Tomorrow’s Argument: Wachovia Bank v. Schmidt

Tomorrow the Court will hear oral arguments in Wachovia Bank v. Schmidt, No. 04-1186. That case involves the question whether, for purposes of diversity jurisdiction, a national bank is considered a citizen of every state in which it maintains branches, even when its main office is in a different state. 28 U.S.C. 1348 states that national banks “shall, for the purpose of all other actions by or against them, be deemed citizens of the States in which they are respectively located.” The question for the Court is what Congress meant by “located” – did it mean only the state(s) where the bank has its principal place of business and possibly where it was first organized, or did it mean every state where the bank has a physical presence? Petitioner Wachovia Bank argues that the Fourth Circuit incorrectly held that Congress intended the broad meaning of “located,” thereby limiting the ability of national banks to access federal courts. Respondents Daniel G. Schmidt, III, et al., argue that the Fourth Circuit correctly interpreted the plain meaning of “located” as anywhere a bank has a physical presence.

Andrew L. Frey will argue for the petitioner. Sri Srinivasan, Assistant to the Solicitor General, will argue for the United States as amicus curiae supporting the petitioner. James R. Gilreath will argue for the respondent. The parties’ briefs are available here, and the amicus brief of the United States can be found here.

Wachovia Bank has its main office and principal place of business in Charlotte, North Carolina, with bank branches in 15 states (including South Carolina) and Washington, D.C. Daniel Schmidt, a resident of South Carolina, purchased an investment strategy offered by Wachovia Bank to limit the capital gain taxes he was obligated to pay after selling his businesses. When Schmidt suffered financial losses as a result of the investment, he filed suit against Wachovia for fraud and related claims in South Carolina state court. Wachovia then filed a petition to compel arbitration in federal district court in South Carolina, invoking diversity jurisdiction under 28 U.S.C. 1332. The district court held that Schmidt had no obligation to arbitrate his fraud claims against Wachovia, and Wachovia appealed to the Fourth Circuit. Rather than reaching the merits of the arbitration claim, a divided Fourth Circuit panel dismissed Wachovia’s suit for lack of diversity jurisdiction, reading section 1348 to mean, unambiguously, that Wachovia was a citizen of every state in which it maintained a branch. The Fourth Circuit’s holding conflicts with the Fifth, Seventh, and Ninth Circuit interpretations of section 1348.

At the risk of pointing out the obvious, allow me to note the irony presented by petitioner’s claim: Wachovia seeks access to the federal courts in order to prevent its customers from accessing any court, federal or state. Wachovia argues that the word “located” in section 1348 is ambiguous, and that the Court therefore must look to other sources beyond the “plain meaning” of the word to determine the meaning Congress intended to convey. Petitioner points out that the Supreme Court noted in Citizens & Southern National Bank v. Bougas that “[t]here is no enduring rigidity about the word ‘located,'” and that in many provisions of the National Bank Act Congress used the word to refer specifically to a bank’s charter location, while in other national bank statutes the word means any place a bank has a branch. Petitioner also suggests that it would be difficult to construe a word as unambiguous when so many courts have interpreted its meaning differently.

As a result of this ambiguity, Wachovia directs the Court to a number of sources that – it contends – clarify the meaning of “located” in section 1348. For instance, in 1882 Congress sought to create jurisdictional parity between national and state banks by removing the federal question jurisdiction that had been conferred on suits involving national but not state banks. In a subsequent act of 1887, in which the “located” language first appears, Congress clarified that national and state banks should be treated similarly for purposes of diversity jurisdiction. The statute was amended again in 1911 and 1948, but petitioner explains that in multiple decisions the Court made clear that section 1348 continued to serve the purpose of removing national banks from the privilege of federal question jurisdiction while maintaining the same access to diversity jurisdiction enjoyed by state banks, which would preclude a broad interpretation of the word “located.”

Petitioner articulates both statutory and policy arguments based on this legislative history. That is, the history demonstrates the meaning of the statute (i.e., national and state banks get an equal shot at the federal courts via diversity jurisdiction), as well as a general Congressional intent to “foster ‘competitive equality'” between national and state banks. This desire to remove any competitive advantage can also be seen in other banking statutes, such as when Congress permitted national banks to open intracity and intrastate banks in order to compete with state banks in the 1920’s and 1930’s. Thus, by finding citizenship in every state where national banks have a physical presence, petitioner argues, the Fourth Circuit departed from the jurisdictional parity and competitive equality between national and state banks that Congress has long intended.

In addition, petitioner advances historical arguments about what Congress must have intended when it passed each iteration of section 1348. For instance, in 1887, and again when the statute was amended in 1948, corporations were treated as citizens of one state – the state of their incorporation – suggesting that Congress must have understood “located” to refer to an equivalent single location for national banks. The Fourth Circuit, on the other hand, found that because Congress used different language in the diversity jurisdiction statutes covering national banks and corporations, Congress must have intended to treat them differently for diversity purposes. Petitioner also explains that federal law did not expressly permit banks to open new interstate branches until 1994, and that before this time interstate banking by national banks was rare, limited to situations in which a bank acquired existing interstate branches. Given this historical backdrop, petitioner argues, it would be difficult to imagine that Congress intended national banks to be citizens of more than one state.

Finally, petitioner makes additional arguments about the statute’s construction, explaining why, for instance, the Court should not find any significance in the fact that section 1348 uses the term “established” as well as the term “located.” Petitioner also attempts to distinguish the 1977 case of Bougas, in which the Court held that under a similar venue statute, national banks are located in every place where they have a branch. Petitioner argues that Bougas is not dispositive because, inter alia, interstate branches were prohibited at the time (the case involved only intrastate branches) and the Court based its decisions on the policy interests served by the venue statute, precisely the type of analysis the Court should apply to section 1348. The amicus brief filed by the Solicitor General’s office makes similar arguments.

Respondents meet these arguments with their own application of the rules of statutory interpretation. Their strongest argument is that the term “located” in section 1348 means what it says: banks have citizenship anywhere they have a physical presence, and nothing in the plain language of the statute can be read to limit the meaning of “located” to only one place. Respondents direct the Court to dictionary definitions of the term, which indicate a definition hinging on physical presence.

Respondents also focus on the fact that section 1348 uses the terms “established” as well as “located” to describe the place of national banks. Under the rule of statutory construction that different words in the same statute are assumed to have different meanings, respondents argue that “established” must refer to the place where a bank is chartered – where it was founded or established – while “located” must refer to anywhere the bank has a presence. Using this same principle of construction, respondents point to differences in the two statutes dealing with jurisdiction over corporations and national banks. In section 1332, Congress was quite clear that a corporation is a citizen of the state in which it is incorporated and the state in which it has its principal place of business. By contrast, national banks are citizens of the states where they are “located.” Because Congress used different language in parallel statutes, respondents suggest, Congress must have intended the statutes to mean different things.

Next, respondents argue that under the rule of construction presuming that the same terms in different statutes dealing with the same subject matter have the same meaning, the word “located” in the venue statute, 12 U.S.C. 94, must have the same meaning as the word “located” in the jurisdiction statute. Although the case was decided before Congress authorized interstate branches, the “located” of the venue statute was defined by the Court in Bougas to mean anywhere a national bank had a branch office. Respondents argue that the same meaning should apply to section 1348, particularly when the two statutes share a common origin.

Moving to the legislative history, respondents explain that when the word “located” was first used in the jurisdiction statute in 1887, it replaced the phrase “doing business,” indicating that Congress understood the term to have a very broad meaning. Respondents also argue that Congress may have been aware of interstate banking long before 1994, since early banking laws permitted interstate branches when banks merged.

Responding to petitioner’s jurisdictional parity argument, respondents note that the purpose of the statute cited by petitioner was to curtail federal question jurisdiction involving national banks; it said nothing about diversity jurisdiction. Along these same lines, respondents argue that when Congress wanted to promote competitive equality between national and state banks, it did so only in the area of business practices, not court procedures. Thus, respondents reject petitioner’s argument that Congress did not intend to limit diversity jurisdiction for national banks because doing so would put them at a competitive disadvantage vis-à-vis state banks.

Respondents put forth strong arguments based on the rules of statutory construction, while petitioner points to plausible historical evidence indicating Congress’s policy preferences for equality between national and state banks. In my opinion, the decision will come down to whether the justices are willing to look deep into the legislative history to divine Congressional intent, or whether they would prefer to take the statute at face value and leave it to Congress to clarify what it meant in light of the evolving nature of interstate banking by national banks.