Wells Fargo Bank Is Citizen of South Dakota

Friday, March 28, 2014

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Wells Fargo Bank Is Citizen of South Dakota—Ninth Circuit

Majority of Three-Judge Panel Says Action Against the National Bank Should Not Have Been Remanded to State Court, Though California Is the Bank’s Principal Place of Business

By a MetNews Staff Writer

Wells Fargo Bank NA—founded in San Francisco in 1852 as a banking and shipping company—still has California as its principal place of business, but is solely a “citizen” of South Dakota, under the act relating to national banks, the Ninth U.S. Circuit Court of Appeals ruled yesterday, in a 2-1 decision.

Wells Fargo and other major financial institutions have identified the Mount Rushmore State as the situs of their “main” offices because of tax advantages: no corporate income tax, personal income tax, personal property tax, business inventory tax, or inheritance tax. There is a split among the circuits as to whether the denomination of a state as the place the “main” office is located creates diversity between the bank and a plaintiff in the state where the bulk of a national bank’s operations take place.

Agreeing with the Missouri-based Eighth Circuit, Circuit Judge M. Margaret McKeown declared in yesterday’s majority opinion that “a national bank is ‘located’ only in the state designated as its main office.”

McKeown mused at the outset of her opinion:

“One might think that 150 years after Congress established national banks in 1863, the question of their citizenship for purposes of diversity jurisdiction would be well established. Not so. The relevant statute is ambiguous, the courts are split on the question, and the Supreme Court has not squarely decided the issue.”

The ambiguous statute, she said, is 28 U.S.C. § 1348, which says, in part:

“All national banking associations shall, for the purposes of all other actions by or against them, be deemed citizens of the States in which they are respectively located.”

The word “located” is not defined.

She acknowledged that the Ninth Circuit, in a 1943 opinion, said that a national bank is “a citizen only of the state in which its principal place of business is located….” Ruling in conformity with that decision, U.S. District Judge Dolly Gee had remanded the action to state court because California is still where Wells Fargo (even after a merger and a major acquisition) mainly does business.

Supreme Court Decision

McKeown pointed to the 2006 United States Supreme Court opinion in Wachovia Bank, N.A. v. Schmidt, 546 U.S. 303, which rejected the view of some circuits that a national bank is a citizen of every state in which they operate a branch. The court said that “a national bank, for §1348 purposes, is a citizen of the state in which its main office, as set forth in its articles of association, is located.”

That decision, McKeown observed, “did not address whether a national bank is also a citizen of the state where it has its principal place of business.”

She noted, however, that the high court commented that “in almost every case...the location of a national bank’s main office and of its principal place of business coincide,” which she said is an indication that the justices intended that a national bank be deemed a citizen only of the state in which it maintains its main office.

No Jurisdictional Parity

In 1958, McKeown said, Congress rendered state-chartered corporations, including banks, citizens of both the state of incorporation and the state where its principal place of business. That doesn’t mean, however, that dual citizenship likewise exists for national banks.

“Beginning in 1882, in Congress’s first treatment of jurisdiction for national banks, the statutory predecessor to the current §1348 explicitly ensured jurisdictional parity between national banks and state-chartered banks,” she wrote. “However, by 1887, Congress had abandoned jurisdictional parity between the two types of banks….”

Sec. 1348, as it exists today, McKeown said, “does not include an ethereal incorporation of any principle of jurisdictional parity between state-chartered banks and national banks for suits asserting diversity as a basis for federal jurisdiction.”

Gould Dissents

Judge Ronald Gould dissented, saying:

“The Supreme Court’s decision in Wachovia Bank does not address whether a national bank could be a citizen of the state of its principal place of business….The controlling issue was never raised in that case because the defendant bank’s principal place of business was located in the same state as its main office….It is one thing to say that a national bank is not a citizen of every state where it has any branch operations….It is quite another to say what the majority says here: that a bank is only a citizen of the state designated as its main office.”

Gould went on to remark:

“Finally, there is an important policy implication that should be considered because the word ‘located’ in 18 U.S.C. § 1348 is ambiguous. To say that a bank like Wells Fargo, traditionally identified with California and with its principal place of business there for more than a century, is not a citizen of California for diversity purposes, would mean that any bank broadly identified with a state in which it started its business and maintained its principal place of business could ensure federal court diversity actions, and rule out the state courts, even when pitted against adverse citizens of the state where it is most closely identified and understood to operate. I do not think that idea, at odds with principles of federalism that give state courts a say in resolving their residents’ disputes, is what Congress had in mind.”

The case is Rouse v. Wachovia Mortgage, No. 12-55278.

Mark T. Flewelling, Robert C. Little, and Yaw-Jiun Wu of the Pasadena law firm of Anglin, Flewelling, Rasmussen, Campbell & Trytten LLP, represented Wachovia, a division of Wells Fargo Bank. Robert A. Long Jr., of the District of Columbia firm of Covington & Burling LLP, acted for plaintiffs and appellees Robert and Victoria Rouse who sued in connection with their home loan.