Mortgage-backed securities litigation has been very good for some of the most obscure laws on the books. I've already mentioned the starring role the unheralded statute of repose has taken in bank motions to dismiss securities claims by MBS investors, and we all know about Bank of America's ingenious (or nefarious, depending on your perspective) use of New York's Article 77 -- a proceeding so rarely invoked that the judge assigned the case had to look it up -- to seek approval of its proposed $8.5 billion settlement with investors in Countrywide mortgage-backed notes. Today I bring you the Edge Act, a hundred-year-old law that grants federal-court jurisdiction to civil suits against any U.S corporation in which claims arise from international banking or banking transactions in a U.S. territory.

You're probably wondering what the Edge Act has to do with U.S. MBS trusts in which securities are backed by U.S.-issued mortgages on properties in the United States. Well, it turns out that a handful of the mortgages backing BofA securities actually originated in the Virgin Islands and Guam. We are talking about a very small handful. According to a brief AIG submitted to the 2nd Circuit Court of Appeals, of the 1.7 million mortgages underlying the 349 MBS trusts at issue in AIG's $10 billion case against Bank of America, exactly 8 mortgages in 3 trusts originated in U.S. territories.

Nevertheless, after BofA's lawyers at Munger, Tolles & Olson and Countrywide's counsel at Reed Smith removed AIG's suit from New York State Supreme Court to federal court in Manhattan, they countered a remand motion by AIG counsel at Quinn Emanuel Urquhart & Sullivan with a brief citing the Edge Act. "Neither the case law nor the statute ... contains a requirement that the case be entirely, primarily, or even in substantial part premised on foreign banking," they argued. The Edge Act comes into play, BofA said, "if any part of it arises out of transactions involving international or foreign banking."

U.S. District Judge Barbara Jones agreed. She denied the remand motion, and then denied AIG's motion for reconsideration. Jones said the number of mortgages issued from U.S. territories doesn't matter. She also rejected AIG's argument that Bank of America N.A. -- the nationally chartered bank that gave the defendants standing to assert the Edge Act -- wasn't involved in issuing the Guam and Virgin Islands mortgages. The judge did, however, grant AIG's motion to certify the issue for appeal to the 2nd Circuit. On Wednesday, the appeals court agreed to hear AIG's appeal.

If AIG wins at the 2nd Circuit, its BofA case would go back to New York state court -- except that part of the case is no longer before Jones in Manhattan federal court. Countrywide successfully petitioned to have AIG's claims against it transferred to the Countrywide MBS multidistrict litigation overseen by U.S. District Judge Mariana Pfaelzer in Los Angeles federal court. Pfaelzer declined to stay the case while the 2nd Circuit decided whether to grant AIG's jurisdictional appeal. In fact, as I've reported, she's already poised to rule on Countrywide's motion to dismiss AIG's fraud claims. And given Pfaelzer's track record in the Countrywide MDL, the ruling probably won't favor AIG.

AIG counsel Michael Carlinsky of Quinn told me he intends to file a formal motion with Pfaelzer to stay the Countrywide case, now that the 2nd Circuit has agreed to hear AIG's appeal. Carlinsky didn't say this, but I'd bet his client would love to get its Countrywide case out of Pfaelzer's courtroom and back to New York state court.

But even if AIG prevails at the 2nd Circuit, that's not a sure thing. Here's the complication: Bank of America and Countrywide have argued that the Edge Act isn't the only reason AIG's case belongs in federal court. Some of the mortgage issuers whose loans were packaged into BofA, Merrill, and Countrywide mortgage-backed notes are bankrupt. The BofA defendants argue that because they have indemnification claims in those bankruptcies, AIG's case must proceed in federal court because it's related to a federal court bankruptcy.

AIG didn't specifically ask the 2nd Circuit to consider the bankruptcy argument against remand, but now that the appeals court has agreed to hear the case, it may raise the issue in the next round of briefs. If AIG persuades the appeals court that Bank of America has neither Edge Act or bankruptcy-related reasons to maintain federal-court jurisdiction, will Pfaelzer be bound by that ruling?

A BofA spokesman declined to comment.

(Reporting by Alison Frankel)

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