On May 17, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York vacated his earlier “bottom line” summary judgment decision dismissing Dexia NV/SA’s (Dexia) suit against J.P. Morgan Chase Bank (J.P. Morgan) and its various affiliates. Dexia alleged fraud, negligent misrepresentation and successor liability claims related to the sale of $774 million in residential mortgage-backed securities. J.P. Morgan had removed the action from state court claiming federal jurisdiction primarily under the Edge Act as well as under the Court’s bankruptcy jurisdiction. The Edge Act, a statute enacted in 1919, provides for federal jurisdiction if two conditions are met: (i) an international banking and financial corporation organized under the laws of the United States (an Edge Act corporation) must be a party and (ii) the lawsuit must involve an offshore banking transaction. Although the Court initially denied plaintiffs’ motion to remand based on the Edge Act, Judge Rakoff vacated that decision based on a recent Second Circuit decision requiring the offshore banking transaction to be engaged in by the Edge Act corporation. Because J.P. Morgan did not originate the securitized loans or otherwise engage in the foreign banking transactions, the court concluded the Edge Act did not apply, and it could not exercise jurisdiction. Opinion.
Edge Act
Second Circuit Rejects Edge Act Jurisdiction in AIG RMBS Case
On April 19, the Second Circuit ruled that a lawsuit brought by American International Group (AIG) against several Bank of America entities involving alleged fraud in connection with $28 billion in RMBS had been improperly removed from state to federal court. Judge Barbara Jones of the United States District Court for the Southern District of New York had denied AIG’s motion to remand the case to New York state court, finding removal proper under the Edge Act, a statute enacted in 1919 that provides for federal jurisdiction if two conditions are met: (1) an international banking and financial corporation organized under the laws of the United States (an Edge Act corporation) must be a party; and (2) the lawsuit must involve an offshore banking transaction. The district court found that these conditions had been met because one defendant – Bank of America, N.A. (BANA) – was an Edge Act corporation and because 27 of the 1.7 million residential mortgage loans underlying the RMBS at issue were secured by properties outside of the United States. The Second Circuit vacated and remanded the district court’s decision for further proceedings, allowing defendants to press their other ground for removal – “related to” bankruptcy jurisdiction – that was not addressed in this interlocutory appeal. It held that the Edge Act only provided jurisdiction where the Edge Act corporation has engaged in the relevant offshore banking transaction. Because BANA did not originate the 27 international mortgage loans, the Second Circuit found that the Edge Act’s requirements were not satisfied, and that federal jurisdiction under the Edge Act therefore did not exist. Opinion.
AIG RMBS Dispute Against Bank of America Stays in Federal Court Under the Edge Act
On October 20, 2011, Judge Jones of the U.S. District Court for the Southern District of New York found that the Edge Act conferred federal jurisdiction over a lawsuit brought by AIG against Bank of America and related entities arising out of certain AIG RMBS investments. The Edge Act confers federal jurisdiction over, among other things, any case in which a national bank is a party arising out of transactions involving banking in a U.S. dependency or insular possession. Defendants relied on the presence in certain RMBS collateral pools of mortgage loans that were secured by properties located in overseas locations, such as Puerto Rico, Guam, and the U.S. Virgin Islands. Noting that 4 of the 349 RMBS at issue were backed by mortgages in U.S. territories, Judge Jones found that jurisdiction was proper even if the territorial transactions involve only a small portion of the total transactions at issue. Decision.