Citizenship and Jurisdiction of Federally Chartered Companies
By Miles Pringle
A federal court’s jurisdiction is typically based on either federal question jurisdiction or diversity of citizenship; however, regarding federally chartered companies, federal jurisdiction is more nuanced than one might imagine.
While most companies in the United States are chartered by state governments, many are chartered by the federal government, such as certain banks, credit unions and railroad companies. Examples include private companies (e.g. Bank of America NA), companies wholly owned by the U.S. government that act in a regulatory capacity (e.g. Federal Deposit Insurance Corporation), and nonprofit corporations (e.g. Boy Scouts of America, Girl Scouts of America, American National Red Cross). The first company chartered by the U.S. government was the First Bank of the United States, during President George Washington’s administration (at the urging of Alexander Hamilton). In fact, it was litigation over jurisdiction and constitutionality of the Second Bank of the United States in McCulloch v. Maryland, in which the Supreme Court first adopted an expansive interpretation of the Necessary and Proper Clause.1
As background, most federally chartered companies are set up as corporations. Limited liability companies (LLC) did not become widely accepted in the United States until the latter half of the 20th century. Oklahoma did not pass its Limited Liability Act until 1992.2 Even though companies may be chartered by the federal government, their actions are usually governed by state law. For example, in First National Bank v. Kentucky (1870), the Supreme Court explained that national banks “are subject to the laws of the state, and are governed in their daily course of business far more by the laws of the state than of the nation. All their contracts are governed and construed by state laws. Their acquisition and transfer of property, their right to collect their debts, and their liability to be sued for debts, are all based on state law.”3 Thus, most law suits involving federally chartered companies are based on state law, not a federal question.
Even though claims made by and against federal companies are typically governed by state law, historically federal district courts still had jurisdiction over most actions involving federal companies. At first, jurisdiction was based on a company’s charter, which was promulgated by the federal government. The Supreme Court reasoned that the act of incorporation itself gave federal courts jurisdiction over suits by and against federal corporations.4 After 1875, when Congress extended general jurisdiction to issues involving a federal question, the courts determined that federal corporations were entitled to removal from state courts on the basis that such suits involving federal corporations inherently involved a federal question.5 In 1948, Congress reversed course when it passed 28 U.S.C. §1349, which provides that district courts shall not have jurisdiction based upon the ground that a corporation was incorporated by or under an act of Congress (“unless the United States is the owner of more than one-half of its capital stock”). Thus, a federal question must be included in the allegations of the pleadings to evoke federal question jurisdiction (e.g. alleging a violation of the Equal Credit Opportunity Act).
Regarding diversity jurisdiction, originally any corporation – state or federal – had difficulty establishing diversity of citizenship due to the court’s early interpretation of a corporation’s citizenship. Noting that a corporation is a “mere legal entity,” the court decreed that a corporation’s citizenship was the state of each of its shareholders.6 In 1958, to address the growing national make up of corporate shareholders, Congress passed 28 U.S.C. §1332(c)(1), providing that a corporation is a citizen of the state in which it has been incorporated.7 It should be noted that Congress has not stepped in to address the citizenship of limited liability companies;8 therefore, an LLC is a citizen of each of its members’ states for diversity purposes.
While Section 1332 made it easier for state chartered corporations to obtain diversity jurisdiction, it was not applied to federally chartered corporations.9 Additionally, in 1916 the Supreme Court ruled that federal corporations are “not a citizen of any state” (concluding that a federal corporation’s “activities and operations are not to be confined to a single state, but to be carried on, as in fact they are, in different states”).10 With the narrowing of federal question jurisdiction, and the inability to establish diversity, removing an action to federal court for federal companies was often difficult.
While Congress has never sought a general solution to these issues, there are a myriad of carveouts for specific federal companies. For example, 12 U.S.C. §1717 provides that Fannie Mae is deemed to be a citizen of the District of Columbia corporation. Regarding national banking organizations, 28 U.S.C §1348 provides that for diversity purposes national banks are “deemed citizens of the states in which they are respectively located.” Federal savings associations have a similar provision, 12 U.S.C. §1464(x), as well.
There remain several forms of federally chartered organizations that do not have their own carveouts, which courts handle in different ways. Federally chartered credit unions, for example, are “usually not considered citizens of any particular state for diversity purposes. However, courts have found that when a credit union maintains ‘localized operations,’ it can be treated as a citizen of the state in which it operates.”11 This principle is generally known as the “localization doctrine.” One court adopting this rationale acknowledged the principle was a “judicially-created exception;” however, it is one that has “won general acceptance in various federal courts.”12
Just because a carveout does apply to an entity, does not mean that all citizenship issues are resolved. For instance, the appropriate citizenship of national banks came before the Supreme Court in 2006 based on the interpretation of the term “located.”13 The 4th Circuit had ruled that Wachovia Bank NA’s citizenship was “every state in which it has established a branch.” The Supreme Court disagreed, stating, “Congress, we are satisfied, created no such anomaly.” The court further opined a national bank’s citizenship for diversity purposes is the state designated in its articles of association as its main office. Some have sought even further clarification on this issue (i.e. can a national bank be a citizen of both its main office and its principle place of business),14 but the circuit courts appear to be in conformity that a national bank’s main office is its only place of citizenship.15
Federal jurisdiction is not the only issue for federally chartered companies. We must also consider when a state court may exercise jurisdiction over a federal company. While not addressing this issue directly, in 2011 the Supreme Court provided a thorough description of a state court’s authority to adjudicate matters in Goodyear Dunlop Tires Operations, S.A. v. Brown.16 The court explained that because a state court’s assertion of jurisdiction exposes defendants to the state’s coercive power, it is subject to review for compatibility with the 14th Amendment’s Due Process Clause. Under the Due Process Clause, a state may exercise either general (or all-purpose) jurisdiction, or specific jurisdiction.
“For an individual, the paradigm forum for the exercise of general jurisdiction is the individual’s domicile; for a corporation, it is an equivalent place, one in which the corporation is fairly regarded as at home.”17 For companies, this is usually the state in which the company is organized; however, it may also be the state in which the company’s principle place of business is located (which is not always the same as its organizing state). Thus, if a federally chartered company identifies a main office, it is likely subject to the general jurisdiction of that state. Additionally, the state in which a federally chartered company’s principal place of business is located is also likely to have general jurisdiction over the company.
Specific jurisdiction, on the other hand, is limited to matters stemming from or connected with the state itself. That is, a state may exercise jurisdiction over nonresident defendants when they cause harm inside the state, so long as the assertion of jurisdiction complies with “traditional notions of fair play and substantial justice.”18 There are two types of specific jurisdiction: 1) when the defendant’s “continuous and systematic” and gave rise to the episode-in-suit; and 2) when single or occasional acts in a state may be sufficient to render the defendant answerable with respect to those acts, but not to other matters unrelated to the forum connections. Many states, including Oklahoma,19 have enacted long-arm statutes granting their courts’ jurisdiction “on any basis consistent with the Constitution of this state and the Constitution of the United States.”
In sum, a federal court may exercise jurisdiction over a federally chartered company when a federal question exists, or when diversity is met. In order to establish diversity, one may need to look to the statute creating the chartering authority, or rely on a judicially created exception. Regarding a state court’s jurisdiction, it must comply with the Due Process Clause and the applicable long-arm statute.
ABOUT THE AUTHOR
Miles Pringle is partner with Pringle & Pringle PC, where he represents clients in a variety of business matters, including financial institutions. He is a native Oklahoman, licensed to practice law in Missouri, Oklahoma and Texas. Mr. Pringle currently serves as chairperson for the OBA’s Financial Institution and Commercial Law Section.
1. McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 400 (1819).
2. (18 O.S. (1992) §2000).
3. 76 U.S. (9 Wall.) 353, 362 (1870); see also Lund, Paul E., “Federally Chartered Corporations and Federal Jurisdiction”, 36 Fla. St. U.L. Rev. 317, n. 51.
4. See e.g. Osborn v. President, Dirs. & Co. of Bank, 22 U.S. (9 Wheat.) 738, 816 (1824); see also 36 Fla. St. U.L. Rev. 330.
5. Pac. R. Removal Cases, 115 U.S. 1, 3, 5 S. Ct. 1113, 1113 (1885); see also 36 Fla. St. U.L. Rev at 332; Rockey v. Harrison, No. 1:14-cv-00147, 2014 U.S. Dist. LEXIS 118304, at *2 n.1 (N.D. Ohio Aug. 19, 2014).
6. Bank of the United States v. Deveaux, 9 U.S. (5 Cranch) 61 (1809); see also 36 Fla. St. U.L. Rev at 327.
7. 36 Fla. St. U.L. Rev at 329.
8. Guzman v. Smithfield Foods, Inc., No. CIV-17-697-D, 2017 U.S. Dist. LEXIS 148232, at *2 (W.D. Okla. Sept. 13, 2017); citing Carden v. Arkoma Assocs., 494 U.S. 185, 195-96, 110 S. Ct. 1015, 108 L. Ed. 2d 157 (1990).
9. See Wachovia Bank, Nat’l Ass’n v. Schmidt, 546 U.S. 303, 306, 126 S. Ct. 941, 945 (2006).
10. Bankers Tr. Co. v. Tex. & P. R. Co., 241 U.S. 295, 309, 36 S. Ct. 569, 572-73 (1916).
11. Mungo v. Minn. Life Ins. Co., No. 0:11-464-JFA, 2011 U.S. Dist. LEXIS 67654, at *9 (D.S.C. June 22, 2011).
12. Arlington Cmty. Fed. Credit Union v. Berkley Reg’l Ins. Co., 57 F. Supp. 3d 589, 593 (E.D. Va. 2014).
13. See End Note ix, supra.
14. See e.g. NOTE: DETERMINING DIVERSITY JURISDICTION OF NATIONAL BANKS AFTER WACHOVIA BANK V. SCHMIDT, 81 Fordham L. Rev. 1447.
15. OneWest Bank, N.A. v. Melina, 827 F.3d 214, 219 (2nd Cir. 2016) (“We agree with our sister circuits that a national bank is a citizen only of the state listed in its articles of association as its main office.”).
16. 564 U.S. 915, 131 S. Ct. 2846 (2011).
17. Id. 564 U.S.at 924, 131 S. Ct. at 2853-54.
18. Id. 564 U.S. at 919, 131 S. Ct. at 2850-51.
19. (12 O.S. §2004(F)).
Originally published in the Oklahoma Bar Journal -- OBJ 89 pg. 14 (February 2018)