International Banking and Finance Provide Grounds for Removal of State Court Action to Federal Court

International Banking and Finance Provide Grounds for Removal of State Court Action to Federal Court


By Louis M. Solomon

American Int'l Group, Inc., et al. v. Bank of America Corp., et al., 11 Civ. 6212 (BSJ) (S.D.N.Y. Oct. 2011) [enhanced version available to subscribers],  highlights one of the common ways to order, sequence, rationalize a complex international litigation (see generally the discussion of ordering or sequencing international litigation in our e-book, International Practice: Topics and Trends).

Residential mortgage backed securities have been the subject of much litigation.  This suit involves 349 RMBSs.  AIG alleges that it purchased the securities and that defendants - financial institutions such as Bank of American, Merrill Lynch, and Countrywide - acted as underwriters, sponsors, and originators.  There are claims pending in multiple jurisdictions alleging that originators of the loans encouraged borrowers to falsify loan applications so as to originate more loans.  There is multi-district litigation pending in the federal court in the Central District of California, but the multi-district rules do not appear to permit the transfer and consolidation of cases pending in state, as opposed to federal, court. 

In this case, the defendants removed a case from state to federal court and then sought to consolidate the case with the MDL proceeding.  The decision just rendered addressed the propriety of the removal in the context of a motion to remand.

The District Court denied the motion to remand.  The Court ruled that removal was proper under 28 U.S.C. sec. 632, also known as the Edge Act, which covers, inter alia, claims

"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 an agency, ownership, or control of branches or local institutions in dependencies or insular possessions of the United States or in foreign countries".

The District Court found the federal statute triggered because some of the properties underlying some of the loans in some of the challenged RMBS "were located in dependencies and insular possessions of the United States" and that "the loan pools included some mortgage loans originated by subsidiaries of (unspecified) foreign banks".   In this connection the Court made three rulings of note to international practice:

  • Although the number of such mortgages was tiny (4 or the 349), the District Court found no de minimus exception to the ability to remove. 
  • As important for international practice purposes, the Court ruled that Section 632 "provides an explicit statutory exception to the well-pleaded complaint rule" - that is, the federal question justifying removal to federal court does not have to appear on the face of a "well-pleaded complaint" but can be introduced as grounds for removal by a defendant.   There are only a very few other examples where federal statutes have been found to contain such an exception (see our discussion of the removal capabilities under the New York Convention)
  • Finally, even though there was no defendant who was both a nationally chartered bank (a necessary ingredient for removal) and the territorial U.S. mortgages (the other necessary ingredient for removal), the Court ruled that there need not be a "perfect match between the particular entity involved in the territorial transaction and the party against whom the claim is brought".


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