Top Court to Hear Two Big Cases for Industry: Arbitration Clauses, Jurisdictional Issues on the Fall Docket

Article excerpt

WASHINGTON -- Two cases the Supreme Court is slated to hear this fall could have a significant effect on the financial services industry.

The first would determine whether national banks can be sued in a state court anywhere they have a branch. The second could nullify some arbitration clauses frequently used by banks and credit card companies.

Whether a national bank can be sued in a state or federal court is a critical question. Bankers fear that state courts favor local plaintiffs and are not friendly to large, national organizations.

"Oftentimes you get a fairer shake in federal court than local courts," because plaintiffs have a "hometown advantage" in state court, said Gil Schwartz, a lawyer with Schwartz & Ballen LLP. Also, "you have greater consistency in federal court, because there are fewer courts."

The case stems from a suit related to KPMG LLP's sale of illegal tax shelters. The auditing giant reached a settlement with the Justice Department last week, and the high court is not expected to weigh in on the shelters' legality. Instead, it is expected to decide where, in the eyes of the law, a national bank is located.

Daniel G. Schmidt 3d, a South Carolina resident, filed a lawsuit in April 2003 in state court accusing Wachovia Corp.'s staff of talking him into using one of the tax shelters. The Internal Revenue Service later audited him.

Shortly after the suit was filed, it was remanded to a federal court, because Wachovia argued the case involved parties in multiple states. But Mr. Schmidt argued that the suit should be heard in state court, since both he and the Wachovia personnel he dealt with were in South Carolina.

Judge Michael Luttig of the U.S. Court of Appeals for the Fourth Circuit agreed and said the case revolved around an interpretation of the word "located" in a section of the federal code pertaining to national banks.

"In ordinary parlance, the word 'located' is a general term referring to physical presence in a place," and since the Wachovia branch was in South Carolina, the case should be heard there, Judge Luttig wrote.

Wachovia said the ruling contradicted three prior circuit court decisions and appealed to the Supreme Court, which is scheduled to hear oral arguments Nov. 28.

If Wachovia loses, industry representatives are concerned more lawsuits would be decided in state courts. They also worry that such a decision could put national banks at a disadvantage to state banks.

Since Judge Luttig cited a section of the federal code pertaining only to national banks, a Supreme Court ruling against Wachovia could let state banks with branches in multiple states continue to remand cases to federal court, while national banks could not.

The American Bankers Association raised just such a possibility in its brief supporting Wachovia.

"National banks' opportunities for access to federal courts will effectively be destroyed in the majority of cases because, unlike their state-chartered counterparts, they are deemed to be citizens of every state in which they have a branch," the ABA argued in the brief. "Instead of maintaining parity between national banks and state banks -- or other corporate entities, for that matter -- the lower court's decision singles out national banks for disparate treatment."

A day after hearing that case, the Supreme Court is scheduled to take up one that stemmed from a dispute between a payday lender and one of its customers. …