We work with many regional financial institution clients on a daily basis, and they regularly send us out-of-state garnishments, liens, levies, and other legal processes with one question—“Do I have to answer this?” The first question we ask is whether the foreign state can exercise jurisdiction over the regional financial institution—in other words, whether the financial institution is doing business in that state. Our clients are often quick to respond that they don’t have any branches or employees in other states, and so do not believe that they are doing business in those states.

But for the most part, the days of only “brick and mortar” banking are long gone. With the competition of internet banks and increase of technology, financial institutions are trying to become more appealing and accessible to their customers. To do that, they have increased their presence on the Internet. One result of this increased presence has been increased opportunity to market other products (such as CDs, car loans, or mortgage loans) outside of their home state. 

All of which begs the question: Are these regional financial institutions, with branches only in one state, now opening themselves up to doing business in all other states? Many plaintiffs have attempted to argue that a financial institution’s online banking activities are sufficient to confer jurisdiction over the financial institution in a foreign state.

If the issue of jurisdiction arises, each state will analyze all of the financial institution’s contacts with the foreign state under its own jurisdictional laws. Some financial institutions allow customers in foreign states to open accounts and enter into contracts. Others only allow customers to manage their accounts, which must have previously been opened in the financial institution’s home state. Here we discuss how three different states analyzed whether an out-of-state financial institution was doing business in their state.

In Kentucky, a court examined all of a foreign bank’s activities within the state to determine whether it was “doing business in the state” and whether the bank would be subject to Kentucky law. (See Community Trust Bancorp, Inc. v Community Trust Fin. Corp., 692 F.3d 469 (6th Cir. 2012).) There, the foreign bank had branch offices only in Texas, Louisiana, and Mississippi—none in Kentucky. And the bank limited its advertising and marketing campaigns to the states where it had branches. Further, the bank did not have any officers, directors, employees, agents or any other physical presence in Kentucky. While the bank had customers who resided in Kentucky, accounts could only be opened in branch offices (in Texas, Louisiana, and Mississippi).

The court also reviewed the number of account holders the bank had in Kentucky, and found that only nine account owners resided in Kentucky, all of whom had moved there after their accounts were opened and continued to only maintain their bank accounts from out of state. Looking at all of the bank’s activities, the court found that the bank did not have substantial activities in the state to subject it to the laws of the state of Kentucky.

In Texas, another court went through the same analysis to determine whether an out-of-state bank was doing business in Texas. (See Federal Insurance Co., et al. v. Prosperity Bank, et al., No. SA-12-CA-112, Order Regarding Mot. Dismiss, W.D. Tex. July 20, 2012).) In that case, the bank had no branches in Texas, did not advertise its services in Texas, and was not registered as a foreign corporation in Texas. The bank’s website, however, enabled bank customers to check account balances, transfer funds between accounts, pay bills, and manage finances. The Texas court noted that the issue of whether the out-of-state institution is doing business in Texas is determined by the level of interactivity and the commercial nature of the exchange of information online.

The evidence showed that the bank’s website in that case was highly interactive—it allowed individuals who already had a bank account to control their accounts over the internet. The fact that the bank maintained an interactive website, however, was not sufficient, by itself, to establish generally that the bank was doing business in Texas. The court held that the plaintiff had to also show that any contacts through the website were substantial, continuous, and systematic. Relevant considerations for that determination were the number of bank customers in Texas, how they came to be customers, and the nature of the bank’s interactions with its Texas customers.

The court found that some of the bank’s online deposit accounts were opened by Texas residents while they were in Texas, but the bank did not solicit business from any Texas residents. Considering all of the bank’s contacts with Texas, the court found that the bank’s activities were insufficient for it to be considered doing business in Texas. The court found it particularly important that there was no evidence that the bank contacted residents in Texas, advertised its banking services in Texas, or in any way sought business in the state of Texas.

In Virginia, in order to determine whether a West Virginia community bank could be sued in Virginia, the court looked at all of the bank’s activities in the state of Virginia. (See Hunt v. Calhoun County Bank, 8 F. Supp. 3d 720 (E.D. Va. 2014).) The bank never had any branches in Virginia nor conducted any other business in Virginia. It further did not have any offices, agents, property, or in-person contact in Virginia. The Virginia court held that it would have jurisdiction over the bank if the bank “(1) directs electronic activity into the state, (2) with the manifested intent of engaging in business or other interactions within the State, and (3) that the activity creates, in a person within the state, a potential cause of action cognizable in the state’s courts.”

The court found that the West Virginia bank maintained a semi-interactive website—it allowed customers to engage in online banking activities, but did not allow potential customers to open new accounts and was not intended to solicit customers from outside of West Virginia. The bank’s representative testified that it does not market itself outside of the state of West Virginia, nor does it advertise in media directed at customers outside of the West Virginia counties in which it operates. Additionally, the bank only had nine borrowers residing in Virginia. Of those nine, five borrowers resided in West Virginia at the time they took out their loans and subsequently moved to Virginia. The other four loans were used to purchase real estate in West Virginia.

Based on a review of all of the bank’s activities, the court held that the bank’s online banking services did not provide a basis for general jurisdiction. Essentially, the court found that the bank was not doing business in Virginia and therefore not subject to the laws of the state of Virginia.

Although all of the courts in the above cases found that the out-of-state financial institutions were not doing business in their states, the activities that they list provide insight to guide financial institutions regarding what they should and should not do to avoid the jurisdiction of a foreign state. The analysis of whether a bank is doing business in a particular state will have to be done on a state-by-state basis, under the rules of that particular state, but all courts certainly will closely examine all of the financial institution’s activities within that state. Courts appear to oppose jurisdiction when the financial institutions:

  • Do not have any branches or offices in the forum state;
  • Limit their advertising and marketing campaigns to their home state;
  • Are not registered to do business in the forum state;
  • Have no direct solicitation of customers in the forum state; and
  • Do not enter into contracts via online with customers in the forum state.

With the increased use of technology and the demand from customers for more convenience and ease of use, financial institutions understandably are using the Internet to expand their customer base. However, financial institutions need to keep in mind the effects of all of their online banking activity, or else risk subjecting themselves to jurisdiction in foreign states without even knowing.

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