Investors who lost money in the housing crisis may prefer to have their case heard by a hometown jury in state court, instead of as a federal securities fraud claim. But if their investment included properties outside of the United States, the Edge Act – created after WWI “in order to protect federally chartered banks engaged in international banking from variations in state law and the local prejudices of state and insular courts” – will force their claims into federal court.

As Judge Rakoff found in Dexia SA/NV v. Bear Stearns, the Edge Act even mandates federal jurisdiction where the international banking is an incidental aspect of the case. In Dexia, investors sued in state court claiming that a number of federally chartered banks misrepresented the quality of 250,000 mortgage loans that supposedly collateralized various securities offered by the banks.  Of the 250,000 loans, eighteen were located on properties in the Virgin Islands. The plaintiffs argued that the Edge Act did not apply at all because the core of their case was based on the fraudulent marketing of the securities in the United States, not on the underlying mortgages. But Judge Rakoff found that claim was undermined by the investors’ own complaint, which alleged that the value of the securities offered by the banks depended on the quality of the underlying mortgages, including the lonely eighteen mortgages in the Virgin Islands.  Nor was the court impressed by the argument that the Edge Act did not apply because the mortgages were sponsored by a subsidiary, not by the federally chartered bank itself.  As long as the federal bank has “potential liability,” the Edge Act applies, and here both the bank itself and its subsidiary were sued.

So the investors lost out on trying to benefit from any perceived “local prejudices of state and insular courts.” But keep in mind that the scope of the Act is not fully settled in the SDNY. In Allstate Ins. Co. v. CitiMortgage, Inc.Judge Sullivan did not apply the Edge Act and remanded a case to state court on a similar set of facts. He found that remand statutes are to be construed narrowly, and that the federally chartered bank was not a itself a party to the Offering that contained the international mortgages, even though it was a party to the overall lawsuit.