[Chapter 3: U.S. Legal System]
Case 3-1 Wachovia Bank V. Schmidt, 126 S. CT. 941 (2006)
Pages 46-47 of Dynamic Business Law
Schmidt, a South Carolina citizen, sued Wachovia Bank in a South Carolina state court for fraudulently inducing him to participate in an illegal tax shelter. Wachovia is a national bank with its main office in North Carolina and branch offices in several other states, including South Carolina. Under federal diversity jurisdiction, federal courts can hear cases in which the parties are citizens of different states. Wachovia filed a petition in Federal District Court, seeking to compel arbitration of the dispute. After the petition was denied on the merits, Wachovia appealed to the Fourth Circuit Court of Appeals, which dismissed the case for lack of jurisdiction. Under 28 U.S.C. Section 1348, national banks are "deemed citizens of the States in which they are respectively located." The Circuit Court interpreted "located" to mean any state where the bank has a branch location. Noting that the statute uses both "located" and "established" to refer to the presence of a bank, the Circuit Court determined that a national bank is "established" in the state where its main office is located, and "located" in every state where it has a branch office. Therefore, under the Fourth Circuit's reasoning, Wachovia was "located" in, and a citizen of, South Carolina (as well as several other states with branch offices). Since both parties, Schmidt and Wachovia, had South Carolina citizenship, the Circuit Court dismissed the case for lack of diversity jurisdiction.
For the purposes of federal diversity jurisdiction, is a national bank "located" in every state in which it maintains a branch office? 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?
No. The Court ruled that a national bank is "located" in, and therefore a "citizen" of only the state in which its main office is located.
The Court concluded that the word "located" did not need to be interpreted to mean any state where a bank has a physical presence. The Court ruled that the Fourth Circuit had erred in drawing a distinction between the words "located" and "established". Congress may have gotten the words “located” and “established” as used in [Section] 1348, as synonymous terms.
She suggests looking to the history of Congress's diversity jurisdiction statutes for sorting out solutions to ambiguity. The word "located" was not a word of "enduring rigidity," but one that gained its precise meaning from context. The word "located" appeared in a prescription governing, not venue, but federal-court subject-matter jurisdiction.
Ethical Decision Making:
Is it right for Wachovia to have citizens participate in tax shelters? Should Wachovia be considered a citizen or “located” of South Carolina? It matters who has jurisdiction because Federal ruling for this case would be different than that of State ruling. The State would probably rule in favor of the plaintiff, while the Federal would be in favor of the petitioner (Wachovia) as we see here. This case really needed concurrent federal jurisdiction so both state and federal courts had jurisdiction.
[Chapter 5: Constitutional Principles]
Case 5-3 Bad Frog Brewery v. New York State Liquor Auth., 134 F.3D 87 (1998) Pages 117-119 of Dynamic Business Law
Bad Frog Brewery makes and sells alcoholic beverages. Some of the beverages feature labels with a drawing of a frog making the gesture generally known as “giving the finger”. Bad Frog’s authorized New York distributor, Renaissance Beer Company, applied to the New York State Liquor Authority for brand label approval, as required by the state law, before the beer could be sold in New York. The NYSLA denied the application...
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