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DISTRICT COURT HOLDS NATIONAL BANK AND OPERATING SUBSIDIARIES MAY BE SUED IN STATE COURT FOR ALLEGED VIOLATIONS OF CALIFORNIA LAW

The United States District Court for the Northern District of California has held that removal of an action against a national bank and two of its operating subsidiaries to federal court was improper because the court lacked federal subject matter jurisdiction. Cortazar v. Wells Fargo & Co., No. C 04-894 JSW, 2004 WL 1774219 (Aug. 9, 2004). The plaintiffs had sued Wells Fargo & Co., Wells Fargo Financial, Inc. and Wells Fargo Home Mortgage, Inc., which are a national bank and two of its operating subsidiaries, in California state court. The plaintiffs claimed that the defendants mortgage lending practices violated Section 17200 of Californias Business and Professions Code prohibiting unlawful, unfair or fraudulent business acts or practices. In addition, the plaintiffs claimed that the defendants actions supported common law causes of action for fraud by concealment, negligent misrepresentation and unjust enrichment.

The defendants removed the action to federal court asserting federal question jurisdiction and the plaintiffs moved to remand the action to California court. In ruling on the plaintiffs motion, the court indicated that a defendant may remove a civil action brought in a state court to federal court if the federal court has original jurisdiction, which may exist if the plaintiffs cause of action arises under federal law. Under the well-pleaded complaint rule, such a federal question must be presented on the face of the plaintiffs properly pleaded complaint without regard to federal defenses. Even if the plaintiffs properly pleaded complaint does not affirmatively allege a federal cause of action, however, federal jurisdiction may exist if omitted federal law is essential to the plaintiffs claims or if the plaintiff has cast in state law terms a claim that can be made only under federal law.

The defendants argued that the plaintiffs claims arose under federal law, and thus were removable, because the plaintiffs had affirmatively alleged violations of numerous federal statutes in their complaint. The court disagreed. According to the court, the plaintiffs complaint referenced a number of federal statutes in order to support the "unlawful" practices prong of their Section 17200 claim and not to assert federal causes of action or seek federal remedies. Moreover, the court indicated that the plaintiffs had not impermissibly cast federal claims in state law terms because the plaintiffs Section 17200 claim was not dependent upon a violation of federal law, but rather, could be supported by the defendants alleged violation of the California Business and Professions Code or their otherwise unfair and fraudulent activity.

The defendants also argued that the plaintiffs claims were removable because the plaintiffs had plead claims of usury against the national bank that were completely preempted by the National Bank Act. The defendants pointed to references in the complaint to "above-market interest rates" and "exorbitant points and fees" as evidence of the plaintiffs usury claims. Again, the court disagreed. According to the court, the plaintiffs used these references to support allegations that the defendants engaged in unfair and deceptive bait and switch tactics in connection with their mortgage loans and not to support claims of usury against the bank.

Finally, the defendants argued that removal was proper because the plaintiffs complaint depended upon the resolution of a substantial federal question regarding the Office of the Comptroller of the Currencies ("OCC") exclusive visitorial powers over national banks. The court indicated, however, that even if the OCCs exclusive visitorial powers were to preempt the plaintiffs claims, such an argument was in the nature of an affirmative defense that could not provide the basis for removal. For this reason and the reasons described above, the court concluded that the defendants had not met their burden to show that the plaintiffs complaint presented a substantial federal question justifying removal.

Jeff Langer and Chuck Gall