Wednesday, October 7, 2009

Sheyn on "The (Un)Constitutionality of Section 632 of the Edge Act"

Elizabeth R. Sheyn (Penn alum) has posted "The (Un)Constitutionality of Section 632 of the Edge Act: An Analysis Under Article III and Theories of Protective Jurisdiction," which will be published in the Loyola University Chicago Law Journal.


Is a statute that establishes federal question jurisdiction over cases with nondiverse parties and involving pure state law claims constitutional? “The absence of diversity (and any other apparent article III ground for jurisdiction) looks like an embarrassment to the principle that Congress may not augment the jurisdictional scope of article III. Nevertheless, courts have [tacitly] approved Congress’s authority to place all [civil] suits” arising out of “transactions involving international or foreign banking” or “out of other international or foreign financial operations” in the federal courts.

The Edge Act of 1919 provides a basis for original federal district court jurisdiction over the two types of suits mentioned above; any defendant named in such a suit may remove the suit from state court to federal district court. Depending on how broadly a federal court interprets the provisions of the Edge Act, the Act could provide a jurisdictional basis for suits that ordinarily have no business being before a federal court, such as suits involving pure state law claims without any diversity of citizenship. This result has been borne out in several recent court decisions that have involved the extension of federal question jurisdiction under the Edge Act to state law claims of wrongful termination in violation of state public policy, breach of contract, fraud, and intentional infliction of emotional distress. 

For example, with the Edge Act providing the sole ground for federal (question) jurisdiction, federal courts have considered claims that a bank violated Ohio’s public policy by wrongfully terminating an employee who allegedly complained about improper actions taken by his co-workers and by his supervisors, that a bank violated a conditional agreement for the sale of a vehicle, and that a financial institution harassed and threatened investors after allegedly defrauding them. International banking transactions or international banking operations were only tenuously (if at all) implicated in each of these suits, thereby illustrating the breadth of federal jurisdiction asserted by some federal courts on the basis of the Edge Act. 

With the assistance of the Edge Act, then, federal courts have begun to erode the control that state courts currently retain over a narrow core of traditional areas of common law such as tort and contract matters that have no connection to international banking transactions or operations. The interest of the state courts in retaining jurisdiction over such matters is quite high, particularly in light of the fact that the states’ control over nearly all other issues generally and in the realm of banking has been taken away through supplemental jurisdiction and alienage and diversity jurisdiction, as well as through the federal regulation of various aspects of banking. 

Thus, especially to curb the continuing encroachment of federal judicial power upon state control over a gradually narrowing sub-set of state law, federal courts must move beyond the proper statutory interpretation of the Edge Act and evaluate whether the Act is constitutional in light of the limitations placed on federal question jurisdiction by article III. Currently, they are neglecting these limitations with respect to the Act (and potentially with respect to other similar statutes). Resolving the question of the constitutionality of the Edge Act is particularly important during this period of financial uncertainty – replete with bank failures and badly-behaving financial institutions – when issues concerning the (federal) jurisdiction of lawsuits against banks and other financial institutions come to the fore and federal courts are increasingly forced to grapple with cases implicating the Edge Act. 

This Article argues that Section 632 of the Edge Act is likely not constitutional because it does not fit within the traditional bounds of federal question jurisdiction set out in article III. For example, the Supreme Court has declared that a jurisdictional statute that is nearly identical to the Edge Act exceeds the limits of article III. Additionally, none of the three recognized theories of “protective jurisdiction” fully apply to the Edge Act – even if one of them did, the Supreme Court has not yet legitimized the theory of protective jurisdiction and it does not appear that it will do so in the near future.


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