Am. Int'l Grp., Inc. v. Bank of Am. Corp.

• Decision Date: 19 April 2013
• Docket Number: Docket No. 12–1640–cv.
• Court: U.S. Court of Appeals — Second Circuit
• Parties: AMERICAN INTERNATIONAL GROUP, INC., AIG Securities Lending Corporation, American General Assurance Company, American General Life and Accident Insurance Company, American General Life Insurance Company, American General Life Insurance Company of Delaware, American Home Assurance Company, American International Group Retirement Plan, Chartis Property Casualty Company, Chartis Select Insurance Company, Chartis Specialty Insurance Company, Commerce and Industry Insurance Company, First Sunamerica Life Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, PA, New Hampshire Insurance Company, Sunamerica Annuity and Life Assurance Company, Sunamerica Life Insurance Company, The Insurance Company of The State of Pennsylvania, The United States Life Insurance Company in the City of New York, The Variable Annuity Life Insurance Company, Western National Life Insurance Company, Plaintiffs–Appellants, v. BANK OF AMERICA CORPORATION, Banc of America Securities LLC, Bank of America, National Association, Banc of America Funding Corporation, Banc of America Mortgage Securities, Inc., Asset Backed Funding Corporation, NB Holdings Corporation, Merrill Lynch & Co., Inc., Merrill Lynch Mortgage Lending, Inc., First Franklin Financial Corporation, Merrill Lynch Mortgage Capital Inc., Merrill Lynch Credit Corporation, Merrill Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch Mortgage Investors, Inc., Countrywide Financial Corporation, Countrywide Home Loans, Inc., Countrywide Securities Corporation, CWABS, Inc., Countrywide Capital Markets LLC, CWALT, Inc., CWHEQ, Inc., CWMBS, Inc., Defendants–Appellees.

712 F.3d 775

AMERICAN INTERNATIONAL GROUP, INC., AIG Securities Lending Corporation, American General Assurance Company, American General Life and Accident Insurance Company, American General Life Insurance Company, American General Life Insurance Company of Delaware, American Home Assurance Company, American International Group Retirement Plan, Chartis Property Casualty Company, Chartis Select Insurance Company, Chartis Specialty Insurance Company, Commerce and Industry Insurance Company, First Sunamerica Life Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, PA, New Hampshire Insurance Company, Sunamerica Annuity and Life Assurance Company, Sunamerica Life Insurance Company, The Insurance Company of The State of Pennsylvania, The United States Life Insurance Company in the City of New York, The Variable Annuity Life Insurance Company, Western National Life Insurance Company, Plaintiffs–Appellants,

v.BANK OF AMERICA CORPORATION, Banc of America Securities LLC, Bank of America, National Association, Banc of America Funding Corporation, Banc of America Mortgage Securities, Inc., Asset Backed Funding Corporation, NB Holdings Corporation, Merrill Lynch & Co., Inc., Merrill Lynch Mortgage Lending, Inc., First Franklin Financial Corporation, Merrill Lynch Mortgage Capital Inc., Merrill Lynch Credit Corporation, Merrill Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch Mortgage Investors, Inc., Countrywide Financial Corporation, Countrywide Home Loans, Inc., Countrywide Securities Corporation, CWABS, Inc., Countrywide Capital Markets LLC, CWALT, Inc., CWHEQ, Inc., CWMBS, Inc., Defendants–Appellees.

Docket No. 12–1640–cv.

United States Court of Appeals,Second Circuit.

Argued: Oct. 19, 2012.

Decided: April 19, 2013.

Kathleen M. Sullivan (Michael B. Carlinsky, Maria Ginzburg, Sanford I. Weisburst, William B. Adams, on the brief) Quinn Emanuel Urqhart & Sullivan, LLP, New York, NY, for plaintiffs-appellants.

Fred A. Rowley, Jr. (Marc T.G. Dworsky, Michael J. Mongan, Munger, Tolles & Olson LLP, Los Angeles, CA; Amy J. Greer, James C. Martin, Colin E. Wrabley, Reed Smith LLP, New York, NY, on the brief), for defendants-appellees.

Before: LEVAL, POOLER, LIVINGSTON, Circuit Judges.

LEVAL, Circuit Judge:

This is an interlocutory appeal of a question certified by the United States District Court for the Southern District of New York (Jones, J.) under 28 U.S.C. § 1292(b), calling for interpretation of the jurisdictional provisions of the Edge Act, 12 U.S.C. § 632. In a suit brought in a New York state court, which was removed by Defendants to federal court under 28 U.S.C. § 1441(a), Plaintiffs appeal from the district court's order denying their motion for remand to the state courts. Whether the district court's denial of remand was proper turns on whether the dispute falls within § 632, which deems certain civil suits involving offshore banking operations “to arise under the laws of the United States,” so that “the district courts of the United States ... have original jurisdiction.” 12 U.S.C. § 632. The district court ruled that the case falls within § 632's jurisdictional grant. The court accordingly denied the Plaintiffs' motion for remand, but wisely certified the question for interlocutory appeal so as to avoid the risk of conducting an extensive trial which might be mooted by a higher court's subsequent determination that remand to the state court was required. In fact, we conclude that the dispute does not fall within § 632's grant of jurisdiction so that removal from state to federal court was not authorized by the statute. We therefore vacate the district court's order denying remand. ¹

Plaintiffs are American International Group, Inc. (“AIG”) and its various subsidiaries, which invested in residential mortgage-backed securities (“RMBSs”) that were underwritten, sponsored, or sold by Defendants. Defendants are Bank of America Corporation (“BOA”) and subsidiaries,including Merrill Lynch & Co., Inc. and Countrywide Financial Corporation. The Complaint alleges that Defendants engaged in various fraudulent misrepresentations while underwriting or sponsoring 349 RMBSs, in which Plaintiffs invested approximately $28 billion, eventually suffering large losses when the RMBSs fell into default.

RMBSs are securities comprised of the rights to cash flows from multiple residential mortgages. They are generally created by placing multiple mortgages secured by residential real property into a trust. The trust issues securities (in the form of “mortgage pass-through certificates”) which entitle the holders of those securities to the payments received by the trust on account of its mortgage holdings. The trust collects the principal and interest payments made by borrowers under the mortgages, and pays those amounts out to the holders of the RMBSs in accordance with the terms established for division of the trust's revenues and assets.²See In re Lehman Bros. Mortg.-Backed Sec. Litig., 650 F.3d 167, 171 (2d Cir.2011).

A tiny percentage of the mortgages aggregated by Defendants into several of the trusts which issued the RMBSs that Plaintiffs purchased were secured by real property in the United States territories, including Puerto Rico, Guam, the U.S. Virgin Islands, and the Northern Mariana Islands.

DISCUSSION

As this appeal turns on a pure question of law, our review is de novo. Bah v. Mukasey, 529 F.3d 99, 110 (2d Cir.2008).

Relying on the fact that some of the mortgages aggregated into the trusts that issued the RMBSs in which Plaintiffs invested were secured by properties in the United States territories, Defendants contend that this dispute comes within the terms of § 632, with the consequence that Defendants were expressly authorized by § 632 to remove the state court action to federal court, and that the district court correctly denied Plaintiffs' motion for remand to state court.³ Plaintiffs respond that the facts do not come within the scope of § 632.

A. The Edge Act.

The Edge Act was enacted in 1919 for the purpose of supporting U.S. foreign trade, in part by authorizing the establishment of international banking and financial corporations. Those corporations would be chartered and supervised by the Federal Reserve Board, and freed from regulation by state and local banking authorities so that they could compete more effectivelywith foreign banks in offshore banking operations. The Act's prefatory statement of purpose asserts:

Congress declares that it is the purpose of this subchapter to provide for the establishment of international banking and financial corporations operating under Federal supervision with powers sufficiently broad to enable them to compete effectively with similar foreign-owned institutions in the United States and abroad.⁴

12 U.S.C. § 611a.

To achieve these goals, the Act authorized the creation of banking corporations chartered by the Federal Reserve Bank, so-called “Edge Act banks” or “Edge Act corporations,” which could engage in offshore banking operations freed from regulatory barriers imposed by state banking commissioners that hindered other U.S. banks in efforts to compete with foreign banks.

Section 632, providing for federal court jurisdiction of certain suits to which these Edge Act banks were parties, was added fourteen years later, in 1933 (as part of the Glass–Steagall Act.). The apparent purpose of § 632 was to give Edge Act banks predictable uniformity of adjudication supervised in the federal courts, and thus better protection against potentially divergent and conflicting strictures imposed by banking authorities of 48 states.

The D.C. Circuit explained:

Looking back to the Edge Act itself, however, one can divine the likely reasons for the grant [by § 632] of federal jurisdiction that would follow 14 years later. Crafted in the wake of the turmoil that the World War had caused in international financial markets, the Edge Act called forth a new type of federally controlled institution intended to increase the stability of, and the public's confidence in, international markets.... Federal supervision of these financial institutions was seen as essential if they were ever to succeed in the international marketplace. Thus a Governor of the Federal Reserve Board would tell the Senate Committee on Banking and Currency that: “The time will probably come when the conflict of the dual control exercised by the Federal Reserve Board and by the banking department of a State may be a matter of embarrassment or operate to restrict the activities of the banking corporation [, and] the benefits and protection of a Federal charter ... would be of great value in competing for business in foreign countries.” ... We infer, therefore, that the substantive federal regulations that the Congress placed upon Edge Act corporations, to be supplemented by the oversight of the Federal Reserve Board, are intended to facilitate and stimulate international trade by providing the uniformity of federal law.

A.I. Trade Fin., Inc. v. Petra Int'l Banking Corp., 62 F.3d 1454, 1462–63 (D.C.Cir.1995) (citations omitted).

B. The text of 12 U.S.C. § 632 in relation to this dispute.

Section 632 reads, in relevant part, as follows:

Notwithstanding any other provision of law, all suits of a civil nature at common law or in equity to which any corporation organized under the laws of the United States shall be a party, arising out of transactions involving international or foreign banking, or banking in a dependency or insular possession of the United States, or out of other international or foreign financial operations, either directly or through the agency, ownership, or control of branches or local institutions in dependencies or insular possessions of the United States or in foreign countries, shall be deemed to arise under the laws of the United States, and the district courts of the United States shall have original jurisdiction of all such suits; and any de...