Legal Bulletins

National banks beware! A recent court opinion substantially limits a national bank's access to federal courts in Maryland, North Carolina, South Carolina, Virginia, and West Virginia. In Wachovia Bank, N.A. v. Schmidt, decided November 1, 2004, the United States Court of Appeals for the Fourth Circuit concluded that a national bank is a citizen of each state in which the bank operates a branch office for purposes of diversity jurisdiction. As a result, national banks no longer will be able to bring (or remove) breach of contract, UCC, or other state law claims in federal court based on diversity. Instead, those claims must be brought and resolved in state court. This is significant on many levels.

First, litigation costs likely will increase for national banks. State court dockets tend to be more crowded and it takes longer for a state court to resolve a case. Federal courts have a policy of disposing of cases faster based on motion when appropriate and well before the parties have expended time and money in preparation for trial.

Second, state courts often have less experience with disputes that turn on banking law. In 2002, 15% of the cases filed in the United States District Court in Maryland were classified as banking law related. The same cannot be said for the Maryland state court where the majority of a judge's time often is spent presiding over criminal trials, domestic matters and personal injury lawsuits.

Third, different pools of jurors lead to different results. In state court, jurors come from only one county. Federal court juries are composed of citizens from multiple counties and, as a result, often have a more diverse background. These more diverse jurors are often better educated, and less parochial in examining the facts.
Schmidt also raises, but does not resolve, several questions:

• Whether federal trial and appellate courts will retain jurisdiction over pending cases where jurisdiction is based on diversity of citizenship?
• Whether federally chartered thrifts will be similarly precluded from invoking diversity jurisdiction?
• Whether state chartered banks with branch offices in more than one state will be treated on a par with national banks, precluding them from invoking diversity?
• Whether a judgment for or against a national bank entered by a federal court sitting in diversity jurisdiction within the last year is subject to revision and voiding or vacature for lack of subject matter jurisdiction?

We expect that courts in the Fourth Circuit will be addressing these questions in the coming months.
Note: Wachovia Bank has petitioned for a rehearing and requested an en banc (i.e., full bench) review of Schmidt. It is our understanding that the OCC will be filing an amicus brief in support of Wachovia Bank's petition.
How to minimize the effect of Schmidt:

• Incorporate a clearly worded arbitration clause in agreements with customers;
• Include a waiver of jury trials in consumer and commercial deposit account agreements; and
• Select or limit the venues in which claims by or against the bank can be brought.

If you have any questions, contact the Financial Services or Litigation treams.