Wachovia Bank v. Schmidt

Issues 

1. If an organization has branches in states other than where it is headquartered, is it considered a citizen of all those states for purposes of litigating in federal courts?

2. Where a word used in a federal statute has an ordinary meaning but may be interpreted in different ways in the context of the lengthy and complicated statute, how should courts interpret the term?

Oral argument: 
November 28, 2005

Daniel Schmidt, a former Wachovia customer, sued the bank in state court after the IRS determined that the investment strategy Wachovia had recommended was illegal. Wachovia, which is headquartered in Charlotte, NC, successfully sought to remove the case to federal court because of the diversity of citizenship of the parties. After an adverse decision on the merits, Wachovia appealed to the Fourth Circuit Court of Appeals. Rather than address the decision on the merits, however, the Fourth Circuit dismissed the case altogether. It determined that the federal system never had jurisdiction to hear the case because Wachovia had branches in South Carolina, and therefore there was no diversity of citizenship between the parties. Wachovia appealed to the Supreme Court because it hopes to keep the case from being retried in state court.

Questions as Framed for the Court by the Parties 

1. For the purpose of federal diversity jurisdiction, is a national banking association a citizen of every state in which it maintains a branch, or is its citizenship more limited?

2. Is the word "located" as used in 28 U.S.C. ? 1348, the statute governing the citizenship of national banks for the purposes of diversity jurisdiction, ambiguous?

Facts 

Petitioner Wachovia Bank National Association ("Wachovia") is a national banking association with its main office in Charlotte, North Carolina. Respondent Daniel Schmidt is a citizen of South Carolina who used Wachovia as his personal and business banker. Brief for Respondents at 1. After Schmidt sold his physical therapy business 1998, Wachovia persuaded him to purchase an investment strategy known as a Foreign Leveraged Investment Program ("FLIP") designed to shelter his capital gains from tax exposure. Id. Schmidt now alleges that FLIP was unlawful; he commenced a civil action in the South Carolina Court of Common Pleas on April 10, 2003, amended May 20, 2004, alleging "civil conspiracy, fraud, constructive fraud, negligent misrepresentation, promissory estoppel, breach of fiduciary duties, aiding and abetting, and violations of the South Carolina Unfair Trade Practices Act." Id. at 1-2. Wachovia responded by filing a petition to compel arbitration in the United States District Court for the District of South Carolina, asserting the court's jurisdiction over the matter pursuant to 28 U.S.C. ? 1332. See Id. at 2. Section 1332, which defines "diversity jurisdiction," allows a federal court to assume jurisdiction over matters that would otherwise belong in state court where the litigants are citizens of different states and the amount in controversy is greater than $75,000. The district court assumed jurisdiction over the matter, but dismissed Wachovia's arbitration petition on the merits. Id.

Wachovia appealed the district court's ruling to the United States Court of Appeal for the Fourth Circuit. See Wachovia v. Schmidt, 388 F.3d 414 (4th Cir. 2004). On appeal, Schmidt challenged the district court's jurisdiction, arguing that under 28 U.S.C. ? 1348 Wachovia is "located" in, and thus a citizen of, every state in which it maintains a branch. See Id. at 416. Since Wachovia maintains a branch in South Carolina, Schmidt argues, it is a citizen of South Carolina. See Id. Because both Schmidt and Wachovia are citizens of the same state, there is no diversity of citizenship and the district court therefore lacked subject matter jurisdiction over Wachovia's original petition. See Id. The court of appeals agreed with Schmidt, finding the language of ? 1348 unambiguous and holding that Wachovia is a citizen of every state in which it maintains a branch. See Id. at 432. After finding that the district court did not have subject matter jurisdiction, the court of appeals vacated the district court's holding and dismissed Schmidt's case. Id.

Analysis 

In an effort to compel arbitration and to avoid litigation initiated by Schmidt, Wachovia Bank National Association ("Wachovia") filed suit in the United States District Court for the District of South Carolina. This type of claim would normally have been decided in state court, but Wachovia argued that the federal courts had diversity jurisdiction over the case. See Petitioner's Brief at 3. The district court dismissed the suit on the merits, finding that Schmidt was not obliged to arbitrate his claims against Wachovia. Id. at 3. Wachovia appealed to the U.S. Court of Appeals for the Fourth Circuit, where it lost again; however, this time it lost on grounds that there was no diversity jurisdiction under 28 U.S.C. ? 1332. See Wachovia v. Schmidt, 388 F.3d 414, 432 (4th Cir. 2004). The Fourth Circuit held that a national banking association is a citizen of all states where it has a main office, maintains a branch, or has a principal place of business. See Id. at 3. Because Wachovia maintained a branch in South Carolina, and because Schmidt and the other respondents were South Carolina residents, the court ruled that the federal courts did not have jurisdiction to hear this case. See Id. at 2.

The central issue before the Supreme Court is whether Schmidt and the Fourth Circuit have correctly defined the citizenship of a national banking association. To make this determination, the Court must interpret the meaning of the word "located" in 28 U.S.C. ? 1348, a federal statute that defines citizenship for national banking associations. The pertinent parts of ? 1348 state:

"the district courts shall have original jurisdiction of any civil action . . . against a national banking association . . . by a banking association established in the district for which the court is held," and,

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

There are several approaches to statutory interpretation (also known as statutory construction). A court must first look at the ordinary meaning of the language in question. See Respondents' Brief at 19. If the language appears ambiguous, courts must determine the "Congressional intent" behind the language; this is generally derived from looking at the statute's legislative history. See Id. at 9, 32. The parties in this case disagree about the ordinary meaning of the term "located," as well as what the legislative history suggests about the significance of this term.

The Ordinary Meaning of the Word "Located"

In arguing that Wachovia is a citizen of South Carolina because it maintains branches in that state, Schmidt, like the Fourth Circuit, believes that the ordinary definition of "located" refers to physical presence in a place. See Respondents' Brief at 9-11. The Fourth Circuit agreed, stating that "located . . . naturally includes branch offices." See Wachovia v. Schmidt, 388 F.3d 414, 417 (4th Cir. 2004).

Wachovia disagrees that this meaning is unambiguous, stating that Schmidt's definition begs the question, "physical presence of what?" See Petitioner's Brief at 11. Wachovia also disagrees with the Fourth Circuit's adoption of this definition because of the sheer number of places where a national banking association may be present. See Id. If "presence" includes branches, then citizenship could potentially expand to all states; Wachovia questions whether it was truly Congress' intention to subject banking associations to liability in so many venues. See Id. Instead, it proposes that banking associations' citizenship is limited to the location on its organizational certificate. See Id. at 40. Wachovia compares banks to corporations, which are citizens of no more than two states: their place of incorporation and principal place of business. See Petitioner's Brief at 5. Wachovia further argues that denying national banking associations federal diversity jurisdiction goes directly against Congress' policy of preventing competitive disadvantages between national banks and state banks for branch banking. See Petitioner's Brief at 31. Congress has a strong interest in preserving competitive equality and equal access to federal courts amongst national banks, state banks, as well as corporations. See Id. at 5, 23.

Congressional Intent

Under the principles of statutory construction, when a word has several plausible meanings, that word no longer has an ordinary or plain meaning. Id. at 12. When a word does not have plain, ordinary meaning, the parties must move away from simply reading dictionary definitions or turning to common uses of the word. See Id. Instead, they must turn to Congressional intent and legislative history to uncover the hidden meaning behind the ambiguous term. See Id.

The parties' disagreement over the legislative history of 28 U.S.C. ? 1332 and the term "located" centers on the development of interstate branching by national banks and Congress' desire to maintain parity between state and national banks. See Petitioner's Brief at 7-8. Section 1332 was originally passed as the 1887 Act and underwent several amendments prior to its codification. See Id. at 7. Wachovia believes that at the time of its original enactment, Congress intended for national banks to be citizens of only one state. See Id. at 7. The 1887 Act was re-enacted in 1948, and Congress chose to maintain the term "located" in the statute's language, suggesting that citizenship would continue to exist for only a single state. Id. at 8.

Schmidt's legislative history argument, however, focuses on the entire construction of 28 U.S.C. ? 1332. He points to the fact that Congress used the term "established" in the first portion of ? 1332 and the term "located" in the second portion. See Respondents' Brief at 15-23. Schmidt denies that the terms are "functionally identical," and maintains that their use was a deliberate choice by Congress. See Petitioner's Brief at 8; Respondents' Brief at 15.

The principles of statutory construction indicate that "where different words are used in different parts of the same statute, it is presumed that the words are used with a different intent." Guarantee Title & Trust Co. v. Title Guaranty & Surety Co., 224 U.S. 152 (1912). Schmidt thus argues that the terms "established" and "located" discuss different types of presence. The use of "established" in the first paragraph governing federal jurisdiction functions as "designated presence" while the use of "located" in the citizenship paragraph functions as "geographical presence." See Respondents' Brief at 17. "Designated presence" is the kind of presence indicated on an organizational certificate and suggests permanence. See Id. at 18. In contrast, a branch location is transient; thus for citizenship purposes, the geographical term "located" is better suited. See Id.

Discussion 

Litigants can only bring claims in federal court under certain circumstances, and the vast majority of matters are decided in state court. See Michael E. Solimine, Judicial Federalism After Bush v. Gore: Some Observations, The Justice System Journal, Vol. 23, Number 1, 2000 at 45, 48. One way in which litigants get their cases into federal court is through diversity jurisdiction, which allows a federal court to hear a case that would otherwise belong in state court when the litigants are citizens of different states and the amount in controversy is greater than $75,000. See 28 U.S.C. ? 1332. This doctrine was initially intended to prevent potential discrimination against out of state litigants by state courts. See Erie R.R. v. Tompkins, 304 U.S. 64 (U.S. 1938). A common, though perhaps incorrect, perception also exists that federal judges are of higher quality than state judges. See Richard H. Field, et al., Civil Procedure Materials for a Basic Course at 216 (Foundation Press 2003). Many commentators question whether trying diversity jurisdiction cases in federal courts is worth the cost of crowding the already congested federal system. See id. The Supreme Court has signaled an intention to express its view on this contentious area of the law by granting certiorari for this case and Lincoln Property v. Roche in the current term, and the Court's decision here stands to impact several institutions.

The decision in this case will have significant implications for all US national banks, a total of over 2,500 such institutions. OCC: Consumer Complaints and Assistance, http://www.occ.treas.gov/customer .htm. If the Supreme Court agrees with the Fourth Circuit's analysis of 28 U.S.C. ? 1348 and rules that a national bank is a citizen of every state in which it maintains a branch, the ability of national banks to bring actions in federal courts under diversity jurisdiction will be severely limited. See Wachovia v. Schmidt, 388 F.3d 414, 432 (4th Cir. 2004). The Fifth, Seventh, and Ninth Circuits have previously ruled that national banks should not be deemed citizens of every state in which they have a branch, and the Comptroller of the Currency has argued that national banks should be treated similarly to state banks for diversity purposes. See Horton v. Bank One, 387 F.3d 426, 2004 U.S. App. LEXIS 20833, 2004 WL 2224867 (5th Cir. 2004); Firstar Bank v. Faul, 253 F.3d 982, 993-94 (7th Cir. 2001); American Sur. Co. v. Bank of Cal., 133 F.2d 160 (1943); Brief of United States as Amicus Curiae Supporting Petitioner at 18. In its ruling, the Supreme Court will determine whether the federal courts will remain a forum for national banks to bring civil actions, or whether they will be limited to state courts and their potential pro-plaintiff biases. See Thomas Ginsberg, Merck Can Expect More Highs, Lows, Philadelphia Inquirer, November 6, 2005, available at http://www.philly.com/mld/philly/business/13091206.htm.

The case may also have implications for the way that the federal courts interpret statutes. In its petition for a writ of certiorari, Wachovia challenged the Fourth Circuit's assumption that the word "located" in 28 U.S.C. ? 1348 is unambiguous; Wachovia contends that the court should have relied on more than just the text of the statute to interpret this term. See Petitioner's Brief at 12. The Supreme Court may decide that it is insufficient for lower courts simply to look to the plain language of a statute to ascertain its meaning. Instead, they may be required to base their interpretations on other sources, particularly the legislative history and overall intent of a statute. See Id. By prescribing a method of interpretation, the Supreme Court may limit the discretion of federal judges to decide what statutes mean.

Conclusion 

This case provides the Supreme Court the opportunity to decide the current state of the law in two significant areas. The Court's holding regarding whether national banks should be considered citizens of every state in which they maintain branches will shape the future of bank litigation in federal courts. In its analysis leading up to this holding, the Court will also likely lay down principles of statutory interpretation that will guide federal and state courts in their decision making.

Written by: Arnab Chadhuri & Nina Jenkins-Johnston

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