a), commonly known as the Edge Act. See Am. Int’l Grp., Inc. v. Bank of Am. Corp., 712 F.3d 775, 778–79 (2d Cir. 2013); “Edge Act Corporations,” Fed. Reserve Bank of Richmond Monthly Review, June 1967, at 2. The Edge Act permitted the Federal Reserve Board to charter corporations for the purpose of engaging in international or foreign banking or financial operations, provided that the corporation possessed capital of at least $2,000,000 and a majority of its shares were held by U.S. citizens or by corporations or firms the controlling interest of which is owned by U.S. citizens.
Fourteen years after its enactment, Congress again amended the act to confer federal jurisdiction over cases “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.” In so doing, Congress sought to give Edge Act corporations consistency of adjudication, as opposed to the potentially conflicting restraints imposed by state-level banking authorities. See A.I. Trade Fin., Inc. v. Petra Int’l Banking Corp., 62 F.3d 1454, 1462–63 (D.C. Cir. 1995) (“Crafted in the wake of the turmoil that the World War had caused in international financial markets, the Edge Act called forth a new type of federally controlled institution intended to increase the stability of, and the public’s confidence in, international markets. . . . Federal supervision of these financial institutions was seen as essential if they were to ever succeed in the international marketplace.”). Thus, the act created another means by which certain defendants can have their cases removed to federal court.
Removability of Matters Involving Edge Act Corporations
As noted above, section 632 of the act provides that cases involving Edge Act corporations and arising out of a foreign transaction may be removed to federal court. 12 U.S.C. § 632. Despite the relative brevity of the provision, courts have lamented, and continue to lament, its ambiguity. Courts generally agree that, in order to qualify for removal to federal court under the Edge Act, the suit must (i) be a civil suit at common law or in equity, (ii) involve a party that is an Edge Act corporation, and (iii) arise out of one of three types of offshore transactions or operations. However, the exact contours of these requirements remain a source of contention. See American International Group, 712 F.3d at 780; People v. Wells Fargo & Co., No. 15-CV-4181, 2015 WL 4886391, at *3 (C.D. Cal. Aug. 13, 2015). The most vexing question facing federal courts considering Edge Act removal concerns the third requirement: when a case can be said to “arise out of” an offshore transaction. See New Mexico ex rel. Foy v. Vanderbilt Capital Advisors, LLC, No. Civ-09-0178, 2009 WL 3672921, at *2 (D.N.M. Apr. 13, 2009) (“Federal Courts are divided on whether 12 U.S.C. § 632 should be interpreted as providing a broad basis for federal jurisdiction or whether the statute should be read more narrowly.”).
Courts subscribing to the broader view of the jurisdiction requisites under the Edge Act reason that the phrase “arise out of” must be read broadly in order to ensure that the act’s primary purpose of protecting federally chartered banks engaged in international banking and providing a federal forum for consistent adjudication of claims derived from international banking transactions is fulfilled. See, e.g., Dexia SA/NV v. Bear, Stearns & Co., 924 F. Supp. 2d 555, 558 (S.D.N.Y. 2013). For example, in Dexia, the plaintiffs alleged that the defendants misrepresented the risk profiles of the underlying securities for 250,000 mortgage loans, some of which were loans on properties located in the Virgin Islands. Id. at 557. Despite the plaintiffs’ assertions that the claims arose out of the misrepresentations regarding the domestic securities transactions and not the international mortgage transactions, the court reasoned that “the process of engaging in the territorial mortgage transactions is sufficiently central to the plaintiffs’ claims to find that the case ‘aris[es] out of’ those transactions.” Id. at 558. In another example, the court in In re Lloyd’s American Trust Fund Litigation, 928 F. Supp. 333, 338 (S.D.N.Y. 1996), held that “a suit satisfies the jurisdictional requisites of Section 632 if any part of it arises out of transactions involving international or foreign banking” even if those transactions are merely incidental. See also Warter v. Boston Sec., S.A., No. 03-81026-CIV/RYSKAMP, 2004 WL 691787, at *5–8 (S.D. Fla. Mar. 22, 2004) (quoting In re Lloyd’s).
By contrast, a number of courts have held that where the foreign banking transactions were merely “incidental” to the claims at issue, such connection was not significant enough to confer federal jurisdiction under the Edge Act. In one of the most widely cited Edge Act jurisdiction cases, the Second Circuit grappled with whether the foreign transaction out of which the case arises needs to have been a transaction executed by the named Edge Act corporation defendant or whether any foreign transaction suffices, regardless of the Edge Act corporation’s level of involvement in the transaction. See American International Group, 712 F.3d at 780. In that case, the plaintiffs invested in residential mortgage-backed securities (RMBSs) that were underwritten, sponsored, or sold by several Edge Act corporations—the named defendants in the suit. See id. at 777–78. A small percentage of those RMBSs were secured by real property located in United States territories; however, it was not clear that any of the defendants were involved in the issuance of the mortgages in those territories, and therefore the foreign transactions out of which the case arose were not those of an Edge Act corporation. See id. at 784. Reasoning that removal under section 632 requires that the case arise out of a foreign transaction executed by the named Edge Act defendant, the court held that removal to federal court in this case was improper. See id.
In another example, in Sollitt v. KeyCorp, the plaintiff filed a state court action against his former employer for wrongful termination after he reported that his coworker had falsely quoted the price on a sale of 250 million Canadian dollars in order to exact additional profit. See 463 F. App’x 471, 472 (6th Cir. 2012). Several months later, the plaintiff was fired after his former employer discovered pornographic content on his work computer. Id. The defendant employer removed the case to federal court citing the Edge Act, asserting that the plaintiff’s claim arose out of transactions involving international or foreign banking. Id. at 473. On appeal, the Sixth Circuit vacated the district court’s remand to state court, reasoning that the plaintiff’s claim of wrongful termination did not “arise out of” a foreign banking transaction, despite the fact that “the entire episode arguably can be traced back to the  foreign currency transaction.” Id. at 475; see also Weiss v. Hager, No. 11 CV 2740 VB, 2011 WL 6425542 at *3–4 (S.D.N.Y. Dec. 19, 2011) (finding no Edge Act jurisdiction where the foreign banking transactions were not “legally significant” to the action); Telecredit Serv. Ctr. v. First Nat’l Bank of the Fla. Keys, 679 F. Supp. 1101, 1104 (S.D. Fla. 1988) (requiring that the claim “stem from the supposed foreign aspect of the transaction”). The court in Sollitt continued, “KeyCorp’s firing of Sollitt was not an aspect of ‘banking’ and, therefore, Sollitt’s claim of wrongful termination did not ‘arise out of’ a banking transaction. . . . This scenario does not satisfy the third element of the Edge Act.” Sollitt, 463 F. App’x at 475. In reaching its decision, the Sixth Circuit noted that a number of courts have embraced a broader approach with respect to the third requirement of the act.
Even courts within the same circuit cannot seem to reach an agreement as to whether the third element of section 632 should be read broadly or narrowly. See Bank of N.Y. v. Bank of Am., 861 F. Supp. 225, 232 (S.D.N.Y. 1994) (noting that courts have generally interpreted 12 U.S.C. § 632 narrowly); Bank of Am. Corp. v. Lemgruber, 385 F. Supp. 2d 200, 214 (S.D.N.Y. 2005) (noting that courts have generally interpreted 12 U.S.C. § 632 broadly). However, recently, some courts have suggested that the Second Circuit’s holding in American International tilts in favor of a broader reading of the “arising out of” language. Specifically, in American International, the Second Circuit reasoned that Edge Act jurisdiction may apply even if only a small percentage of the total transactions in question are foreign transactions. See American International Group, 712 F.3d at 780. Thus, some courts read this to mean that the foreign transaction need not be central to the plaintiff’s claims in order to confer Edge Act jurisdiction. See, e.g., Ritchie Capital Mgmt., LLC v. JPMorgan Chase & Co., 532 B.R. 461, 467–68 (S.D.N.Y. 2014). However, other courts read American International as creating a distinction between (i) cases in which only a small percentage of the total transactions in question are international and (ii) cases in which the foreign transaction is completely incidental to the claims at issue. See Wells Fargo, 2015 WL 4886391, at *5.
Suggestions for Banking and Financial Institutions Seeking to Assert Removal under the Edge Act
Just as is the case with subject matter and diversity removal, the removing party bears the burden of actually proving the facts to support jurisdiction. See JPMorgan Chase Bank, NA v. Wanke, No. 1:12-CV-893, 2013 WL 308766, at *1 (S.D. Ohio Jan. 25, 2013). Thus, any party wishing to remove a case to federal court under the Edge Act must demonstrate that the suit (i) is a civil suit at common law or in equity, (ii) involves a party that is an Edge Act corporation, and (iii) arises out of an offshore transaction or operation. While the first two requirements often do not pose any significant hurdles for a defendant wishing to remove to federal court, the lack of consistency in court opinions regarding the scope of the third element may present a close question.
While many courts appear to have embraced the broad interpretation of section 632, defendants seeking to remove to federal court should take great effort to demonstrate that the offshore transactions form a significant part of the plaintiff’s claim. In so demonstrating, defendants should consider referencing any allegations in the plaintiff’s complaint that tie in or otherwise mention the offshore transactions. See Dexia, 924 F. Supp. 2d at 558 (finding removal appropriate in part because the plaintiffs referenced the effect that the foreign transaction had on their claims in their complaint). Defendants also should consider highlighting the litany of cases that hold that even where the overall number of foreign transactions is proportionally small, that is often sufficient to confer jurisdiction under the Edge Act. See American International Group, 712 F.3d at 780; In re Lloyd’s, 928 F. Supp. at 338. Finally, defendants should research the specific district judge who will be considering their motion, for, as mentioned above, there is little consistency within circuits, and therefore the best predictor of the success of the motion may be the judge hearing it.
Amanda Lawrence is a partner of Buckley LLP in its Washington, D.C., office. Scott Sakiyama, is counsel to Buckley LLP in its Chicago, Illinois, office. Nancy Turner is an associate with Buckley LLP in its Washington, D.C., office.
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