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Dreher Tomkies LLP
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FOURTH CIRCUIT HOLDS NATIONAL BANK IS “LOCATED” WHERE IT OPERATES BRANCH OFFICES

The U.S. Court of Appeals for the Fourth Circuit has held that a national bank with its principal place of business in North Carolina and branches in other states, including South Carolina, is “located” in South Carolina and therefore a citizen of South Carolina for purposes of diversity jurisdiction. Wachovia Bank, N.A. v. Schmidt, ___ F.3d ___, 2004 WL 2423812 (4th Cir. No. 03-2061 Nov. 1, 2004). This case relates to a dispute between Schmidt and the bank over a tax-avoidance investment strategy. After the investment strategy was questioned by the Internal Revenue Service, Schmidt sued the bank in state court for, among other things, violation of the South Carolina Unfair Trade Practices Act. The bank filed a motion in federal court to compel arbitration of Schmidt’s state-court claims pursuant to arbitration provisions in two documents executed in connection with the investment strategy based solely on diversity jurisdiction (i.e., that the parties are citizens of different states). The U.S. District Court for the District of South Carolina denied the bank’s petition to compel arbitration without mention of the jurisdictional issue and the bank appealed. On appeal, Schmidt argued that the district court lacked diversity jurisdiction because the bank operates branch offices in South Carolina, his own state of residence.

Construing 28 U.S.C. § 1348, which provides that national banks will be deemed citizens of the states in which they are located, the Fourth Circuit concluded that a national bank is "located" in a state in which it operates branches and therefore a citizen of that state for purposes of diversity jurisdiction. The Fourth Circuit based its opinion on (i) the ordinary meaning of “located,” (ii) the use of “located” in juxtaposition with the contrasting term “established” in the immediately preceding sentence in Section 1348 and (iii) the U.S. Supreme Court’s construction of “located” in a parallel venue statute in Citizens and Southern National Bank v. Bougas, 434 U.S. 35 (1977). Accordingly, the Fourth Circuit determined that the district court lacked jurisdiction and the bank’s federal court action must be dismissed.

The Fourth Circuit expressly disagreed with decisions to the contrary from the Seventh and Fifth Circuits holding that “located” refers only to a bank’s principal office and the office listed in its organization certificate. See Firstar Bank, N.A. v. Faul, 253 F.3d 982 (7th Cir. 2001); Horton v. Bank One, N.A., ___ F.3d ___, 2004 WL 2224867 (5th Cir. No. 03-50865 Oct. 5, 2004). The split among the circuits may make this important issue ripe for review by the U.S. Supreme Court.

􀂉 􀂗 Mike Tomkies