A federal judge has decided that the lawsuit between Wells Fargo ( WFC) and Citigroup ( C) over the San Francisco bank's acquisition of Wachovia belongs back in state court.

Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York ruled on March 20 that the case should be moved back to New York State Supreme Court, according to Bloomberg.

Citi had asked for the transfer request on the basis that the lawsuit does not raise a federal claim, according to Reuters.

According to Reuters the judge rejected Wells Fargo's argument that the case belonged in federal court due to a provision of the federal bailout legislation passed by Congress last fall that governed acquisitions.

Citi sued Wells Fargo back in October after it trumped the New York company's offer to buy Wachovia. Citi at the time had cited a breach of contract of its exclusivity agreement.

Citi on Sept. 29 had agreed to take over Wachovia's banking operations for $2.16 billion, or about $1 a share, with the Federal Deposit Insurance Corp. agreeing to take on potential losses in Wachovia's loan portfolio. On Oct. 3, Wells agreed to purchase all of Wachovia without FDIC assistance, in a deal totaling originally as much as $15 billion.

Wells Fargo acquired Wachovia on Dec. 31.

The takeover battle has morphed from several lawsuits, including a Wells Fargo suit against Citi; a Wachovia suit against Citi; and a Citi suit against Wachovia, Bloomberg said.

Shares of Citi were down 3.8% to $3.01 and Wells shares were off 3.9% to $16.65 in recent trading.

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