InfoBytes Special Alert, June 30, 2009
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Supreme Court Holds States May Enforce Non-Preempted State Laws Against National Banks
In a narrow 5-4 decision, the Supreme Court held yesterday that states have the power to enforce state laws against national banks through the judicial process but they lack the authority to examine banks or subpoena documents or other information without judicial process. Cuomo v. The Clearing House Association, LLC, 557 U.S. ---, No. 08-453 (June 29, 2009), available at http://www.supremecourtus.gov/opinions/08pdf/08-453.pdf. The Clearing House decision represents a significant victory in principle for opponents of national bank preemption and was handed down amid the backdrop of the Obama Administration’s recent regulatory reform proposal, which (among other things) would give the states more power to apply state consumer protection laws to federally-chartered banks of all types.
However, the true impact of the case remains to be seen given that the statutory basis for state enforcement found by the Court requires state authorities to use "judicial process" and work only through the litigation process - commencing with the filing of a lawsuit - as opposed to pre-litigation formal or informal requests for information or documents. State attorneys general may simply be much quicker to file lawsuits based on less information and then use discovery to strengthen their case. Alternatively, attorneys general may effectively compel the pre-litigation disclosures supposedly prohibited by this decision by telling banks they will proceed with a lawsuit unless given the information. Thus, the question looming over the industry is whether the "judicial process" requirement will in fact serve as an obstacle to prosecutorial fishing expeditions or will be nothing more than a minor speed bump on the path to what will serve effectively as visitorial powers.
Although New York Attorney General Cuomo hailed the decision as reaffirming "the vital role State Attorneys General play in protecting consumers from illegal and improper practices by our country’s biggest and most powerful banks" and as a "huge win for consumers across the nation," the decision is very likely to sow confusion on legal requirements among the banks that are widely understood to be the best-regulated aspect of our nation’s financial system. Consumers will be forced to pay the enormous costs of the national banks trying to manage a national business in the face of fifty separate enforcers (and thus rulemakers).
The Clearing House majority - led by Justice Scalia and joined by Justices Ginsburg, Souter, Stevens and Breyer - affirmed in part and reversed in part a judgment of the United States Court of Appeals for the Second Circuit upholding an injunction issued by the Southern District of New York which prohibited the New York Attorney General from enforcing state fair lending laws. Specifically, to the extent that the lower court ruling enjoined the threatened issuance of an executive subpoena by the state, the Supreme Court upheld the injunction. But, to the extent the injunction prohibited the Attorney General from bringing any judicial enforcement action against national banks, the Supreme Court reversed the Second Circuit, concluding that such judicial enforcement action was not a preempted exercise of "visitorial powers" under the National Bank Act (NBA). According to the majority, the Office of the Comptroller of the Currency’s (OCC) interpretation of the NBA’s "visitorial powers" provision was unreasonable. In short, the majority concluded that "a sovereign’s ‘visitorial powers’ and its powers to enforce the law are two different things," and that the OCC could not prevent states from enforcing laws by virtue of the "visitorial powers" provision.
The Clearing House decision arises from letters sent to several national banks by then-New York Attorney General Eliot Spitzer in 2005 - following the publication of Home Mortgage Disclosure Act (HMDA) data which appeared to indicate that a significantly higher percentage of high-interest home mortgage loans were made to African-American and Hispanic borrowers than to white borrowers. The letters requested certain non-public information about the banks’ lending practices, "in lieu of subpoena," to determine whether the banks violated New York fair lending laws. The OCC and a banking trade group, brought suit to enjoin the requests, arguing that OCC regulation promulgated under the NBA prohibits such an enforcement of state laws against national banks because only the OCC may exercise "visitorial powers" - defined by the OCC to include the prosecutions of enforcement actions - over national banks. The United States District Court for the Southern District of New York entered the requested injunction, and the Second Circuit affirmed. Both courts held that the OCC’s interpretation of the term "visitorial powers" in the NBA was entitled to Chevron deference and was reasonable.
The Supreme Court granted certiorari. According to the majority, the question to be addressed by the Court was "whether the [OCC’s] regulation purporting to pre-empt state law enforcement [could] be upheld as a reasonable interpretation of the [NBA]." The Supreme Court concluded that it could not.
The NBA provides that:
No national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or such as shall be, or have been exercised or directed by Congress or by either House thereof or by any committee of Congress or of either House duly authorized.
12 U.S.C. § 484(a). To implement this provision, the OCC adopted a regulation providing that "[o]nly the OCC...may exercise visitorial powers with respect to national banks...," and "State officials may not exercise visitorial powers with respect to national banks, such as conducting examinations, inspecting or requiring the production of books or records of national banks, or prosecuting enforcement actions, except in limited circumstances authorized by federal law." 12 C.F.R. §7.4000(a)(1) (emphasis added). The OCC defined "visitorial powers" to include "(i) Examination of a bank; (ii) Inspection of a bank’s books and records; (iii) Regulation and supervision of activities authorized or permitted pursuant to federal banking law; and (iv) Enforcing compliance with any applicable federal or state laws concerning those activities." Id. §7.4000(a)(2). The OCC regulation thus prohibited states from "prosecuting enforcement actions" except in "limited circumstances authorized by federal law."
According to the majority, however, the OCC had no reasonable basis upon which to "extend[] the definition of ‘visitorial powers’ to include ‘prosecuting enforcement actions’ in state courts." In reaching this conclusion, the Court considered the historical definition of "visitation" - "the act of examining into the affairs of a corporation" - as well as the definition of "visitation" that has developed from case law (and even church) precedent - the "right to oversee corporate affairs, quite separate from the power to enforce the law." The majority found that "visitorial powers" referred only to a sovereign’s supervisory powers over corporations, and included "administrative oversight that allows a sovereign to inspect books and records on demand." The exercise of "visitorial powers" did not, however, include an action to enforce state law against a national bank, where the sovereign acted as a law enforcer. According to the Court:
There is necessarily some ambiguity as to the meaning of the statutory term "visitorial powers,".... The [OCC] can give authoritative meaning to the statute within the bounds of that uncertainty. But the presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the [NBA]. We can discern the outer limits of the term "visitorial powers" even through the clouded lens of history. They do not include, as the [OCC’s] expansive regulation would provide, ordinary enforcement of the law.
Slip Op. at 3. Accordingly, the majority vacated the injunction to the extent that it prohibited the Attorney General from bringing judicial enforcement actions, but affirmed it to the extent that it applied to "the threatened issuance of executive subpoenas." This result followed from the "pragmatic" understanding that the Attorney General, as an entity of the State, must pursue the action as a "civil litigant," subject to the rules of civil procedure and discovery, not as a "visitor," which could "inspect books and records at any time for any or no reason."
The majority also noted that the Court’s recent decision in Watters v. Wachovia Bank, N. A., 550 U. S. 1 (2007), was "fully in accord with the well established distinction between supervision and law enforcement." According to the Court, "the sole question [in Watters] was whether operating subsidiaries of national banks enjoyed the same immunity from state visitation" as their parent banks; "[t]he opinion addresses and answers no other question." Slip Op. at 6.
Justice Thomas issued a dissent, in which he was joined by Chief Justice Roberts, Justice Kennedy, and Justice Alito. According to the dissenters, the term "visitorial powers" was "susceptible to multiple interpretations," and in light of the ordinary meaning of this term, the structure of the NBA, and the history of "visitation," the OCC’s regulation was reasonable and entitled to Chevron deference. Among other things, the dissent argued that the majority’s "narrow conception of visitorial powers [did] not fully capture the common law," which regarded "all attempts by the sovereign to compel civil corporations to comply with state law - whether through administrative subpoenas or judicial actions - [as] visitorial in nature." The dissent also responded to arguments that the OCC regulation raised federalism concerns. According to the dissent, "it is not this Court’s task to decide whether the statutory scheme established by Congress is unusual or even ‘[b]izarre,’" as "[t]he Court must decide only whether the construction adopted by the agency is unambiguously foreclosed by the statute’s text." In addition, the dissent argued that the preemptive effect of the regulation at issue here did not pose the same risks to federalism as in other areas because national banks have been historically regulated by the federal - not state - government.
As such, the dissent concurred with the majority’s decision to affirm the Second Circuit’s injunction as applied to the New York Attorney General’s threatened issuance of executive subpoenas to national banks, and would have affirmed the lowers court’s decision to enjoin the state’s threatened judicial enforcement action as well.
The Clearing House decision raises a number of interesting questions and issues. As an initial matter, while the case is a major precedent limiting the scope of federal preemption, it is not a complete victory for state law advocates nor a complete loss for the banking industry. States’ rights advocates can claim victory for the states’ ability to enforce state laws against national banks. Members of the lending industry, on the other hand, can take some solace in the fact that the decision recognizes and maintains significant procedural hurdles to a state enforcement action. The decision makes it clear that state attorneys general "will be treated like a litigant," and will be expected to "file a lawsuit, survive a motion to dismiss, endure the rules of procedure and discovery, and risk sanctions if his claim is frivolous or his discovery tactics abusive." Slip Op. at 9. As such, the Clearing House case on remand may provide an interesting road map for future disputes between state law enforcement agencies and national banks.
The Clearing House decision also raises interesting questions regarding the implementation of the Obama Administration’s recently issued "White Paper" proposal for reforming the financial regulatory system (see InfoBytes Regulatory Restructuring Report, Issue One, June 18, 2009). According to the White Paper, "[t]he states should have the ability to adopt and enforce stricter laws for institutions of all types, regardless of charter, and to enforce federal law concurrently with respect to institutions of all types, also regardless of charter." It remains to be seen whether and how Clearing House will impact the implementation of this and related objectives by Congress. Similarly, the Clearing House decision could be relevant to the implementation of Section 626 of the Omnibus Appropriations Act of 2009. Among other things, Section 626 authorizes state attorneys general to enforce the Truth in Lending Act (TILA) and mortgage loan regulations promulgated by the Federal Trade Commission (FTC), but does not specify whether such enforcement may be directed at national banks and other federally-chartered depository institutions. The FTC advance notice of proposed rulemaking proposes to exclude banks and thrifts from the ambit of its new regulations.
Finally, the Clearing House decision, while leaving intact the Watters decision, reopens the question as to the scope of federal preemption applicable to national banks and their operating subsidiaries. Given the White Paper proposal and the clear interest among many leading Democrats in Congress (see InfoBytes Regulatory Restructuring Report, Issue Three, June 25, 2009) to carve back federal preemption of state consumer protection laws, it is possible that Congress will act to define the scope of preemption before the Supreme Court has another opportunity to consider the question. Nonetheless, regardless of whether Congress acts promptly, the Clearing House decision opens the doors to an unprecedented wave of litigation by state attorneys general against federally chartered banks and their operating subsidiaries alleging violations of consumer protection laws.
We welcome reader comments and suggestions regarding issues or items of interest to be covered in future editions of InfoBytes. E-mail .