Thursday, June 14, 2007, 8:41 PM

Fourth Circuit Issues Important Arbitration Case; Also Invokes Preemption For State-Law Claims Against State-Chartered Banks Under FDIA

Yesterday, in Discover Bank v. Vaden, the Fourth Circuit, in a split decision, issued an important decision involving the Federal Arbitration Act (FAA).

To simplify, here's what happened. Discover Bank (Discover), a state-chartered, federally insured bank, sued Vaden in state court for failing to pay her credit card balance. It was a state law claim. There wasn't diversity to establish federal jurisdiction.

Vaden counterclaimed with state law claims. She alleged breach of contract and violation of Maryland's (usury) statutes regulating interest rates.

Believing that Vaden's state law counterclaims were completely preempted by federal law governing banks, Discover filed a petition in federal court seeking to compel arbitration of her counterclaims, based on an arbitration clause in Discover's cardmember agreement. (The FAA doesn't itself confer federal jurisdiction.)

The district court held that Vaden's state court usury counterclaims were completely preempted and granted Discover's request for arbitration. The Fourth Circuit affirmed.

First, the majority held that the "complete preemption" doctrine applied, even though the preempted claims were counterclaims. The majority emphasized that complete preemption is an exception to the rule (the well-pleaded complaint rule) that a case generally may not be removed to federal court solely because of a defense or counterclaim arising under federal law (i.e., it's an exception to the general rule that federal jurisdiction must appeal on the face of the complaint).

Second, in an issue not reached by the dissent, the majority held that Vaden's state law usury claims were completely preempted by the Federal Deposit Insurance Act (FDIA). Specifically, the majority held that section 27(a) of the FDIA completely preempts state-law usury claims against a state-chartered, federally insured bank. The U.S. Supreme Court had previously held (in 2003) that the National Bank Act completely preempts state-court usury claims against national banks. The majority reasoned by analogy that the FDIA should preempt claims against a state-chartered, federally insured bank.

The dissent (by district judge Goodwin) took issue with federal jurisdiction. He contended that federal question jurisdiction can't be predicated on federal issues that may arise in an action by way of defense or counterclaim. To him, there could be no federal jurisdiction because there was no diversity jurisdiction and no federal question appeared on the face of the complaint. He argued that the majority erred in using complete preemption, which he deemed a removal doctrine, to recharacterize a state court counterclaim as federal. "The majority fails to recognize that complete preemption is solely a removal doctrine that is analytically applied to recharacterize allegations made in a plaintiff's complaint," the dissent emphasized.

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